Member Business Lending: Growth and Risk Management

March 21 · 2017

How to grow and manage risk in the member business lending portfolio

under the new NCUA rule

PRESENTED BY

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The premier conference for lending and risk

New expanded agenda to include lending, credit and portfolio risk!

• Learn: » Sessions dedicated to lending, credit risk and

portfolio risk» Led by industry experts to address your

challenges around growth and risk» Earn CPE credits

• Network:» More than 250 bankers from 130 institutions

attend

• Apply:» 98% of attendees recommend the Summit» Offers actionable next steps regarding

business loan growth and portfolio management

Sageworks.com/Summit

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Founder and Principal, Synergy Credit Union Consultingacooley@syncuc.com

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Board of Directors

Per §723.3, a federally insured credit union’s board of directors must:

• Approve the commercial loan policy;

• Ensure the credit union appropriately staffs its commercial lending program in compliance with §723.3(b); and

• Understand and remain informed about the nature and level of risk in the commercial loan portfolio, including its potential impact on the credit union’s earnings and net worth.

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Senior Management

• Understand the credit union’s commercial lending activities;

• Have a comprehensive understanding of the role of commercial lending in the credit union’s overall business model; and

• Establish risk management processes and controls necessary to safely conduct commercial lending activities.

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Meeting Experience Requirements

A credit union has multiple options to meet staff experience requirements. For example, it may meet the requirements by training

and developing existing staff, hiring experienced professionals, or by using a third party such as a CUSO or an independent

contractor. It is generally not prudent for a credit union that has newly adopted a commercial loan program to initially rely solely on training and developing existing staff, unless existing staff already possess the skills, competencies, and experience required.

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Prohibited Activities (highlights)

The explicit prohibitions contained in §723.7 are as follows: Ineligible borrowers. A federally insured credit union may not grant a commercial loan to:

Any senior management employee directly or indirectly involved in the credit union’s commercial loan underwriting, servicing, and collection process, and any of their immediate family members (a spouse or other family member living in the same household);

Any person meeting the definition of an associated borrower as set forth in §723.2 with respect to any senior management employee directly or indirectly involved in the credit union’s commercial loan underwriting, servicing, and collection process, and any of their immediate family members; or

Any compensated director, unless the credit union’s board of directors approves granting the loan and the compensated director was recused from the board’s decision making process.

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Meeting Experience Requirements

A credit union has multiple options to meet staff experience requirements. For example, it may meet the requirements by training

and developing existing staff, hiring experienced professionals, or by using a third party such as a CUSO or an independent

contractor. It is generally not prudent for a credit union that has newly adopted a commercial loan program to initially rely solely on training and developing existing staff, unless existing staff already possess the skills, competencies, and experience required.

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MBL Growth Starts with Strategic Planning

7 Reasons Why Strategic Plans Fail • Managers Afraid to speak truth to power• Lack of Project Management Skills• Overuse of SWOT analysis • The problem is in the room• Unspoken vested interests• In constant fire drills• Group Think

What is

Risk

Appetite?

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“a risk appetite statement resides at

the heart of an effective risk

management program and is linked to

the organization’s overall risk

management philosophy and strategic

ambition.”

The amount of risk, on a broad level, an entity is willing

to accept in pursuit of value. It reflects the entity’s risk

management philosophy, and in turn influences the

entity’s culture and operating style. … Risk appetite

guides resource allocation. … Risk appetite [assists

the organization] in aligning the organization, people,

and processes in [designing the] infrastructure

necessary to effectively respond to and monitor risks.

Risk Appetite Definition:

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Example Risk Appetite and Risk Tolerance

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“Your Risk Appetite

Should Drive All Your

Strategic Decisions”

Loan Growth

Risk Management

Ris

k A

pp

eti

te

Talent management is key to

strategic success

Credit Unions withcompetent and engaged employee do more with less.

Efficiency Ratio = Operating Expense/Operating Rev

Currently there are

2012 credit unions

with efficiency ratios

greater than 90%.

Talent Management Tip

Strong

credit

unionswrite

down their

“recipes.”

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Sales Risk Analysis Processing

AcquisitionCollect

informatio

n

Credit

Analysis

Risk

Assessment

Approval Compliance and

Disbursement

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“UNDERSTANDING A COMPANY’S BUSINESS MODEL VS. THE BUSINESS PLAN IS THE KEY.”

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SBA Lending is great way to start or grow your MBL portfolio This is an example of a 25-year commercial real estate loan priced at 6.0%.

Because the SBA guarantees 75% to 85% of each loan, lending institutions can use

this program as a tool to mitigate risk in their loan portfolio. The guaranteed portion of

each loan can be immediately sold on the secondary market. Let’s look at the math in

this sample loan:

• Loan Amount $100,000

• Guaranteed Portion $75,000

• Net gain on sale of the guaranteed portion $10,875 (14.5% premium)

• CU retained portion $25,000

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Document Review

Field staff should review credit approval memorandums for appropriateness. These memos should be a standard format to ensure a consistent, complete, and fair evaluation of credit for all applicants. They should be commensurate with the size and complexity of each credit facility, and must contain sufficient information for the approval authority to make a fully informed decision.

• Assess the financial analysis within the credit approval memos to determine if decisions are sound and well supported.

• Ensure unsecured, unguaranteed, and high loan-to-value loans are well mitigated

• Ensure management has assigned credit risk ratings that match the potential for loss.

• Document technical exceptions, credit administration weaknesses, and regulatory violations, and discuss any concerns with the appropriate staff.

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Monitoring• Determine if loan relationships receive timely ongoing reviews in accordance with Part 723

• Periodic reviews should be completed at least annually and should include updated cash flow and financial analysis, a reassessment of the risk rating, status of covenant compliance status, documented site visits, collateral inspections/reevaluations, and field audits if applicable; problem loans should be reviewed more often

• Frequent communication with a borrower will allow the credit union and borrower to establish a plan of action to improve the likelihood of repayment

• Review loan servicing, monitoring, and tickler reports that identify all loan covenants, and ongoing monitoring items, such as insurance policies, pending loan and collateral documents, and loan officer exception reports.

• Review the corresponding engagement letters to determine compliance with the contract

• Ensure the party requesting a review was independent from the commercial loan department, such as the supervisory committee or an internal auditor

THE KEY TO MBL GROWTH

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Founder and Principal of Synergy Credit Union Consultingacooley@syncuc.com