The document discusses key aspects of lending from a banker's viewpoint. It outlines three main sources of repayment for banks: cash flow from operations, guarantor support, and collateral/security. It then discusses the 5 C's of credit - character, capacity, capital, conditions, and collateral. The rest of the document delves into the key underwriting pillars a banker evaluates for a loan application, including financial condition, management quality, collateral/security, and industry dynamics. It provides details on analyzing profitability, liquidity, leverage, and cash flow when evaluating the financial condition of a borrower.

1. Lending: From A Banker’s Viewpoint
Presented by: Jamila Braithwaite

2. 2
Sources of Repayment
Banks
typically rely
on three main
sources of
repayment
Cash Flow
from
Operations
Guarantor
Support
Collateral /
Security

3. 3
5 C’s of Credit
Character
• Is the collateral sufficient as a tertiary source of repayment? If the
collateral must be liquidated, is the realizable value enough to repay
principal, outstanding interest and cover the bank’s administrative
costs of liquidation?
• What are economic and market conditions that could impair the
company’s ability to service the debt and repay the loan? Does the
company recognize these risks and have plans to mitigate them?
• Does the borrower demonstrate a commitment to honor his or her
transactions and keep promises even under adverse
circumstances?
Capacity
Conditions
Capital
Collateral
• Does the business demonstrate the capacity to apply the loan
funds? Does management have a business plan? Are plant and
equipment sufficient? Are marketing and product delivery well
developed?
• Does the company have sufficient net worth to absorb normal
business risk?

4. 4
The Loan Application
• Ensure that the loan application is complete and accurate
• Core bank loan application information often includes:
o Historical business financial information (2 years)
o Business and owner’s personal tax returns (2 Years)
o Personal Financial Statement
o Interim financial statements of the business and its owner for
the current & prior year, along with accounts receivable and
payable aging reports
• Alternative (micro) loan application is similar, but often allows
some flexibility – ask questions!

5. 5
Underwriting Pillars
• A company’s financial
condition determines
the borrower’s ability
to generate enough
cash to repay the debt
• Three items in
particular are
evaluated:
• Cash Flow
• Liquidity
• Leverage
Financial Condition
• It is necessary to
determine the
competence and
integrity of key
individuals running a
company
• A weak management
team not only
endangers the
second source of
repayment, but
opens the doors for
additional problems
Management
Quality
• The bank will
determine the realistic
level of control over
any collateral
pledged, including its
likely liquidation value
or net present value
• Inability to realize or
“call” collateral
threatens the third
source of repayment
Collateral / Security
• Analysis of the
industry focuses on
the particular industry
of the borrower and
the borrower’s
position within the
industry
• Weaknesses in the
industry foundation
can negatively impact
a borrowers ability to
repay
Industry Dynamics

6. 6
Underwriting Pillar – Financial Conditions
Financial Conditions
Profitability Liquidity Leverage
• Indicates operating success, growth
potential, and competitive position
• Determines the company’s ability
to meet obligations
– Cash
– operating expenses
– debt service
– supplies
– credit
• Determines the degree of financial
risk and ability to absorb business
risk
• Sign of the owner’s commitment to
the business as excess leverage is
often a key cause of failing
businesses

7. 7
Important to
Remember
• Cash flow
• Determine trends
(revenue/expense)
• Industry comparison
(profitability, leverage,
etc)
• Owner’s salaries /
bonuses / dividend
payments
Underwriting Pillar – Deeper Dive on Financial Condition
Profitability
&
Cash Flow
Provides a better
understanding as
to how much
excess income the
company will
generate and the
factors that
influence income
EBIDA Debt Service
Coverage (EDSC)
Calculation:
(Net income + interest expense + depreciation
+ amortization) / (Current portion long term
debt (prior period) + Interest Expenses)

8. 8
Liquidity
The ability to
quickly convert the
company’s assets
into cash
Important to
Remember
• Evaluate integrity of
creditor support
(adequate asset
protection for liabilities)
• Evaluate current asset
quality and aging of
receivables (A/R > 90)
• Assess shareholder’s
support, willingness to
guarantee / inject
additional capital
Underwriting Pillar – Deeper Dive on Financial Condition

9. 9
Important to Remember:
• Evaluate capital
• Assess creditor / shareholder
support
• 1:1 is good
• 3:1 is guideline
• Have to consider officer loans (to
& from) and intangibles
• Negative impact of treasury
stock
• Consolidating statements and
evaluate receivables and
payables to related companies
Underwriting Pillar – Deeper Dive on Financial Condition
Leverage
Comparison of
borrowed capital to
owner’s investment to
determine risk of
lenders if the company
fails
Leverage
Calculation:
(Total liabilities – Subordinated debt) / (Equity +
Subordinated debt)

10. Underwriting Pillar – Industry Dynamics
Industry Dynamics
Restricted High Risk Desired
• Adult
• Casinos
• Check Cashers
• Speculative
• Lenders
• Start-ups
• Restaurants
• Contractors
• Firearms
• Pawn Shops
• Professional
• Manufacturing
• Wholesale
• Service

11. Thank you for attending…