NORTH ISLAND CREDIT UNION Policy Section: Business Services Policy Name: Member Business Lending Policy No: 500-05-01 Board Review & Approval: July 21, 2014 Effective Date: July 22, 2014 POLICY STATEMENT North Island Credit Union (the Credit Union) will originate National Credit Union Administration (NCUA) defined Member Business Loans (MBLs) based on guidance provided in the NCUA s Member Business Lending Regulations as detailed in Part 723.1, and in the California Department of Business Oversight (DBO) Regulations. This Policy Statement will be supplemented by guidelines contained in a Procedure Manual, which will be maintained by Business Services Department Manager and will provide additional direction on the lending requirements outlined here. The Board will review the MBL Policy for needed updates on an annual basis, or more frequently if needed. A. Types of Loans made: Any member business loan as defined in NCUA Rules and Regulations, Part 723.1, with the exception that we will not make construction loans. Based on the breadth of the Credit Union Staff s level of business lending experience, (except as limited below in the section on Credit Decision Analysis), the Credit Union will consider loans that will fall under any of the categories specified in Exhibit A to this Policy. By way of example, the Credit Union will lend on any kind of office, industrial, multi-family and retail properties both for investors and owner users. Additionally, the Credit Union will provide business lines of credit and term loans on an unsecured and secured basis. In accordance with NCUA Rules and Regulations, Part 723, loans with aggregate business loan exposure under $50,000 are not classified as MBLs and accordingly are not subject to the limitations of this Policy; however, as a matter of practice the Credit Union will still exercise a comparable level of underwriting and monitoring with these loans. B. Charter Area: The Borrower must fit within our existing field of membership, which includes San Diego, Orange, and Riverside Counties and pre-existing Select Employee Groups. Borrowers and all guarantors must be or become members of the Credit Union. C. Loan Diversification: The Credit Union s total portfolio of Member Business Loans, less loans purchased from other credit unions (in-participations), will be limited to the regulatory maximum of 175% of Net Worth or 12.25% of assets (whichever is less). In Page 1 of 8
accordance with the Credit Union s waiver dated, November 26, 2012, total MBLs, including the non-member in-participations, shall not exceed 17.25% of assets or 225% of net worth 1 (whichever is less). D. Concentrations: The maximum allocation in relation to net worth for any category of business loans, as well as the geographic limitations for loans outside of California, are enumerated in Policy 500-05-04, MBL Concentrations. The policy concentration limits for commercial real estate (CRE) loans, based on property type, may be exceeded only with Board approval per the MBL Concentration Policy. On a quarterly basis, a report will be prepared and delivered to the Board illustrating aggregate loan balances, sorted by property type with explanations for any exceptions to policy. E. Maximum net amount loaned to one member or group of associated members: The absolute maximum or Regulatory Loan-to-One-Borrower, or group of associated borrowers, Limit is 15% of Regulatory Net Worth. The Credit Union internal policy Loanto-One-Borrower House Limit will be the lesser of the Regulatory Limit or Ten Million Dollars ($10,000,000). Exceptions to the House Limit may be approved by the Board of Directors, provided the absolute Regulatory Limit is not exceeded. Not less than annually a summary report will be prepared and delivered to the Board that highlights the top relationships, based on aggregate MBL balances. F. Personnel Qualification and Experience: Those Employees designated by the Board and Business Services Department Manager to have business lending limits, underwriting authority or authority to present loans for approval to the Executive Officers Loan Committee must have a minimum of five years prior business lending experience. Loan officers and underwriters must have experience handling loans with similar characteristics as those that have the authority to underwrite or approve for the Credit Union. Members of the Executive Officers Loan Committee shall also have such similar business lending experience or the equivalent in analytical experience with consumer lending or finance. Other staff members who handle the administrative activities associated with member business loans must have a minimum of two years prior experience in MBL processing and/or servicing. G. Loan Approval Authority: The Board approved Lending Limit for the Business Services Department Manager is $2 million, who in turn is empowered to delegate limits and authorities of the loan officers related to MBLs. Loans with aggregate balances that exceed the Business Services Department Manager s limit will be approved by the Executive Officer s Loan Committee. The appropriate approval authority is required for all new loans, renewals, modifications, workouts, and troubled debt restructures (TDRs). The loan approval authorities for the Credit Union s individual Loan Officers shall be maintained by the Business Services Department Manager and Credit Manager. The creation of any new loan types not designated in the MBL Concentrations Policy requires the approval of the Board of Directors. The Business Services Department Manager must also approve all loans involving exceptions to our Environmental Procedures. Within their respective loan limits and loan policy limit ranges, Executive 1 All references to Net Worth within this policy shall refer to Regulatory Net Worth Page 2 of 8
Business Lenders and the Executive Officers Loan Committee are empowered to approve exceptions to: underwriting guidelines (except as limited below in the Collateral Section), financial statement quality procedures, and procedures setting the appropriate level of appraisals. Executive Business Lenders may also grant post-approval negotiated changes that are within policy. An Executive Business Lender may approve conforming business automobile and equipment loans up to $100,000 for existing borrowers graded 3 or better, regardless of the borrower s current indebtedness to the Credit Union, as long as the Loan-To-One-Borrower limit is not exceeded. For any loans classified/rated as Grades 4 to 7, the required approval authority, is escalated one level. For example, a loan graded 1 through 3 that falls within the range for Business Loan Officers would require Executive Business Lender approval if the loan was graded 4 through 7. For consistency between all MBL Policies and Procedures, the Credit Union will use the following terms with the following meanings: New Loans: Loans to both current members and new prospects where all of the loan proceeds are used for any purpose other than paying off an existing North Island loan(s). Renewals: Other than Workouts and TDRs, as defined below, any change in an existing loan that includes an extension of the maturity is considered a renewal. If additional funds are also advanced (other than amounts to cover closing costs) the loan is then a new loan, and would be subject to the underwriting requirements for DCR and LTV as required in the MBL Policies and Procedures for new loans. Modifications: Changes in the existing loan s rate, without extending the existing maturity, are considered modifications. The changes must be market based and consistent with rates and terms offered to members for new loans. A single weakness with either LTV or the property debt coverage ratio (DCR) would not necessarily preclude a loan from being classified as a modification provided all other credit quality factors including global cash flow meet current underwriting guidelines. Workouts: Are restructured loans for members that are experiencing financial difficulty. The new terms, as modified, are based on current market rates and terms and these new terms do not include a concession. Troubled Debt Restructures (TDRs): Like Workouts, TDRs are for members that have demonstrated financial hardship. However, these restructures do include a concession in either rate and/or term, such that the anticipated ultimate repayment of either principal or interest is for an amount less than was originally contracted. Concessions include offering rates and/or terms that are more favorable for the member than the Credit Union would consider for either a new loan or market based modification. Member hardship is verified by Page 3 of 8
documenting the deterioration in credit quality factors, including a member s ability to service debt. H. Credit Decision Analysis: The Credit Union is required to use the financial analysis standards outlined in the NCUA Rules and Regulations Part 723.6(g). Specifically staff shall follow the underwriting standards that are detailed in this Policy and its Exhibits and utilize the product specific processes that are presented in the individual sections of the Credit Union s Procedure Manual. These processes present the how to methodology on subjects such as how and when to obtain the appropriate financial statements, tax returns, credit reports, and other information on the member s business experience that will allow full analysis of the member s debt service ability, both at the time of loan inception and at renewal or annual review. As specified in the Procedures, for most product types, this financial profile information shall be updated on an annual basis. Additionally, this Policy shall require that staff follow the instructions that are presented in the Procedures on how to perform this analysis, which will include a review of the member s, the property s, and the guarantors debt service ability both on an individual and global cash flow basis (with the exception of share secured loans). Appropriate requirements regarding the type of collateral along with its valuation, ownership verification, and the method for perfection of the Credit Union s security interest shall be set forth in paragraph J in this Policy, and in the Procedures. Loan term and interest rates shall be found in our published Rate Sheets as described herein under the section on Pricing and Term Parameters. Acceptable Loan to Value and Debt Coverage Ratios shall be contained in Exhibit A to this policy. Requirements for investigation of the environmental status of our collateral shall be found in MBL 1800- Environmental Procedures. In general, the Credit Union shall not make loans to support speculative ventures or loans based on collateral where the value cannot be determined. Any cash out loan request shall require an analysis of the proposed use of funds and its impact on the member/borrower s global cash flow. I. Documentation Requirements: As outlined in the NCUA Rules and Regulations Part 723.6(g), the Member Business Loan Policies section of the NCUA Examiners Handbook, and the Credit Union s Procedure Manual, the appropriate documentation shall be obtained or prepared for new loans, renewals, extensions, modifications, workouts, or TDRs. Any deviations from these guidelines will require the approval of an Executive Business Lender or the Executive Officers Loan Committee. J. Collateral: Generally all MBLs will be secured by real estate and/or a combination of other business collateral (such as Accounts Receivable, Inventory and/or Equipment) to a maximum Loan to Value of 80%. Vehicles, specifically excluding fleet vehicles (five or more), may be financed for up to 100%. If there is private insurance, a government (state or federal) guarantee or commitment to purchase in place, the maximum LTV is 95%. Additionally, the NCUA has provided that SBA 7(a) and 504 Loans are exempt from these collateral requirements, as long as the loan conforms to Page 4 of 8
the security/collateral requirements of the respective SBA Loan Program. Specific loan product LTV guidelines can be found in Exhibit A to this policy and in the Procedure Manual, which also addresses perfecting security interests in the collateral. New unsecured loans for up to $100,000 may be funded and renewed. Renewals of any previously granted unsecured loans or lines in excess of $100,000 shall require a forbearance waiver from both the DFI and NCUA. This unsecured limit is based on the aggregate of all unsecured member business loans to an individual borrower and all related borrowing entities in which the member guarantees or there is common ownership. Additionally, the Credit Union s total portfolio balance of all unsecured MBLs shall not exceed 10% of Net Worth. K. Environmental Policy: For loans secured by real property, the Relationship Manager shall review the appropriate reports, based on the size of the loan and the potential risk in the property as directed by MBL 1800-Environmental Procedures. L. Guarantee Requirements: On all MBLs, personal guarantees for 100% of the loan amount will be required from at least 51% of the individuals owning the borrowing business entity or the property collateralizing the loan, with the exception of loans to cooperatives and not-for-profit corporations (for which no such guarantee requirements apply). M. Appraisal Requirements: The Credit Union will adhere to NCUA Rules and Regulations contained in Part 722 and the Uniform Standards of Professional Appraisal Practice (USPAP) for all real estate appraisals, and will perform and document an appropriate valuation of any non-real estate collateral. Approval of appraisers is delegated to the Department Head of Business Services, who will communicate such approval to the Executive Officers Loan Committee. Under the provisions of the Interagency Appraisal and Evaluation Guidelines, the majority of Appraisal Reviews will be performed by the CRE underwriter. The Underwriter s independence will be maintained by not assigning them either a loan limit or performance goals that would cause the incumbent s compensation to be based on loan volume. Secondary appraisal reviews will be performed by the VP Audit Manager on loans over $3,000,000 and on any appraisal reviewed by a Loan Officer in the CRE Underwriter s absence. Any such Loan Officer performed review, must not be completed by the Loan Officer responsible for the transaction (the Relationship Manager). On any new CRE loans in excess of $10,000,000, the Credit Union will engage a second approved appraiser to perform the Appraisal Review on behalf of the Credit Union and its Loan Participants. The ordering of appraisals will be administered by a member of the Consumer Lending Department who has no responsibility for any other part of the MBL underwriting or approval process. Additional requirements for the appropriate use of appraisals and/or evaluations for new loan requests, annual reviews and loan modifications are detailed in MBL 1700 Appraisals and Title of the Procedure Manual. N. Pricing and Term Parameters: Loan pricing will be established in published rate sheets. Page 5 of 8
O. Exceptions to Policy: New loans that do not meet the New and Renewed Loan Policy Limits for LTV and DCR, as detailed in Exhibit A, will not be granted unless an exception request is well documented and approved as outlined below. However, the authority in this regard will remain limited by any regulatory maximums (such as the 80% LTV limitation). Other than as noted elsewhere in this Policy, all exceptions to Policy Limits outlined herein (including Exhibit A) shall be approved with a higher level review as detailed below: If the total borrowing relationship balance (less the portions of loans that have been participated to other credit unions) is less than $3,000,000, the CEO s prior approval will be required. In the CEO s absence, the Board of Directors approval may be substituted. If the total borrowing relationship balance, including the new request, is more than $3,000,000, the Board of Directors prior approval will be required. If granting a modification or workout is in the best interest of the Credit Union, the exception approval requirements shown above shall apply. Generally workout loans requiring exception approval will be for members with demonstrated hardship and if concessions are granted, the loans will be reportable as TDRs. The Quarterly Board Report will include a listing of new, renewed and modified workout and TDR loans that included any exception to policy. P. Loan Servicing: Credit Union staff will service all MBLs originated by the Credit Union for portfolio, sale, or participation on the core operating system. The addition of interest to principal, at loan renewal, will not be allowed; however, in certain TDRs, with the approval of the Executive Officers Loan Committee, interest may be forborne or restructured into a separate loan (B Note) and possibly charged off. Q. Loan Review & Loan Quality Supervision: All direct Commercial and Industrial Loans (C&I) over $250,000, which are unsecured or secured by business assets, shall be subject to review, site visit and collateral assessment by a Loan Officer or Relationship Officer at least once a year and examination by Internal Audit at any time. Collateral assessment will be one of the purposes of the site visits. Annual or biennial updates of financial statements and tax returns will be required on all business loans over $100,000. Active lines of credit with limits over $100,000 and a borrowing base that consist primarily of accounts receivable will require periodic agings" no less frequently than quarterly. For loans secured by CRE refer to MBL-2800 CRE Loan Reviews and Portfolio Monitoring in the Procedure Manual, specifies the CRE loans that shall have a scheduled review and property inspection. If the member is less than cooperative in providing the updated financial information, reviews may be delayed for up to 18 months. After 18 months the CRE Underwriter or Business Services Administrator shall prepare a file update based on current credit history, general information on the property and any other information that can reasonably be obtained from vendors and Page 6 of 8
public sources. The primary purposes of the review are to determine: the borrower s continued repayment ability, the condition of the collateral and the updated value of the collateral as described in MBL- 2800. To ensure the appropriate level of loan quality supervision, the Chief Administrative Officer is a voting member of the Executive Officers Loan Committee. Additionally, an independently contracted Quality Control Administrator will review a sampling of his or her choice of new, recently renewed or modified loans and existing portfolio loans to comment on the documentation, credit quality and accuracy of loan grades. The resulting quality control (QC) report and department response will be directed to the Chief Administrative Officer, who will present extracts of the reports with the Supervisory Committee or provide the full report upon request. Reports on the status of classified loans where collection or loan restructuring activity is in process will be provided monthly to the Board of Directors. R. Loan Collection: All MBL collection activities shall be coordinated by the Business Services Relationship Manager, with Direction from the Business Services Department Manager. Oversight shall be supplied by the Executive Officers Loan Committee. Membership of this committee will consist of the Credit Union s Senior Vice President of Lending, Chief Financial Officer, Business Services Department Manager, and Chief Administrative Officer, with the Business Services Administrator serving as its Recording Secretary. Additional support for all parties will be provided by Legal and outside counsel, as needed. Additional details are contained in MBL 2700 Business Loan Collection Procedure and MBL 2750 MBL Workouts, Modification and Nonaccrual Procedures. Delinquency and Classified Loan Status shall be monitored by the Business Services Relationship Officer and reported to the Executive Officers Loan Committee, Supervisory Committee and the Board of Directors. Remedial action plans shall be provided on those loans graded substandard and/or over 60 days past due. S. Identification of Ineligible Management: The Credit Union will not grant a business loan to any senior management employee, compensated director, members of the Executive Officers Loan Committee or their family members or associated members. Senior management includes anyone with the title of Vice President or higher. T. Director/Employee Loans: Loans to any uncompensated director, volunteer official, employee, their associated member or family members of such individuals shall be granted on terms available to Credit Union members in general. Additionally, none of these individuals identified here will receive any pecuniary consideration in connection with the lending, servicing, or collecting of a business loan. U. Equity Agreements/Joint Ventures: The Credit Union will not grant a member business loan if additional income received by the Credit Union or a senior management employee, as further defined in paragraph R of this policy, is tied to the profit or sale of a property, business or commercial endeavor for which the loan is made. V. Contract Work: The Credit Union may negotiate, structure, and underwrite loans for its members/ prospects or for those of another credit union, per the terms of a negotiated Page 7 of 8
contract with that credit union. The terms of all such contracts shall include provisions designed to limit or eliminate the Credit Union s exposure to liability, as well as holding the Credit Union harmless and indemnifying it to the fullest extent permitted by law and sound business practices. The intent of this service is to deliver the underwritten package to the contracted credit union for their internal review, approval, funding and servicing. Such loans will be subject to the pricing parameters of the contracted credit union. These contract services are separate and independent from the Credit Union s process for selling participation interests in its own loans. W. Other Actions: In recognition that not all potential member business credit situations can be addressed in this policy and the accompanying procedures, any member business lending related action that is not covered specifically by this Policy or the MBL Procedure Manual shall by default, be delegated for appropriate action to the Loan Officer or the Executive Officers Loan Committee, whichever has the appropriate level of loan approval authority. Policy Changes This policy update was approved by the Board of Directors on 11/20/08 Amended and approved by the Board on 01/22/09 Amended and approved by the Board on 07/20/10 Amended and approved by the Board on 07/28/11 Amended and approved by the Board on 10/18/11 Amended and approved by the Board on 12/15/11 Amended and approved by the Board on 01/26/12 Amended and approved by the Board on 02/28/13 Amended and approved by the Board on 07/21/14 Page 8 of 8
500-05-01 Member Business Lending Policy MBL POLICY EXHIBIT A: Loan To Value & Debt Coverage Ratio Limits Refer to endnotes for exceptions, including cash out transactions CRE Loans (by property type) LTV Limits DCR Limits Commercial/ Industrial New and Renewed Limit 80% 1.20x Workout/TDR Limit 6 N/A 1.00x Faith Based (see CRA note below) Unimproved Land New and Renewed Loan Policy Limit 65% 1.40x 1 1 Entitled Land New and Renewed Loan Policy Limit 75% 1.30x 1 1 Leased Land New and Renewed Loan Policy Limit 80% 1.25x Mixed Use Multi-Family New and Renewed Loan Policy Limit 80% 1.10x Office Other Non Profit (see CRA note) Other Underserved (see CRA note) New and Renewed Loan Policy Limit 80% 1.10x Rev July 21, 2014 1
500-05-01 Member Business Lending Policy MBL POLICY EXHIBIT A: Loan To Value & Debt Coverage Ratio Limits Refer to endnotes for exceptions, including cash out transactions CRE Loans (by property type) LTV Limits DCR Limits Residential Underserved (CRA note) New and Renewed Loan Policy Limit 80% 1.10x Retail SBA 504 New and Renewed Loan Policy Limit 95%*** 1.20x ***95% includes the short term 2 nd TD Single Family Residence (SFR) Hospitality New and Renewed Loan Policy Limit 70% 1.40x Workout/TDR Policy Limit 6 N/A N/A Note: Credit unions are not yet required to comply with the Community Reinvestment Act (CRA); however, tracking is strictly for informational purposes only. Construction Loans 2 (on temporary hold) Loan to Cost Limits DCR Limits SBA 504 New and Renewed Loan Policy Limit N/A N/A Single Family Residence New and Renewed Loan Policy Limit N/A N/A All Other CRE Types New and Renewed Loan Policy Limit N/A N/A Business (C&I) Loans CLTV Limits 3 DCR Limits SFR Secured Line of Credit (LOC) Workout/TDR Policy Limit N/A 1.00x Rev July 21, 2014 2
500-05-01 Member Business Lending Policy MBL POLICY EXHIBIT A: Loan To Value & Debt Coverage Ratio Limits Refer to endnotes for exceptions, including cash out transactions Business (C&I) Loans CLTV Limits 3 DCR Limits Business Asset Secured LOC Workout/TDR Policy Limit N/A 1.00x Equipment Secured Term Loan Unsecured Business LOC New and Renewed Loan Policy Limit N/A 1.20x Unsecured Business Term Loan New and Renewed Loan Policy Limit N/A 1.20x Rolling Stock Term Loan New and Renewed Loan Policy Limit 100% 4 1.20x Government Guaranteed Loan New and Renewed Loan Policy Limit Workout/TDR Policy Limit 6 95%, or higher on 7a loans, if so approved by the SBA 1.20x 1.00x Other Collateral Secured LOC Other Collateral Term Loan Other Real Estate Secured LOC Other Real Estate Term Loan Share Secured Business LOC New and Renewed Loan Policy Limit 100% N/A Rev July 21, 2014 3
500-05-01 Member Business Lending Policy MBL POLICY EXHIBIT A: Loan To Value & Debt Coverage Ratio Limits Refer to endnotes for exceptions, including cash out transactions Business (C&I) Loans CLTV Limits 3 DCR Limits Share Secured Term Loan New and Renewed Loan Policy Limit 100% N/A Business Overdraft Line of Credit New and Renewed Loan Policy Limit N/A N/A Workout/TDR Policy Limit 6 N/A N/A NOTES 1) GDCR: Global DCR includes the implied DCR for the subject property (which is based on market rents for owner user properties) and borrower's overall debt coverage ratio as calculated to include all other income and debts of the borrower and related entities. 2) Construction Loans: As stated in the Policy, the Credit Union is not currently offering new construction loans. 3) CLTV: Combined LTV includes the total of all debt on the property such as a North Island CU 2nd mortgage behind a first with either North Island or other third party lender. 4) One hundred percent financing is not available for fleet vehicles or trucks over 1 ton. Generally 100% financing will be limited to executive use vehicles, which would include business owners, managers and staff members not engaged in heavy business activities. 5) Cash out transactions require a 5% reduction in LTVs. 6) LTV Limits on Workouts and TDRs will be set on a loan by loan basis and, pending further guidance, will be subject to the NCUA s LTV Waiver requirements if the current LTV exceeds 80%. Rev July 21, 2014 4