May 25, 2010

Credit Union Management magazine’s Web-only “Loan Zone” column runs the fourth Tuesday of every month.

Some credit unions shy away from member business lending saying it “doesn’t serve the needs of enough members” or takes a credit union “too far outside its expertise.” But Collins Community Credit Union has had great success with MBL. It has used the offering to serve members and their businesses in such volumes that the CU regularly bumps into the cap on such loans.

“It’s a good business for credit unions,” says Steve Shepherd, EVP/lending for the $570 million credit union in Cedar Rapids, Iowa. “They just need to go with their eyes open.”

A recent interview with Shepherd identified some practices that have supported the CU’s success with MBL.

1. Be sure your credit union has the means to support a qualified business lender on staff. Shepherd suggests that credit unions need to have an MBL portfolio of $40 million to $50 million to be able to support the salary of a commercial lender. Taking that a step farther, Shepherd says, credit unions will need to have a minimum of about $400 million in assets to afford a commercial lender. CUs are allowed to have 12.25 percent of total assets in member business loans ($50 million = $408 million * .1225). “The cap limits smaller credit unions,” he summarizes.

2. Be sure your program is run by someone with experience in commercial lending. When he joined Collins Community CU, Shepherd brought to the table 20 years of experience in commercial lending at community banks. “I was in this market for 10 years when I came” to the credit union, he notes. “I brought a lot of clients with me.”

3. Be sure there’s an appropriate balance of MBLs in your portfolio. Shepherd says Collins Community CU already had a solid MBL portfolio when he came on board. During his tenure, he has worked to have a more even balance of commercial real estate loans and commercial and industrial loans (banker lingo for short-term loans of 30 days to five years) in the CU’s portfolio. The C&I loans bring in more member deposit business and more employees as members, while the commercial real estate loans are important to generating volume, he notes. Interestingly, 25 percent of the CU’s commercial funding is supplied by commercial checking and savings accounts. (Collins Community CU’s Web site details the variety of business services offerings the credit union promotes, including loans.)

4. Stay keenly abreast of changes in the commercial real estate market. Shepherd says a good member business lender needs to be a consummate networker. He himself knows a lot of the bankers in the Cedar Rapids area personally. He also calls on certified public accountants and existing members, with an eye for staying current on market trends. “Go slow with the new business,” Shepherd advises. “There’s a reason someone’s leaving a financial institution. If they have been at five banks on their way to you, that tells you something.”

5. If you’re getting close to the cap, make sure you’re counting the right loans in your tally. Collins Community CU has grown its member business loan portfolio to $68 million, up from $15 million 10 years ago, when Shepherd came on board. Some examples of loans that do not count against the 12.25 percent of total assets MBL cap include loans to one member that do not add up to more than $50,000, loans made through the U.S. Small Business Administration, loans that are fully secured by shares and certain participation loan arrangements. “It gets to be kind of a long report every month,” Shepherd notes, to calculate where the CU is compared to the cap, because the CU has to account for so many different factors in its small business lending portfolio.

Lisa Hochgraf is a CUES editor.