1 Scott S. Hickey Executive Vice President & Chief Credit Officer

1. Commercial & Industrial lending Banks lent to ever increasing multiples of cash flow. Debt- to-ebitda levels of 3 to 5x were common with specialty industries even higher. On top of those high multiples, banks underwrote to projections which showed ever increasing levels of ebitda. A belief amongst bankers that all companies had some intrinsic enterprise value as a going concern and their secondary repayment source was not so much collateral as the sale of the company.

So, what happened? In a recession, both ebitda and multiples fall; this means a significant loss as the enterprise valuation receives a double wammy. Leverage, while accretive on the way up, kills on the way down.

2. Commercial Real Estate Unrealistically low cap rates Underwrote to the secondary market takeout not internal benchmarks Distortion in the secondary markets as Wall Street created complex CDO structures which were not reliant on sound credit underwriting Overbuilding for perhaps the first time systemically in the residential asset class driven again by Wall Street exotic mortgage products

So, what happened? Collapse of the residential mortgage market Rising cap rates combined with declining cash flows and deals can’t be refinanced Foreclosures driving values

3. Impact on the Banks Earnings decline as loan loss provisions are driven by the migration of risk ratings Depletion of capital Liquidity issues as certain asset classes become illiquid

4. How do the banks react? Tighten credit despite the fact that the bad loans are already on the books Shrink the balance sheet to strengthen capital ratios or exit those businesses which attract higher levels of capital Increase pricing to repair capital impairment

5. What is getting done today? Traditional bank deals with stable cash flows, low leverage, and hard assets as a secondary source of repayment Commercial real estate deals which are stabilized or construction deals with limited lease-up risk (build to suit). No higher risk asset classes such as residential or retail. Non-recourse lending is almost impossible to obtain.

6. Underwriting - your bank will be looking at the following: Fixed charge coverage: does your free cash flow cover your fixed obligations with margin. Leverage: cash flow leverage (funded debt –to-ebitda) of no greater than 2.5x Liquidity: often overlooked; is there sufficient availability under credit lines to support the business.

Terms and conditions: 1. Some measure of fixed charge coverage and leverage 2.Borrowing base and updated appraisals 3.Personal guarantees full on limited Bank hold appetite: may want to spread single name risk 10