Government Guaranteed Business Lending

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1 Government Guaranteed Business Lending Ideally suited to the mission of CU s to satisfy their members business loan needs Herb White, VP of Lending, Hudson Valley FCU Margaret Gilbert, Managing Director, Coastal Securities

2 Government Guaranteed Lending Intro s & audience poll - Margaret Why good for CU s & members Herb & Margaret Latest SBA stats Margaret Overview of SBA lending Herb Best Practices Herb Secondary Market Opportunities Margaret

3 Does your CU make member business loans? No. We have not yet decided to offer MBLs. Yes. We offer MBLs.

4 Does your CU currently make SBA 7(a) loans? No. Yes.

5 Why does your CU not originate SBA 7(a) MBLs? Do not have SBA expertise. Our members are not asking for SBA loans. Not confident the SBA will make good on its full guarantee in the event of default. Other.

6 Government Guaranteed Loan Programs SBA 7(a) Real estate, working capital & equipment Up to $5MM, 25 YR, 75% - 85% guarantee USDA Business & Industry Rural area real estate, working capital & equipment Up to $10MM, 30 YR, 60 80% guarantee FSA Farm Ownership & Operating Farm ownership, livestock, equipment & operating loans Up to $1.355MM, 40 YR, 90% guarantee

7 Good for Credit Union Mitigate credit risk w/ guaranty Less restrictive underwriting requirements: SBA 7(a) guaranteed loans can exceed 80% LTV 25% min construction loan equity does not apply Helps you compete: Offer loans that exceed 15YR commercial loan term limit Can charge prepay penalty if part of Govt Gty Loan Program (see 5/10/04 NCUA letter to SBA) Increase profitability & liquidity Guaranteed portion of loan can be sold into secondary market Guaranteed portion does not count toward MBL cap

8 Good for the Member Longer term means lower payment for member Lower down payment Can finance high risk purposes Start-up s Acquisitions Blue Sky Can be used for collateral shortfalls Borrower projections are allowed

9 Role of the SBA SBA does NOT provide grants sba.gov/content/find-grants SBA does NOT make DIRECT loans SBA DOES PROVIDE: Loan Guaranty on loans made directly by CUs with the SBA s backing

10 7(a) Guaranty Fee Examples $150,000 loan 85% SBA guaranty $150,000 x 85% = $127,500 guaranteed portion $25,500 x 0% = $0 guaranty fee* $1MM loan 75% SBA guaranty $1MM x 75% = $750,000 guaranteed portion $750,000 x 3.5% = $26,250 guaranty fee *Varies and can change.

11 $25,000,000,000 $20,000,000,000 $15,000,000,000 $10,000,000,000 $5,000,000,000 SBA 7(A) Loan FY Approvals (2015 through 8/22/15) 60,000 50,000 40,000 30,000 20,000 10,000 Source: SBA $ $ Loan Approvals # Loan Approvals SBA FY 15 was a record year! If you are not making SBA loans someone else is! 0

12 Credit Union SBA Loan Approvals FY /12/15 Fiscal YR # of CUs YR over YR Growth Number of Loans YR over YR Growth Gross $ Approvals YR over YR Growth ,129 $ 191,291, % 1,676-21% $ 198,076,700 4% % 1,552-7% $ 263,776,200 33% % 1,349-13% $ 223,558,600-15% % 1,289-4% $ 262,679,500 17% % 1,421 10% $ 302,776,500 15% % 1,620 14% $ 357,665,500 18%

13 CU SBA growth is proportional to overall growth But CU s are only 1.6% of approved $s ($20B) Source: SBA 13

14 Number of 7(a) loans from CUs has declined over the years but average loan size is increasing Source: SBA 14

15 Huge Opportunity for CUs 2015 Credit Unions Credit Union Share Total Subprogram Approved Amount Approved Loans Approved Amount Approved Loans Approved Amount Approved Loans Other 7(a) $ 131,944, % 5.2% $ 3,531,128,907 3,696 Preferred Lenders Program $ 105,856, % 1.0% $ 13,270,305,014 14,391 SBA Express $ 46,353, % 3.2% $ 1,881,322,362 26,791 Small Lender Advantage $ 39,276, % 3.4% $ 1,342,868,315 7,631 Certified Lenders Program $ 3,470, % 1.8% $ 241,435, Community Advantage $ 40, % 0.2% $ 83,398, Rural Express $ % 0.0% $ 1,248,700 8 Grand Total $ 326,940,206 1, % 2.7% $ 20,351,707,091 53,394 CUs - only 1.6% ($326M) of total approved dollars ($20B) CUs - only 0.8% of Preferred Lenders Program (PLP) CUs - not more than 4% of any of the 7(a) subprograms Source: SBA 15

16 CU Loans - Smaller & Shorter Term 2015 Average Loan Size Average Loan Term Subprogram All 7(a) Credit Union All 7(a) Credit Union Inter Trade $ 1,821,291 $ 2,500, Certified Lenders Program $ 1,112,606 $ 867, Preferred Lenders Program $ 922,125 $ 705, Other 7(A) $ 878,589 $ 668, Small Loan Advantage $ 175,975 $ 153, SBA Express $ 69,696 $ 55, Community Advantage $ 126,361 $ 40, Export Express $ 186,118 $ 15, Export Working Capital Program $ 1,987,644 $ Small/Rural Lender Advantage $ 156,088 $ Grand Total $ 381,161 $ 225, Avg loan size by CUs is $225K vs. $381K overall Avg CU loan term is 8.5YR vs. 10YR overall Source: SBA 16

17 SBA CU Participation Only 207 Credit Unions have approved at least one 7(a) loan in 2015 Smallest CU 7(a) Lender is Queens $338,649 in Assets! Source: SBA

18 SBA Loan Guaranty Requirements Business must be Small based on the North American Industry Classification System (NAICS) Business must be operated for profit Business must be open to the general public Owners must be US citizens ** Owners must make reasonable investment into business, usually 10-25% Owners must be of good character

19 7(a) Loan Guaranty Program Loans for any reasonable business purpose: Equipment Inventory Real Estate Franchise Debt refinancing Business purchase Working Capital

20 SBA Express Streamlined approval process CU uses current guidelines for terms and collateral requirements. Loans/Lines of $350,000 or less Credit not reviewed by SBA 50% guarantee Lender uses own forms Turn time is under 36 hours

21 SBA Repurchase Denials Lien and Collateral issues (generally a repair) Failure to obtain proper lien Unauthorized use of proceeds Disburse proceeds inconsistent with loan authorization Liquidation Deficiencies (generally a repair) Failure to conduct site visit Misapplication of recoveries

22 SBA Repurchase Denials Of defaults, only 3.5% of repurchases get denied! Undocumented servicing Actions (generally a repair) Liens not renewed Insurance lapse and collateral loss SBA Loan Eligibility Ineligible loan purpose Ineligible loan recipient

23 Best Practices Training CUNA, SBA, local CDC, NAGGL.org SOP s 7(a) wizard and boiler plate Research GP vs. PLP General Partner Preferred Lenders Program (delegated authority) Invest in software

24 Best Practices 3 rd Parties Vendors can cover A-Z Underwriting Packaging Closing Research the monthly reporting process (1502) Start Simple Create specific SBA policies File maintenance 10 tab system Record current SOP version Audit Loan Authorization

25 Secondary Market Opportunities As a Seller Sell the guaranteed portion for premium & servicing income As a Buyer Efficient way to grow/diversify loan portfolio with no credit risk

26 Example of Selling 7(a) Loan Name: ABC Co. Balance $2,500,000 Gty Bal (75%) $1,875,000 Origination 7/1/2015 Maturity 8/1/2025 Gross Rate 5.50% initial adjusting Q to P % Servicing 1.00% Net Rate 4.50% initial adjusting Q to P % Premium % 9.25% Sale Price

27 Example of Selling, cont. 75% Guaranteed Portion Sold to Coastal: $ 1,875,000 25% Unguaranteed Portion Held By Lender (Invested Funds): $ 625,000 Premium Earned on Sale: (Guaranteed Portion x 9.25%) $ 173,438 1% Servicing Fee Income on Guaranteed Portion Sold: $ 18, % Interest Earned on Unguaranteed Portion Held: $ 34,375 Year 1 Return: (Premium + Servicing + Interest) $ 226,563 Years 2 and Following Return: (Servicing + Interest) $ 53,125 Return On Invested Funds Year 1: % Years 2 and Following: 8.500%

28 Purchasing Govt Gty Participations Supplement & diversify existing loan portfolio Increase asset quality US government guaranty Self managing asset; exempt from MBL rules/regs Manage interest rate risk Wide range of maturities & adjust frequencies available Manage liquidity Active secondary market

29 Nature of the Guarantee Originating Lender: Guarantee is conditional: may be compromised or lost if underwriting or servicing is not SBA/USDA compliant Secondary Market Investor: The guaranteed portion receives an unconditional government guarantee as to principal and accrued interest; any premium paid is not guaranteed

30 NCUA Opinion Unconditional government guarantee transforms SBA & USDA loan participations into permissible investments

31 Gty Participations - Booked as Loans

32 No Participation Agreement Required

33 What Happens if Loan Defaults*? Demand can be made to originating lender when loan is 60 days in arrears If lender does not repurchase loan, demand is made to the Agency Interest will accrue to settlement date rather than claim date Investor never has a non-earning asset *Describes USDA default process; SBA default process is handled for investor by the SBA FTA

34 Typical Range of Loan Structures Wide range of maturities & sizes Fixed Rate Quarterly Adjusting Annual Adjusting 3YR Adjusting 5YR Adjusting With and without prepayment penalties

35 Guaranteed Loans Trade at Premiums Premium is not guaranteed Example of Low Premium Gty Participation: Type FSA Borrower Happy Farm Location Gainsville, TX Loan Amount $625,000 Gty % 80% Gty Balance $500,000 Note Date August, 2015 Maturity Date August, 2030 Gross Rate 5.00% Lender Retained Servicing 1.64% Net Passthrough Rate 3.36% Price Premium Paid $15,000 Risk is limited to $15,000 premium (3% X $500,000)

36 Premiums Typically Amortized Over 3 5 YRs Amortization Period Yrs 'Happy Farm' Corresponding Yield % % % % % If, for example, you amortized 3% premium over 3YRs, your yield for the first 3YRs would be 2.25%

37 Premium Amortization 2.25% yield while premium is being amortized over 36 MO 3.36% yield (the loan s net rate) after premium had been fully amortized & book price of loan is PAR Book yield increases to full net rate of loan after premium has been amortized

38 Premium Risk Declines USDA Orchard 5/5/5/5/5 Prepayment Penalty 5.50% Net P +.75% 5YR Adj 6.50% Gross P % 5YR Adj 5.50% Net Floor 6.50% Gross Floor 09/14 Note Date 03/2044 Maturity

39 Managing Premium Risk Example: Early Loan Payoff in Diversified Portfolio

40 Government Guaranteed Participations Safety of government guaranty Source of important diversification Ease of administration Liquidity of active secondary market Entry point to gain experience with SBA & USDA guaranteed lending programs

41 Reference Material

42 USDA B & I Guaranteed Loan Program Project Eligibility Map: Max Loan: $10MM, with some exceptions up to $40MM Max advance rates: Real Estate: 80% of fair market value Equipment: 70% of fair market value Inventory: 60% of book value A/R: 60% of book value (less than 90 days) Max loan guarantee: 90% for loans of $5MM or less 70% of loans between $5MM and $10MM 60% of loans exceeding $10MM up to $25MM max Loan max terms: Real estate - 30 years Machinery & Equip useful life or 15 years, whichever is less Fully amortizing; balloon payments are not permitted Rates may be fixed or variable; variable may no adjust more often than quarterly Underwriting & security requirements: Realistic repayment ability Tangible balance sheet equity of at least 10% (existing business) or at least 20% (new business)

43 USDA B & I Guaranteed Loan Program How to get started? Contact the USDA Rural Development Business Programs Director in the state where the project is located: