Five C s of Credit: Understanding Bank Decision Process. Shane Tiernan SVP Chief of Lending GNB Bank

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1 Five C s of Credit: Understanding Bank Decision Process Shane Tiernan SVP Chief of Lending GNB Bank

2 Who Is GNB Bank? Locally owned community bank with $350MM in total assets. Four locations: Grundy Center, Conrad, Marshalltown, Manchester HC also owns Ackley State Bank $120MM community bank $222MM in loan volume Sub S Corporation with shareholders Largest individual shareholder-employee close to 10%

3 Shane Tiernan Profile Chief of lending for GNB Bank Facilitator for GNB Bancorporation strategic planning process 30+ years in small business/ag lending 3 Governors volunteer awards for rural community economic development Recognition from USDA for role in rural community economic development Served on multiple local and regional boards and committees

4 PRIMARY BANK FINANCING DECISION CRITERIA FIVE C S OF CREDIT Character Capital Capacity Collateral Conditions

5 CHARACTER What is your credit score? 700+ (emphasis on +) Do you have a history of borrowing and repaying debt? Any collection items will be negative regardless of the reasons Principals must be prepared to personally guarantee the debt Do you know your business?

6 CAPITAL How much skin do you have in the game? No free lunches. What tangible equity are you putting in? IE Cash is King What other (tangible) assets do you have to strengthen the deal? Loan to Asset Value, depending on property type will be limited to 60-80% of purchase price or appraised value-whichever is lower Sweat equity has minimal influence on most deals. Exception might be community based development.

7 CAPACITY (Cash Flow) (Doesn t matter what the property is worth if it doesn t cash flow) Net Income vs. Net Cash Flow-know the difference Commercial property will require a Net Cash Flow after debt service and distributions of x Cash Available Net Income +Depreciation/Amortization +Term Interest Paid NET CASH FLOW = -Distributions/Owners Draw/Dividends =Cash Available For Debt Service

8 Example of Debt Service Cash Flow Net Income $25,000 Depreciation $36,500 Term Interest Paid $15,000 Owner Distributions Taken ($25,000) Cash Available for Debt Service $51,500 Principal and Interest Payment $45,500 Net Cash Flow After Debt Service $ 6,000 Debt Coverage Ratio ($51,500/$45,500) 1.13

9 COLLATERAL Property is only worth the income it can generate Most appraisals will base valuations on a combination of Capitalization Rate and Comparable Sales. What is Capitalization Rate?

10 Capitalization Rate Gross Income -Fixed & Variable Operating Expenses excluding loan interest expense =Net Operating Income before Debt Service Divide by Capitalization (return) rate for like business =Estimated value of property **Does not include any business value

11 Cap Rate Example Gross Income $75,000 Operating Expenses $ 45,000 Net Operating Income $30,000 Cap Rate 10% Estimated Value of Property = $300,000

12 What s My Business Worth? IT DEPENDS.. Most going concern business valuations range from 3-7 times Earnings Before Interest, Depreciation, Taxes, Amortization (EBITDA) and Owner s Draw *Varies widely across different business types **Business value is not the same as Collateral Value

13 CONDITIONS What is the current state of the local/regional economy? What is the overall health of the community What condition are other properties in the area in Percentage of non-owner occupied buildings Turnover rates

14 THANK YOU Shane Tiernan

15 Revolving Loan Funds A local Financing Tool Bruce Nuzum Vice President Finance

16 Discussion Outline Introduce IADG / Sponsors USDA Rural Economic Development Loan & Grant Program Revolving Loan Funds

17 Membership 85 consumer owned utilities & 150 Telcos The economic development organization for Iowa Rural Electric Cooperatives, Associated Municipal Utilities and Independent Telcos.

18 IADG Sponsors

19 IADG Member Territories

20 Site Selection Community Information Financial Packaging Permit Assistance Business Services IADG Team

21 IADG & Member Impacts 2,000 Projects $10 Billion in Investment 50,000 Jobs 95 Industrial Parks 7,239 ac 74 Spec Buildings 2.2MM sq. ft. 79 USDA REDLs totaling $42MM 119 USDA REDGs totaling $32MM 43 RLFs Capitalized at $45MM

22 Rural Economic Development Loan & Grant Program A Unique Tool for Rural Economic Development Efforts Limited to Eligible RUS Borrowers

23 USDA Rural Economic Development Loan and Grants Program Purpose: To Promote Rural Economic Development and Job Creation Projects through 0% Pass through Loans (REDLs) Grants to establish a local Revolving Loan Fund (REDGs) Program Priorities Job Creation / Improve the Skill Set of the Rural Workforce Education Projects Health Care Projects Nationally Competitive Program Monthly Application Submissions Rural Definition of 50,000 or less in population REDL&G Funding Levels REDLs $32 Million expected (FY-2014/15) REDGs $10 Million expected (FY-2014/15)

24 USDA Grant for Revolving Loan Fund RUS grants to RLF $300,000 Max REC/ Muni/Telco matches 20% with own funds $60,000 max REC/Muni/Telco Administered RLF $360,000 REC/Muni/Telco

25 USDA Grant for RLF $360,000 Loan Terms First loan to non-profit entity 0% interest loan 10 years term maximum Up to 2 year deferment Adequate security Priority: Community Development Projects Hospitals & Medical Facilities Educational Facilities

26 39 REDG Revolving Loan Funds Capitalized at $41 Million Range $240,000 to $3,700,000 4 IRP Revolving Loan Funds Capitalized at $4.4 Million Range $400,00 to $2,100,000

27 RLF Report Combined Subsequent Loans 526 Loans Totaling $46.8M Leveraging $441M in Project Investment Creating / Retaining 7,700 jobs

28 IADG RLF Partnership Report Average RLF Loan $85,000 loan $800,000 project Creates / Retains 13 jobs Maximum Loan Limit $150,00-$250,000 (Generally) All projects combined, 67% of all loans are off system

29 IADG RLF Partnership Report Available Funding as of December REDG RLFs: $15.4M (37%) IRP RLFs: $ 2.3M (52%) Total $17.7M

30 Where to Find RLFs Local Economic Development Office Chamber of Commerce City / County Councils of Government / Planning Agency Rural Electric Cooperatives Municipal Electric Companies Independent Telephone Companies Resource:

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33 Revolving Loan Funds in general RLF Priorities, Terms, Collateral and Requirements are determined locally Possible limited eligibility of project type May exclude business types May exclude working capital Loan amount available to business may vary based on job creation/retention of project Role as a gap financer but collateral requirements vary Junior Liens vs shared collateral with the bank Minimum Loan may vary $5,000 $50,000 Terms maximum usually 10 years Real Estate 10 years Equipment 5-7, but possibly shorter Interest Rate: 3-5% cost of funds

34 RLF Requirements The Realities: Business Plan Required! RLF information requirements and project review will likely be more intense than going to the bank! Application process will likely be longer! Not a traditional lender Outside review committee Review time varies depending on board meeting Collateral and Personal Guarantees still apply!

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36 Micro Loan RLF Microbusinesses: 10 or fewer employees Start-Up, Expansion, Refinancing Loan: $5,000 50,000 Terms: 6 year Maximum 8.125% Interest Technical Assistance Component

37 Summary of RLFs Questions? Flexible, locally controlled financing tool RLF priorities and requirements vary by fund Information requirements at least equal to bank and can be more Fills a role as gap financer But risk tolerance varies Special fund for Microloans

38 Business Plan Finance Tools What Lenders Want

39 Business Description Company name, location, type of entity, owner(s) Keys to success Brief overview of products or services

40 Products/Services Detailed description of what they are making or service they are providing Competitive advantage of product or service

41 Market Analysis of market, industry trends Geographic description of market Demographic description of market Psychographic description Summarize market advantage of their business/differentiation

42 Your Team Owner(s), brief bio Management, skills needed, education needed, salary and benefits Personnel, adequate poll, skills needed and wage to be paid

43 Financial Plan Summary of significant assumptions or if existing business, revenue streams Historical financial statements if already in business 3 years

44 Financial Plan Financial Projections o Sources and Uses/Financial Assumptions page o Opening day balance, 3 years of balance sheets o 3 years of profit and loss o Statement of cash flow for 3 years o 3 years of month by month financial statements Any other required info, resume, personal financial statements of owner(s), summary of major customers, etc

45 Summary Know your Audience Goals Concise