Small BusinessCredit Risk

October 16, 2007

Seminar Agenda

About Sum2Recent Credit and Market EventsHow Credit Events Effect

LendersWhat Can a Small Business Do

About Sum2

Building Sound Practice Foundations for Businesses and Industries

Sum2 is dedicated to the commercialization of sound practices that address risk management, corporate governance, shareholder communications and regulatory compliance

Founded 2002

Product Suite

SMB 360°, Small and Mid-Size Business Risk Assessment and Management Tools

PACO™, Patriot Act Compliance Officer

AlphaSource, Portfolio Risk Analysis

Value Added Distributor

Some Partners and Clients

2007 Raging Bulls

Markets Awash in Liquidly

Premium Asset Valuations

Money Chasing Deals / Leverage Buying EBITDA

Kramer Going Wild

Kudlow and Goldilock’s America’s Cutest Couple

China and India Driving Demand

Signs of Froth Appear

Stephen Schwarzman’s Birthday Party

TXU, Equity Office, First Data, Sallie Mae and other Mega PE & LBO Deals

IB’s Buying Cash Flow Businesses

Hedge Funds Go Public

Dow Crosses 14,000

What Goes Up

Submerged Risks

Against Backdrop Of

Rising Interest Rates

Declining $ / Balance of Trade

Commodities Rising Oil Gold

Geo-Political Risk / War

Deteriorating Housing Market

Ballooning Deficit Spending

CRB Index Monthly Price Chart

Credit Market Problems

Sub Prime Mortgage Crisis

Commercial Paper Market

Contagion to Hedge Funds

Securitization : Structured Finance / CDOs

Funding Sources : Risk Aversion / Liquidity

Housing Crisis: Housing Bubble or Lending Bubble?

Change in Valuation Metrics/PsychologyCredit Default SWAPS / Level 3 Assets

Banks Assuming Higher Credit Risk

Kamakura Reports Fourth Consecutive Monthly Decline in Global Credit Quality

Kamakura Troubled Company Index Rises to 8.0% in September

Anecdotal Observations

Report: More Than 300K Ohioans Trapped In Payday Lending Debt(More than 300,000 Ohioans are trapped in a cycle of debt to payday lenders and are paying more than $318 million in payday loan fees each year)

Private Student Loan Bubble Could Burst

New Century Financial Chapter 11 Filing

Bank Earnings and Write Offs

Pascack Valley HospitalImpact of a Credit Default Event

Systemic Event

$100mm Debt

$20mm Outstanding Payables

$80mm In Bonds Outstanding

Shut Down Of Services

Layoff Notices To 700 Employees

Pascack Valley Hospital Closure

Pension’s

Local Businesses

Vendors

Spouses of EE’s

Housing Inventory

Mortgage Defaults

Community Tax Revenue

Where's Goldilocks?

Recession

Inflation

Deflation

Stagflation

Dollar Based Assets

Corporate Earnings

Taxes, Deficits, Trade

Yield Curves and Equities

Bernanke Goes Greenspan

Federal Funds Rate

Sources of SMB Funding

Existing Shareholders And Directors Funds (“owner financing”)

Overdraft FinancingTrade CreditEquity FinanceBusiness Angel FinancingVenture CapitalFactoring And Invoice DiscountingHire Purchase And LeasingMerchant Banks (medium to longer term

loans)

SME Finance Sources

Self FinancingLoans

Bank Loans Credit Card Debt People to People

Investment CapitalGrants

SME Self Funding

Existing Cash Flow Assumes Strong Cash Management Predicable Consistent EBITDA Predictive Cost of Sales Margins and Pricing Power

Receivables and Factoring Assumes Clients Good Credit Risk More Exacting Factoring Standards Strong Credit Risk Management

Culture

SME Self Funding

Personal Capital 401K Investment Portfolio Home Equity

Risk Premium On Collateral Valuation And Market Risk

Private Equity

Angels Capital Adequacy

Private Equity Secure Funding Sources Credit Risk Premium Exacting ROI Discipline

Banks Response

More Stringent Credit Guidelines Credit Risk Management Response

Capital Allocation Requirements Regulatory Response

Consolidation and Rationalization Market Response

Small Business Scoring Solution

SBSS 6.0 Fair Isaac

SBSS 6.0

Empirically Derived Scores For Startup Businesses

Credit Offer Index Size Of Loan Indexed To Industry Experience

Divergence And Kolmogorov-Smirnoff (K-S) Profiling, Identifying And Scoring Bad And Good

Accounts

60 Other Models That Use Application Data, Sector, SIC And Other Derived Elements

Capital Allocation RequirementsRegulatory Response

Capital AdequacyDefine Risk Characteristics Of Business

Lines And Market Segments

Allocate Regulatory Capital To Fund That Risk

SMB 360° Product of Basel II SME Initiative

FDIC Chart: Capital Adequacy Regulatory Capital to Cover Loan Losses

Banking Market

Community Banks Under Pressure

Competitive Landscape S&L For Retail Bulge Bracket Banks Commercial Brokers For Wealth Management Private Equity Mortgage Brokers

Market ConsolidationRationalization

Sum2’s NJ Community and Russell 2000 Bank Study

Acute Competitive Pressure

Concentrated Regional Risk

Slowing Earnings Momentum

Rich Valuations High P/E’s (M&A)

Regulatory And Economic Capital Strain

SBA Study

Our statistical analysis finds that small businesses receive less credit on average inregions with a large share of deposits held by the largest banks, irrespective of how debt is

measured.

Notable details about this primary finding are that:

When access to credit is measured by credit limits, reductions in lending in response togreater market share by large banks is larger than when credit access is measured byactual credit balances. This means that the market for un-accessed lines of credit ispotentially most affected by banking consolidation.

Credit reductions appear more severe in total when access to credit is examined throughthe dichotomous decision to obtain credit, than when the amount of debt as a share ofassets is used as a measure. Thus banking consolidation is more likely to affect thedecision, by either the small business borrower or the banking institution, to borrow,rather than affect the actual level of debt.

*Credit reductions in areas dominated by large banks are found to occur both for firmswith positive, and with negative, equity. Bank credit reductions are found to be more

*Most importantly, we find that non-bank financial institutions are making up part of thecredit reduction in terms of the level of credit conditional on borrowing, but notcompletely in the case of access to credit.

*The activity of the non-bank financial institutions appears to be especially important forfirms with negative, rather than with positive, equity.

These findings are essentially mirrored when we look at the individual credit instrumentsof lines of credit, and other loans, although with some important exceptions. As we find for totalcredit limits, non-bank institutions are not able to compensate for lines of credit accessreductions resulting from a greater share of large banks. Additionally, non-bank institutions arenot able to make up for shortfalls in credit limit levels. In other loans, however, we find thatnon-bank institutions do compensate for reductions in bank credit, although the finding isstronger for credit levels than credit access.

One set of small firms that therefore seems to be affected by banking consolidations arethose that use lines of credit for assurances to customers and suppliers, rather than as a source ofloan funds. It is possible, therefore, that these small businesses are finding it more difficult toconduct their business with a reduced ability to access credit. This concern is accentuatedbecause we find credit reductions are more significant for firms with positive equity, than withnegative equity. Conversely, it is also possible the changes we observe in the market for smallbusiness credit do not fully reflect the market for financial insurance needed to conduct somebusinesses, and another market mechanism rather than traditional lines of credit has arisen whichallows small business firms to fully conduct their business in competition with large andestablished firms

SBA Study

The Impact of Bank Consolidationon Small Business Credit Availability

By Steven G. Craig and Pauline HardeeHouston, TX

For SBAunder contract number SBAHQ-02-M-0459Release Date:

SBA Study

SMB 360°

Risk Assessment & Management ToolsScore and Manage Business Threats

Business Strategy & Targets

Business Market & Competition

Business CapabilityBusiness & Financial Planning Business Risk Management

360° View of Risk and Opportunities

Template 1: Market and Competition Assessment Template 2.1: Product Service Grouping, CustomersTemplate 2.2: Product Service Grouping, SuppliersTemplate 2.3: Product Service Grouping, CompetitionTemplate 2.4: Product Service Grouping, Market DynamicsTemplate 3.1: General ManagementTemplate 3.2: Sales/ Marketing ManagementTemplate 3.3: Operations and Production ManagementTemplate 3.4: Facilities ManagementTemplate 3.5: Financial ManagementTemplate 3.6: Planning and Information Management Template 3.7: People and Human Resource Management Template 4: Financial RatiosTemplate 5: Business and Financial Plan AssessmentTemplate 6: Scoring Specific Critical Success FactorsTemplate 7: Scoring Generic Critical Success FactorsTemplate 8: SWOT AnalysisTemplate 9: STEEPLE Analysis

Engagement Tools for Bankers and CPAs

Why Did You Choose Them?TransparencyGood Risk ManagementAble ManagementCritical AssessmentUnderstand Business ProcessConfidence in Product and StrategyRisk Factors are Known

Why Do SMBs Choose You?

Differentiators

Communication

Shared Goals

Understanding

Delivering Value Add

Prescient Tools

Relevance

S Social (e.g. changes in social behavior that might impact product / service selection);

T Technological (e.g. rapid development in cheaper components that will affect product prices or performance);

E Economic (e.g. non-US exchange rates affecting key imported supplies);

E Environmental (e.g. waste re-cycling legislation and penalties on producers);

P Political (e.g. government directives on certification or subcontracting);

L Legal (e.g. changes in employment laws)

E Emerging (Domestic Regulatory or International) (e.g. NAFTA, or World Trade Organization agreements affecting market dynamics and competitors)

Steeple Analysis

Steeple Analysis

Social RisksColumbus parade in Lodi and Garfield Canceled Because Of Pulaski Conflict

Steeple Analysis

Technological Risks

Lucent Technologies Over Reliance On Central Switching Long Lines Business

VOIP and Wireless

Offset Printers, Film Developers

Steeple Analysis

Economic Risks Outsourcing Manufacturing IC/Barriers to Entry

Cost of Capital

Weak Dollar

Energy Costs

Recession

Macro/Micro

Environmental Risks

DEP Releases Ranks Top Risks to New Jersey's Environment and Human Health

Land Use Change Poses a Major Environmental Threat to State, indoor and outdoor pollution, and invasive species as major threats to New Jersey’s environment and people.

United Water’s product has high sodium content due to salt spreaders

Climate Change Opportunities & Threats

Steeple Analysis

Steeple Analysis

Political Risks

Local Level Zoning, Community

Standards, Education

National Level Taxes, Infrastructure,

Immigration

International Level Trade and Stability

Legal Risk

Sarbanes Oxley, Patriot Act, HIPPA, OSHA, DEP, EOE

Product Liability Feds Demand N.J. Tire

Importer Pay For RecallChinese Manufacturer

Denies Responsibility

Steeple Analysis

Emerging Risks

CAFTA and NAFTAClimate ChangeRegime ChangeLaissez-faire / RegulationGlobalization and Market

Stability

Steeple Analysis

Sum2 is dedicated to the commercial promotion of sound practices. Sum2’s objective is to assist businesses to implement corporate sound practices that add exponential value for shareholders, employees, clients and to the communities in which they operate and serve.

Sum2 identifies its core competency to be the creative application of sound practice principles to the industries and businesses that we serve. Sum2’s SMB 360 is a clear example of this creative application of sound practices to an industry need. Sum2 is dedicated to corporate responsibility, ethical business practices, customer service excellence and delivering to our clients a unique and essential value proposition. We uphold these values in all our work and continually strive to deliver on the commitments that we make to our clients.

All products marketed by Sum2 are focused on risk mitigation. We look to creatively package and bundle solution suites that address targeted client and industry market segment requirements. All product marketing activities and business development initiatives are guided by and conform to a clearly identified industrial application of sound practices.

We appreciate your business and look forward to hearing from you about our products and how we can improve it.

PO Box 184 Little Ferry, New Jersey 07643

201.440.1173 customer.service@sum2.us

Citations

Dow and Nikkei

http://www.the-privateer.com/chart/us-jpn98.html

300,000 Ohioanshttp://www.starbeacon.com/local/local_story_263024729.html

FDICKey Aspects of the Proposed Rule on Risk-Based Capital Standards: Advanced Capital Adequacy Frameworkhttp://www.fdic.gov/news/news/financial/2006/fil06086a.html

Yardenihttp://seekingalpha.com/article/16521-housing-crisis-housing-bubble-or-lending-bubble

Columbus and Pulaski

http://www.northjersey.com/page.php?qstr=eXJpcnk3ZjczN2Y3dnFlZUVFeXkzNTcmZmdiZWw3Zjd2cWVlRUV5eTcxOTk3NDAmeXJpcnk3ZjcxN2Y3dnFlZUVFeXkz

NJ DEP Studyhttp://www.nj.gov/dep/newsrel/releases/03_0106.htm

NJ Tire Distributor

http://www.consumeraffairs.com/news04/2007/06/china_tires03.html