March is here, bringing year-end financial reporting processes throughout the insurance industry. The late winter and early spring days include familiar rituals for the owners of independent insurance agencies in the property-casualty industry: preparing and filing personal and business tax returns to the state and federal governments, and preparing and submitting agency financial statements to lenders and/or investors.

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

Even though it seems like the banking crisis is old news, banks continue to be cautious with their loan portfolios. Banks are on the lookout to cut from their loan portfolios any borrower who might raise eyebrows with regulators.

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

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

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

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

The problem is that many bankers are under pressure from problem loans made to other borrowers. Or they may face financial pressures based on activity in derivatives in years gone by. Or they may face unprecedented scrutiny of their own from regulators for any number of reasons.

Unless the bank your agency uses is a specialist in leveraged loans, you may have a difficult time maintaining credit in 2010.

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

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

"Affirmative covenants" require a borrower to keep promises such as:
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 will not 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 or reviewing year-end financial statements. Keep in mind that bankers will be on the lookout to scour them, under their newly-issued and freshly-painted green eyeshades, once you deliver them to your bank as required.

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