5/9/2013 IF BANKS AREN'T LENDING, WHERE DO I GO? AGENDA. Casey Sullivan, Vice President, Commercial RM. State of the banking industry

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1 IF BANKS AREN'T LENDING, WHERE DO I GO? Casey Sullivan, Vice President Wells Fargo Commercial Banking Casey Sullivan, Vice President, Commercial RM Commercial banking since 2005 Partnering with clients primary financial service providers to coordinate cost-savings strategies Master s, professional accounting, Seattle University, degree expected 2014 B.S., business, Concordia University Contact Information: casey.sullivan@wellsfargo.com (253) AGENDA State of the banking industry Understanding credit underwriting/loan approval Preferred/discouraged industries for financing Financing for difficult requests Positively impact/influence credit decision 1

2 COMMERCIAL BANKS ARE CASH FLOW LENDERS 457 Failed banks from 2007 to mid Acquired Banks 2

3 Number of problem banking institutions dropped to 694 in Q banks with <$100 million in assets were acquired or failed in U.S. COMMERCIAL AND SAVINGS INSTITUTIONS STATS ghb7 LARGEST COMMERCIAL BANK FAILURES 2007 Lehman Brothers Assets: $639 billion 2008 Washington Mutual Bank Assets: $307 billion Acquired by JPMorgan Chase IndyMac Bank Assets: $32 billion 2009 Colonial Bank Assets: $25 billion Guaranty Bank Assets: $13 billion 3

4 Slide 9 ghb7 Should add deposit for WaMu boehmegh, 5/7/2013

5 ghb8 457 Failed banks from 2007 to mid Acquired Banks ghb10 LARGEST COMMERCIAL BANK DISTRESSED ACQUISITIONSSINCE 2008 Merrill Lynch: Acquired in September 2008 with assets of $876 billion by Bank of America for $38.25 billion ghb4 Wachovia: Acquired in September 2008 with assets of $673 billion by Wells Fargo for $15.1 billion Bear Stearns: Acquired in September 2008 with assets of $399 billion by JP Morgan Chase for $2.36 billion Countrywide: Acquired in September 2008 with assets of $172 billion by Bank of America for $4.1 billion National City Bank: Acquired in October 2008 with assets of $140 billion by PNC Financial for $5.32 billion FACT OR FICTION: COMMERCIAL BANKS AREN T LENDING 4

6 Slide 10 ghb8 Repeats of Slide #5 boehmegh, 5/7/2013 Slide 11 ghb4 Merger completed on Jan. 1, boehmegh, 5/7/2013 ghb10 Simplify like Silde #9 boehmegh, 5/7/2013

7 COMMERCIAL BANKS ARE CASH FLOW LENDERS 5

8 FACT OR FICTION: COMMERCIAL BANKS AREN T LENDING COMMERCIAL BANKS USE SYNTHETIC CREDIT RATINGS FOR CLIENTS Moody s Analytics Financial spreads Credit Rating Metrics (Fixed Charge Coverage Ratio, EBITDA Coverage/Leverage Ratio, Current Ratio) 1-to-10 or 1- to-20 loan risk-rating scales Risk-based pricing tied to risk-adjusted capital ratios WHAT IS YOUR COMPANY S SYNTHETIC CREDIT RATING? PRICING, STRUCTURE, GUARANTIES, HOLD LIMITS 6

9 COMMERCIAL LOAN APPROVAL PROCESS Automated Centralized Loan committees One-up approvals Single approval signing authority Hold limits/house accounts Syndications/club loans FOCUS LENDING NICHES Commercial & Industrial (C&I) Loans Asset-Based Loans EXIM (Export Import) SBA (Small Business Administration) AVOIDED LOAN PURPOSES Land/construction Investment commercial real estate Cash-out requests High leverage LBOs Funding operating losses Start-ups Restricted/high risk industries 7

10 WHERE DO YOU GO? LAND / CONSTRUCTION Partner or borrow directly from developers/general contractors Primary Commercial Bank Relationship accommodation Owner-Occupied 30% or more cash down payment Lesser of Loan to Cost or Loan to Value (appraisal risk) High borrower liquidity Strong personal guarantors with liquidity Local Hard Money or private lender WHERE DO YOU GO? INVESTMENT COMMERCIAL REAL ESTATE Primary Commercial or Private Banking Relationship accommodation IM&T (Investment Management & Trust) relationships are high value to a Private Banking department Strong or New Community Banks/Credit Unions Insurance Companies Local Hard Money or private lender WHERE DO YOU GO? CASH OUT Primary Commercial or Private Banking Relationship accommodation Do the planned use of the proceeds create disproportionate value? Regional/Community Banks Willing to make more accommodations to win business 8

11 WHERE DO YOU GO? HIGH LEVERAGE LBO Aggressive super regional banks National/super regional banks that have historical working relationships with either the operating company being purchased or the private equity sponsor Insurance companies use a lower senior-funded multiple and push more onto the mezzanine side of the transaction and increase average interest rates WHERE DO YOU GO? Funding Operating Losses High yield/junk bond issuances through investment banks Special asset departments at commercial banks Local niche-factoring companies Activist accredited investors WHERE DO YOU GO? START-UPS Angel investors (groups and individuals) Venture capital Private placements accredited investors SBA loans 9

12 WHERE DO YOU GO? RESTRICTED INDUSTRIES Condominium construction/conversion Continuing care retirement communities Entitled commercial land Homebuilding (vertical construction) Merchant builders (develop /sell but don't retain income-producing property) Mortgage companies Mortgage REITs ghb5 Motels and hotels (except for Public REITs) Non-owner occupied single tenant properties with non-investment grade tenant Real estate related finance companies (consumer and commercial) Recreational properties Residential land development Ski resorts Theaters (except for public REITs or if the theater represents less than 20% of an overall property's cash flow) Unanchored retail centers Unentitled (raw) land financing (residential/commercial) Unsecured lines to private developers/investors dependent on real estate as a source of repayment WHERE DO YOU GO? RESTRICTED INDUSTRIES Keep searching for a Commercial Bank with different Restricted industries Smaller regional and community banks with credit policies that are not as deep Niche Private / Hard Money Lenders BORROWING CAPACITY, COSTS & COVENANTS Bank s have maximum borrowing thresholds per CPA Statement quality (Audited, Reviewed, Compiled) as compared to tax returns and company prepared statements Exceeding these thresholds creates a policy exception and will impact other aspects of your credit facilities Banks used relationship based pricing models that primarily are driven by your synthetic risk rating. Upgrading your statement quality should lower your borrowing costs Loan covenants include performance and reporting requirements. Higher quality CPA Statements will allow the Bank to reduce the number of covenants required. You may be eligible for a multi-year line of credit or a demand line of credit 10

13 Slide 28 ghb5 Spell out -- don't think everyone will know what the abbreviation means boehmegh, 5/7/2013

14 BEST PRACTICES TO IMPROVE YOUR BORROWING CAPACITY Budget Forecasting: Detailed annual monthly budget with internal tracking to plan. Historical comparison of accuracy of budget to actual results. Long term high level 3 to 5 year financial projections. CAPEX projections Detailed written internal control policies and procedures with an occasional 3 rd party review, such as from a CPA firm Invite your banker and their credit officers to visit your facilities and get to know your management team Invite your bankers and CPA s to get together with you during long term strategic planning sessions Each scenario is different. The size of your company and the amount of banking financing you utilize will dramatically impact the value proposition of upgrading your CPA statements MEET YOUR CREDIT OFFICER(S) What s their career background? What s the future health of your industry? Did they have a loan go bad on them in the past that was in your industry? How long have they been at the bank? Do they understand your business and industry? What are their approval authorities? Will they stretch for you on tough requests? QUALITY OF YOUR BANKER What is their career background? Do they understand your business and industry? What is their rapport level with their Credit Officer? Do they understand the story behind the financial numbers? Do they understand the accounting aspects of your financial statements? How well do they advocate on your behalf? Do they share banking knowledge and pro-actively inform you of ways to accomplish your goals? DO YOU HAVE ACCESS TO LOCAL SENIOR MANAGEMENT? 11

15 COMMERCIAL BANKS ARE CASH FLOW LENDERS Q & A 12