March is here, bringing year-end financial reportingprocesses throughout the insurance industry. The late winter andearly spring days include familiar rituals for the owners ofindependent insurance agencies in the property-casualty industry:preparing and filing personal and business tax returns to the stateand federal governments, and preparing and submitting agencyfinancial statements to lenders and/or investors.

Although it may be tempting to breathe a sigh of relief whenyou're done with the paperwork, keep in mind that bankers will belooking more closely than ever at the financial statements yousubmit to meet loan reporting requirements. Expect that your loanwill come under unprecedented scrutiny, for any justifiable reason-- material, technical or otherwise.

Even though it seems like the banking crisis is old news, bankscontinue to be cautious with their loan portfolios. Banks are onthe lookout to cut from their loan portfolios any borrower whomight raise eyebrows with regulators.

There's a reason that independent agencies are under specialscrutiny, compared with other businesses down the street. That'sbecause most bankers view loans to independent agencies as"leveraged finance" -- cash-flow based loans that are not supportedby hard asset values and/or balance sheet equity. Leveraged loanshave been and will continue to be made based primarily onintangible factors such as "enterprise value."

These loans are suspect in the eyes of most bankers, even ingood times. Now that credit is tight, bankers will avoid themaltogether and aim to cut them out of their existing loan portfoliowhere possible.

Look at it from the banker's perspective: he/she can lend to anagency, or invest in government securities. In an era of second-and third-guessing of bankers by regulators, less-risky investmentsare the preferred use of funds.

It doesn't matter whether the loan is a good one, or that theborrower never missed a payment, or that the borrower has along-term relationship with the bank, or that the borrower has tensof thousands of dollars in deposit accounts at the localbranch.

The problem is that many bankers are under pressure from problemloans made to other borrowers. Or they may face financial pressuresbased on activity in derivatives in years gone by. Or they may faceunprecedented scrutiny of their own from regulators for any numberof reasons.

Unless the bank your agency uses is a specialist in leveragedloans, you may have a difficult time maintaining credit in2010.

Many of those things are beyond the control of borrowers. Whatyou can affect, however, is your financial performance and yourfinancial reporting.

Don't become your own worst enemy by giving banks theopportunity to call a loan by breaking, or not adhering to, loancovenants. Loan covenants are the commitments that borrowers makein those detailed loan documents.

"Affirmative covenants" require a borrower to keep promises suchas:
o Producing sufficient cash flow to repay the debt
o Keeping an adequate cushion of cash
o Supplying financial information.

"Negative covenants" are promises that a borrower agrees it willnot break, such as:
o Changing the composition of owners
o Paying dividends
o Taking distributions
o Incurring additional debt.

Your agency can trigger a loan default (and have the loan"called" by the bank) by breaking covenants in either category.

Right now, you and the agency's accountants are compiling orreviewing year-end financial statements. Keep in mind that bankerswill be on the lookout to scour them, under their newly-issued andfreshly-painted green eyeshades, once you deliver them to your bankas required.

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