Buying and SellingMBL Participations

Larry Middleman, President/CEOCU Business Group

CUNA Lending Council, October 31, 2016

Meet Your Presenter

Larry Middleman, President / CEO

• 36 years of credit union and commercial banking expertise

• Founded CUBG in 2002

• CPA and banking executive, worked with financial institutions across the U.S

• Leads CUBG’s new product development and consulting practice

CU Business Group Profile

Largest business services CUSO in the industry

Working with more than 500 credit unions in 46 states

Staff of 40

Offices in Portland, New York, Houston, Phoenix, Los Angeles, San Diego and Las Vegas

Industry leader with credit unions and regulators

State of the Industry

Credit Unions By Asset Size, 12/31/2015

Asset Size Number of CUs Percent of Total

Less than $100M 4,591 75%

$100M - $250M 726 12%

$250M - $500M 336 5%

$500M - $1B 238 4%

$1B - $2B 151 2%

$2B + 102 2%

Total 6,144 100%

Median Credit Union Asset Size: $26.8M

Credit Unions That Offer Business Lending

Source: NCUA

Assets

Chart1

Total IndustryTotal Industry

$500MM +$500MM +

$100-$500MM$100-$500MM

Below $100MMBelow $100MM

2004

2015

0.19

0.36

0.72

0.94

0.53

0.77

0.13

0.21

Sheet1

Assets20042015

Total Industry19%36%

$500MM +72%94%

$100-$500MM53%77%

Below $100MM13%21%

To resize chart data range, drag lower right corner of range.

Sour

ce: N

CU

A 5

300

repo

rts

$8.9

$54.6

2.36%

6.63%

0%

2%

4%

6%

8%

10%

12%

14%

$0

$10

$20

$30

$40

$50

$60

2003 2004 2005 2006 2007 2008 2009 2010 2011 2012 2013 2014 2015 Jun-16

Bill

ions

Member Business Loan Balances

Bank and Credit Union Commercial Loan Growth

2008 2009 2010 2011 2012 2013 2014 2015 June 20168 Year

Change

CreditUnions $32B $35 $37 $39 $42 $46 $52 $58 $62 +94%

CommunityBanks $531B $495 $467 $416 $401 $403 $402 $394 $387

All Banks $3.0T $2.7 $2.6 $2.6 $2.7 $3.0 $3.1 $3.5 $3.6 18%

6% 16%

of community banks

Credit Unions vs. Banks – June 30, 2016Business Loan Delinquencies as a % of Outstandings

Source: FDIC call report and NCUA 5300 reports*Delinquencies are defined as 30+ days past due

Chart1

200720072007

200820082008

200920092009

201020102010

201120112011

201220122012

201320132013

201420142014

201520152015

June 2016June 2016June 2016

All Banks

Banks < $1B

All CUs

1.34

2.25

2.71

4.9

6.32

3.55

6.97

6.19

5.33

5.85

5.92

5.74

4

5.03

5.08

2.67

3.93

3.18

1.69

2.82

2.57

1.19

2.09

1.77

1.06

1.7

1.97

1.28

1.62

1.98

Sheet1

200720082009201020112012201320142015June 2016

All Banks1.344.906.975.854.002.671.691.191.061.28

Banks < $1B2.256.326.195.925.033.932.822.091.701.62

All CUs2.713.555.335.745.083.182.571.771.971.98

Credit Unions vs. Banks – June 30, 2016Business Loan Charge-Offs as a % of Outstandings

Source: FDIC call report and NCUA 5300 reports

Chart1

200720072007

200820082008

200920092009

201020102010

201120112011

201220122012

201320132013

201420142014

201520152015

June 2016June 2016June 2016

All Banks

Banks < $1B

All CUs

0.47

0.44

0.50

1.27

0.47

0.5

0.15

1.34

1.27

0.46

2.45

1.59

0.67

2.27

1.51

0.81

1.26

1.24

0.98

0.77

0.85

0.83

0.44

0.53

0.43

0.28

0.35

0.28

0.18

0.19

0.15

0.29

0.18

0.23

Sheet1

200720082009201020112012201320142015June 2016

All Banks0.471.342.452.271.260.770.440.280.180.29

Banks < $1B0.501.271.591.511.240.850.530.350.190.18

All CUs0.150.460.670.810.980.830.430.280.150.23

13 Largest MBL Participation Sellers

Credit Unions as of 2015 State TOTAL MBLs Sold MBLs % Off Balance Sheet

1 EVANGELICAL CHRISTIAN CA $ 566 $ 261 46%

2 DIGITAL MA $ 696 $ 159 23%

3 BETHPAGE NY $ 727 $ 122 17%

4 COASTAL NC $ 320 $ 80 25%

5 VERVE WI $ 203 $ 72 36%

6 PROGRESSIVE NY $ 591 $ 71 12%

7 BAY RIDGE NY $ 119 $ 65 55%

8 BELLCO CO $ 298 $ 63 21%

9 CALIFORNIA CA $ 135 $ 52 39%

10 LOGIX CA $ 489 $ 52 11%

11 ALLIANT IL $ 333 $ 43 13%

12 NASA MD $ 109 $ 40 37%

13 AMERICA'S CHRISTIAN CA $ 170 $ 38 22%Totals $4,763 $1,125 23%

Source: NCUA 5300 report

(In $MM)

13 Largest Sellers – Performance Ratios

Credit Unions as of 2015 State TOTAL MBLs Delinquencies Charge-Offs

1 EVANGELICAL CHRISTIAN CA $ 566 6.36% 1.88%

2 DIGITAL MA $ 696 1.97% 0.02%

3 BETHPAGE NY $ 727 0.22% 0.15%

4 COASTAL NC $ 320 1.84% 0.09%

5 VERVE WI $ 203 1.19% 0.06%

6 PROGRESSIVE NY $ 591 2.92% 0.57%

7 BAY RIDGE NY $ 119 8.23% 0.00%

8 BELLCO CO $ 298 0.00% 0.04%

9 CALIFORNIA CA $ 135 1.97% 1.47%

10 LOGIX CA $ 489 0.46% 0.97%

11 ALLIANT IL $ 333 0.58% 0.00%

12 NASA MD $ 109 0.36% 0.01%

13 AMERICA'S CHRISTIAN CA $ 170 0.90% 0.74%Totals for the Group $4,763 2.08% 0.46%

Source: NCUA 5300 report

(In $MM)

Regulatory Update

NCUA MBL Regulations – Effective 1/1/17

The Revised Rule…

- Gives credit unions ability to waive personal guarantees

- Removes explicit loan-to-value limits- Lifts limits on construction and development loans

- Eliminates the need for a waiver process- Clarifies that non-member business loan participations will not count

against the MBL cap

“It will be up to each credit union to manage MBL risks through their own policies and procedures”

Business LoanParticipations

MBL Participations

$42,750,000 secured by a 25 building commercial office complex in Memphis, TN

$45,750,000 debt restructure of Class A office building in Milwaukee, WI

Credit Unions are getting a shot at large deals

Management and Board Oversight

Board and Management ResponsibilitiesThe credit union’s board and management must:

– Approve and review a commercial loan policy prior to any material change to their program

• Annually at a minimum– Understand and remain informed regarding risk and its potential impact on

earnings– Ensure the credit union staffs its program with the required expertise and

experience• Internal training and hiring qualified people• Meeting experience requirements

Key ParticipationParameters

Typical Participation Loan Parameters

Debt Service Coverage Ratio 1.25 or higher

Loan to value ratio 75% or less, 80% maximum

Amortization 25 years or less, 30 year maximum

Maturity 10 years or less, 15 year maximum

Rate adjustment Re-price after 5 years or less

Prepayment penalty Specific to each credit union

Loan fee from borrower Originator typically keeps loan fee

Typical Participation Loan Parameters

Participation amount $250,000 minimum, $500,000+ normal

Guarantors Dictated by lead credit union

Geography Typical is entire U.S., refer to policy limits

Loan types Best Less Desirable

Office Mixed use

Apartment buildings Hospitality

Light industrial Restaurants

Defined retail “Big box”

Owner occupied Specialized

Typical Participation Service Standards

Activity Lead Credit Union to Participants

Payment remittance Within 10 days of receipt

Investor reporting Within 10 days of payment

Updated borrower information Within 10 days of receipt

All borrower correspondence Within 10 days of receipt or submission

Lead credit union analysis Within 10 days of completion

Participation Accounting

Lead credit union takes in all payments from borrower

Within 10 days, lead remits to participants based on their pro-rata share of the loan

a. Check Participation Agreement to verify

Lead keeps the full interest rate (e.g. 4.25%); participant gets rate after servicing fee (e.g. 3.75%)

Lead accounts for the full loan, with the participation sold as a contra-asset

Participant sets up the loan on their system only for the amount they own

continued…

We will now review two sample participation offers

Keys to a Successful Participation Program

Strong lead lender expertise and depth

Strong relationship with lead lender and servicer

Independent underwriting and analysis

Close management of the participation loan portfolio

Maintain annual reviews and keep files updated

Develop tools to monitor participations separate and together with your MBL portfolio

For further information or answersfeel free to contact me

Larry Middleman

Phone (866) 484-2876lmiddleman@cubg.org

Thank You!

Buying and Selling�MBL ParticipationsMeet Your PresenterCU Business Group Profile Slide Number 4Credit Unions By Asset Size, 12/31/2015Credit Unions That Offer Business LendingSlide Number 7Bank and Credit Union Commercial Loan GrowthCredit Unions vs. Banks – June 30, 2016Credit Unions vs. Banks – June 30, 201613 Largest MBL Participation Sellers13 Largest Sellers – Performance RatiosSlide Number 13Slide Number 14Slide Number 15MBL ParticipationsSlide Number 17Board and Management ResponsibilitiesSlide Number 19Typical Participation Loan ParametersTypical Participation Loan ParametersTypical Participation Service StandardsParticipation AccountingSlide Number 24Slide Number 25Keys to a Successful Participation ProgramThank You!