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Financial Crisis_ Private _ Public Sector Impacts Challenges Amid

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Financial Crisis_ Private _ Public Sector Impacts Challenges Amid Powered By Docstoc
					How to Navigate
Banking Relationships


October 5, 2012
Bill McDermott,
McDermott Financial Solutions
The “New” normal
• Consolidation, SunTrust story

• Consolidation, past, present and future

• Formation of new community banks

• Profit picture for banks improving

• Haas Dodd, stiff regulatory environment
Outline
• BankSpeak

• The bank’s financial health could be the
problem

• What happens at loan renewal

• When to stay and when to leave

• Must haves and nice to haves in a loan package and bank
  presentation

• Here comes trouble, covenant defaults, forbearance agreements
Your new normal includes….
  Here’s how to help your client

• Assess the strengths and weaknesses of the financials
  • 3 years of financials - analyze them, trends…
• Banks want to know about:
  •   Liquidity (balance sheet)
  •   Leverage (balance sheet)
  •   Profitability (income statement)
  •   Activity (AR and Inventory turns)
  •   Asset quality (balance sheet)
Is your client financially
healthy?
• Were they profitable for the last operating year?

• Are they leveraged less than 4 to 1? Total debt/net
  worth
Guiding your client through
the “new” normal …
• Everything is about risk/reward

• Bank reward is 5% gross margin with no upside, bank’s are
  leveraged between 8 and 12 to 1,therefore risk tolerance is
  low

• Bank profitability is up, but credit is still tight. Why?

• Lending conditions are unfavorable, economy is sluggish, low
  interest rates,

• Risk profile for the reward is not there
The must haves…
Your bank presentations must address these, it’s non negotiable


• 5 C’s-
  •   Character
  •   Collateral
  •   Cash flow
  •   Credit
  •   Conditions
One of the best shortcuts to
finding financing for your
clients… that is profitable, has adequate capital and is
   • Find a bank
        either raising capital, paying back TARP money or both

   •    You can’t assume every bank is lending money just because
        their doors are open

   •    MOU, Consent orders and Cease and Desist orders are public
        records, just know where to look (google search-bank name
        consent order)

   •    These are all regulatory terms that mean the bank is having
        issues which could affect your ability to borrow
Why is it so hard to find $$…
• All banks are highly regulated. Because of bank
  failures, regulatory environment is tight
• www.fdic.gov, under quick links, bankers,
  institution directory, bank find, name and state
  of bank
• Look for capital-asset ratio (8-12%), <1%
  problem loans, profitable or not and
  loan/deposit ratio >85% is high
• Banks have liquidity and leverage issues too. If
  your line isn’t renewed it might be their
  problem, not yours
Is the Bank on a Watch List?

• Has it been sold or acquired in the
  last 5 years?
• Do you sense your loan is in a special
  assets category?
Google Alerts…
• If you have a Google profile, you can set up an
  email or text alert to obtain daily information
  about a bank

Examples:
• PNC insures RBC merger is fast track south from
  DC to Atlanta - 11/10/11
• UCB reports net loss of $6.2 million for Q3 2011 -
  10/31/11
• Synovous posts profit after 3 years - 10/27/11
(we post these on Facebook and LinkedIn daily)
More Google Alerts…

• Georgia banks post $608 million Q1 profit – May
  24, 2012
• Southwest Georgia Financial Declares Quarterly
  Cash Dividend May 24, 2012
• Renasant Bank/Non Chexsystems Banks May 19,
  2012
Gone Shopping?
How many of you your clients have gone shopping for a new
 banker/relationship in the last 2-3 years?

Why did they shop?

What did they learn?
The “new” normal
-new loan, loan renewal
   -”anxiety is the price you pay for the
   unprepared mind and mouth”
Prepare and Propose
• For a new loan at a new institution, the bank wants

1. 3 years of financial statements or tax returns
2. Interim financial statement with comparable a year ago (10/31/11
  vs 10/31/10)
3. For a line of credit, they will request AR and AP aging, may request
   comparable a year ago
4. Personal financial statement and two years personal tax returns
5. Real estate projects or LLC’s they will ask for separate financial
   statement or tax return, rent roll
6. Contractors (job status reports-contracts in progress, contracts
   completed)
Present….
-Presentation to the bank should
  incorporate the 5 C’s of credit for
  the bank
  •   Character
  •   Collateral
  •   Cash flow
  •   Credit
  •   Conditions
-Demonstrate you have:
  • A Command of your financials
  • A Clear request
  • A Compelling case
There was a time when loan maturity =loan renewal.

Covenant defaults were waived and forbearance
agreements were a foreign term to most business
owners

Under the “new” normal, this is not the case

Banks are enforcing covenant defaults and entering in
to forbearance agreements. This is new territory for
your clients
What’s a loan covenant default
• A covenant is a mutual promise made between two parties

• A loan covenant is a promise to loan by the bank and a
  promise by the business owner to run the business with
  certain conditions

• If the promise is broken by either party then there is a loan
  covenant default.

• If you break the loan covenant, you break your promise to the
  bank and they may break their promise to loan
If any of these happen…
• Options could be…
  • Your bank declares a default
  • You enter into a forbearance agreement, you bank agrees to
    forbear or delay the close of your business in exchange for
    something
  • The bank forecloses on your business
  • You declare bankruptcy
Special Assets Department SAD
L
• If you or your client has had losses, had a loan covenant
  default and signed a forbearance agreement, you might be in
  SAD

• It’s consider special, because there is greater than average or
  special/specific risk associated with it

• Banks put all these loans together in one department to work
  them out of the bank

• Bank failures, acquisitions can cause a movement in loans to
  SAD due to loss share agreements even if they pay promptly
Forbearance Agreement
• How many of your clients have signed one of these in the last
  year or 2? Did they know what it was?

• Likely, they didn’t meet the 30 day payout, they broke a cash
  flow or leverage covenant with the bank , loan covenant
  default or waiver

• Recitals, term, interest rate, fee, conditions

• 6 to 12 month term is common. Getting it as long as possible
  is to your client’s advantage
If any of these happen…
• There could be a forbearance fee (this may sound ridiculous)
  however, the bank feels consideration is given for not
  foreclosing on the business ½-1% is common

• The Scope of Forbearance- have your client pay special
  attention here, this defines what the bank will or won’t do
  and what your client agrees to do or not do

• Typical items in this section
  • Lender won’t accelerate the debt, discontinue lending or obtain a
    judgment against your client
  • They may also want to correct loan documentation
In addition…
• The bank may ask you or your client to waive a jury
  trial or waive their rights to bankruptcy provisions

• They may ask you to hire a turnaround professional
  or provide an equity infusion

• Beware of cross collateralized, cross default
  language if you have 2 loans (double crossed)

• You may be asked for a banking plan, how will you
  turn things around?
Can a forbearance agreement be
avoided…
• Watch your covenants, leverage or profitability

• Offer additional collateral

• Agree to a higher rate or fee

• Put capital in the business vs borrowing it
     Questions?

www.bankingsolved.com

     Bill McDermott
 bmcdermott@mcdfs.com
     678-597-8184

				
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