how to navigate banking relationships october 5, 2012 bill mcdermott, mcdermott financial solutions
TRANSCRIPT
How to Navigate Banking Relationships
October 5, 2012Bill 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
• How many have had the bank restrict terms of their LOC?
Outline• BankSpeak
• The bank’s financial health could be theproblem
• 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…
• Find a bank that is profitable, has adequate capital and is 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
• 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
