CEIS REVIEW QUARTERLY REPORT Q4-2015

ON MY MIND – CEIS PRESIDENT, JOE HILL

CEIS successfully passed the Service Organization Control 1 Type 2 audit!

This success illustrates the security and longevity of the firm

CEIS has an effective system in place to prevent any hacks or security breaches that may have effected other firms.

Not only is CEIS teeming with experts willing to purposefully aid their clients, CEIS is a strong, reliable firm that can be trusted with a banks private/sensitive information.

REGULATORY RELEASES

Recent releases which pertain to our clients OCC - Linda Cunnigham names the OCC's First Chief Risk Officer

OCC - Reminder to Institutions regarding Emergency Preparedness

OCC Increasing Sustainable Loan Modifications and Reducing Foreclosures

CONSTRUCTION LENDING – STRUCTURING YOUR PROGRAM

Commercial Real Estate Construction Returned to its pre-crisis growth levels. A strong sector to finance loans and drive profits.

Several aspects of the industry must be analyzed before a banks enters into the commercial real estate sector

Regulatory: Current standing as well as ones. capabilities to

maintaining compliance to the guidelines.

Historical and Institutional Risk Tolerance.

Are the risk levels measurable and can they be tracked?

REGULATORY CHANGES IN THE CONSTRUCTION LENDING INDUSTRY

A comprehensive and thorough review of an institution's critical expertise in this specialized area is required by regulatory agencies.

Reductions in the levels of construction/renovation/improvement loans as a percentage of capital and the loan portfolio have also been implemented.

These regulations set the stage for the level of involvement of a lender.

INTERNAL AND EXTERNAL ANALYSIS OF ALL INVOLVED PARTIES

Internal Was there a lack of staff experience in this type of lending that was unrecognized and

thus caused inadequate underwriting and monitoring while problems were occurring? Were there documentation issues evident including lack of Title Insurance, inadequate

monitoring of liens filed, no updated title policy, or were there weak covenants? External

Was there an experienced engineering / inspection firm hired or was this waived to save costs?

Was the General Contractor (GC) adequate for the project (experienced as to type and scale of the project)?

Was the GC replaced during construction and was the institution not immediately notified or notified well after the fact, with a replacement GC not approved and perhaps not as experienced? Why was the GC replaced?

When looking at historical performance and or losses some general considerations a banker should ask themselves are: What has been your institutions prior experience in construction or renovation lending?

When and if losses were sustained, what were the reasons and has the institution performed "post-mortems" to fully identify the reasons, including common threads or elements?

APARTMENT AND MULTI FAMILY PROJECTS

1. Apartment and Multi Family Projects Generally lower risk (high risk can lie in the underwriting

process). Understand the communities development schedule –

other nearby projects being completed at the same time increases the risk factor.

Establish, before the commencement of the project, a minimum equity contribution.

Have your total project budget be reviewed by an independent consultant.

COMMERCIAL PROJECTS

1. Commercial (Office, Retail and Industry) An in-depth understanding of the history of and current

market direction of the affected local economies before any consideration can be made for funding in these areas.

Analyze the pre-existing/pre-crisis lease documents for the projects that collapsed in 2008 to study potential errors.

Investigate the character, expertise and financial standing of all related parties.

All final zonings should be in place for the intended use of the property prior to the first advance and Bank's Credit Policy.

ALTERNATIVES TO DIRECT LENDING: PARTICIPATIONS

Participations An investment strategy for projects where expertise or risk

appetite prevent fully funding such construction loans. An investment strategy for banks that are restrained

geographically or in terms of regulation from fully investing.

Evaluate the lead institution in the participation before getting financially involved

Does our internal lending staff have the necessary expertise in handling these participation lending relationships?

Does the Bank have appropriate internal systems to track and monitor construction progress?

Insure that communication is maintained with the lead institution throughout the project.

CONCLUSION

There are many considerations facing the institution when determining if commercial real estate construction lending is, in fact, an appropriate type of lending activity for the organization in the near future.

CEIS Review can help with this laborious and complicated process with their extensive body of experience and staffed experts.