Building a Bank Around You One Customer at a Time

1
Presentation to North Carolina State University

November 9, 2007
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• Rick Hartmann
• Director Risk Management
• RBC Centura - Raleigh

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Overview

• RBC/RBC Centura overview
• Funding sources vs Business Types
• Common Bank loan products
• Enterprise Risk Management
• Loan process
• Risk Assessment Process
• Loan structure/pricing
• Loan monitoring
• When loan risk deteriorates
• Role of Auditors

4
Royal Bank of Canada (RBC)

• Largest Bank in Canada Headquartered in Toronto,
  
• Ontario, Canada
• Established in 1869 138 years old
• Approximately US535 Billion in assets 6th
  largest in
• North America
• Employs 61,000 1400 branches in Canada, US and
  Carribbean
• AA stable public rating
• Offers personal and commercial banking, wealth
  management, insurance, corporate, investment
  banking and transaction processing on a global
  basis (gt 30 countries) Strong market positions
  in all business lines in Canada
• Stock price currently US55 (post split), up
  from US16 when first joined forces with Centura
  Bank in June , 2001
• Most recognized logo in Canada behind McDonalds,
  most valuable Canadian brand (4 bil) and most
  respected corporation in Canada 4 years running
  One of the worlds top 100 sustainable companies
  Global Private Banking is rated one of the top 20
  private banks in the worlds.

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RBC Centura

• First joined RBC in June, 2001 with approximately
  12 billion in assets
• Headquartered in Raleigh, NC (home of the RBC
  Center and the 2006 Stanley Cup Champions)
• Primary strategy of delivering banking services
  to businesses, business owners and professionals
  Specialized areas include Commercial and
  Industrial, Knowledge Based Industries,
  Government Banking, Commercial Real Estate
• Approximately 335 branches and 300 ABMs in a 6
  state footprint in the SE US (VA, NC, SC, GA, FLA
  and ABA)
• Approximately 4,000 employees
• 26 billion in core assets with recent Georgia
  and Alabama acquisitions
• 155 million in net income for 2006 projected to
  increase to 255 million in 2007

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Funding Sources vs Business types
Funding Sources
Capital markets
Banks
Venture capital
Personal equity/ Angel money
Type of business
Start-up
Small Business
Corporate
Commercial

• 
  0 to 10MM
  10MM to 250MM
  gt250MM REVENUE
• 0 to
  50M in loans 50M to 2.5MM 2.5MM to
  100MM gt100MM LOANS

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Common types of Bank loan products
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Credit Risk Analysis

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RBCCs Risk Framework
Less Control
More Control
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Overview of Loan Process


Preliminary Assessment /Term Sheet issuance
Customer Visit/info gathering
START
Business plan/projections
Company visit
Existing financial statement (3-5 yrs)

Term Sheet Acceptance/ In-depth Assessment -
further due diligence
Final loan approval/ Commitment/ Acceptance
Loan Administration (documentation/ monitoring/rep
orting)
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Borrower Risk Assessment

• Key in on measurement of probability of default
  to any unsecured lender over a 3 year time
  horizon
• Focus on cashflow
• Utilize a Risk Assessment Framework (RAF) model
  with a focus on areas that affect quality and
  sustainability of cashflow, our primary source of
  repayment (industry, management, financial,
  access to cash, other events)
• Secondary repayment source is security but is
  usually not a preferred avenue to the Bank
  (considerable time/expense)

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Risk assessment framework (RAF)Six key
assessment factors

• ..more than just
  financial
• Industry 15
• Market and Competitive Analysis 15
• Business and Financial Strategy 15
• Financial Analysis 35
• Event Risk 5
• Access to Funds 15
• 100

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Industry Analysis

• 15 of overall rating
• Consideration of the industry in which company
  operates
• Industry structure, market characteristics,
  supply/demand factors, competitiveness, barriers
  to entry/exit, performance and industry outlook
• Full comprehension of the industrys KSF is
  essential to understand and position the Borrower
  within its business environment
• Sources of information Banks internal
  resources/research, 3rd party research/analysis,
  Discussions with management Company, Internet.

14
Market and Competitive Analysis

• 15 of overall rating
• Identify the Borrowers key strengths and
  weaknesses in terms of key success factors for
  the industry (key competencies and how they
  differentiate themselves for success)
• Sources of information Banks internal
  resources/research, 3rd party research/analysis,
  Discussions with management, Internet.

15
Business and Financial Strategy

• 15 of overall rating
• Generally to assess Borrower Business and
  Financial Strategies in relation to market and
  competitive positions
• Business Strategy how company plans to stay
  competitive (markets/products)
• Financial Strategy how company plans to fund
  Business Strategy and manage the Balance Sheet
• Source of information Discussions with
  management, Financial projections, Banks
  internal research analysis

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Financial Analysis

• 35 of overall rating
• Analysis of Financial condition of company with a
  focus on assessing quality and sustainability of
  cashflow and probability of default
• Sources of information Company financial
  statements/projections, Moodys MFA, RMA/SP/peer
  group comparisons, Banks internal analysis,
  Discussions with Management

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Financial Analysis (contd)

• Key components/ratios
• (historical and projected financial analysis,
  trends,
• fluctuations)
• Liquidity working capital, quick ratio,
  current ratio
• Leverage debt/worth, FD/EBITDA, net worth
• Cashflow/debt coverage cashflow analysis,
  debt coverage
• ratios (FCC/DSC)
• Profitability sales growth/profitability,
  gross margin, operating margin, net margin

18
Event Risk

• 5 of overall rating
• Focus on events that are likely/bound to have
  serious consequences on the financial viability
  of the borrower such as
• Sources of information Internal research and
  assessment, 3rd party research, Discussions with
  Management, Internet

19
Access to Funds

• 15 of overall rating
• Funds outside of our facilities to prop up
  cashflow/reduce probability of default to fund
• Ongoing operations
• Current/future growth
• Repayment of Bank credit facilities
• Reduces borrowers reliance on Banks continued
  availability of credit and therefore reflecting
  reduced risk willingness to prop up earnings are
  view positively
• Sources can come from equity (public/private),
  balance sheet capacity, owners/guarantors
• Sources of information Banks internal
  assessment, Discussions with management

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Overview of Loan Process


Preliminary Assessment /Term Sheet issuance
Customer Visit/info gathering
START
Business plan/projections
Company visit
Existing financial statement (3-5 yrs)

Term Sheet Acceptance/ In-depth Assessment -
further due diligence
Final loan approval/ Commitment/ Acceptance
Loan Administration (documentation/ monitoring/rep
orting)
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Loan structuring security/advance rates
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Loan Pricing

• Based on borrower risk rating and Loss in the
  effect of default (LIED) (derived from historical
  loss rates and type of collateral)
• Utilize a pricing model that also considers cost
  of capital
• Smaller loan/loan portfolio based on matrix
• Minimum return thresholds/target return as per
  risk adjusted return on capital (RAROC) and net
  income after cost of capital (NIACC)

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Overview of Loan Process


Preliminary Assessment /Term Sheet issuance
Customer Visit/info gathering
START
Business plan/projections
Company visit
Existing financial statement (3-5 yrs)

Term Sheet Acceptance/ In-depth Assessment -
further due diligence
Final loan approval/ Commitment/ Acceptance
Loan Administration (documentation/ monitoring/rep
orting)
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Loan Structuring - Monitoring
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When loan risk deteriorates

• Life cycle of a deteriorating commercial markets
  credit
• credit originated regular monitoring performed
• company experiences financial difficulty
• risk rating of relationship is downgraded
  monitoring increased
• relationships are regularly reviewed in
  quarterly watchlist strategy
• developed by working with company
• if risk deteriorates further - Specialized Loan
  group assumes management of relationship two
  possible outcomes
• Credit exits the Bank Credit rehabilitates, is
• through payout or upgraded and returned
• charge off to the field

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How auditors become involved

• Involved in financial meetings with Company and
  Bank
• Preparation of financial projections/business
  plans
• Re tax strategies/financial advice consider
  banking arrangements
• Establish business relationships with bankers

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Thank you for listening!