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Buying and SellingMBL Participations
Larry Middleman, President/CEOCU Business Group
CUNA Lending Council, October 31, 2016
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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
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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
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State of the Industry
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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
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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.
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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
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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
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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
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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
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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)
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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)
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Regulatory Update
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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”
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Business LoanParticipations
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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
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Management and Board Oversight
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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
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Key ParticipationParameters
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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
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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
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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
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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
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continued…
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We will now review two sample participation offers
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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
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For further information or answersfeel free to contact me
Larry Middleman
Phone (866) [email protected]
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!