COMMERCIAL LENDING POLICY

Credit Union Name

COMMERCIAL LENDING POLICY

Approved as of: Insert Date

LUCRO V3 2018

Credit Union Name Commercial Loan Policy

TABLE OF CONTENTS

Section I. II. III. IV. V. VI. VII. VIII. IX. X. XI. XII. XIII. XIV. XV. XVI.

Title Business Loan Definitions Business Loan Limitations Prohibited Activities Target Area and Market Unacceptable Loan Types Specific Product Types Underwriting Process General Underwriting Guidelines Lending Approval Limits Loan Grading Collateral Guidelines Other Collateral Requirements Environmental Issues Credit Reviews Portfolio Reviews Collection Policy

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Addenda________________________________________________________

A.

Pricing Guidelines

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B.

Risk Rating Worksheets

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I. Loan Definitions A. Commercial Loan Definition 1. A commercial loan request will be defined primarily by the purpose of the loan. Any loan, line of credit, or letter of credit (including any unfunded commitments), and any interest the credit union obtains in such loans made by another lender, to individuals, sole proprietorships, partnerships, corporations, or other business enterprises for commercial, industrial, agricultural, or professional purposes, but not for personal expenditure purposes. 2. Consumer or personal expenditure purpose loans will generally not be underwritten as commercial loans. 3. For regulatory purposes, the following are not considered Commercial Loans: a. A loan or loans fully secured by a lien on a 1-4 family dwelling whether or not it is the member's primary residence. b. A loan or aggregate loans made to a borrower or an associated borrower, which when added to other such loans to the borrower or associated borrower is less than $50,000 is not classified as a Commercial loan but will be underwritten using the same criteria set forth in this loan policy. A loan made to a credit union or credit union service organization (CUSO). c. A loan which is fully secured by shares in the credit union or deposits in other financial institutions. B. Member Business Loan Definition 1. Any commercial loan as defined above, except that the following commercial loans are not member business loans and are not counted toward the aggregate limit on the credit unions member business loans: a. Any loan in which a federal or state agency (or its political subdivision) fully insures repayment, fully guarantees repayment, or provides an advance commitment to purchase the loan in full. b. Any non-member commercial loan or non-member participation interest in a commercial loan made by another lender, provided the credit union acquired the non-member loans and participation interests in compliance with all relevant laws and regulations and it is not, in conjunction with one or more other credit unions, trading member business loans to circumvent the aggregate limit. c. Any loan secured by a vehicle manufactured for household use that will be used for a commercial, corporate, or other business investment property or venture, or agricultural purpose, is not a commercial loan but it is a member business loan (if the outstanding aggregate net member business loan balance is greater than $50,000) and must be counted toward the aggregate limit on the credit union's member business loans.

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Table: Comparison of Member Business Loan and Commercial Loan Definitions

Type

Loan fully secured by a 1- to 4- family residential property (borrower's primary residence)

Member business loan secured by a 1- to 4- family residential property (not the borrower's primary residence)

Member business loan secured by a vehicle manufactured for household use

Business loan with aggregate net member business loan balance less than $50,000

Commercial loan fully secured by shares in the credit union making the extension of credit or deposits in other financial institutions

Commercial loan in which a federal or state agency (or its political subdivision) fully insures repayment, fully guarantees repayment, or provides an advance commitment to purchase the loan in full

Non-member commercial loan or non-member participation interest in a commercial loan made by another lender

MBL No No

Yes (>50k) No No

No

No

Commercial Loan No No

No No No

Yes (>50k)

Yes (>50k)

For the purposes of NCUA form 5300 reporting, the net member business loan balance will be determined by calculating the outstanding loan balance plus any unfunded commitments, reduced by any portion of the loan that is not defined as an MBL above.

II. Loan Limitations A. Total portfolio limit - The lesser of 1.75 times the actual net worth of the credit union or 1.75 times the minimum net worth required under section 1790d(c)(1)(A) of the Federal Credit Union Act. B. Member limit - The aggregate of all outstanding member business loans to any one member or group of associated borrowers may not exceed the greater of 15% of the credit union's net worth or $100,000, plus an additional 10 percent of the credit union's net worth if the aggregate balance over this limit is fully secured at all times with a perfected security interest by readily marketable collateral as defined in ? 723.2. Any insured or guaranteed portion of a commercial loan made through a program in which a federal or state agency (or its political subdivision) insures repayment, guarantees repayment, or provides an advance commitment to purchase the loan in full, is excluded from this limit. 1. The aggregate amount of unsecured business loans to any one member, group of associated borrowers should not exceed 2.5% of net worth. 2. The aggregate amount of all unsecured loans should not exceed 10% of the credit union's net worth. 3. Associated borrower means any other person or entity with a shared ownership, investment, or other pecuniary interest in a business or commercial endeavor with the borrower. This means any person or entity named as a borrower or debtor in a loan or extension of credit, or any other person or entity, such as a drawer, endorser, or guarantor, engaged in a common enterprise with the borrower, or deriving a direct benefit from the loan to the borrower. Exceptions to this definition for partnerships, joint ventures and associations are as follows: (1) If the borrower is a partnership, joint venture or association, and the other

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person with a shared ownership, investment, or other pecuniary interest in a business or commercial endeavor with the borrower is a member or partner of the borrower, and neither a direct benefit nor a common enterprise exists, such other person is not an associated borrower. (2) If the borrower is a member or partner of a partnership, joint venture, or association, and the other entity with a shared ownership, investment, or other pecuniary interest in a business or commercial endeavor with the borrower is the partnership, joint venture, or association and the borrower is a limited partner of that other entity, and by the terms of a partnership or membership agreement valid under applicable law, the borrower is not held generally liable for the debts or actions of that other entity, such other entity is not an associated borrower. (3) If the borrower is a member or partner of a partnership, joint venture, or association, and the other person with a shared ownership, investment, or other pecuniary interest in a business or commercial endeavor with the borrower is another member or partner of the partnership, joint venture, or association, and neither a direct benefit nor a common enterprise exists, such other person is not an associated borrower. 4. Notwithstanding these limits, on a periodic basis, the Board will review and may approve specific target industry sub limits. These target limits will be closely monitored and reported to the Board of Directors at their regularly scheduled meetings.

Sublimits Owner Occupied Real Estate Non-Owner Occupied Construction & Development Secured Term Loans and Lines of Credit Unsecured Term Loans and Lines of Credit Industry Concentration by NACIS codes

% of Net Worth 50% 25% 15% 50% 5% 25%

The report to the Board will also include updating information for: Current Risk Rating distribution of the portfolio with comparative migration statistics New Loans/Portfolio Growth Loan review and risk monitoring updates Geographic Concentrations by Zip code Largest Borrowers Delinquency/Problem Loan reports Adherence to policy and regulations Other reports as deemed necessary by the Board

III. Prohibited Activities A. Insiders 1. Loans to any senior management employee, including credit union's chief executive officer, any assistant chief executive officers, and the chief financial officer, and any of their immediate family members. 2. Loans to any person meeting the definition of an associated borrower with respect to persons identified above. 3. Loans to any compensated director, unless the Board of directors approves granting the loan and the compensated director was recused from the board's decision-making process.

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4. Loans where any additional income received by the credit union or its senior management employees is tied to the profit or sale of any business or commercial endeavor that benefits from the proceeds of the loan.

B. Conflicts of Interest Any third party used by the credit union to meet the requirements of this part must be independent from the commercial loan transaction and may not have a participation interest in a loan or an interest in any collateral securing a loan that the third party is responsible for reviewing, or an expectation of receiving compensation of any sort that is contingent on the closing of the loan, with the following exceptions: 1. A third party may provide a service to the federally insured credit union that is related to the transaction, such as loan servicing. 2. The third party may provide the requisite experience to a federally insured credit union and purchase a loan or a participation interest in a loan originated by the federally insured credit union that the third party reviewed.

IV. Trade Area and Target Market A. Loans will be restricted to businesses located within our approved field of membership or those outlined in the Participation Loan Policy. B. The credit union will actively solicit the following loan types from the small business market: 1. Secured commercial term loans a. Lines of credit i. Secured ii. Unsecured (including overdrafts) 2. Commercial Real Estate Mortgages a. Owner Occupied b. Non-owner Occupied 3. Commercial Real Estate Construction Mortgage C. Certain industries generally have a lower risk profile. Our focus will be on the following industry types with target concentration limits:

Industries (SIC/NAICS) Retail Professional Wholesale Service Church/Religious with strong affiliations Select non-profits

% of Portfolio 25% 75% 25% 50% 25% 25%

Other industries may be considered but may require additional underwriting.

V. Unacceptable Loan Types A. Loans where the initial risk rating would make it a classified loan by regulatory definition. B. Loans where the primary source of repayment is the issue of future debt or equity instruments. C. Loans for political purposes. D. Loans for speculative purposes E. Non-amortizing term loans F. Loans secured by collateral of uncertain liquidity or salability G. Unsecured loans for real estate purposes

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H. Loans secured by the stock in a closely held corporation, which is not readily marketable I. Construction loans with no permanent take out in place J. Loans to any of the following business types:

1. Adult Entertainment 2. Gambling or Bingo Halls 3. Properties with unresolved environmental issues 4. Salvage Yards 5. Oil Refineries/Pipeline/Chemical manufacturing 6. Dry Cleaners (unless cleaning is done off-site) 7. For SBA loans, uses or business types that do not meet the SBA's eligibility

guidelines as outlined in the most current SBA SOP publication.

While these loans are generally unacceptable, in those instances where an opportunity may exist, the approval of the proper authority will be necessary to pursue the loan.

Undesirable Loans A. True Asset Based Loans where, by definition, loan advances are made based on a

formula, revolve based on that formula, the credit union holds a cash collateral account for the administration of the loan and it is collateralized solely by the company's assets, specifically, accounts receivable and inventory. B. Loans to the following industries: Bars and Restaurants, Skilled Nursing Care, Dealer floorplans. C. Loans not directly originated with the borrower or guarantor (i.e. brokered loans) except those outlined in the Participation Loan Policy.

VI. Specific Product Types Permitted: A. Owner Occupied Commercial Real Estate - >50% owner occupied and used by the member as the primary place of business or 1-4 family property 1. First Mortgage Only a. Maximum Term = 15 years (Up to 30-year amortization) b. Global DSCR >= 1.25x, Project >=1.1x 2. Non-Owner Occupied Real Estate a. First Mortgage Only b. Maximum Term = 10 years (up to a 20-year amortization). c. Project DSCR >= 1.25x, Global DSCR >=1.1x 3. Church Loans a. First Mortgage only on improved real property owned by the church b. Church must be classified as a not-for-profit organization under IRS (26 USC 501) rules c. Maximum Term ? 15 years (Up to 30-year amortization) d. DSCR >= 1.1x 4. Business Vehicles ? New (auto, truck, van) and durable equipment a. Maximum Term = 48 months b. Global DSCR >=1.25x 5. Business Vehicles ? Used (auto, truck, van) and non-durable equipment a. Maximum Term ? 36 months b. Global DSCR >= 1.25x 6. Secured Lines of Credit a. Maturities of this type of loan should match maturity of collateral or payable on demand

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b. Preferred Collateral ? Properly margined stock, marketable securities, CD's, CSV Life Insurance, or owner occupied real estate.

c. Acceptable Collateral ? All other properly margined and monitored collateral

d. Global DSCR >= 1.1x if secured with "Preferred" collateral and 1.25x if secured with "Acceptable" collateral.

7. Unsecured Lines of Credit including lines for the purpose of overdraft protection (Extended only to the most creditworthy member businesses.) a. Guidelines to assist in determining creditworthiness: i. Extensive time in business (5+ years) ii. Global DSCR >= 1.35x (based on 36 month amortization) iii. Sufficient personal and business liquidity iv. Excellent personal and business credit (700+ BEACON score) b. All unsecured LOC's will be payable on demand, required to have the balance paid down to 5% or less of the available line for at least 30 consecutive days during the preceding 12 months and be reviewed no less than annually for subsequent renewal. c. Failure to Revolve ? will be considered stagnant and term repayment should be negotiated. Note: Open lines of credit will not be made available to those borrowers with unresolved tax liens. d. All LOC's secured by collateral other than listed in #6 will be classified as unsecured. (Examples include: equipment, "other" business assets, unmonitored accounts receivable/inventory, blanket liens).

8. Unsecured Term Loans a. All factors in determining creditworthiness for Unsecured Lines of Credit are applicable. b. Maximum Term = 36 months c. Global DSCR >= 1.35x

9. Commercial Real Estate Construction Loans Construction or development loan means any financing arrangement to enable the borrower to acquire property or rights to property, including land or structures, with the intent to construct or renovate an income producing property, such as residential housing for rental or sale, or a commercial building, such as may be used for commercial, agricultural, industrial, or other similar purposes. It also means a financing arrangement for the construction, major expansion or renovation. The collateral valuation for securing a construction or development loan depends on the satisfactory completion of the proposed construction or renovation where the loan proceeds are disbursed in increments as the work is completed. A loan to finance maintenance, repairs, or improvements to an existing income producing property that does not change its use or materially impact the property is not a construction or development loan. Income producing means any property that generates income from the rental or sale of the units constructed with loan proceeds and the repayment of the loan is dependent on the successful completion of the project. Commercial purpose, by contrast, is a term that applies to structures that do not directly generate income but enhance the operation of a commercial or industrial operation, such as a warehouse, manufacturing facility, and management office space.

First Mortgage Only a. Maximum Length of construction period = up to 18 months

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