September 3, 2010

Lending might be flat at credit unions across the country, but member business loans are the fastest-growing loan category for U.S. credit unions in the first half of 2010, according to Callahan and Associates.

And with credit union lobbyists trying to raise the cap on member business loans from 12.25 to as much as 27.5 percent of assets, its’ a good time to look at how you staff your member business lending programs.

The National Credit Union Administration has established a minimum experience standard of two years for staff members involved in the underwriting of member business loans. Many questions have been raised regarding this standard. The most obvious concern is whether two years' experience is really enough to enable these staff members to actively and confidently initiate the development of their credit unions' business services activities.

Resumes can be very deceiving so credit unions need to make sure they are fully prepared to ask the right questions as they screen prospective applicants for these job positions. They must be certain the candidates have had real hands-on experience working with businesses and underwriting business loans.

Many candidates will likely come from large regional or national banks. The majority of these banks have developed centralized underwriting strategies over the last 15 years in an effort to standardize their approach.

Loan centers at these banks have helped create operating economies of scale that have increased the profitability of small business lending activities. These banks have intentionally separated the sales and relationship management functions from the business credit underwriting function and incorporated the use of credit scoring and other automation tools to streamline and standardize the process.

Because of this centralized model, many bank employees carrying business banker job titles today have little, if any, real business-credit-underwriting experience. In their recruiting process, credit unions may see many resumes that indicate several years of business banking experience when, in reality, the candidate may have almost no real business credit analysis background.

If hiring former business bankers proves a difficult road, credit unions will need to develop their own internal strategies for training their staff members and getting them the requisite experience. Given the overall complexities of the skill sets required to adequately perform these jobs, there needs to be a holistic approach to developing a viable training program.

Skills to Look For

1. Your staff needs to treat owners of small business to the personal service they desire. In countless interviews, small-business owners complain about being treated by their banks like a number in a database and not a person in a relationship. They really want to have a more personal relationship with their lenders.

Owners of small businesses want their lending officer to know them individually and understand their business needs. Ultimately, small-business owners are looking to get financial management advice from a financial services expert who will partner with them on a long-term basis.

Since so little real business expertise exists today at the point of sale between banks and their typical small-business customers, there is very little depth and stability in these relationships. Ironically small business relationship profitability and stability is a function of the depth of products and services associated with the overall relationship. Depth in these relationships is an earned right.

2. Your member business services relationship managers and underwriters need to become business model experts who can effectively analyze the credit requests received from prospective business borrowers. Business model expertise enables underwriters to properly measure operating cash flow and debt service coverage capacities based on the unique structure of the subject business.

Business model experts should be capable of analyzing historical financial performance and providing peer group and/or industry comparable analysis. They should also be capable of analyzing business financial projections and have the ability to understand the logical links between historical financial performance and any forecasts of anticipated future performance.

Managing growth is a significant challenge for every business owner. The key is to grow at a pace that is cash-flow-affordable. Lenders that are business model experts should be capable of attesting to the validity of the structure of any financial forecast they receive from a prospective borrower. They can use this expertise to identify the capacity to get repaid and be in a position to counsel their borrower on the ramifications of their financial projections from a credit worthiness perspective.

Training is Important

To have staff with these skills, credit unions must make a commitment to training. Simply said, you have to be willing to invest the time and the money required to develop member business services staff members. This is not a cost outlay. It is rather an investment in the development of intellectual property that will produce returns of consequence to your credit union for years to come.

In reality there is no quick-fix, easy way to train and develop your MBS staff. Surely attending a couple of two- or three-day training session helps, but it will ultimately require a much more involved commitment. Long-term success in this business line will require an ongoing investment in training.

Retention is Critical

To create relationship continuity with your business members, you will need to retain your employees. A big part of that will be to develop some career path logic for the professionals who will be serving business members.

Credit unions will need to develop employee retention plans so they will not be vulnerable to losing their staff members to other financial services providers.

Credit unions do not have the flexibility of providing incentive compensation packages that include stock options like banks can. You will need to develop other employee incentives that will combine with salary dollars to support MBS staff retention efforts.

The incentives should be first based on the CU achieving targeted performance benchmark thresholds. In other words, the program should be designed to be a win-win deal. The compensation pay-out should be weighted toward long-term retention objectives. This will create a type of annuitized incentive program that will reward staff members who keep and nurture good member business relationships over time.

In addition, make sure your compensation is at the right level. One way is to use a salary survey, like the CUES Executive Compensation Survey. For example, according to that survey, median base salary plus bonus pay for business lending executives has steadily increased since 2007 when it was $93,5550. In 2010, that figure rose to $114,864.

Member business services can be a bright spot for credit unions during this dark period. But your program won’t go anywhere without the right staff.

Jim Devine is founder, chairman and CEO of Hipereon Inc., Seattle, an instructor for CUES' School of Business Lending.