May 2005

   

Acceleration of the Process

Even as the world of lending gets more competitive and complicated with regard to the number of Banks pursuing each deal (or for that matter, other non-bank institutions as well), the pricing pressure fostered by institutions vying for assets and loan structures that press the limits of “reasonable and sound,” lenders today are faced with a new and recurring problem – acceleration. Whether it is brought on by contract deadlines, last minute shopping, competition, the pressure of closing on 1031 exchange transactions or simply borrower impatience, loan deals need to close a lot more quickly than ever before.

The pressure of deadlines imposed by borrower and their request cause the time frame for information collection, due diligence and underwriting to be compressed. If the deal involves real estate, it may require calling in favors from the title company, appraiser, attorney or in many cases, all three. Regulatory pressures from the US Patriot Act and sound due diligence associated with “know your customer” cannot be ignored, but the flow of information from your prospective client may not move at the speed they want the deal to attain. There are only so many short cuts available to the lender and they all shortchange the process in one way or another.

In dealing with an accelerated transaction, it is important to stay focused on the key basics of the process. Make sure that items held for post closing are indeed items that can be handled and dealt with after the fact. Issues and items that should NOT be compromised:

  • Regulatory Issues (US Patriot Act, requirements of Government guaranty programs {SBA} )
  • “Know Your Customer” due diligence
  • Third Party Reports (appraisals, environmental reports, surveys, title work, lien searches, field audits, tenant estoppels)
  • Corporate documentation (Articles, By Laws, Resolutions, Good Standing Certificate, Opinion of Borrowers Counsel)
  • Make sure all pertinent loan and structure issues are clear, understood and acceptable (subordinations, covenants, equity requirements, closing costs, guarantors.


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Red Flags

On occasion, lenders can fall into patterns where they become complacent with the “process” of reviewing or filing financial information. Receipt of monthly/quarterly/annual financial information from clients may not be getting the attention and follow-up that could alert the lender to a potential disaster down the road.
Following is a list of warning signs to assist lender in taking that “extra-step” to investigate and query the borrower. Taking a pro-active approach with your client benefits the lender and borrower and hopefully provides the time to work through the situation rather than having to “react” too late.
“ Warning Signs “
FINANCIAL STATEMENTS:
  • The income statement and balance sheet are completely unreliable.
  • Increasing payroll tax liability.
  • Any liability line item similar to “payroll taxes payable”. It could be payroll taxes that are past due which can create a lien on newly created accounts receivable and inventory ahead of your prior blanket-filing lien.
  • Financial statements that disclose the presence of a book overdraft. (If the company is “playing the float”, they are extremely illiquid and experiencing substantial financial pressure).
  • Borrower is moderately profitable, but working capital is showing declining trend. Earnings are insufficient to meet term debt obligations and/or necessary capital expenditures.
  • Growth in “other assets” on the balance sheet of a corporate borrower. Be on the lookout for assets that are really due from officers, employees, and stockholders as these are intangible and often increased in lieu of expensing salary to avoid showing a loss.
  • Net of depreciation, large leasehold improvement shown as fixed assets on the balance sheet. (Could or should be spread as intangible).
  • Current ratios of just over 1:1 or below. Few companies can operate beyond the short term with a current ratio of less than 1:1.
  • Depreciation and other non-cash charges never paid a loan back.
  • Continuing increases in accounts payable and payable days.
  • Capital expenditures well above historical averages.
  • Borrowers that have no inventory and have revenue at a level where they can file their tax returns on a cash basis where the bank underwrites the borrower on the basis of their accrual based financial statements. The borrower has no economic incentive to write off old accounts receivable.
  • Escalating levels of debt at amounts the borrower has never before managed.
  • Book overdrafts listed in current liabilities on either FYE or interim financials of the borrower. Suggest cash flow liquidity concerns---holding checks payable to trade and or bank.
  • The presence of substantial dollar amount operating leases for capital equipment where the asset and liability do not show on the balance sheet. Actual leverage may be much greater than it appears in the financial statements.
  • Qualified financials.
  • Frequent change in accounting firms.
  • Unsigned financials and tax returns (not usable in subsequent court collection efforts if deal goes badly). Allowing the excuse that the customer has filed for an extension on submission of personal or business tax returns for not getting updated income information—and then not following up six months later (the maximum time an extension can be valid) to see if the return is obtained.
  • Lack of Audited/Reviewed level financial statements for appropriate size companies.
  • Late receipt of financial statements or missing or outdated financials

COMPANY MANAGEMENT (or) PRINCIPALS
  • Change in CFO or change in executive officers.
  • Absentee owners.
  • Too many family members involved in business.
  • Excessive credit inquiries or from unusual sources (casinos).
  • Large loans to officers/employees and/or unusual owner/partner withdrawals.
  • Declining credit score of guarantor.
  • Broken promises.
  • Decrease in deposits and/or moving accounts. Continuous shifting to new banks as primary lender.
  • Selling assets.
  • High employee turnover and/or layoffs.
  • Use of more than one bank for financing by a relatively small company. (Unless your bank is very large, your target market likely has companies that should center their banking with one institution).

MISCELLANEOUS
  • Cancelled insurance.
  • Late tax payments of any kind.
  • Payment delinquency.
  • Borrower asks for principal repayment waivers.
  • Lawsuits / M&M liens. Multiple unpaid liens of a significant dollar level.



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Credit vs. Sales Event Re-Cap

Held April 20th in Columbia was well attended with over 40 registrants.

From L to R: Brian Israel, Dan Herr (CCRMA 1st Vice President),
Tom Johnston, Sabina Kelly, Brian Walter
and Cheryl Dahut (CCRMA President)

Many thanks to our panelists for their time and support:

Credit
Sabina Kelly
Sr. Risk Manager
Bank of America

Tom Johnston
SVP
Wachovia Bank NA

Sales
Brian Israel
EVP
Columbia Bank

Brian S. Walter
Group Mgr Middle Market Division
M&T Bank

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RMA Lending Academy - June 6-10

The RMA Lending Academy is a new and exciting way for beginning-level lenders and analysts (with 0-3 years experience) to gain the required skill sets to help them make the best possible credit recommendations and lending decisions. If you are an inexperienced lender/analyst unsure of which level of RMA open enrollment program to begin with, The RMA Lending Academy is for you. The Academy can be used as a "springboard" to other RMA programs and educational courses, providing a solid foundation of credit and lending skills to all attendees. The Academy is presented in an intense five-day format with pre-course work and evening assignments covering topics including balance sheet and income statement analysis with a focus on small to medium-sized businesses, personal financial statements/tax returns and business tax returns for small business customers.

Register by visiting www.rmahq.org and selecting the Quick Link for Register/Find event and use the Course code #3103165.

Date/Time: June 6-10; all day
Location: Mercantile Safe Deposit & Trust, 2 Hopkins Plaza, Pavilion - 2nd Fl, Baltimore, MD
Fees (includes lunch): $1,695 RMA Members, $2,295 Non-Members; Save $50 when you register on-line

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RMA June Webinars

Pensions & Off-Balance-Sheet Risks
June 1 and 8, 2005
Event Number: 3131535

Lending to Nonprofit Organizations: A Primer
June 2 and 9, 2005
Event Number: 3132535

Assessing Management Effectiveness
June 2 and 9, 2005
Event Number: 3139515

Risk Control Self-Assessments
June 8 and 15, 2005
Event Number: 3135045

EBITDA
June 22 and 24, 2005
Event Number: 3139025

To register for RMA's Web seminars, please click on any of the links above, or go to: http://www.rmahq.org and follow these steps:

Go to Quicklinks and click on "Register for/Find Event"
Enter the Event Number in the Event Search, and hit "Search"
Click on searched event
Click Register for Event button

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Regulators Share View of Banking in the Current Market - June 15

Join the RMA Chesapeake Chapter and Maryland Bankers Association on Wednesday, June 15, 2005 to hear the latest news and thinking from the FDIC, OCC, OTS, State of Maryland and the Federal Reserve. The panel will cover a wide-range of key safety and soundness issues and financial regulations such as the Privacy Act, the Patriot Act, Sarbanes Oxley, FIDICIA & 404 Requirements, and loan loss allowances. In addition, Kathy Kalser, Regional Manager, Division for Insurance and Research, Federal Deposit Insurance Company will open the event with a highlight of national, regional and local economic trends. 

Panelists include:
Steve Bareford, Supervisory Examiner, Federal Reserve Bank of Richmond;
MaryAnn Kennedy, Assistant Deputy Controller, Office of the Comptroller of the Currency;
Bob Mitchell, Assistant Regional Director (responsible for the safety and soundness examinations in Maryland, Virginia, and DC), Office of Thrift Supervision; and
Phyllis Zumbrun, Assistant Commissioner Bank Supervision, MD State Department of Labor, Licensing & Regulation.
Glenn Wilson, President & CEO, Citizen's National Bank will moderate the discussion. For more details and on-line registration, visit www.rmachesapeake.org.

Date/Time: June 15, 2005; 11:30am Registration & Lunch; 12:30pm Presentation with Q&A
Location: The Center Club, 100 Light Street, Baltimore, MD
Fees (includes lunch): $85 CCRMA/MBA Members; $95 All Others

Special Thanks to Our Event Sponsors:
Cambridge Capital LLC & Lerch Early & Brewer Chartered

Contact us at 301-725-3540 or click here
if you're interested in becoming a CCRMA event sponsor.



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RMA Paper Writing Competition

MONEY! FAME! PERSONAL AND PROFESSIONAL DEVELOPMENT!

Not to mention personal satisfaction and the chance to win a free registration at the 2005 RMA Annual Conference--all this can be yours if you decide to enter RMA’s Annual Paper Writing Competition.

Forget all those old memories of term papers and hours and hours in the library--this contest has been specially designed for today’s busy credit risk professional.

Your paper can be as short as six pages, double spaced, and it can be on any topic applicable to financial services risk management. And any employee of an RMA member institution can enter. This contest has easy rules, simple instructions, and flexibility--you can even write the paper jointly with one of your peers. You can draw from past experiences with little or no outside research, you can pick a cutting-edge topic and do special research, or you can do something in-between. Papers are judged on appropriateness, content, and creativity--not on stuffy grammar rules and footnoting.

Share your resources, talent, research, and insight with your peers. Write a paper and maybe you can win money, fame, and satisfaction. The Chesapeake Chapter will be awarding $500 for first place. Additionally, each entrant will receive a $50 voucher for a future Chesapeake Chapter event. In addition, if your paper places first, it will automatically be entered in the Headquarters competition that also has cash awards and pays the Annual Conference registration fees for top winners.

The deadline for submission is May 31, 2005, so if you are interested in finding out more information on this new and improved contest, complete and return the on-line form as soon as possible or contact Thad Ulrich at 410-626-2110 or thad.ulrich@mercantile.net. Click here for a copy.

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Welcome Bank of Georgetown!

Bank of Georgetown is a new commercial bank offering both consumer, commercial and retail products, with a focus on small to medium sized businesses. The Bank is headquartered at 1054 31st ST NW Suite 18 Washington DC 20007. Curtin Winsor III is Chairman and Michael P Fitzgerald is President and CEO. The Georgetown Branch is located at 1001 Wisconsin Ave NW with a second branch soon to open (July) will be known as Friendship Heights, located at 5236 44th ST. NW Washington DC 20015. Charles J. (Jay) Hedderly, Senior Vice President, has joined RMA Chesapeake Chapter as the Senior Associate. For further information reference www.bankofgeorgetown.com or contact jhedderly@bankofgeorgetown.com.

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Welcome Capital Funding Group Inc!

Capital Funding Group Inc., is a commercial mortgage lender specializing in health care loans. They are a national lender in FHA insured mortgages for healthcare entities such as Nursing Homes, Assisted Living Facilities, Board and Care Homes and Mental and Rehabilitation facilities. Comprehensive financing solutions are provided through various types of programs. For further information contact: www.capfundinc.com

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Welcome New Members

Jeffrey Arpin
VP/Head Asset Management
Fannie Mae

Donna Grossman
Vice President
Manufacturers & Traders Trust Co

Arline Klingenberger
Assistant Vice President
Manufacturers & Traders Trust Co

Lisa LiPira
Assistant Vice President
Provident Bank of Maryland

John Marton
Assistant Vice President
Manufacturers & Traders Trust Co

Joel McCrea
Finance Specialist
Maryland Department of Business & Economic Development

William Peters
Vice President
Patapsco Bank

Thomas Reymann
Vice President
Manufacturers & Traders Trust Co

John Ryan
Assistant Vice President
Bank of America

Pushpa Subedi
Capital Lending and Mortgage Group, LLC

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