Chapter 5
Managing Bank Relationships
CACF 450 – N. Kirsh, CPA, MBA, CBV
Adapted from Working Capital Management: Applications and Cases, James S. Sagner
(Copyright ©2014 by John Wiley & Sons, Inc. All rights reserved.)
Foreword
This chapter has a strong US bias, however the main
sentiment still holds
COVID-19 has had a significant impact on banking, however
many effects are deemed temporary
You are encouraged to do a short presentation on banking in
Canada and important differences
Learning Objectives
Analysis of current trends in banking relationship
management
Mobilization of cash in a multibank network
General terms of credit agreements
Specific issues of importance in arrangements for credit
Ongoing bank relationship concerns
Selection of non-credit banking services (appendix to chapter)
Results of Financial Deregulation
Prohibitions against interstate banking and line-of-business
activities until the 1990s
◦ Fewer banks today: about 6,800 vs. 15,000 in the 1980s
◦ Has greatly affected community banks
◦ Forced banks to merge or become more knowledgeable
◦ Handshakes have given way to a formal relationship
◦ May be necessary for corporates to reexamine banking relationships
Bank relationship management: a comprehensive approach to the
bank–corporate partnership
◦ Credit arrangements to meet short- and longer-term financing
requirements
◦ Noncredit services for United States and global transactions
◦ Reasonable pricing and service quality
Twenty-first-Century Banking
The new regulatory environment allows pursuit of a broad
range of business opportunities, reducing reliance on
marginally profitable services
Banks require a reasonable ROE from each customer
◦ May terminate a relationship if there is little prospect of acceptable
returns in the long run
A proactive relationship management plan is necessary for
corporates to satisfy their financial institutions and bankers to
justify the business to their management
Finance as the Gatekeeper to Banking Services
Bank contact with companies has traditionally been through the
treasurer
However, access has been extended through other business
functions in recent years as banks have broadened their product
offering, which should not be permitted
◦ Too often, treasury staff remains unaware of the resulting dilution of its
responsibility
◦ Purchasing and accounts payable for e-commerce and purchasing cards
◦ Payroll department or human resources for direct deposit of payroll and
paycards
◦ Investment or real estate departments for specialized services as stock
loan, custody, and escrow or tax services
◦ Systems or information technology (IT) for technology-oriented services
Cash Mobilization
Where multiple collection and disbursement accounts exist,
cash needs to be mobilized into and funded from a principal
bank relationship
◦ Examples: retailing and company branch offices
Company-initiated: large companies may develop their own
reporting systems for cash mobilization
Standing instructions: based on frequency or amount
Deposit reporting services: 3rd party that provides a full
reporting and mobilization service, initiated by the local
manager, for about $1 each location
◦ Using ACH transfers
Too Many Bank Accounts?
Companies with more than about 25 bank accounts should
examine why these accounts are open
◦ Idle accounts often exist that are infrequently used; their balances can be
moved into a single bank account earning a higher return
◦ Closing 15 accounts could save $20,000-$25,000 a year and significantly
reduce the possibility of fraud
Focus on a single principal bank selected for corporate needs—
what does the company require?
◦ Credit
◦ International expertise
◦ Noncredit services
◦ Investment banking
◦ Knowledgeable relationship managers and other personnel
Terms of Credit Facilities
The type of loan being made, its amount of the bank’s
commitment, fees and interest to be paid, the repayment
schedule, and any restrictions that may be applied on the use
of loan proceeds by the borrower
“Conditions precedent”: one party, namely the bank, is not
required to perform its duties and obligations—namely lend
the borrower the money—until the borrower has satisfied
certain requirements, namely the conditions precedent to
allow the loan to be executed
Representations and warranties to be made by the borrower
Establishing a Credit Facility
Establishing a Credit Facility
Seniority Ranking “Sweetening” the deal
Senior Secured Unsecured credit facility
Claim on
certain
assets Junior Secured
Collateral/ covenants
Senior Unsecured
General Personal guarantee
claims only Junior Unsecured
Subordinated Equity co-investment
Covenants
Loan Covenants and Pricing (Cost-plus)
Apply to lines of credit and other types of credit agreements,
which are affirmative or negative restrictions that require
certain performance by borrowers
◦ These may include limitations on new debt beyond current borrowings,
changes in business strategies or senior management, and various
financial compliance requirements, often as measured by standard
ratios in such categories as liquidity, leverage, activity, and profitability
◦ Exhibits 5.2 and 5.3 list illustrative loan covenants
Loan interest rate = CF + OC + RB + PM
◦ CF: cost of funds RB: borrower risk
◦ OC: operating costs PM: bank’s profit margin
Ongoing Bank-Corporate Concerns
Monitoring compliance with loan terms
Helping borrower to avoid default
Renegotiating loan terms, if required
Controlling and updating banking records
Maintaining contact through periodic meetings
Determining noncredit services that are appropriate
Annual review cycle
First quarter : Formal meeting of company management and bank officers to:
◦ Discuss the strategic and financial results for the previous year.
◦ Outline the next year’s goals and objectives.
◦ Schedule the implementation of new initiatives.
Second quarter : Calling by the bank’s relationship manager to:
◦ Update the company on service and technology initiatives.
◦ Introduce product specialists.
Third quarter : Informal meeting of company management and bank officers
to:
◦ Review the status of the year’s goals.
◦ Determine which initiatives to emphasize to meet critical objectives.
Fourth quarter : Senior‐level social event to:
◦ Discuss current year.
◦ Plan for the next year and beyond.
