President’s Letter
As we enter 2005, the uncertainties remain, both here and abroad. The continued war oversees, the Iraqi elections, the continued emphasis on Homeland Security, the rising interest market, the various regulatory requirements on financial institutions, the consumer debt burden – the list could go on and on. As an industry, we need to continue to focus on the basics and best practices that allow us to continue to mitigate risks as best we can. One of the best ways to stay informed is through your involvement in RMA and using the resources that are available through your membership on both the local and national level. Through RMA National, you also have access to a number of different opportunities to gain knowledge and best practices. Through RMA, you can become one of the first to become RMA-CRC (Credit Risk Certified). There will be two testing windows per year – March/April and again in October/November each year. Besides the test preparation and the exam itself, there is a continuing education requirement. What a great way to set yourself and your organization apart. There are also nationwide training seminars, audioconferences, webinars, conferences, risk news, survey results just to name a few. During a program year, your local Chesapeake Chapter offers a wide range of events, from general membership meetings to co-sponsored training seminars with RMA National to joint sessions with the Maryland Bankers Association and the Turnaround Management Association. We have an active Young Financial Professionals Group that in addition to sponsoring membership events with informative speakers also teams up with the Young Professionals of the MACPA and the Maryland Bar Association for networking events. There are plenty of opportunities to get involved in the Chesapeake Chapter, from passing along program ideas to one of us on the board, to attending events, to becoming involved on a committee or with the Board. If you have any suggestions or wish to volunteer, please give me a call at 301-497-4044 or email. Take a moment to read through this newsletter as well as to watch your e-mail for information about upcoming events. We have several events on the calendar for the upcoming months – hope to see you there!Cheryl M. Dahut, AVP
The Citizens National Bank
President, Chesapeake Chapter RMA For a complete list of CCRMA board, visit http://www.rmachesapeake.org/officers.html
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Spilled Milk: Growth within Limits
By David Schallich, Senior Vice President, Special Assets, National Cooperative BankWith an improving economy, increasing shareholder demands, and hefty incentives, the temptation to grow rapidly certainly presents itself. One of the easiest ways is through large loans, either directly, or through participations. The latter being the perceived cost effective method. For Sub-Prime Bank, a profitable, well capitalized mid-size regional, it decided to use the expertise of others and dive into the syndicated loan market.
Background
Sub-Prime had begun to develop an expertise with Non Profit organizations. After a couple of years with an excellent yielding and strong credit portfolio, it determined that its staff was ready to move up from the minor to major leagues. A relationship with some well known large regional Lenders was developed with some small participation loans. After sifting through a couple of multi-million dollar offerings, a prospective, but complex, deal with a 75 year old, national, religious non-profit organization was brought in by Joe Superstar. The credit package for Feel Good, Inc. was a balance of strong and weak points. Historically FG had been through a string of profitable years, and diversified its investment portfolio with small strip centers located throughout the country, in good, but not great locations. The last year or two, there was creeping occupancy issues, and increasing competitor projects. The balance sheet was not leveraged, and had a substantial investment portfolio that had been developed by Feel Good donors. Previous projects had been funded by numerous Feel Good bankers on an unsecured basis. The reputation and history was spotless. With declining stock market and interest rates cash flow however was becoming slightly tight. Most of the strip center projects were operated at loss/break-even, with the donors/investment portfolio subsidizing cash flow. Feel Good decided it too was time to further diversify its retail centers with a plan to develop a large commercial property. The property location in Hot Market, USA had idea demographics of new business development and a new high tech employment base. The similarities between JR’s business objectives and sub-Prime seemed like an ideal match. Feel Good’s President, Nancy Fay, had a well-known reputation that while operationally had some weaknesses, was politically astute and could raise money at ease. Prime Bank, the lead bank, provided an excellent underwriting package that Joe Superstar and staff carefully analyzed. There were open issues, but Joe and staff didn’t want to expose their lack of industry knowledge. An $80 million Bond issuance would be supported by Prime Bank’s Letter of Credit. While somewhat familiar with commercial property, everyone felt that little could go wrong with real estate, especially in Hot Market. Pricing was excellent, draw down exposure appeared limited, however, the required lease-up for the project appeared aggressive. Yet the allure of expanding its relationship with Prime and becoming a player was very strong. Oh, the LC, like all credits to FG was unsecured and was at its house-lending limit. Problems
Joe Superstar started to note the ongoing effects of a declining stock market and interest rates on Feel Good’s delinquent financial statement. Further, the project was leasing up at slower than anticipated rate (the high tech industry was having some serious issues). Fundraising was becoming more difficult. Nancy Fay however was having a good year with a new salary increase to $500,000. A Bank group meeting was held after operating results were well below projections. At the meeting everyone was surprised by National Turnaround consulting presenting new projections. When Nancy Fay did not contribute to the meeting, everyone wondered who was in control. A covenant waiver was requested with the belief that National Turnaround would solve their cash flow/lease up issues. A subsequent meeting with National Turnaround and National BK Law Firm left everyone not feeling so good. They requested a 40% write-down in debt as they felt Feel Good’s investment portfolio was needed to preserve the mission. Ongoing defaults resulted in the Bond Trustee to draw on the LC. Missed projections, delayed statements and ongoing defaults followed. Shortly thereafter, BK Law firm shopped an out of state court to file Chapter 11. Joe Superstar was aging quickly with a $9 million unsecured credit. The battles were now filtering their way into the political arena, and the numerous professionals now draining the cash – at a rate of exceeding US export dollars. Solution
The BK judge, who was a lot smarter and creditor friendly than BK Law firm had anticipated, knew when to force a sale. The State Attorney General also thought it a good idea. Creditors’ consultant went to market with all fixed assets, and surprisingly there was more value than anyone anticipated. The sale of assets, plus a negotiated amount of Feel Good’s investment portfolio help protect many participating loan officer’s jobs. Unfortunately, Nancy Fay would have to find another. Lessons
Sub-Prime bank had relied on Prime Bank based on its past relationship and did not conduct adequate due diligence. This included, Feel Good cash flow, secondary source collateral and management. However, the underlying issue was in reality the desire for growth with large loans. Attempting to meet, or exceed, investor expectations can be a dangerous route, especially in marginally economic periods. Note: For more “common sense” viewpoints please refer to an excellent RMA Journal article - From Me to You – Reflections on a Career in Lending by Tom D. Vance, The RMA Journal, December 2004- January 2005
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Young Financial Professionals Update
By Thad Ulrich, Vice President, Annapolis Banking & TrustOn a chilly January evening, the Chesapeake Chapter of RMA’s Young Financial Professionals (YFP) co-hosted a Networking Event / Happy Hour in Annapolis with the MACPA New / Young Professional Network and the Young Lawyers Section of the Maryland Bar Association. Those who braved the cold and attended the event were treated to a chance to warm up with drinks and appetizers, and, more importantly, had an excellent opportunity to network with a diverse group of peers. All three groups were well represented and the event was well received by all. Another joint networking event will be held early in this summer and details will be forthcoming. The next YFP event will be a Luncheon held on March 23, 2005, followed by a presentation, titled “Mergers & Acquisition Update”. The YFPs are excited to have Arnold Danielson, chairman and founder of Danielson Associates Inc., as the presenter. Danielson writes and speaks extensively on banking matters, and his articles have appeared in nearly every major industry trade periodical. Danielson Associates perennially ranks among the leading advisors for bank and thrift mergers. Since 1996, the firm has advised on acquisitions of banks, thrifts, insurance agencies and branches with a combined transaction value of over of $3.5 billion. The firm annual regional banking report, The Danielson Report, focuses on structural changes in the regional banking industry and suggests what might happen in the future. Danielson’s presentation will surely provide invaluable insights on the current, and future, banking landscape in the area and be of great benefit to the YFPs in their career planning. A printable flyer and details on registration are available at http://www.rmachesapeake.org/events.html.The YFPs are searching for a select group of young professionals from diverse organizations in the area to form a steering committee to guide the group going forward and help to plan and organize future events. This would be a great opportunity for young professionals to contribute to RMA at the local level and could possibly lead to further leadership opportunities in RMA’s Chesapeake Chapter. If you are interested in joining this committee or know a young banker who might be interested, please contact Brian Slagle at bslagle@kbank.net or Thad Ulrich at thad.ulrich@mercantile.net.
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Maryland Brownfields Program
By Mary Jo Taylor, Senior Vice President, First Mariner BankLast December, CCRMA & TMA (Turnaround Management Association) co-sponsored a breakfast event at the Center Club, featuring Ken Philbrick, Maryland Secretary of the Environment. Philbrick opened with the Maryland Department of the Environment (MED)’s mission which is primarily to protect and restore the quality of Maryland’s air, water and land resources. He emphasized the point that MDE’s mission fosters smart growth, economic development, healthy and safe communities, and quality environmental education for the benefit of the environment, public health, and future generations. “The VCP [Voluntary Cleanup Program] reforms the process used to clean up eligible properties that are, or perceived to be, contaminated by hazardous substance release. In addition to providing a streamlined cleanup process, the VCP law provides liability protection for certain prospective owners of eligible properties in the Program to encourage the transfer of properties”, he said in highlighting Maryland Brownfields Program and Voluntary Cleanup Program. “These changes provide more ‘certainty’ regarding environmental requirements to both responsible persons and future owners of a property thereby allowing parties to more accurately predict costs and time lines associated with a cleanup and increasing the likelihood of cleanup and redevelopment.” An updated VCP guidance document is available on line. Effective October 1, 2004, changes were passed by Maryland Legislation modifying certain requirements for redevelopment through VCP. A major change allows oil-contaminated sites and sites under active enforcement under specified conditions to be eligible for the VCP. Any one attempting to finance a property with environmental issues may benefit from this VC Program to protect the borrower as well as the Bank. To view further information on Brownfields and the Voluntary Cleanup Program, visit the MDE site at: www.mde.state.md.us
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Convenient, Cost-Effective Training
If you want training that's convenient and cost-effective, consider RMA's new Web Seminars. Each seminar delivers high quality training right to your PC, and each takes just three hours to complete (two 1 1/2 hour sessions, unless otherwise noted). There’s no travel time or expenses. What's more, an experienced instructor who gives you the chance to ask real-time questions leads every seminar. It's just like being in a traditional classroom without the hassle and cost of traveling. Best of all, if something comes up and you have to miss a Web Seminar session, you can go back and review the course for 30 days - at no extra charge. Enrollment in each of the seminars is capped at just 25 participants. Register online or by calling 800-677-7621. To register online, visit www.rmahq.org and select the Quick Link for Register/Find event and then input the Course code listed after course title. Credit Culture: The Foundation of Best Practices (#31130350)
March 17 and 24, 2005
EBITDA (#3139045)
March 23 and 30, 2005
EBITDA (#3139015)
also offered in April:
April 27 and May 4, 2005
Managing Market Risk in the Current Environment (#3138015)
March 24, 2005 (one 90-minute session only)
Risk Control Self-Assessments (#3135035)
March 24 and 31, 2005
Capitalization Rates: A User's Guide for Lenders (#3126045)
April 5 and 12, 2005
Pensions & Off-Balance-Sheet Risks (#3131525)
April 13 and 20, 2005 Lending to Nonprofit Organizations (#3132525)
April 21 and 28, 2005
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