Regulatory Update

Impact of FAS 166 May Be Significant
The Financial Accounting Standards Board (FASB) is at it again. Recent revisions of FAS 140, involving off-balance sheet transactions, are currently being reviewed by accountants and attorneys across the country.

The ultimate impact of this revision is not fully known at this time since the revision is in excess of 300 pages long. However, initial reports indicate that various types of participation arrangements between banks could be impacted. More specifically, if a participation loan were to be qualified as a "true sale", a bank would need to assume proportionate ownership rights with equal priority to the participating interest holder. This would effectively eliminate last in first out participation arrangements.

Again, this is being reviewed thoroughly and a final determination of this revision and its impact on loan participations has not been determined. Please stay tuned for more information as it becomes available.

Fundamentals Return for Importer Suppliers
International trade grew enormously in recent years, fueled by abundant credit, high consumer consumption and the easing of commercial regulations in developing countries. For many independent importers, successful sourcing of consumer packaged products from manufacturing countries throughout the world became more about deal making than the sometimes arduous fundamentals of business. But things have changed. The economic thud reverberating through the system has quieted the din of easy commerce, forcing us to come to terms with the financial challenges ahead.

Few among us had factored the present economic situation into our business plans as a worst case scenario. International trade declined by a stunning 31% from January '08 to January '09 and most of that occurred during the last quarter of '08. This downward spike has introduced a measure of volatility with broad implications. Beyond the primary issue of slack consumer demand is the other big issue for importers - the financial health of suppliers. Without a doubt, the vetting process for foreign manufacturers should begin anew. Many continue to be well capitalized, but those whose double digit growth rate in past years stretched their limits may find themselves illiquid and unable to access credit. This could affect their ability to fill purchase orders on time, and for a vendor to large retailers, reliability is everything. In China, some 200,000 textile companies have shut down in recent months. Risk consulting companies are being kept busy, called upon to determine the ongoing viability of Chinese suppliers who are running into cash flow problems. Good relationships cultivated over the years are worthy of every consideration, so trust - but verify. And one should be prepared, because this due diligence will go both ways. Many importers will face more stringent terms from their suppliers which will exacerbate an already tight credit situation.

For decades, a commercial letter of credit was de rigueur when importing consumer packaged goods from developing countries. Foreign manufacturers used them as instruments of finance as well as credit assurance. They were able to present letters of credit at their banks and either discount the face value or borrow working capital using the letter of credit as collateral. In recent years, however, manufacturers who had grown their businesses into competitive, well capitalized enterprises were willing to fill purchase orders with only a partial advance payment. Importers would typically pay 50% on submission of the purchase order, and the remainder at time of shipment. For both parties, this was satisfactory as long as the credit risk was mutually acceptable. Now, there is more wariness on the part of foreign manufacturers, many of which were stuck with unexpected inventories by importers unable to access credit to pay the balance.

Tight credit continues to be a problem. The hope is that the worst is behind us, but for small and medium size companies whose principal business is sourcing product for major retailers, adequate access to credit is essential. One alternative to traditional working capital lines used by many experienced importers is the transferable letter of credit. This is a normal commercial letter of credit, issued for the account of the buyer in favor of the vendor but with a provision that allows the vendor to transfer a portion or all of the letter of credit to a second beneficiary, in this case, the foreign manufacturer. Incorporating this tool into the business model allows the importer to operate without a line of credit to purchase product, essentially by using the credit of the major retailer. The fees are nominal and the flow of documents through the banking process goes exceptionally well. The transferable letter of credit is an excellent option for those importers who have the opportunity to fill an order which would exceed their normal borrowing capacity, or those who would like to reduce their reliance on borrowed funds.

Financing the supply chain business requires careful consideration of all options. In a tight credit market, every party to the transaction must be willing to negotiate with greater flexibility. An importer who has developed a strong relationship with a foreign manufacturer can draw upon that strength to negotiate extended terms. This alone will improve cash flow and increase borrowing capacity under a working capital line by converting inventory to receivables before payables come due. While this may be a hard sell, it is entirely worth the effort. The difference can mean as much as 25% to 30% more borrowing power under a typical borrowing base formula, because most banks will finance up to 75% of the value of receivables, but only 50% against inventory. By collecting the receivable before accounts payable come due, the resulting positive cash flow brings a punch of buying power that creates even more volume for the supplier. Such an arrangement would be particularly advantageous for both parties in this historically low interest rate environment.

During the best of times, businesses engaged in international trade have known the value of aligning themselves with good external resources, such as World Trade Centers, customs brokers and yes, bankers. In and around today's business schools, much is being made about the need for creativity in the workplace. Right now, a little creativity on the part of business owners and their strategic partners could help resolve some of the problems which have contributed to the commercial malaise that clouds the horizon. Sometimes, just one new idea can open up a little blue sky.

Anna Anderson is Executive Vice President and Manager of the International Banking Department. She has been a banker for more than 25 years, most of which have been devoted to international business. Anna can be reached at Anna.Anderson@intrustbank.com or 316-383-1215. The International Banking department can be reached by calling 316-383-1300 or 800-895-2265.

Upcoming Training/Conference Opportunities
If you missed the 4th Quarter 2008 newsletter, you may not know that INTRUST Bank's Learning and Development department is now offering courses to you, our correspondent bank customers. We are excited to announce a couple of really great offerings coming up in September and October of this year.

First, in September, we will be offering a two-day seminar entitled Professional Writing Skills. This class is a hands-on workshop designed to help you more clearly communicate your message, identify red flags that clog sentences with extra words, provide tips for punctuation and mechanics, and much more.

In October, we will be offering the much anticipated Franklin Covey course entitled The 7 Habits of Highly Effective People. This course is based upon the similarly titled number one best-selling business book of all time. This three-day seminar teaches the basic principals underlying personal and interpersonal effectiveness. These principals are the habits of people who consistently achieve their desired results.

To find out more about these offerings, follow the link on the left hand side of this publication or contact Heather Funck by e-mail or by calling 800-732-5120.

2009 ABA National Agricultural Bankers Conference
If Franklin Covey is not your style, but David Kohl gets your attention, be sure to check out the upcoming 2009 ABA National Agricultural Bankers Conference. This year's conference will be held in San Antonio, TX on November 15th through November 18th. An outstanding lineup of speakers has been retained to discuss all of the most current issues in agriculture and banking. We hope to have Kansas and our neighboring states well represented at the conference. For registration information or additional details about the conference, visit the ABA Web site.

Get to know Dan Heinz, Vice President
Dan Heinz is a native of Syracuse, Kansas and spent the first 12 years of his ag lending career in Scott City, Kansas. Dan and his wife Jenny now reside in Rose Hill, Kansas with their three children, a daughter, Jadan (10), a son, Colby (7) and a daughter, Mandi (4). As if three children weren't enough, Dan and his family also have a 2 year old black lab named Hallie who can leave a path of destruction in her wake that can only be rivaled by Marley from the recent movie Marley and Me! In addition to keeping up with three very busy kids, Jenny is employed part time as a parent educator in the Parents as Teachers program through the Rose Hill school district.

Dan has been with INTRUST Bank for three years in the Correspondent Banking and Agribusiness Lending department. He spends a good deal of his time traveling throughout Kansas and Colorado visiting with bankers and agribusiness customers.

Dan's hobbies include woodworking, golf, camping, mountain biking and jogging.