716 HORIZON Lending – Complex Commercial Lending …

HORIZON LendingComplex Commercial Lending Processes Resolved

May 2017Paul Stokes, HORIZON Product Line Manager

HORIZON Commercial Lending Scenarios Agenda

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• Brokered Loans

• Cross Collateralization

• Asset Based Lending

• Billings from a Commercial Lending Perspective

• Leveraged Lending

• The future

Brokered Loans – Here’s the Scenario

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• 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….

Brokered Loans

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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?

Brokered Loans

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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.

Brokered Loans

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You’ll need a GL interface set up in order to:

(1) Track the contra accrual and income

(2) Facilitate movement of broker funds to either a GL or DDA account

Brokered Loans

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

Brokered Loans

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The dealer record is set

up as a ‘when-paid’

reserve type.

Brokered Loans

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Accruals happen daily as a contra to the loans

accruals.

Brokered Loans

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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 Line of Credit

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.

Brokered Loans

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T-Accounts

to recap

movement

of dealer

funds.

Brokered Loans

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The payment

transaction

shows the

split to the

dealer record.

Brokered Loans

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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.

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Cross Collateralization


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• 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?


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Utilizing the

spreadsheet you

can populate the

pledge amount to

each loan.


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The Collateral

view of the

loans

attached.

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Asset Based Lending

Asset Based Lending

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• What is it?

– It is typically a business loan secured by collateral (assets). The loan, or line of credit, is typically secured by

inventory, accounts receivable and/or balance-sheet assets.

– Other names: ‘commercial finance’ or ‘asset-based financing’.

• Why?

– This type of loan is often used to meet various cash 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.

Asset Based Lending

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Asset Based Lending

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Asset Based Lending

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Asset Based Lending

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To utilize the

BBC

functionality

you must

populate the

BBC field

values.

Asset Based Lending

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Populating the

BBC values

opens the link

to the BBC

screen,

allowing

updates to

other pertinent

values.

Asset Based Lending

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Asset Based Lending

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Asset Based Lending

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Availability is

calculated

based on the

lesser of

collateral value

or loan

amount.

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Billings

Billings

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• 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

Billings

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• 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.

Billings

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Billings

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Billings

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Pay split two

loans, P/99 Pay in

Adv/Freq

increment, collect

as billed into the

future resulting in

negative accruals.

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Leveraged Lending

Leveraged Lending

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• 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.

Leveraged Lending

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• 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 ofthe 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

Leveraged Lending

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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

Hold/Tranche

Borrower Base Cert Hold Based on Collateral

1,000,000.00 4,000,000.00 1,601,601.00

Outstanding Balance 0.00Participation of Term Loan, 50% of outstanding

balance

Participation of Revolver, 50% of revolver 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.

Leveraged Lending

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Leveraged Lending

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Leveraged Lending

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Leveraged Lending

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Leveraged Lending

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Leveraged Lending

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Leveraged Lending

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Leveraged Lending

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Leveraged Lending

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Leveraged Lending

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The Future

The Future

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• 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

The Future

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• 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.

Paul Stokes

[email protected]

716 HORIZON Lending – Complex Commercial Lending …

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