HORIZON Lending Complex Commercial Lending Processes Resolved

Paul Stokes, HORIZON Product Line Manager May 2017 HORIZON Commercial Lending Scenarios Agenda

• Brokered Loans

• Cross Collateralization

• Based Lending

• Billings from a Commercial Lending Perspective

• Leveraged Lending

• The future

2 Brokered Loans – Here’s the Scenario

• You have a commercial lender that has a broker who wants the bank to finance a commercial endeavor, such as the purchase of an insurance agency. The terms of the deal are as follows: – The borrower is going to receive a fixed rate loan at 6%. – The bank will receive a net yield of 4.8%. The broker receives a yield of 1.2%. – The borrower needs $400,000.00. – This is a bank owned loan with the yield paid to the broker when the customer makes their payment. – The loans under this arrangement tend to be from 5 to 10 year loans.

• How would you handle this arrangement?

• Well, you could do this manually… – Monitor the loan for payments, calculate the interest due the Broker, manually hit GL for that interest, etc.

• I think there is a better way….

3 Brokered Loans

The borrower will be getting a 6% fixed interest rate, so the loan needs to be set up as a fixed rate loan at 6%. How does the broker get their money?

4 Brokered Loans

Might I suggest HORIZON’s indirect Lending processes as a solution? Step 1 before setting up the loan is to set up a dealer record. If the broker has a DDA account with your bank as part of the agreement you can have the broker’s funds directed to the account. 5 Brokered Loans

You’ll need a GL interface set up in order to: (1) Track the contra and income (2) Facilitate movement of broker funds to either a GL or DDA account

6 Brokered Loans

A dealer reserve earnings schedule is required, set up as type ‘5’ simple

7 Brokered Loans

The dealer record is set up as a ‘when-paid’ reserve type.

8 Brokered Loans

Accruals happen daily as a contra to the loans .

9 Brokered Loans

018 InfoShare Bank L O A N S S Y S T E M Processing Date 3/09/2011 Page 1 Daily Dealer Recap Processing Thru 3/09/2011 LN1050P3 System Date 4/23/2017 17:14:56 Totals for Dealer 8 CCD BROKERS UNLIMITED When Paid When Earned Upfront Reserve Holdback Dealer Holdback Wgtd Yld Count Accrued/Unearned 371.11 .00 0 .0 4.800% 1 Reserve Not Disb .00 .00 .00 .00 .00 Delinq 30 to 59 Days Delinq 60 to 89 Days Delinq Over 89 Days Nbr Amount Past Due Nbr Amount Past Due Nbr Amount Past Due Current Balance Full Recourse 0 .00 0 .00 0 .00 .00 .0 Non-recourse 0 .00 0 .00 0 .00 397,625.84 .0 Partial Rep 0 .00 0 .00 0 .00 .00 .0 Repurchase 0 .00 0 .00 0 .00 .00 .0 Total 0 .00 0 .00 0 .00 397,625.84

A daily Dealer Recap report is generated.

10 Brokered Loans

T-Accounts to recap movement of dealer funds.

11 Brokered Loans

The payment transaction shows the split to the dealer record.

12 Brokered Loans

018 InfoShare Bank L O A N S S Y S T E M Processing Date 3/10/2011 Page 1 Dealer Transactions Posted Today Processing Thru 3/13/2011 LN1050P1 System Date 4/24/2017 17:19:00 Dealer Dlr Disb Reserve Account Total Number TC Meth Amount Number Payment Principal Interest Late Charge Other 008 8125 P 371.11 2071700000 008 8190 P 371.11 0 Dealer Totals Debits Count Credits Count When Paid 371.11 1 371.11 1 Upfront .00 0 .00 0 When Earned .00 0 .00 0 Dealer Total 371.11 1 371.11 1 Bank Totals Debits Count Credits Count When Paid 371.11 1 371.11 1 Upfront .00 0 .00 0 When Earned .00 0 .00 0 Bank Totals 371.11 1 371.11 1

Automated dealer transaction post when a payment posts to the loan.

13 Cross Collateralization

14 Cross Collateralization

• Here’s the Scenario: – You have a client that has two loans – There are three pieces of collateral that are tied to the two loans – You need to spread the collateral across the two loans

• Can we find a way to do this?

15 Cross Collateralization

16 Cross Collateralization

17 Cross Collateralization

Utilizing the spreadsheet you can populate the pledge amount to each loan.

18 Cross Collateralization

19 Cross Collateralization

The Collateral view of the loans attached.

20 Asset Based Lending

21 Asset Based Lending

• What is it? – It is typically a business loan secured by collateral (). The loan, or line of credit, is typically secured by , and/or balance-sheet assets. – Other names: ‘commercial finance’ or ‘asset-based financing’.

• Why? – This type of loan is often used to meet various flow needs of companies. As an example meeting payroll or building inventory. – Interest rates are less than rates on unsecured loans.

• Would you consider an automobile loan a form of asset based lending?

• Can we make this work on HORIZON?

• Let’s start with the Borrowing Base Certificate.

22 Asset Based Lending

23 Asset Based Lending

24 Asset Based Lending

25 Asset Based Lending

To utilize the BBC functionality you must populate the BBC field values.

26 Asset Based Lending

Populating the BBC values opens the link to the BBC screen, allowing updates to other pertinent values.

27 Asset Based Lending

28 Asset Based Lending

29 Asset Based Lending

Availability is calculated based on the lesser of collateral value or loan amount.

30 Billings

31 Billings

• How do you determine what billing statement to use? – Short form? – Long form? – Commercial billing statement?  No history.  Interest stratification.  Master Loan.

• What processes are utilized to determine payment postings? – Pay in Advance Frequency/Increment – Pay Split – Project Payment/Zero Due Notice

32 Billings

• What happens today? – System Type 1 Loans:  Pay Split 1 and 2: P/99 (Project up to 99 payments).  Pay Split 3: E/00 (Excess Payments to Principal). Pay in Advance processing does not apply to Pay Split 3 (Scheduled Balance) loans. This is not changing. – System Types 2 through 4:  E/00 (Excess Payments to Principal). – System Type 5:  Although Pay in Advance processing is not applicable to System Type 5 loans because they do not include a Payment Schedule, the Pay in Advance settings for this loan type are defaulted to E/00.

• How do you control this? And why? – Pay split 1 versus 2.

33 Billings

34 Billings

35 Billings

Pay split two loans, P/99 Pay in Adv/Freq increment, collect as billed into the future resulting in negative accruals.

36 Leveraged Lending

37 Leveraged Lending

• Are these considered risky arrangements? • A leveraged loan is extended to companies or individuals that already have considerable amounts of debt. • Lenders consider leveraged loans to carry a higher risk of default, and as a result, a leveraged loan is more costly to the borrower. Leveraged loans for companies or individuals with debt tend to have higher interest rates than typical loans; these rates reflect the higher level of risk involved in issuing the loan. • There is no exact criteria for defining a leveraged loan. Some market participants base it on a spread. – For instance, many of the loans pay a floating rate, typically based on LIBOR plus a stated interest margin. If the interest margin is above a certain level, it is considered a leveraged loan. – Others base it on the rating, with loans rated below investment grade, which is categorized as Ba3, BB- or lower from the rating agencies Moody's and S&P.

38 Leveraged Lending

• Why might this be important? • Jan 5 2017: The Office of the Comptroller of the Currency (OCC) has tempered its view of systemic risk posed by US leveraged lending. – The bank regulator changed its characterization of leveraged lending to an "issue warranting continued monitoring" from a "key risk," according to its semi-annual risk report for fall 2016 released on Thursday. – "Capital, liquidity, and leverage are all vastly improved since the dark days of the (financial) crisis," said Comptroller of the Currency Thomas J. Curry on a call with reporters. • Despite improvement, weak underwriting and erosion of covenant protection remain supervisory concerns in leveraged lending, according to the report. • “Yet we want to keep it on the front of the radar screen at least from a risk perspective because we continue to see instances of weaker underwriting in that area, and given the high risk in that type of lending it's something we'll always want to monitor," the official said. • RISKS REMAIN

39 Leveraged Lending

SCA Corporation Master Commitment/Facility 29,500,000.00

Term Loan Revolver with Swing Loan, set up as Master Loan, Asset Based, with hold for Letter of Credit

16,000,000.00 13,500,000.00 Outstanding Balance 16,000,000.00 Outstanding Balance 7,350,000.00

Swing Loan as Revolver, tranche Letter of Credit Bank Borrower Base Cert Hold Based on Collateral Hold/Tranche

1,000,000.00 4,000,000.00 1,601,601.00 Outstanding Balance 0.00 Participation of Term Loan, 50% of outstanding Participation of Revolver, 50% of revolver balance balance only

8,000,000.00 3,675,000.00

Available to Draw = 548,399.00

Narrative: 1 Facility is set up as a Master Commitment 2 Swing Loan is short term, bank owned. At a point in time the outstanding balance transfers to revolver with 50% participation 3 Letter of Credit: Bank hold utilized until letter of credit is finalized 4 Borrower base Certificate: Collateral BBC is utilized as needed and adjusted monthly based on updated asset value.

40 Leveraged Lending

41 Leveraged Lending

42 Leveraged Lending

43 Leveraged Lending

44 Leveraged Lending

45 Leveraged Lending

46 Leveraged Lending

47 Leveraged Lending

48 Leveraged Lending

49 Leveraged Lending

50 The Future

51 The Future

• Multiple Rate Processes – More commercial arrangements are being written where a loan could potentially have different rate scenarios over the life of the loan:  Fixed for one year  Variable tied to libor with a specific margin for 2 years  Variable tied to a different index with a different margin for x years

• This is an approved future project in which we have laid the infrastructure within the loan application

52 The Future

• Swaps – An interest rate swap is an agreement between two parties to exchange one stream of interest payments for another, over a set period of time. – The most commonly traded and most liquid interest rate swaps are known as “vanilla” swaps, which exchange fixed- rate payments for floating-rate payments based on LIBOR, the interest rate high-credit quality banks (AA-rated or above) charge one another for short-term financing. – By convention, each participant in a vanilla swap transaction is known by its relation to the fixed rate stream of payments. The party that elects to receive a fixed rate and pay floating is the “receiver,” and the party that receives floating in exchange for fixed is the “payer.”

• HORIZON: – A new swap file will be added with needed fields to track the parameters of the swap. – A new billing/reset statement will be added. – Investor processes will be utilized to identify the participants in a swap.

53 Paul Stokes [email protected]