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Real Estate Lending—What, Me Worry? Dev Strischek, SVP & Senior Credit Policy Officer Sun. Real Estate Lending—What, Me Worry? Dev Strischek, SVP & Senior Credit Policy Officer Sun. Trust Bank, Atlanta GA Dev. [email protected] com 404 -230 -5242 RMA Jan 2017 1

Agenda • Review regulatory concerns about and market expectations for lending to developers and Agenda • Review regulatory concerns about and market expectations for lending to developers and contractors • Provide some guidance on key real estate underwriting and credit risk management tools • Extra added attraction—appendix of analytical and underwriting tips on developers and contractors 2 RMA Jan 2017 2

Why the Fuss? Over the past 60 years, US banking industry has migrated from Why the Fuss? Over the past 60 years, US banking industry has migrated from C&I lending to real estate lending: Year As a % of total loans C&I loans Real Estate 1955 25 2015 • • 40 20 50 Transformation from C&I to real estate occurred during mid 1980’s Today RE loans are 75% of total loans for 4, 700 banks <$1 B in assets Real estate securities now account for 60% of banking system securities During 2007 -2012’s Great Recession, the 50% of the banks with the highest real estate ratios accounted for 82% of bank failures RMA Jan 2017 3

Commercial Bank or Real Estate Bank? RMA Jan 2017 4 Commercial Bank or Real Estate Bank? RMA Jan 2017 4

 Recent CRE Trends Agencies have observed these recent trends: ◦ Increasing investor demand Recent CRE Trends Agencies have observed these recent trends: ◦ Increasing investor demand for CRE Low current interest rates boost income producing properties’ net operating income (NOI) historically low cap rates result higher property values ◦ Rising concentration levels Continued strong demand for CRE credit Earnings pressures Positive trends, so far, in asset quality (AQ) metrics, e. g. , low delinquencies and low net charge-offs (NCO) ◦ More competition among banks & non-banks resulting in easing of underwriting standards & increases in underwriting exceptions RMA Jan 2017 5

Real Estate Regulatory Reminders 12/18/15 Interagency Statement on Prudent Management for CRE Lending reminds Real Estate Regulatory Reminders 12/18/15 Interagency Statement on Prudent Management for CRE Lending reminds us bankers ◦ To implement prudent risk management practices and capital levels commensurate with level & nature of our institutions’ concentration risks ◦ Of existing regulations & guidance related to CRE lending (See App A) ◦ That agencies focus on our institutions’ adherence concentration risk and other CRE-related guidance RMA Jan 2017 6

Best Practices in CRE Lending 1 -Establish adequate & appropriate ◦ Loan policies, underwriting Best Practices in CRE Lending 1 -Establish adequate & appropriate ◦ Loan policies, underwriting standards, credit risk management practices & concentration limits approved by Board or designated committee ◦ Lending strategies, such as plans to increase lending in particular market or property type, limits for credit and other asset concentrations, & processes for assessing whether lending strategies & policies continue to be appropriate in light of changing market conditions ◦ Strategies to ensure capital adequacy & allowance for loan losses (ALLL) are consistent with level and nature of inherent risk in CRE portfolio RMA Jan 2017 7

Best Practices in CRE Lending 2 -Conduct global cash flow (GCF) analyses based on Best Practices in CRE Lending 2 -Conduct global cash flow (GCF) analyses based on reasonable rental rates, sales projections, & operating expenses to ensure borrower has sufficient repayment capacity to service all loan obligations ◦ See App B for lending to real estate developer ◦ See App C for lending to contractors 3 -Perform market & scenario analyses of CRE loan portfolio to quantity potential impact of changing economic conditions on AQ, earnings & capital 4 -inform Board & management so they can assess whether lending strategy & policies continue to be appropriate as market conditions change 5 -assess ongoing ability of borrower & project to service all debt as loans convert from interest-only to amortizing principal repayment, especially during periods of rising interest rates RMA Jan 2017 8

Best Practices in CRE Lending 6 -Implement processes and procedures to monitor potential volatility Best Practices in CRE Lending 6 -Implement processes and procedures to monitor potential volatility in supply & demand for lots, retail & office space, & multi-family units during business cycles 7 -Maintain management information systems (MIS) that provide Board and management with sufficient information to identify, measure, monitor, & manage concentration risk 8 -Implement independent processes for appraisal reviews that evaluate whether sufficient information has been provided to support the market value conclusion based on reasonable market rental rates, absorption periods & expenses RMA Jan 2017 9

Credit Risk Defined – Risk that a borrower may not perform in accordance with Credit Risk Defined – Risk that a borrower may not perform in accordance with contractual terms resulting in potential loss of value in assets; unable or unwilling to • pay in full from – Cash flow – Collateral – Guarantees • pay on time • pay as agreed – Credit risk overlaps other risks, but is usually the single biggest risk a bank incurs, and if a bank can manage its credit risk, the other risks are more easily managed – CRE borrower’s repayment issues: – Cash flow dependent on sale or rent of property – Collateral is dependent on cash flow and cap rate used to derive value – Guarantors typically lack liquid assets 10 RMA Jan 2017 10

How Real Estate Banks Get into Trouble ◦ Poor risk assessment Too many risky How Real Estate Banks Get into Trouble ◦ Poor risk assessment Too many risky borrowers, e. g. , developers & contractors ◦ Excessive exposure to risky types of lending Too many spec construction loans Too many multi-family housing projects ◦ Concentrations of aggregate risk Lend too much to one borrower Lend too much to one place Lend too much to one industry Lend too much in one bank line of business (LOB) RMA Jan 2017 11

Types of Risks Type of Risk Definition Measurement Transaction (T) Risk in individual transactions, Types of Risks Type of Risk Definition Measurement Transaction (T) Risk in individual transactions, e. g. , • REDI • Co-REDI • Owner-occupied Measured by risk rating system Intrinsic (I) Risk associated with Measured in LOB sub. LOB’s, e. g. , residential RE segments by risk scoring lending, CRE lending process Concentration (C) Risk from aggregated exposures by borrower, LOB, industry, geography, etc. Measured as % of capital RMA Jan 2017 12

T-I-C Risk Strategy Alternatives Some Risk Strategy Alternatives T Reduce exposure to marginally acceptable T-I-C Risk Strategy Alternatives Some Risk Strategy Alternatives T Reduce exposure to marginally acceptable borrowers X Manage risk distributions by LOB X Set exposure limits by risk rating X Limit exceptions to collateral LTV’s and guarantees I X Reduce exposures in riskier real estate-related LOB’s X Exit construction lending X Grow lower risk non-real estate LOB’s C X Buy and sell participations to reduce concentrations X Set concentration limits on high risk real estate LOB’s X Raise limits for lower risk non-real estate LOB’s X RMA Jan 2017 13

Commercial Real Estate (CRE) Policy Hot Buttons ◦ Underwriting Guidelines ◦ Policy Exceptions ◦ Commercial Real Estate (CRE) Policy Hot Buttons ◦ Underwriting Guidelines ◦ Policy Exceptions ◦ Portfolio Limits and FDICIA Limits ◦ Suggestions for managing CRE concentrations ◦ Lending Authorities ◦ Valuation ◦ Environmental risk ◦ Real Estate Construction Administration (RECAD) ◦ HV-CRE RMA Jan 2017 14

Example of Underwriting Guidelines Guideline Apts >100 units Unanchored Shopping Center Multi-tenant Office Building Example of Underwriting Guidelines Guideline Apts >100 units Unanchored Shopping Center Multi-tenant Office Building Max LTV 80% 75% Max FDICIA LTV 85% 85% Max LTC 85% 80% Min Equity 15% 20% Min DSC 1. 30 X 1. 35 X 1. 25 X Min Pre. Leasing/Presales NA 0. 70 X Max Construction Loan Term 36 months 24 months Max Loan Term 5 years Max Amortization 30 years 20 years RMA Jan 2017 15

Construction Underwriting Interest reserve ◦ How much ◦ How long Inventory management ◦ ◦ Construction Underwriting Interest reserve ◦ How much ◦ How long Inventory management ◦ ◦ Specs Models Pre-sales Release prices RMA Jan 2017 16

TPEs Applicable to All Wholesale Loans, CRE-Secured Loans, and Business Banking Loans This example TPEs Applicable to All Wholesale Loans, CRE-Secured Loans, and Business Banking Loans This example shows 14 TPEs applicable to all wholesale loans, 7 additional TPEs applicable to wholesale loans secured by CRE, and 2 TPEs applicable only to WLS Production Center loans TPE’s applicable to: All wholesale loans (14) All wholesale loans secured by CRE(7) All Production Center loans (2) 10 guarantors 20 LTV exceeds FDICIA 11 unsatisfactory borrower 12 min DSC 21 appraisal 30 min time in business 13 max loan term 40 min pre-leasing/pre-sales 14 max loan amortization 41 min leasing/occupancy rate 15 fin statement quality 43 release prices 16 max TBE 44 LTC 17 higher risk industry 45 min equity 18 undesirable collateral 19 max LTV 22 environmental risk 23 Speculative purpose 50 line of credit clean-up 55 LFT 36 unsecured line of credit RMA Jan 2017 17

 • Most Obligor – Obligation TPE’s are obligation-specific, e. g. , • One • Most Obligor – Obligation TPE’s are obligation-specific, e. g. , • One obligation may be guaranteed, another may not be • One obligation may meet LTV requirements, another may not • But a few TPE’s are obligor-specific, e. g. , financial info, DSC, etc. • For example, we count financial statements once against obligor, not against each obligation • Likewise, we cite DSC against obligor, not against each obligation • Obligation and obligor specific TPE’s Obligation Obligor 10 13 14 18 19 20 21 22 23 29 24 25 26 27 28 11 borrower 12 DSC 15 financial statement quality 16 TCE 17 higher risk/undesirable industry 30 LFT guarantor loan term amortization undesirable collateral max LTV exceeds FIDICIA LTV appraisal environmental risk speculative purpose LOC clean-up pre-leasing/pre-sales leasing/occupancy rate release prices max LTC min equity RMA 18 Jan 2017

 Portfolio Limits Limit on total borrower exposure to ◦ Any individual or entity Portfolio Limits Limit on total borrower exposure to ◦ Any individual or entity ◦ Any single project ◦ Any single A&D project FDICIA limits ◦ Total Real estate secured loans in excess of supervisory LTV/Tier 1 Capital < 100% ◦ Commercial real estate secured loans in excess of supervisory LTV/tier 1 Capital < 30% RMA Jan 2017 19

 • FDICIA LTV and Ratios Guidelines – – • Land loans < 65% • FDICIA LTV and Ratios Guidelines – – • Land loans < 65% Developed land loans < 75% Improved property < 85% Residential property < 90% LTV in excess of guidelines currently measured by these ratios – CRE < 30% of capital – All RE < 100% of capital • Quarterly reporting requirements – Bank board of directors – Format. . . RMA Jan 2017 20

LTV Exposure in Excess of FDICIA Guidelines Loans Secured by Real Estate FDICIA LTV LTV Exposure in Excess of FDICIA Guidelines Loans Secured by Real Estate FDICIA LTV A. Land Carry loans, total 1. Commercial Aggregate $ over FDICIA LTV Current Portfolio $ Exposure Portfolio Limit 65% 376 332 1, 386 692 694 2, 000 A. Land Developed Loans, total 1. Commercial A & D Loans 2. Residential A & D Loans 3. Residential Developed Lots 75% 75% 512 1, 762 356 5, 044 1, 370 3, 127 547 6, 000 A. Construction Loans, total 1. Commercial Construction 2. Residential Construction 80% 85% 731 990 11, 508 3, 987 7, 521 12, 000 A. Improved Property Loans, total 1. Commercial Owner-Occupied (O-O) MP 2. Commercial Non O-O MP 3. Mini-Perm (MP): a. Commercial b. Residential 4. Other: 85% 85% 1, 362 279 0 121 8 0 16 0 14, 962 8, 479 5, 509 2 732 46 0 191 3 18, 000 90% 7, 585 119 51, 757 49, 323 2, 434 55, 000 Total Aggregate RE , A through E 14, 549 84, 657 93, 000 Total CRE, A 1, B 1, C 1, D 3 a, D 4 a, &D 4 d 2, 989 Capital for Current Quarter 1. Aggregate Loans in Excess of Supervisory LTV/Capital (100% max) 2. Commercial Loans in Excess of Supervisory LTV/Capital (30% max) 73. 67% 15. 13% 2. Residential a. Commercial b. Residential c. Ag land d. Misc A. 1 -4 Family Mortgages, total 1. Residential O-O 2. Residential non O-O RMA 19750 Jan 2017 21

 Suggestions for managing CRE concentration Underwriting standards by project type Policy exceptions MIS Suggestions for managing CRE concentration Underwriting standards by project type Policy exceptions MIS systems to stratify portfolio by ◦ Loan information Loan balance, commitment, and TBE Term, maturity, and amortization Interest rate Policy exceptions Loan documentation exceptions ◦ Collateral information Property type Location Presold/preleased data Unit sales prices/lease rates Vacancy rates Property age Fixed and variable costs Appraised value tenant concentrations by name and industry ◦ Developer concentrations ◦ Risk rating Total borrower exposure to any one borrower LTV data integrity RMA Jan 2017 22

Lending Authorities ◦ Restrict CRE authority to individuals with training and experience ◦ One-up Lending Authorities ◦ Restrict CRE authority to individuals with training and experience ◦ One-up approval for riskier requests Single-purpose properties Speculative projects Other policy exceptions ◦ Approval pushed higher as total borrower exposure increases and risk rating worsens RMA Jan 2017 23

Lending authorities grid Position 1 -3 Rating 4 -5 Rating 6 -7 Rating Criticized Lending authorities grid Position 1 -3 Rating 4 -5 Rating 6 -7 Rating Criticized &Classified 8 -9 Rating Non-Accrual & Charge-off Lending Officer 250 125 0 0 Lending Manager 500 250 0 0 Senior Lender 1, 000 500 0 0 Credit Officer 2, 000 1, 000 500 250 Loan Committee 5, 000 2, 500 1, 000 500 Special Assets Officer 0 0 2, 000 1, 000 Chief Credit Officer or Bank President Legal lending limit Notes: • Authority level should be based on TBE, not transaction size • Authority level should permit 60 to 80% of loans with no policy exceptions to be approved by concurrence of line lenders and credit officer • Real estate lending authority to REDI and Co-REDI borrowers should be restricted to officers with CRE skills and experience • Loans with policy exceptions are typically approved by one-up approval • Problem loan management should be restricted to special assets officer, CCO, and/or bank president, including approval of non-accrual, write-downs, and charge-offs.

Valuation—you know the drill. . . ◦ Independence of valuation process Selection of appraiser Valuation—you know the drill. . . ◦ Independence of valuation process Selection of appraiser Ordering Review and approval ◦ Updating ◦ Type of valuation—new and renewal Under$250 M to $1 MM Over $1 MM ◦ Abundance of caution RMA Jan 2017 25

CRE Valuation Requirements RMA Jan 2017 26 CRE Valuation Requirements RMA Jan 2017 26

Real Estate Construction Administration (RECAD) – Independence – Minimum size of construction loan to Real Estate Construction Administration (RECAD) – Independence – Minimum size of construction loan to manage – Documentation – Draws • Inspections • Liens • Funding – Valuation (appraisal) management – Environmental risk management – Approved appraisers and environmental auditors – Records • • Credit files Doc files Draw files Misfiles RMA Jan 2017 27

Construction Lending is Risky Definition of HVCRE ◦ “Credit facility that finances or has Construction Lending is Risky Definition of HVCRE ◦ “Credit facility that finances or has financed the acquisition, development, or construction (ADC) of real property. ” ◦ If ADC, then HV-CRE? Eligibles vs. Excludables Risk vs. public policy Why HV-CRE ◦ “Supervisory experience has demonstrated that certain ADC loan exposures present unique risks for which the agencies believe banking organizations should hold additional capital. ” RMA Jan 2017 28

HV-CRE Reporting Guidance ADC loans to REDI borrowers, Co-REDI borrowers and Owner-Occupied borrowers that HV-CRE Reporting Guidance ADC loans to REDI borrowers, Co-REDI borrowers and Owner-Occupied borrowers that finance: Commercial land loans HV-CRE Reporting Guidance Land acquisition* Lot acquisition* Land development Commercial construction loan SFR tract development loans (a tract development is defined as a project with five or more units that is constructed or is to be constructed as a single or multi-phased development) Flag as HV-CRE Raw land LTV > 65% Lots LTV > 75% A & D LTV > 75% Regardless of LTV, if the minimum upfront equity contribution** of 15% is not met > 75% LTV (lots) Do not Flag as HV-CRE Raw land < 65% Lots < 75% A & D < 75% LTV < 80% and minimum upfront equity contribution** of 15% is met < 75% LTV (lots) > 80% LTV (SFR detached or attached) < 80% LTV (SFR detached or attached) Renovation, rehabilitation or reposition loans (Rehabilitation, modernization, or conversion to another use that involves extensive improvements or modifications) Regardless of LTV, if the minimum upfront equity contribution** of 15% is not met LTV < 80% and minimum upfront equity contribution** of 15% is met Bridge loans (Short-term financing to allow newly constructed or acquired commercial properties to reach stabilization) > 80% LTV < 80% LTV 1 -4 family ADC loans NA Loans to finance 1 -4 family ADC Agricultural land loans Community development loans NA Loans to finance farmland Affordable housing including multifamily * Value means the lesser of cost or market value for purpose of LTV calculation ** Equity must be comprised of liquid assets and/or real property at its purchased price, not its current market value. The 15% equity is calculated on “as completed” appraised value satisfactory to REVAL, not total costs. RMA Jan 2017 29

Quantifying the Capital Cost of HV-CRE Comparing identical pricing & characteristics for HVCRE & Quantifying the Capital Cost of HV-CRE Comparing identical pricing & characteristics for HVCRE & non-HVCRE loans shows that an acceptable HVCRE ROE requires an additional return is received to support the additional capital. Additional Notes • Hurdle rate & assumed tax rate drive the magnitude of the surcharge • The shaded area identifies hypothetical market range reported by lenders Pricing model should include premium for HV-CRE capital cost • Explicitly accounts for the cost required to cover return on additional capital within the existing metrics used to price and approve credit transactions. • Easy to explain and understand • Bank retains the ability to offer product when appropriate • Easy to adjust as warranted in the future RMA Jan 2017 30

HV-CRE Underwriting Issues OCC-Fed-FDIC interpretative differences ◦ Residential development—in or out? ◦ Ambiguity of HV-CRE Underwriting Issues OCC-Fed-FDIC interpretative differences ◦ Residential development—in or out? ◦ Ambiguity of community development exclusion--SBA 504? 15% minimum equity requirement ◦ Based on “as completed” appraisal value Pre-sold/pre-leased property appraised higher than spec building & so requires more equity? ◦ Cash up front until end of construction loan ◦ Loan documentation governing equity contribution and release ◦ Cost of administering equity contribution Land equity counted at cost ◦ Inducement to flipping? Construction loan facility ◦ Major or minor work? ◦ Line of credit for general working capital purposes ◦ Pricing—typically adds 50 -90 bps to cost of funds Other issues? RMA Jan 2017 31

Summary & Closing Banks more reliant now on RE lending Heavier reliance on RE Summary & Closing Banks more reliant now on RE lending Heavier reliance on RE lending worries regulators because of losses in previous recessions Now’s the time for preventive maintenance— is your bank tuned up for RE lending? Here’s a take-away checklist. . . RMA Jan 2017 32

Real Estate Checklist for Bank Management & Directors Regulatory Checklist for Discussing Bank’s CRE Real Estate Checklist for Bank Management & Directors Regulatory Checklist for Discussing Bank’s CRE Activities Exists Now? Current? Prepared By? Approved By? 1 -CRE lending strategy: a. Growth goals b. Existing & potential sources of loan demand c. New loan types, property types, or geographic regions d. New marketing strategies & initiatives 2 -staff’s experience & ability to implement strategic initiative & achieve strategic goals 3 -Concentrations a. Current & projected CRE credit concentrations b. Bank’s plan to manage concentrations 4 -Significant changes in policies, procedures, underwriting, personnel, & control systems a. Project underwriting guidance, e. g. , LTV, LTC, min equity, etc. b. Policy exception trends c. Real estate credit administration, e. g. , inspections, draws, HV-CRE monitoring d. CRE concentration limits including project types, e. g. , multi-family housing, hotels 5 -internal and external factors that could affect CRE portfolio a. National, regional, & local economy b. Local real estate market c. Industry outlook d. Regulatory framework e. Technological changes 6 -stress testing practices a. Interest rates b. Cap rates c. NOI d. other 7 -internal bank reporting a. Risk rating migration b. CRE exposure c. AQ reporting 8 -syndication & participation activity as buyer and/or seller RMA Jan 2017 33

References “Commercial Real Estate Lending, ” Comptroller’s Handbook, OCC, August 2013. Keith Friend, Harry References “Commercial Real Estate Lending, ” Comptroller’s Handbook, OCC, August 2013. Keith Friend, Harry Glenos, and Joseph B. Nichols, An Analysis of the Impact of the Commercial Real Estate Concentration Guidance, April 2013, http: //www. occ. gov/news-issuances/news-releases/2013/nr-occ-2013 -59 a. pdf “Interagency Statement on Prudent Risk Management for Commercial Real Estate Lending, ” OCC Bulletin 2015 -51, December 18, 2015. Alex J. Pollock, “’Commercial’ Bank is Misnomer. ‘Real Estate’ Bank Is More Apt, ” American Banker, August 8, 2016. Derek Pollard, Richard Appel, and Dev Strischek, “Loans to Construct and Finance Medical Office Buildings: Enter at Your Own Risk, The RMA Journal, April 2009, pp. 32 -5. Dev Strischek, “Character and Fraud: Protection and Prevention, ” The RMA Journal, Nov 2011, pp. 32 -5. Dev Strischek, “Coming to Terms with Financial Covenants, ” The RMA Journal, June 2007, pp. 69 -73. Dev Strischek, “Credit Culture” for American Bankers Association 8 -part series published in Commercial Insights: ◦ Credit Culture: Don’t Make Loans without It (CI: 09/08) ◦ Credit Culture: Four Types of Culture (CI: 10/08) ◦ Credit Culture: Determinants of Credit Culture (CI: 11/08) ◦ Credit Culture: How to Change a Bank’s Credit Culture (CI: 12/08) ◦ Credit Culture: Credit Discipline Tools (CI: 01/09) ◦ Credit Culture : Moving from an Old Culture to a New Culture (CI : 02/09) ◦ Credit Culture: How to Identify and Manage Your Bank’s Risk Profile (CI: 03/09) ◦ Credit Culture: Risk Management Strategies to Achieve the Risk Profile and Culture You Want (CI: 04/09) Dev Strischek, “Lessons Relearned” for American Bankers Association 4 -part series published in Commercial Insights (CI) ◦ Culture Clash: Balancing Reward and Risk (CI: 7/10) ◦ Missing “C (character)” in Today’s Credit Analysis (CI: 8/10) ◦ Analyzing a Borrower’s Repayment Ability (CI: 9/10) ◦ Share and Share Alike in the Risk of Participations (CI: 10/10) Dev Strischek, “Financial Statement Guidance: A Credit to the Bank’s Lending Policies, ” RMA Journal, April 2013, pp. 20 -27. Dev Strischek, “Five C’s of Credit, ” The RMA Journal, May 2009, pp. 34 -7. Dev Strischek, “Ins and Outs of Lending Inside the Box, The RMA Journal, Feb 2010, pp. 38 -46. Dev Strischek, “Lending Inside the Box, The Journal of Lending & Credit Risk Management, Feb 2000, pp. 42 -46. Dev Strischek, “Policy Exceptions Matter as a Rule, ” RMA Journal, Jul-Aug 2012, pp. 46 -51. Dev Strischek, “Regulatory Guidance on Commercial Real Estate: Mind the Gap for Great Guidance on Good Lending, ” The RMA Journal, April 2006, pp. 62 -73. Dev Strischek, “The Ups and Downs of Cash Flow Projections for Contractors: Making a Case for Downside and Most Likely Scenatrios, ” Part 1 published in The RMA Journal Sept 2015, pp. 12 -19, Part 2 in Oct 2015, pp. 12 -15. Dev Strischek, “Writing a Credit Policy: Much to Do about Something, The RMA Journal, Feb 2008, pp. 60 -5. Dev Strischek, “Written Policy for Lending to Contractors, Journal of Lending & Credit Risk Management, June 1999, pp. 32 -43. Carla Whitlock and Dev Strischek, “Guarantor Policy: Satisfaction Guaranteed, ” The RMA Journal, March 2011, pp. 38 -43. Study on the Impact of Failure of Insured Depository Institutions, FDIC Office of the Inspector General, January 2013. RMA Jan 2017 34

Glossary A&D Acquisition & Development ALLL Allowance for Loan & Lease Losses ABL Asset Glossary A&D Acquisition & Development ALLL Allowance for Loan & Lease Losses ABL Asset Based Lending AR Accounts Receivable CA/CL current assets to current liabilities ratio, aka current ratio CAMELS Bank rating system assessing Capital, Asset quality, Management, Earnings, Liquidity, and Sensitivity to Market Risk CAPEX Capital expenditures CCO Chief Credit Officer Co. REDI non REDI borrower who decides to engage in REDI activity, e. g. , doctors who borrow to buy office building CRE Commercial Real Estate CRO Chief Risk Officer CRM Credit Risk Management Documents, documentation DSC Debt Service Coverage ratio D/W Debt to Worth ratio EL Estimate of Loss GPM Gross profit margin = GP/Sales Inventory FDICIA FDIC Investment Act LGD Loss Given Default LOB Line of Business, e. g. , commercial lending, CRE lending, private banking, consumer lending, mortgage banking, etc. L-T Long-Term LTC Loan to Cost ratio LTV Loan to Value ratio Maximum, < Minimum, > NOI Net Operating Income NW Net Worth NWC Net Working Capital OAEM Other Assets Especially Mentioned, aka Special Mention (SM) O-O Owner-occupied % percentage, e. g. , LTV = 80% PD Probability of Default PRAC Product Risk Assessment Committee RAROC Risk-Adjusted Return on Capital RE Real Estate REDI Real Estate Developer-Investor , fullprofessionals in CRE ROA Return on Assets SM Special Mention, aka OAEM S-T Short-Term TBE Total Borrower Exposure W-I-P Work in progress X ratio, e. g. , DSC = 1. 2 X RMA Jan 2017 35 time

Appendices App A: Interagency Regs & Guidance for CRE Lending App B-1: Lending to Appendices App A: Interagency Regs & Guidance for CRE Lending App B-1: Lending to RE Developers App B-2: RE Developers Red Flags App C-1: Lending to Contractors--Industry Issues and Trends App C-2: Lending to Contractors—Banking Considerations App C-3: Lending to Contractors--Profile of Higher Risk Contractor App C-4: Lending to Contractors—Info Needed to Underwrite, and Approve a Credit Request App C-5: Lending to Contractors—Underwriting Considerations App C-6: Lending to Contractors—Underwriting Considerations (continued) App C-7: Lending to Contractors--Typical Bank Covenants and Conditions RMA Jan 2017 36

Appendix A: Interagency Regs & Guidance for CRE Lending Title FRB FDIC OCC RE Appendix A: Interagency Regs & Guidance for CRE Lending Title FRB FDIC OCC RE Lending Standards, Regulations, & Guidelines 12 CFR 208, subpart E 12 CFR 365 12 CFR 34, subpart D (national banks) & 12 CFR 160. 101 (federal savings associations Appraisal Regulation 12 CFR 208, subpart E; 12 CFR 225, subpart G 12 CFR 323 12 CFR 34, subpart C Standards for Safety & Soundness 12 CFR 208 12 CFR 364, App A 12 CFR 30, App A Interagency Appraisal & Evaluation Guidelines (10/24/13) SR 10 -16 FIL-82 -2010 OCC Bulletin 2010 -42 Prudent CRE Loan Workouts SR 09 -7 FIL-61 -2009 OCC Bulletin 2009 -32 Interagency Guidance on Concentrations in CRE, 71 Fed Reg. 74580 (12/12/06) SR 07 -1 FIL-104 -2006 OCC Bulletin 2006 -46 Interagency FAQ’s on Residential Tract Development Lending (9/8/05) SR 05 -14 FIL-90 -2005 OCC Bulletin 2005 -32 Interagency supervisory Guidance on Stress Testing for Banks with More than $10 B in Total Assets (5/17/12) SR 12 -7 Press Release PR-532012 OCC Bulletin 2012 -14 Interagency Statement to Clarify Supervisory Expectations for Stress Testing by Community Banks (5/14/2012) Federal Reserve Press Release 5/14/12 Press Release PR-542012 OCCNews Release 201276 RMA Jan 2017 37

Appendix B-1: Lending to RE Developers Borrower’s repayment capacity ◦ Nature & degree of Appendix B-1: Lending to RE Developers Borrower’s repayment capacity ◦ Nature & degree of protection provided by global cash flow from business operations or collateral to cover ALL existing and proposed obligations ◦ Borrower’s character, overall financial condition, resources, & payment record ◦ Market conditions that may influence repayment prospects & cash flow potential of business operations and/or underlying collateral Collateral ◦ ◦ ◦ Current & projected vacancy & absorption rates Lease renewal trends & anticipated rents Effective rental rates or sales prices after concessions Time frame for achieving stabilized occupancy or sellout Property’s NOI vs budget with reasonable operating & maintenance costs Discount rates & direct capitalization rates Guarantees Guarantee is written and legally enforceable Guarantor has financial capacity to be able and willing to support credit through ongoing payments, curtailments or re-margining Source: “Analyzing Repayment Capacity of the Borrower, ” Commercial Real Estate Lending, OCC, August 2013, pp. 72 -3. RMA Jan 2017 38

Appendix B-2: RE Developers Red Flags Delinquent real estate taxes 2. Declining sales prices Appendix B-2: RE Developers Red Flags Delinquent real estate taxes 2. Declining sales prices or rental rates 3. Cancellations of sales contracts or reservations 4. Liberal sales or unusually generous concessions including rent, tenant improvement allowances, moving allowances, a& lease payments 5. Slower absorption than budgeted 6. Delinquent lease payments from major tenants 7. Higher vacancy & turnover rates 8. Changes to initial concept or development plan, e. g. , condo converted to apartment building 9. Construction budget overruns 10. Borrower requests for significant reallocation of funds to other budget line items 11. Late or delinquent payments 12. Draw requests ahead of schedule for work yet to be completed 13. Construction delays or other unanticipated events that could lead to cost overruns 14. Liens due to worker or supplier payment disputes 15. Borrower requests for additional financing due to unanticipated costs or expenses 16. Deterioration in performance of borrower’s other properties or businesses 17. Interest reserves that have been repacked Source: “Other Considerations, Commercial Real Estate Lending, OCC, August 2013, p. 72 1. RMA Jan 2017 39

Appendix C-1: Lending to Contractors--Industry Issues and Trends Facts of life: ◦ ◦ ◦ Appendix C-1: Lending to Contractors--Industry Issues and Trends Facts of life: ◦ ◦ ◦ ◦ construction activity much more volatile than business cycle swings interest rates and accelerator principle aggravate construction volatility competition drives margins down while cycle contributes to revenue swings thin GPM -->high break-even points W-I-P inventory and fixed assets-->illiquidity high leverage and low solvency-->poor capitalization post 9/11 insurance costs-->harder to transfer risk vulnerability to failure ◦ ◦ ◦ Entry of relatively inexperienced contractors into market Decreasing use of established regional and national contractors Increasing common ownership of project developer and general contractor Resistance to bonding requirements Resistance to equity and liquidity requirements Volatility of construction materials prices Recession Issues RMA Jan 2017 40

App C-2: Lending to Contractors— Banking Considerations Contractor lending is specialized skill--lending authority usually App C-2: Lending to Contractors— Banking Considerations Contractor lending is specialized skill--lending authority usually restricted to lenders experienced in construction Contractor lending is higher risk portfolio—banks may set maximum limit in $$ or as % of total loan portfolio Contractor lending is permanent, not seasonal– so borrowing base formula (% billings ) employed to administer borrowings Lend to contractors based on downside cash flow, and take collateral and guarantees as secondary repayment sources Lend to contractors in bank’s target market who are engaged in projects within bank’s target market RMA Jan 2017 41

App C-3: Lending to Contractors-Profile of Higher Risk Contractor Warning Flags for Bankers: ◦ App C-3: Lending to Contractors-Profile of Higher Risk Contractor Warning Flags for Bankers: ◦ Inability to get bonding, bonding capacity has been cut, or insurance agent unable to renew bonding company with current surety ◦ contract status report shows major jobs behind schedule ◦ jobs are outside of traditional geographic market ◦ product is not contractor’s traditional offering ◦ AR/AP ratio < 1. 00 ◦ credit agency reports show poor payment record, judgments, liens, bankruptcy, etc. for firm and/or principals ◦ delinquent taxes--payroll, income, sales, RE, etc. ◦ expired contractor license or unlicensed contractor ◦ Inability or unwillingness to provide current financial statements, including contract status report, receivables ageing, trade payables ageing RMA Jan 2017 42

App C-4: Lending to Contractors—Info Needed to Underwrite, and Approve a Credit Request Thoughtful App C-4: Lending to Contractors—Info Needed to Underwrite, and Approve a Credit Request Thoughtful explanation of reason for borrowing, amount desired, length of time to repay Business plan—company’s overall strategy Current financial info—BS, P&L, contract status report, receivable ageing, payables ageing Financial projections showing ability to repay loan Bonding and insurance Personal guarantees of owners/principals Personal financial statements of owners/principals Tax returns on company and guarantors Collateral from borrowers and guarantors Credit agency reports on company and guarantors Other? RMA Jan 2017 43

App C-5: Lending to Contractors— Underwriting Considerations Entry of relatively inexperienced contractors into market App C-5: Lending to Contractors— Underwriting Considerations Entry of relatively inexperienced contractors into market and decline in use of established regional and national contractors ◦ Sponsorship—customer’s ability to build, lease or manage this type of property in this market, “been there, done that. . . , ” ◦ Qualified third parties—property managers, project managers, leasing agents, external accountants, internal accounting and bookkeeping, real estate attorneys, civil engineers, architects, insurance agents, etc. ◦ Global cash flow—resources of borrower and guarantors vs their collective debts Increasing common ownership of project developer and general contractor and resistance to bonding requirements ◦ Most sureties won’t bond projects where developer and contractor are under common ownership, so. . . Require bonding of subcontractors at some minimum level, say 10% to 20% of budgeted hard costs Additional upfront equity to offset completion risk for unbonded work Stand-by letter of credit in lieu of general contractor bond Spell out default points—project completion deadline in construction loan agreement Rigid compliance with construction loan administration— 3 rd party review of contract and budget for feasibility and reasonable retention, equity injected upfront before any draws, 3 rd party inspections, low tolerance for overadvances, monitoring of contingency fund depletion too early in project, lender approval of any changes to plans, specs, and construction budget RMA Jan 2017 44

 App C-6: Lending to Contractors— Underwriting Considerations (continued) Volatility of construction loan materials App C-6: Lending to Contractors— Underwriting Considerations (continued) Volatility of construction loan materials ◦ Market intelligence from building supplies wholesalers and retailers in local market ◦ Monitor commodities prices for steel, lumber, gypsum, concrete, oil, etc. ◦ Credit checks on your borrower with its suppliers ◦ Third-party data providers—RMA, Ibis. World, various real estate sources ◦ Review and stress-test construction contracts and budgets —breakeven analysis Resistance to equity & liquidity reqts ◦ Reduce LTV and loan term, increase amortization ◦ Require subsequent lump-sum cash equity injections ◦ Springing lien on cash collateral under bank control RMA Jan 2017 45

App C-7: Lending to Contractors-Typical Bank Covenants and Conditions No additional lenders without prior App C-7: Lending to Contractors-Typical Bank Covenants and Conditions No additional lenders without prior bank consent subordination of any related party debt no decrease or loss of bonding capacity bonding company rated A or A+ by Best’s copies of all documentation submitted to surety monthly financial statements including BS, P&L, Cash Flow, AR aging, AP aging, and contract status report cross-defaults and cross-collateralization bank as loss payee on key person life or disability insurance equal to bank’s exposure no change in ownership or control without prior bank approval borrowing base certification and covenant compliance certification Financial covenants ◦ Minimum current ratio ◦ Maximum debt/worth ratio ◦ Minimum net working capital with step-up provision to capture some % of earnings ◦ Minimum net worth with step-up provision to capture some % of earnings RMA Jan 2017 46