ECONOMIC DEVELOPMENT FINANCING AND ITS PRIVATE FINANCING PARTNERS

ECONOMIC DEVELOPMENT FINANCING AND ITS PRIVATE FINANCING PARTNERS JOSH HOCKER, ORRSTOWN BANK MELISSA STONE, CAPITAL REGION ECONOMIC DEVELOPMENT CORPORATION

WHY IS THE PRIVATE LENDER’S PERSPECTIVE IMPORTANT TO ED PROFESSIONALS? Goal of each ED loan program is to leverage private sector dollars with public dollars. More often than not those private dollars will be from financial institutions like banks. - Understand what the incentive is for a bank to be willing to fund part of a deal - Understand what risk the bank faces in being part of a ED deal.

FEATURES/BENEFITS For Business: Save $ Below Mkt Interest Rates Stability Rates fixed for full term No fluctuating payments Keep your Cash Only 10% down vs. 20% Can include soft costs For Banks: Improved collateral position They’re in 1 st lien We subordinate Reduced exposure 50/40/10 Less volatility in debt service Fixed payment for life of loan Leaves borrower with more reserves

BANK’S BIGGEST CONCERNS Providing Interim Financing Being stuck with 90% extended Taking on construction risk at 90% Program guidelines/legislation loopholes Closings that take too long and go beyond bridge loan expiration

THE CURRENT LANDSCAPE Borrowers are still hesitant Private financing partners are competing for the best credits with good rates Public program rates not providing great margin of difference for fees and inconvenience

EFFECTS ON EDC’S Reduced loan volume for EDC’s Some potential borrowers sit on the sidelines. Banks try to soak up the remaining good borrowers by themselves to find loan production. Banks reject “edgy” deals immediately. Revenues declining and balancing the budget for EDC’s becomes difficult.

EDC’S MUST REINVENT THEMSELVES Ultra-Network with your financing partners Reach end-users directly where practical Diversify and add to your product mix Increase value-added to Financing Partners Become a trusted resource Reduce your timelines Leverage your underwriting to your partner’s advantage Prepare yourself to sell a deal to a partner Become a credit expert

CREDIT ANALYSIS / PRIVATE LENDERS PERSPECTIVE OF THE DEAL

WHY DOES UNDERWRITING MATTER? EDC’s goal is to incentivize private investment into their communities to fuel the economy. We use public dollars to do that – should that be once and done? We should BALANCE the REWARD of developing their areas with the RISK of each deal. Underwriting is assessing the risk and identifying how to mitigate it, if possible. Community Banks are audited for this very thing, so understanding how they assess the risk in the deal can be used to tailor the EDC’s approach.

CASE STUDY Read loan presentation to familiarize yourself with a real life case. Think about what it means to you now, what you would be considering if this was on your desk, and formulate questions on the areas that are unfamiliar to you.

DECISION - CREDIT VS. EC DEV Credit Decision Ec Dev Decision Character Jobs Created Capacity/Cash Flow Jobs Retained Collateral Economic Impact Capital Conditions

CHARACTER Without it, there is no loan! Is this somebody with whom your organization wants to do business? Personal Integrity should outweigh Personal Net Worth How do you assess it? Personal credit reports 680+ Due diligence i. e. references During interactions with client Honesty Detail in application and business plan Preparedness

CASH FLOW Primary Source of Repayment Debt Coverage Ratio (DCR) Net Profit + Deprec + Int Exp – Distributions Debt Payments (P & I) Banks want 1. 25 or higher What about 1. 10? Never under 1. 00 (Can’t pay it back). Historical/Projected/Break-even Global/Personal Cash Flow

COLLATERAL Value of assets pledged as security for loan Collateral Value may be different than: Purchase Price Appraisal Book Value Liquidation Value Discounts applied by banks: On lower of purchase or appraised value On depreciated book value if existing assets On basis of accounts receivable aging

COLLATERAL Clients need to know that collateral is necessary as a “last resort” form of repayment Look at business balance sheet and personal financial statement Don’t be afraid to get all you can! “What else ‘ya got? ” Stress subordination as good for the client & the bank The reality of the 2 nd mortgage Don’t underestimate the value of “Psychological Collateral”

GUARANTEES Personal guarantees Required? All owners? Just 20% owners? Get creative: limited; conditional Corporate guarantees If shell entity, get guaranty of operating company Do they think the business will fail? If they believe in what they are doing, guarantees should not be an issue

CAPITAL Owner’s equity (cash) into a project 10% minimum (Banks require 20%) “Skin in the game” What reason do they have to get out of bed each morning to make sure the venture is successful? Net Worth on a company’s balance sheet Debt/Tangible Net Worth ratio Liquidity! – Access to reserve cash Held within business Held in personal name of guarantors Invested by shareholders (related terms) Available credit from revolving lines

CONDITIONS Outside influences: State of Economy Type of Market/Industry Location of real estate Presumed health of suppliers Presumed health of customers with A/R Company specific conditions What’s the deal driver? WHY? !? !? !

CASE STUDY Break into groups which would represent a loan committee. Debate the credit as presented, what changes you would make or not make, and take a vote.

Joshua Hocker SVP, Regional Sr. Loan Officer jhocker@orrstown. com 717 -530 -3902 Melissa Stone VP of Economic Development melissa@hbgrc. org 717 -213 -5042 Q&A SESSION THANK YOU