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Banking UpdateSeptember 29, 2009
©Baker Tilly Virchow Krause, LLP
Introductions
Dave Bauer› Recovering commercial lender
› Baker Tilly Virchow Krause, LLP – 13 years– M&A
– Capital markets
– Business planning
Jeff French› Assurance services
› General business consulting
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Agenda
› Current Banking Environment
› Potential Impacts to your business
› Strategies to consider
› Potential Negotiable items
› Discussion
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Current Environment
Current News
› The amount of capital a bank holds affects how much money it can invest and lend, and how susceptible it is to collapse. U.S. officials, led by Treasury Secrectary Timothy Geithner, want to erect tough new capital requirements that they contend will boost the long-term viability of the global banking system. Forcing banks to hold more capital would constrain their riskiest impulses, perhaps paring economic growth but also smoothing out the booms and busts, the U.S. argues.
› The Federal Reserve, in a move aimed at keeping interest rates low for home buyers through early next year, decided to extend and gradually phase out its purchase of mortgage-backed securities. The Fed’s action signals its belief that the ecomony, while in recovery, remains fragile and that housing, which has been seen some improvement in recent months, has only started to pull out of its slump.
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Current Environment
Current News
› The Federal Open Market Committee voted 10-0 to maintain the target federal-funds rate for interbank lending at a record-low range of zero to 0.25%. “Economic activity has picked up following its severe downturn,” the Fed said in the upbeat policy statement it released at the conclusion of its two-day policy meeting.
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Current Environment
› We’ve only just begun
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Period A+ A B C D F
June 2009 3,518 1,449 417 421 72 2,256
March 2009 3,959 1,431 452 437 88 1,820
December 2008 3,918 1,705 119 390 98 2,003
September 2008 4,498 1,325 283 356 63 1,793
June 2008 4,884 1,248 404 326 66 1,458
Source: FDIC/IRA Bank Monitor
IRA Bank Stress Index Distribution(FDIC insured bank units)
Current Environment
› The dollars are even more scary
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Period A+ A B C D F Total
June 2009 $2,005 $2,097 $4,132 $518 $68 $4,458$13,27
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March 2009 $3,202 $3,131 $3,587 $729 $86 $2,784$13,51
9Source: FDIC/IRA Bank Monitor
IRA Bank Stress Index Distributions(Assets of FDIC insured banks, $B)
Current Environment
› FDIC losses running at 25% of assets
› If 50% of the F’s fail = $500 billion loss
› Current FDIC reserves = $10 billion
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Current Environment
› In case you missed it, the last slide said
$500 BILLION› Fed can borrow $100 billion and another $500 billion
through 2010
› Perspective:– S&L crisis (20 short years ago) = ?
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Current Environment
› $15 billion
› And we are still paying that 30 year loan back
› How do funds get repaid? Raise the rates charged to banks
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Current Environment
› Typical leverage – 10 x capital base
› What needs to happen to loans and commitments when the capital base is eroded?
› Yes a $1 loss in capital = a $10 reduction in loans and commitments
› A $568 million loss in capital = $5.7 billion reduction in loans and commitments
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Current Environment
› Regulators – not your friend or mine
› Oh yes and commercial real estate lending Roll over risk
Securitized products
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Potential Impacts to Your Business
› Pricing Up Interest rates – 150 to 350 basis points
Floors
Pricing may vary based on term of loan
Letter of credit fees
Unused fees
Depository fees
› Loan amounts down Lines of credit
Capital expenditure financing
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Potential Impacts to Your Business
› Credit Tightening Certain asset classes boycotted
Term of loans
Asset advance ratios
Covenants
› Waiver of Loan Covenants Much tougher to get
Fees may be involved
Timing is slow
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Potential Impacts to Your Business
› Lack of capital when the rebound comes Capital expenditures required to take on new business
Working capital requirements to fund growth
Compliance issues with advance ratios
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Strategies
› Communicate regularly Get close to your banker
Get close to your banker’s boss
› Monitor loan covenants closely
› If Loan Covenant Waivers are required Need solid presentation
Need pro-forma financials and cash flows
Pro-forma covenant calculations
Longer timetable for approval
$$
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Strategies
› Make a profit
› Review your bank’s financial status
› Stay up to date with current banking events
› Work on a Plan B
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Strategies
› Plan B Look for alternative sources of capital
» Asset based lending
» Factoring
» Mezzanine financing
» Equity
» Asset disposition
Get to know some other bankers
Give yourself time to enact Plan B
› Know your collateral
› Personal asset protection
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Strategies
› Asset based lending Still learning, but more particular
Higher loan spreads
Advance rates have not really changed
» 80-85% A/R
» 50-60% of inventory
» 80-85% of equipment OLV
Appraised values have declined
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Potential Negotiable Items
› Contracts: Only come into play when bad things happen
› WBA Documents: Surprise: Not written in your favor
› The bank “deems itself insecure”
› “adverse change”
› Cure periods
› Require written notification of all defaults
› Eliminate defaults such as “death of a shareholder or member”, especially if there are numerous owners
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Potential Negotiable Items
› Trade items the best that you can– i.e. Discuss pricing as it relates to total commitment
› Review depository processes, fees and earnings credit rate
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Takeaway’s
› We remain in unprecedented times
› Hope is not a strategy
› Over prepare for bank meetings
› Explore Plan B
› Know your breakeven points, lay out a critical path to survive and know when to make critical decisions
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Discussion
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