APPENDIX D - COMMERCIAL LOAN POLICY
Table of Contents 1.
GENERAL POLICY ................................................................................................................................... 1
2.
ORGANIZATIONAL STRUCTURE ............................................................................................................. 1
3.
LOAN STRUCTURING ............................................................................................................................. 2
4.
TYPES OF COMMERCIAL LOANS ............................................................................................................ 2
5.
OTHER TYPES OF LOANS AND COLLATERAL .......................................................................................... 5
6.
UNSECURED LOANS .............................................................................................................................. 7
7.
INFORMATION AND DOCUMENTATION REQUIRED ............................................................................. 8
8.
FINANCIAL STATEMENT GUIDELINES .................................................................................................... 9
9.
CREDIT BUREAU REPORT/FICO SCORES .............................................................................................. 10
10.
GUARANTEES .................................................................................................................................. 11
11.
LOAN AGREEMENTS ........................................................................................................................ 11
12.
LOAN COVENANTS .......................................................................................................................... 12
13.
ENVIRONMENTAL GUIDELINES ....................................................................................................... 12
14.
LOAN PRICING ................................................................................................................................. 12
15.
RENEWALS, DEFERMENTS AND EXTENSIONS ................................................................................. 13
16.
LOAN PARTICIPATION PURCHASED ................................................................................................ 13
17.
LOAN PARTICIPATIONS SOLD .......................................................................................................... 13
OBJECTIVE: The objective of the commercial loan policy is to set forth the guidelines that will help ensure a diversified loan portfolio of acceptable quality, while providing the Bank with a sufficient return on its funds as justification for the acceptance of risk inherent in lending. 1. GENERAL POLICY
The purpose of commercial lending is to provide short, intermediate and long term business loans to customers within our CRA area. It is the expectation our lending practices will benefit the borrower, the community and the Bank, while adhering to safe, sound and prudent lending practices. The success of this function will enhance the growth and profitability of the Bank. 2. ORGANIZATIONAL STRUCTURE
The Chief Credit Officer shall be held directly responsible for adherence to this policy. This individual shall report to CEO and shall be held accountable for the quality as well as the profitability of consumer, agricultural and commercial lending. In addition to the CCO, Market Presidents and individual bankers are responsible for knowing and understanding CornerStone Bank’s credit policy. Appendix D – Commercial Loan Policy Board Approved – 4/26/2016
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All credits are to be presented in accordance with loan policy with any exception to policy noted and mitigated. 3. LOAN STRUCTURING
The manner in which a loan is structured will either enhance or cause deterioration in the quality of the loan portfolio. Loans should be scheduled for repayment at the time one could reasonably expect the cash flow to be available to meet the required payment. Payment schedules determined solely for the benefit of the borrower or the Bank can result in a non-performing asset. Loans should be structured to match purpose and cash flow, not collateral. Primary repayment should always be specifically identified along with a secondary source of repayment in the event the primary source fails to materialize. 4. TYPES OF COMMERCIAL LOANS
a. Single Advance/Seasonal Credits (secured or unsecured) Seasonality of business cycles can cause a temporary shortage of cash flow during peak business periods. Loans shall be made for 180 days or less and repaid from the replenishment of working capital through the normal business cycle. b. Term Credit Amortizing term loans require the borrower to make periodic payments of loan principal (typically monthly or quarterly). The periodic principal payments may or may not be equal, and there may or may not be a balloon payment due at the final maturity. Term credit is used to finance the purchase, modernization or expansion of a plant/equipment; to refinance debt, or replenish working capital depleted, not by losses, but by previous expansions or equipment purchases. Amortization shall generally match the assets’ economic life, usually 3 to 7 years, but should not exceed ten years (see guide table). In general, the advance rate on equipment should not exceed fifty percent (50%) to seventyfive percent (75%) of the item’s cost or estimated value which ever is less, unless the loan is part of a more complete financing package, including additional collateral at which time a higher advance rate may be acceptable. It is difficult to define the advance rates and allowable amortizations on all types of equipment, however, the following table provides a guide that bankers should use and apply in similar circumstances: Collateral category
Computers, fax machines, copiers, printers & related hardware, restaurant equipment Used New 50% 75%
Advance Rate Amortization 2 yrs 3 yrs Continued explanation next page
Office furniture and fixtures
Specialty equipment, medical equipment
Used 50%
New 75%
Used 50%
New 75%
5 yrs
5 yrs
5 yrs
5 yrs
Appendix D – Commercial Loan Policy Board Approved – 4/26/2016
Industrial equipment, dozers, loaders, scrapers, semi-tractors, dump trucks Used New 75% 75% 5 yrs
7 yrs
General equipment, passenger vehicles, pickups, etc...
Used 75%
New 75%
5 yrs
7 yrs Page 2
When taking individual equipment as collateral for a loan, due diligence must be used in determining useful life and value when evaluating advance rates and the term of the loan. For loans in excess of $250,000 a complete equipment listing is required. When individual pieces of exceed $250,000, equipment value should be supported through a third party appraisal, industry publications, officer inspection valuation reports or invoices. Vehicle valuations should be determined by use of NADA, Kelly Blue Book or similar reputable sources. When equipment loans are less than are $250,000 or less, the net book value may be used with the appropriate advance rate and amortization per the guide table. When existing equipment value in lieu of a cash down payment is to be used as equity to support additional equipment credit, the existing equipment value needs to be supported by the criteria listed above with the valuation to be less than 1 year old is required. c. Non-Revolving Credit Line/Draw Down Line A non-revolving line is a commitment under which the borrower can draw at any time during the specified time period of the commitment approval. However, the borrower cannot draw against payments previously made to the line. A non-revolving commitment may be represented by a single promissory note signed for the entire commitment amount. Non-revolving lines are commonly used for equipment intensive businesses or businesses that must updated equipment on a regular basis with the equipment financing termed out at line maturity. d. Revolving Credit Commitment A revolving line of credit is a commitment under which the borrower can draw or repay funds at any time during the term of the commitment without any additional approval, provided the balance of the line does not exceed the approved limit, and the borrower complies with all other terms of the commitment. i.
Lines of credit shall not exceed 364 days. Seasonal revolving lines of credit shall be paid out for 10 consecutive days or for 30 non-consecutive days annually. Lines of credit are to revolve to avoid the line becoming permanent working capital and therefore when the line does not revolve, consideration must be given to terming out the line balance or a portion thereof. Caution should be exercised to ensure the line is not a substitute for capital. Secondary collateral may be needed to reduce risk and in most instances an all business asset security agreement and corresponding Uniform Commercial Code financing statement are required. Revolving lines of credit supported by a borrowing base certificate are not subject to a requirement to be paid out for a specific time frame; however, such revolving lines of credit should be monitored for appropriate use to assure that the line is not a substitute for capital.
ii. Accounts Receivable and Inventory Financing Accounts Receivable (A/R) and Inventory lines are typically revolving lines of credit used to provide financing for the operating cycle of a company. Accounts receivable and inventory are the assets of a business that are generally the most liquid on the balance sheet. Inventory is sold and is generally converted to an account receivable. Appendix D – Commercial Loan Policy Board Approved – 4/26/2016
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The account, when collected, is then converted to cash. Time delays in the turning of inventory to accounts receivable to cash can cause cash shortages. This type of facility supplements the cash needs of an expanding business. In addition to sales growth, the need for funding may be caused by timing differences between the borrower’s purchasing terms, inventory turnover and the selling terms of the trade. A/R and Inventory lines should generally not be used to pay off long-term debts or to purchase fixed assets. Lines of credit extended to businesses will generally be secured by both accounts receivables and inventory. On A/R lines, inventory must always be taken as collateral, even though there may be no inventory advance rate. Perfecting the Bank’s interest in the inventory ensures that the Bank has a security interest in the inventory along with proceeds from the inventory. In addition, A/R lines are also governed by written loan agreements. A/R lending requires that the borrower maintain their primary depository relationship with the Bank. Advance ratios are based on the conversion cycle of receivables and inventory into cash. Advance ratios should be tailored to the type of industry or business. An advance ratio relates to the percentage that can be loaned against total eligible collateral and is reported periodically on a borrowing base certificate. Advance ratios are used primarily with receivables; an advance against inventory is usually done on a conservative basis. Inventory is normally financed by accounts payable (trade credit) or working capital; however, bank financing is necessary at times. A/R advance ratios shall be specific to the type of business and based on receivables dilution caused by returns, credits, allowances, concentrations, bad debts, or warranty claims. (1) Advances shall be limited to 80% of eligible accounts receivable, however, the applied advance rate should consider the underlying source of the receivable and the ability to enforce collection. Consideration should be given to a lesser advance rate when are less desirable (large amount of small receivables or out of market). (2) The Bank shall not lend against receivables when another bank is lending against inventory. (3) Ineligible receivables include, but are not limited to, invoices more than 90 days past due, consignment and guarantied sales, contractor progress billings, contra-account billing, foreign sales, sales to affiliated companies, and claim-type receivables such as insurance, warranty, or freight damage claims. Special notice requirements are needed when lending against government receivables. (4) If 10% of the invoiced amount to a borrower’s customer is 90+ days past due, the bank should consider excluding the entire receivable from the aging report, thereby reducing the amount of borrowing base availability. (Taint rule) (5) Concentrations of sales by the Bank’s borrower to any customer should also be reviewed. Concentrations in excess of 10% of total accounts receivable should be analyzed to determine: 1) the ability of the borrower to absorb Appendix D – Commercial Loan Policy Board Approved – 4/26/2016
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the concentration risk; 2) the quality of the credit monitoring practices of the borrower and 3) the credit quality of the account debtor. Inventory advance ratios shall be specific to the type of business with attention to the amount of overhead costs absorbed by inventory. The security agreement shall normally include intangibles in order to allow the Bank to sell branded merchandise. (1) Advances on inventory shall generally be limited to 50% and capped at a maximum dollar amount. The inventory advance ratio shall be specific as to raw materials, WIP and finished goods and shall exclude or limit advances on work-in-process, new and unproven products, supplies, proprietary packaging materials, and obsolescent inventories Caution shall be used when advancing against perishable goods, livestock products, dated products, and products subject to style, size, and color change with consideration of a lower advanced rate. Special consideration should be given to verification of inventory held off-site, (e.g. with vendors, installers, warehouses, and branch offices). iii. Floor Plan Lines of Credit Floor plan lines of credit are used to supply capital to permit dealer to acquire inventory for sale. Monitoring of inventory is to be no less than quarterly, and may be monthly when necessary for proper monitoring. Businesses requiring greater monitoring than monthly would generally be considered undesirable e. Lender Guidance Line A Guidance line is an expansion of a banker’s authority to lend to a customer (rather than a loan to the customer) subject to review of purpose and terms, and subject to approval by the banker when the line is activated. All Lender Guidance Lines will be approved at least annually. The Lender Guidance Lines are not to be disclosed to the customer that such an authority has been approved. Advances under guidance lines, when made are to be secured, within policy and without exceptions unless approved with the exception or specifically approved as unsecured. Discretionary lines will be considered for 3 rated credits or better. f.
Conditional Sales Contracts Conditional sales contracts are the time sales contracts assigned from vendors with or without recourse. When the bank enters a relationship with a vendor to purchase financing paper originated by the dealer, proper analysis and documentation will evidence the credit analysis and the fundamental terms of the business arrangement. The Bank’s security interest is to be identified and documented in the financing paper.
5. OTHER TYPES OF LOANS AND COLLATERAL
As a general rule, loans shall be secured by the asset being acquired and/or other assets owned by the borrower and should reflect the repayment source. At all times the collateral securing a loan should reflect a sufficient margin to adequately protect the Bank from loss in the event of the decline in market value. Conservative valuation of collateral by banker is critical. As a general rule, loans will be approved on a cash flow basis and ability to service debt rather than collateral value. Advance rates on various loan types can be dependent upon the marketability of the collateral. Appendix D – Commercial Loan Policy Board Approved – 4/26/2016
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a. Commercial Real Estate Loans See Loan Policy Appendix E - Commercial Real Estate Loan Policy b. Construction Loans See Loan Policy Appendix F – Construction Loan Policy c. Letter of Credit Letter of credit requests are considered for appropriate needs. All Letter of Credit requests shall be treated as a credit request and will be documented as such including an underlying promissory note. All letter of credits will be individually numbered and generally have a maturity of less than one year. Letter of Credits are to be issued in accordance with the terms and conditions of the Uniform Customs and Practices for Documentary Credits, International Chamber of Commerce, Publication 500 (or successor versions). d. Government Guaranteed Loans CornerStone Bank recognizes the importance of Small Business Administration (SBA) and Bureau of Indian Affairs (BIA) lending where an SBA, BIA or similar guarantee can make credit requests acceptable, which may not otherwise qualify on the terms requested or needed by the borrower. All loans are to be structured and underwritten following CB’s Loan Policy and supplemental guidelines with consideration given to terms outside of CornerStone Bank policy when supported by SBA, BIA or similar guarantee programs. e. Government and Quasi Government Leases Leases to government or quasi-government entities shall be available. An attorney knowledgeable and experienced in this area of the law must prepare all legal documentation. f.
Certificate of Deposit Loans Commercial loans secured by Certificate of Deposits are allowed at 100% of the certificate’s value. In general, the Bank shall loan money secured by CD‘s of this Bank at two (2) percentage points above the CD rate. Loans secured by CD‘s of other institutions shall bear interest at the normal rates as determined by the ALCO Committee and shall be limited to $250,000. Loan maturity and certificate maturity are to match.
g. Common Stocks, Bonds and Life Insurance The use of securities and life insurance cash value are an acceptable practice however, loans whose primary purpose and repayment source is the speculative future sale of the securities are against policy. Loans should not be made against savings or CDs held in trustee, custodianship, guardianship, or IRA accounts. Type and advance rates follow: i.
U.S. government securities – 90% of the lower of face or market value
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ii. Municipal/corporate bonds rated by Moody’s (A) or better – 80% of the lower of face or market value iii. Securities listed on any U.S. security exchange—70% of market value, except where margin requirements indicate a lesser advance. Will be verified quarterly. iv. Cash surrender value of life insurance – 95% of cash value 6. UNSECURED LOANS
All Markets i.
Unsecured lending to individuals Unsecured lending to individuals is considered based on the following characteristics and is to be considered in aggregate with any existing unsecured lending to closely held businesses the individual guaranties. All unsecured lending requires a credit score of 700 or greater with Risk Rating of 3 or better. (1) Lines of credit maturity (a) Lines of credit shall be short term in nature and not exceed 364 days. Lines of credit are to revolve and maintain a 10 day consecutive rest period or 30 day non-consecutive rest period during the term of the line. (b) Interest payment frequency shall be monthly for credit scores of 700-749. (c) Interest payment frequency shall not be less than quarterly for credit scores of 750 and greater. (2) Unsecured loans maturity, amortization and payment frequency (a) FICO scores 700-749 shall not exceed a term of 2 years and 3 year amortization with monthly payments with the exception of single pay notes with 6 month maturity or less. (b) FICO scores 750 and greater shall not exceed 3 years and a 5 year amortization with payments not less than quarterly with the exception of single pay notes with 6 month maturity or less. While policy establishes maximum terms and amortizations, unsecured loans are expected to have short maturities and amortizations (i.e. for a request that is related to an annual expenditure it is expected the term and amortization will not exceed one year). (3) Credit availability (a) Credit scores of 700-749 (i) Credit availability shall not exceed the lesser of 30% of unencumbered liquid assets or a credit amount equal to an amount that can be amortized over 3 years with a debt service coverage ratio of 120% utilizing the average of the last 3 years of the individual’s discretionary cash flow. (b) Credit scores of 750 and greater
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(i) Credit availability shall not exceed the lesser of 50% of unencumbered liquid assets or a credit amount equal to an amount that can be amortized over 5 years with a debt service coverage ratio of 120% utilizing the average of the last 3 years of the individual’s discretionary cash flow. Liquid assets are defined as those assets that can be readily converted to cash within 20 days or less without substantial loss in value including but not limited to non-qualified stocks, bonds, certificate of deposits. Not considered liquid assets are real estate, autos, recreational vehicles and qualified stocks, bonds or certificates of deposit that are held in retirement, annuity or 529 Plans ii. Unsecured lending to businesses Unsecured lending to closely held businesses will be based on the credit quality of the guarantors. Credit availability is based on the credit availability of the majority of the guarantors and is considered in aggregate with the unsecured credit to the individual and that to be extended to the company. 7. INFORMATION AND DOCUMENTATION REQUIRED
In general, the banker should obtain the following information, depending on loan type and borrowing entity, upon application, and follow-up information on an annual basis a. Financial Statements See Section 8 – Financial Statement Guidelines for details information i.
Interim Financial Statements when considering new requests for operating entities when 90 days past year end and the credit aggregate is greater than $250,000
ii. Last three years’ balance sheets and income statement, signed by an officer of the company. iii. Last three years’ tax return for borrower and guarantors, inclusive of K1s when the borrower or guarantor is an individual. iv. Current signed personal financial statement (less than 12 months old) on individual borrowers and guarantors. When personal financial statements are older than 6 months bankers are to consider potential deterioration in the borrower’s or guarantor’s industry, sources of income, etc… due to local or national economic conditions. If potential deterioration exists the banker should have the borrower or guarantor certify that no material change has occurred with a statement to that effect on the personal financial statement and have the borrower/guarantor date and resigned. If there are material changes these should be noted on the personal financial statement and have it dated and resigned. b. Credit reports i.
See Section 9 of Appendix D
ii. Dun & Bradstreet reports when available c. Entity Documentation i.
Corporations: Articles of Incorporations & Bylaws
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ii. LLC: Articles of Organization & Operating Agreement or Member Control Agreement, iii. General Partnership: General Partnership Agreement & Trade Name /Assumed Name Filing iv. LP: Limited Partnership Agreement and Trade Name/Assumed Name Filing v. LLP or LLLP: Limited Partnership Agreement ad Limited Partnership Registration with Secretary of State See Entity Documentation Guide for acceptable alternatives when necessary d. Documentation of Officers – unless stated in above entity documents i.
Minutes of meeting establishing most recent list of officers or
ii. Copy of Annual Report from the Secretary of State e. Certificate of Good Standing or Assumed Name Filing from the Secretary of State website f.
Insurance
g. Appraisal inspection of business collateral (generally) h. Annual lien searches 8. FINANCIAL STATEMENT GUIDELINES
a. Personal Financial Statement (PFS) It is recognized that the requirements and quality of personal financial statements are situational in nature. When lending to an individual or to an entity where the individual has an active guaranty (the individual is making payments as a result of his/her guaranty) at minimum the Bank requires a PFS detailing current and noncurrent assets and liabilities, the resulting net worth and contingent liabilities as outlined in the Bank personal financial statement form. It is not necessary to use the Bank’s form however the format used must provide the necessary information. All personal financial statements are to be dated and signed by, at a minimum, the borrower or guarantor. Accountant prepared and provided personal financial statements are acceptable without signatures if the accompanying cover letter or email is attached to the PFS. The level of due diligence applied to the PFS is subject to the risk associated with the credit exposure. The Banker must complete sufficient due diligence to allow for Bank reliance on the accuracy of the statement. For example the PFS of a high net worth client with low leverage may only require a comparison to the current credit bureau report to verify the accuracy of current indebtedness. The opposite is equally applicable( i.e. the PFS of a small or moderate net worth highly leveraged client may require independent verification of the majority of the significant assets such as brokerage statements, IRAs/401k statements, closely held business YE financial statements, RE tax records etc...). The cash flow of an individual can also drive the need for further financial statement due diligence. If an individual’s personal cash flow is insufficient and reliant on utilization of existing assets, independent verification of assets and asset liquidity may be required. The opposite also applies in that an individual with high cash flow with minimal debt service and outside cash Appendix D – Commercial Loan Policy Board Approved – 4/26/2016
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flow demands may only require verification of cash flow and indebtedness through the use of tax returns and a current credit bureau report. Bankers must properly position requests for a PFS with the borrower understanding that the credit underwriting process may create a need for additional information and due diligence. Incomplete or financial statements lacking necessary detail will delay the decision process or may result in a declination of the request. b. Business Financial Statements i.
Company Prepared Business Financial Statements Generally company prepared will be acceptable for businesses with credit exposure of $1,000,000 or less and real estate holding companies or other similar non complex companies. This exception does not apply to large real estate companies with multiple holdings.
ii. Compiled Business Financial Statements Generally compiled will be acceptable for business entities with credit exposure of $2,000,000 or less. iii. Reviewed or Audited Financial Statements May be required for credit requests in excess of $2,000,000 may require reviewed or audited financial statements dependent on the complexity of business entity, the financial strength of the borrower, the financial strength of guarantors, the sophistication of the borrowers accounting program, the quality, marketability and quantity of collateral and the loan terms. iv. Interim Statements Generally will be required for credit relationships of $250,000 whenever borrowings are primarily secured by accounts receivable or inventory or the banker and/or CLC believes additional monitoring is required. Bankers must properly position requests for business financial statements with the borrower understanding that the credit underwriting process may create a need for additional information and due diligence. Inaccurate inconsistent financial statements will delay the decision process or result in a declination of the request. 9. CREDIT BUREAU REPORT/FICO SCORES
All Markets - Credit Bureau/FICO Scores – Credit Bureau reports are considered valid for 6 months and are to be pulled for initial and subsequent requests accordingly. Secured lending requires a FICO score of 650 or greater for individuals and 650 or greater for the majority of the principals for closely held entities. Subject to all other loan policy criteria, additional secured only credit requests will be considered for existing performing credits with a FICO score less than 650 (all accounts with CSB and reported on the credit bureau are current and no 30 day or greater past due in the last 12 months) Approval of such credit requests will not be considered a policy exception. See section 6.a. for credit bureau/FICO Score requirements for unsecured lending. Appendix D – Commercial Loan Policy Board Approved – 4/26/2016
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10. GUARANTEES
All commercial requests shall have the unlimited guarantee of entity principals with 25% or greater ownership. In cases where there is sufficient guarantor strength from all the entity principals, limited guarantees of not less than 125% of their proportional share may be considered. There are circumstances where owners with less than 25% ownership may be required to provide a guarantee. When changes to credit are material, new guaranties should be obtained. Guaranties are to be refreshed every 5 years or when a new credit request increases guarantor exposure. 11. LOAN AGREEMENTS
Loan agreements are utilized to safeguard the sources of repayment identified in the credit analysis. The agreement generally consists of appropriate covenants and conditions of default and related remedies, and should be directly linked to the risks identified by the Banker. Compliance with the financial covenants shall be tracked through the annual review and analysis process. The banker shall send prompt written notice of covenant violations to the customer, with identification of the Bank’s intended action. a. Reporting: A/R lines monitored on a monthly or quarterly basis will generally be credits where the bank is relying on margined trading assets as the primary collateral and as a secondary repayment source. Monitoring will encompass the following disciplines: i. Monthly borrowing base certifications are generally required, however at a minimum must be quarterly and identify accounts receivable net of exclusions, inventory net of exclusions and accounts payable aging reports ii. Thorough review of agings for concentrations, trend analysis, ineligibles, etc… iii. Reconciliation of borrowing base certificates to agings Responsibilities for these types of reporting are set forth as follows: Close monitoring of the collateral within approved borrowing base limits is extremely important as collateral can deteriorate in value or be liquidated by the borrower quickly. Deteriorating performance can be evidenced by declining collateral margins, over-advances on collateral, increases in ineligible receivables, frequent overdrafts, lack of profitability, uncontrolled growth, and depletion of working capital as well as and slow down in turnover of accounts receivable, inventory, and accounts payable. Any of these situations should cause the banker to thoroughly investigate reasons for the deteriorating performance. The accuracy of the loan grade should also be evaluated. b. Limited Reporting: Limited reporting is available on lines in the committed amount of $250,000 or less, Risk Graded 3 or better. This reporting should generally be used when the overall financial condition of the borrower warrants less monitoring and controls. c. Non-monitored A/R lines will be extended to creditworthy borrowers with the financial capacity to support a facility in which the collateral will not be closely monitored and controlled by the bank. Underwriting of these lines must be well supported in the loan presentation. Borrowers approved on this basis are not subject to formula lending. As a result, borrowing base certificates, monitoring of eligible collateral, field examinations and verifications are not required. Appendix D – Commercial Loan Policy Board Approved – 4/26/2016
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12. LOAN COVENANTS
a. Debt Service Coverage Ratio Commercial loans shall be written with a debt service coverage ratio 1.20/1 prior to distributions and 1/1 after distributions. DSC prior to distributions shall be defined as net income plus depreciation plus amortization plus interest expense divided by principal and interest required. DSC after distributions is defined as net interest plus depreciation plus amortization plus interest expense less distributions divided by principal and interest required. b.
In addition to the debt service coverage for commercial loans the following are covenants frequently used in loan agreements and should be considered when appropriate: i.
Working Capital – Identifies that working capital will not drop below a certain amount.
ii. Owner Equity – Requires tangible net worth to meet a minimal level. iii. Financial Ratios – Used to ensure that the operation maintains its financial condition in good order. Ratios commonly include: current ratio, debt to asset, equity to asset, or debt to equity. iv. Other Borrowings – Prohibits the borrower from incurring additional debt exceeding a certain amount without prior Bank approval. v. Limitation on Acquisitions or Sale of Assets is utilized to assure the size and capacity of the operation is sufficient to maintain a profitable operation. vi. Limitation on Changes in Management or Ownership are used to assure the borrower originally considered and approved is maintained for the life of the loan, vii. Capital Expenditures –Limits the amount of capital purchases, which can be made out of either cash flow or other types of financing without the bank’s consent. viii. Limitation of Dividends, Distributions and Salaries are used to limits the amount that owners/officers can take out of the company (maintains the equity position). 13. ENVIRONMENTAL GUIDELINES
The bankers will adhere to the environmental policies of the Bank. See Loan Policy Appendix I – Environmental Risk Management Policy. It is the policy of the Bank to take extreme caution in respect to filing mortgages or lending money to acquire property where the potential for undesirable substances may exist. The Bank requirement prior to making a commitment to loan funds, is completion of environmental due diligence per policy with verification of no environmental issues which verifies the nonexistence of hazardous substances and the businesses continuous efforts to comply with all laws pertaining to this subject. 14. LOAN PRICING
It shall be the responsibility of the Asset Liability Committee (ALCO) or designee(s) to set pricing guidelines. The appropriate approver (individual or committee) is responsible to assure that all Appendix D – Commercial Loan Policy Board Approved – 4/26/2016
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loans are priced in accordance with the guidelines. Said pricing guidelines shall take into account the following areas of consideration: a. Liquidity of the Bank b. Credit Risk c. Time Rate Risk d. Term e. Deposit Relationship In general, commercial lines will be structured with a variable rate of interest with an interest rate floor. Variable rate lines and loans shall be indexed to the Wall Street Journal's Prime rate of interest or an alternative pricing index deemed appropriate by ALCO and based on marketplace competition. Commercial term loans may be variable or fixed rates, with fixed rates not to exceed 5 years. 15. RENEWALS, DEFERMENTS AND EXTENSIONS
All requests to renew, defer or extend existing loans shall require the same process required as when the loan was originally made. These types of requests generally reflect a deviation from the original agreement. Caution is to be taken in handling these requests. The policy of the Bank will be to recognize any potential problems or loss exposure at the time it becomes apparent. Renewals, extensions and deferrals will never be used to defer a potential problem or loss to a later date. Interest brought current is a requirement of renewals, extensions or deferments. 16. LOAN PARTICIPATION PURCHASED
In market loan participations within lending parameters are subject to CLC and Board approval limits are acceptable. Out of market participation purchases require Board approval prior to the purchase. See Loan Policy Section 23 – Loan Participation for participation requirements and Participation Procedures for further detail. 17. LOAN PARTICIPATIONS SOLD
Prior to booking, credits approved on the basis that a portion of the credit is to be sold must have the purchasing participant’s commitment under the terms and conditions approved by CornerStone Bank. Any subsequent credit action involving participations sold require documented concurrence from purchasing participant per the participation agreement at the required approval level. See Participation requirements in Loan Policy Section 23 – Loan Participation and see Participation Procedures for further detail.:
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