Document View

Member demand and shrinking net interest margins are pushing many credit unions into commercial lending. So far, about 2,000 credit unions US-wide have made the leap, and that number is growing each year, says Jean Faenza, president/CEO, Business Partners LLC, a credit union service organization (CUSO). Faenza says it takes credit unions about three years to become fully comfortable with and habituated to operating commercial lending departments. CUSOs like hers and software vendors specialize in helping credit unions create commercial lending departments. These resources provide quick market entry and post-origination loan monitoring and servicing. The Credit Union National Association (CUNA) member business services provides business lending consulting services ranging from strategic implementation and planning to the actual lending setup, says VP Doug Benzine. He says although CUNA member business services does not directly recommend software, it recommends that clients perform due diligence on at least three vendors, keeping in mind they are looking to make the closest fit based on their needs.

MEMBER DEMAND AND shrinking net interest margins are pushing many credit unions into commercial lending. So far, about 2,000 credit unions nationwide have made the leap, and that number is growing each year, says Jean Faenza, president/ CEO of Business Partners LLC, a Chatsworth, Calif., credit union service organization (CUSO).

"The consumer market is getting tougher, and it's harder to generate margins," she says. "Serving members is the most compelling reason for getting into commercial lending. Members want options, including alternatives to banks. If they already have a relationship with a credit union, it's natural for them to come to the credit union for a business loan."

Banks have known for a long time how profitable business lending can be. Benefits of a business relationship include handling checking account balances that are an average 25 times larger than consumer checking accounts and the fee generation from providing services such as direct deposit of employee paychecks, Faenza says.

But it's also highly competitive, she adds. "Commercial lending is an extremely sought-after segment of the market because it allows lenders to go beyond small loans or deposits. You have to compete with large, experienced financial institutions-a difficult thing to do if you don't have expertise or the right loan products."

Faenza says it takes credit unions about three years to become fully comfortable with and habituated to operating commercial lending departments. CUSOs like hers, organizations such as the Credit Union National Association (CUNA) member business services, and software vendors specialize in helping credit unions create commercial lending departments. These resources provide quick market entry and post-origination loan monitoring and servicing.

"Using us allows credit union clients to acquire an immediate skill set as opposed to acquiring it as they go along," says Faenza. "We do back-office work, from origination to approval to servicing. We also provide clients with a nationwide network of credit union partners to which they have instant access, plus we set up administrative processes and deposit products. Business deposits are very different from consumer deposits."

For one thing, she says, businesses have evolving needs, often starting with simple checking accounts but quickly growing into a desire for more security and advanced technology to handle billing and payroll.

The typical range of commercial lending activities credit unions might engage in include real estate loans, Small Business Administration (SBA) loans, small and non-SBA loans, and participations, where credit unions can buy and sell loans within a network like the one Business Partners operates ("Member business loan participations," p. 48). Each of these options requires

different amounts of time to start up, Faenza says.

"SBA loans can take up to six months to introduce, small loans will take about 90 days, commercial real estate lending can be under way in 30 to 45 days, and participations can take 10 days. A vital key is training key management players and branch employees how to originate loans and seek clients."

Consider the risks

CUNA member business services provides business lending consulting services ranging from strategic implementation and planning to the actual lending setup, says Vice President Doug Benzine. "We sit down with a client and lay out a five-year pro-forma business plan to examine expenses, processes, and potentialrevenues. First we ask, 'Why are you doing this? What outcome do you want? Is this a new tool? A new income stream? A response to member demand? Do your business members want something like $250,000 lines of credit or just simple business credit cards?'

"We also get into the credit union's culture," he continues. "Business lending is a brand-new environment, and we want to know the credit union's risk tolerance."

Benzine cites an instance where CUNA member business services helped a credit union find and hire a commercial real estate lending expert who almost immediately brought in a $2.5 million loan.

"But the lending com- mittee had a hard time approving it," he says. "They didn't doubt the salesperson. They weren't ready for that level of risk."

Whatever the scenario, he says the institution must have the requisite expertise to deal with it. "Education is the key from the top down. Some credit unions think, 'We've been doing consumer mortgages and consumer lending for years. How hard can business lending be?' But it's a big step with huge differences. When we lay it out in black and white, that's often the first time they'll see its impact. Yes, there are high rewards, but there also are high risks."

Benzine says although CUNA member business services doesn't directly recommend software, it recommends that clients perform due diligence on at least three vendors, keeping in mind they're looking to make the closest fit based on their needs ("The truth behind the numbers").

"Once clients introduce business lending, we help them for as long as they want us to," he says. "Usually, once they're launched, they tend to work more with their database or software people. However, we'll do portfolio reviews or look at specific loans."

But even as more vendors and business service providers jump onto the credit union business lending bandwagon, Benzine cautions the number of credit unions that plausibly can engage in commercial lending may be smaller than people think.

"Two thousand out of 8,500 credit unions nationwide are doing business lending right now. The potential number is probably 3,000 to 3,500," he says. "Remember, the median size of a U.S. credit union is $13 million, which means roughly 4,000 will find it difficult to get into this. There are 1,200 credit unions with $100 million or more in assets. It's tough for credit unions below that [asset level] to get into business lending just on their own resources. Most will go through a CUSO."

Benzine predicts some business lending software providers now swarming to the credit union market will pull out in two or three years once they realize it's not as big a field as they thought.

"Still, business lending is a tremendous opportunity for credit unions," he says. "We've told few credit unions not to do it, providing they follow our advice to go slow and steady. They shouldn't set out to be all things to all people, and they should acquire experience."

[Sidebar]

The Truth Behind the Numbers

Jeff Beall, co-founder and executive vice president of Vision Software Solutions in Charleston, S.C., continues to develop fisCAL, an evaluation package for financial statements. It's typical decisioning software that credit unions offering business loans must use.

"It's software a credit union can use to take a business loan applicant's financial statements and analyze them to determine the business's ability to repay a loan," says Beall. The software gets to the truth behind the numbers by calculating key indicators and comparing them to industry standards.''

But beyond the ability to analyze financial information in depth is the software's speed. "As quickly as an analyst can enter data, the software can generate more than 20 reports that show how a business is performing and will perform. This allows credit unions in most cases to give applicants same-day answers."

Credit unions determine their own criteria for lending. They set up their own benchmarks and make decisions accordingly. "It's not a black box that arbitrarily says 'yes' or 'no' to applications," says Beall. "Credit unions use their knowledge to make final decisions. The software gives them confidence by parsing and analyzing financial information from every conceivable angle."

Beall says the software just came out of a complete redevelopment cycle that took 30 months. FisCAL 9.0 uses Microsoft .NET and an SQL back-end database.

Current users were upgraded automatically to the new version, paying a small increase in the annual service agreement. The service agreement is 20% of the price a credit union pays for a fisCAL installation, which typically runs from $7,500 to $12,000.