2012 THE YEAR FOR MEMBER BUSINESS LENDING
THE MBL VALUE PROPOSITION - WHY BOTHER?Current Financial Services Environment … Influx of deposits from Bank customers No where to invest the funds with a decent
return Reduced consumer loan demand Competitive pressure on consumer loans
has driven down yields to historic lows MOST COMPETITOR BANK RESOURCES ARE
CONSUMMED WITH MONITORING WORK OUT LOANS, SHRINKING ASSETS, AND MANAGING REGULATORS
Credit Union Portfolio Segment Credit Union Portfolio Segment TrendsTrends
-6
-3
0
3
6
9
12
15
00 01 02 03 04 05 06 07 08 09 10Aug
Total Loans RE Loans Vehicle Loans
10-Year Average Growth RatesTotal Loans = 7.8%RE Loans = 11.5%
Vehicle Loans = 5.0%
Percent
August 2009 – August 2010 GrowthTotal Loans = -1.2%
RE Loans = 0.7%Vehicle Loans = -5.9%
Source data: CUNA Economics & Statistics and CUNA Mutual Economics
Credit Union Portfolio Credit Union Portfolio Segment TrendsSegment Trends
“Growth in member business loans outpaced all other loan categories each year since 2006. Loan growth in other categories was low or negative in 2010”
Chuck Cockburn, “Pace of Small Business Growth Offers Opportunity to Credit Unions “ August, 31, 2011
Credit Union Portfolio Credit Union Portfolio Segment TrendsSegment Trends
Chuck Cockburn, “Pace of Small Business Growth Offers Opportunity to Credit Unions “ August, 31, 2011
Commercial Loan Trends
Why Bother?Current Press…
“The Growing Impact of Credit Unions on Small Business Lending”- Small Business Administration “We found that small business loans at credit unions
tended to partially offset declines in business loans at banks”
“Credit Unions’ increasing share of Small Business Loans suggest that they are increasingly important sources of SBLs as a longer run development and in response to fluctuations in SBLs at banks.”
“If credit unions can increasingly offset fluctuations in bank’s SBLs, potential small business borrowers should be made aware of this alternative source of loans.”
“Regulators might consider the extent to which credit unions could offset fluctuations in business loans at banks…”
Why Bother?!Benefits of Member Business Relationships
Higher yields - Over 5% NIM Floating rate loans re-price daily with floors
(5.5-6%) Fixed rates re-price every 3-5 years
Business Relationships Provide Low Cost of Funds Financing
Cross Sale Opportunities With Business Owners and Employees Personal accounts Home equity Investments Auto loans Student loans
Why Bother?!Benefits of Member Business Relationships
New Opportunities Become Available As Existing Relationships Grow Expanding businesses are constantly
seeking financing Term loans renewed when equipment is
replaced Exceptional Source Of Referrals Fee Income Enhances Bottom Line
Commitment fees Disbursement fees Late payment fees
Select Employee Groups
Show me the money!
Member Credit Union marginal earnings per $1MM of new business loans 5% NIM = $50,000/yr. Estimated $200K in new deposits
invested at 2% = $4,000 Estimated new personal loans of
$50,000 at 3% NIM = $1500 Annual marginal income of $55,500
What is a Member Business Loan?
• Definition of Member Business Loans• A member business loan includes any loan, line of
credit, or letter of credit (including any unfunded commitments) where the Borrower uses the proceeds for commercial purposes, corporate funding needs, and business investment property or ventures.
• • b) The following loans are not considered member
business loans: i) A loan fully secured by a lien on a 1-4 family
dwelling that is the member’s primary residence.ii)A loan fully secured by cash.iii)Loans made to a Credit Union Service
Organization. iv)Loans to a member or associated member which,
when the member’s full relationship loan balances are totaled, are equal to or less than $50,000.
v)A loan where a federal or state agency fully insures or guarantees repayment, or provides an advance commitment to purchase the loan in full.
Source: NCUA Regulation 723
Member Business Relationships
• Business Owners- Who Are Business Owners- Who Are They?They?
• What Are They Like?What Are They Like?
Member Business Relationships
Member Business Relationships
“SMALL BUSINESSES CREATE MOST OF THE NATION’S JOBS, EMPLOY ABOUT HALF THE NATION’S PRIVATE SECTOR WORK FORCE, AND PROVIDE HALF THE NATION’S GDP.”
-2009 The Small Business Economy, A Report to the President
“Fully 99 percent of all independent enterprises in the country employ fewer than 500 people:
19.6 million Americans work for companies employing fewer than 20 workers
18.4 million work for firms employing between 20 and 99 workers
By contrast, 47.7 million Americans work for firms with 500 or more employees.”- “Small Business in the United States”, U.S. Department of State
Distinguishing Advantages for Credit Unions vs. Banks
Credit Unions Not-For-Profit Business Members Are
Owners Volunteer Board Of
Directors Income Invested Back
Into Credit Union Cannot Be Bought Or
Sold Flexible To Serve
Members Best Interests Credit Unions Work
Together Social Mission
Banks For-Profit Customers are NOT
Owners
Stock Holders On Board Income Generated Paid
Out To Stockholders & Management
Can Be Bought Or Sold Focused To Serve The
Stockholders Best Interests
Banks Compete … Not Cooperate
Stockholder Centric
Advantages Over Banks
Not serving a small elite group of shareholders – serving members
Not forcing business owners into a defined structure, but actually listening to their needs and developing the structure around that - We Care!
Consistent strategy Minimal risk of buy-out/merger We have no stock to sell and no
stockholders, rather members are owners and benefit from resources directed to their needs through better products, rapid response, lower borrowing rates, higher returns, and loan terms suited to their needs
The Harsh Reality of Business Lending – What to Avoid and How to Avoid It
Non-performing loans can have a shocking impact on earningsNon-performing loans hit you 3 times!
Loss of interest income on existing loan Loss of principal and interest on charged-off loan Loss of funds to lend or invest in new
opportunities Poor loan quality often results in additional regulatory oversight and limitations that can become industry wideReal Estate lending in not a panacea – remember the RTC?
How to Avoid Costly Mistakes ByControlling Risk
Thorough and proper underwriting is critical Diligent analysis of accurate financial records Verification of debt service capability for both
business and ownership Thorough review of management success and
ability Comprehensive identification of all risk factors Verified and realistic collateral analysis
How to Avoid Costly Mistakes ByControlling Risk
Thorough and defensible loan documentation is critical Third party guaranteed loan documentation
software LaserPro of Baker Hill
Experienced loan documentation expert for input and review
Competent and responsive law firm to review or draft documentation
Continuous training and updating to remain current with changing legal aspects and risk trends
How to Avoid Costly Mistakes ByControlling Risk
Meticulous monitoring Loan documents should include a Loan
Agreement with terms stipulating the type and frequency of items required of the Borrower
Quarterly financials Year end accountant audited financials Tax returns Collateral audits Guarantor updated financial statement and tax returns
Operating system should generate ticklers Staff dedicated to tracking and resolving
exceptions Penalties for non-compliance
How to Avoid Costly Mistakes ByControlling Risk
Work out expertise More money will be made or lost based on the
success of your work out capabilities than all the loan income accumulated
Outside counsel to review documents and advise on work out strategy
Collateral should be verified and secured Move fast and at least as fast as the Borrower Access to turn around specialists may be
needed
Distinctive Characteristics and Challenges of Business Lending
Most Credit Union Culture Is Immersed In Retail Services To Individuals Consumer Relationships
Transactional relationships High volume, low yield Resources are focused on the sale Little or no ongoing monitoring
Business Relationships Relationship oriented Low volume, high yield Need to continually monitor financial
condition
MBL Realities
• This is an investment in an entirely new delivery channel– think of it as a new branch requiring well developed marketing plan, human capital, time to develop, and commitment from all staff, especially the C.E.O.
• Business accounts are developed through contacts and professional relationships. They do not walk in on their own, and you do not want the ones that do walk in.
• Member Business Loans pose unique risks: Larger loan amounts than consumer Performance closely tied to economic cycles Fraud is easier Collateral values are weak in a liquidation
How to Find MBL Opportunities
Bull’s Eye Marketing Call on Member Business owners and seek
referrals Sort member households by deposit totals:
> $50,000 $25-50,000 $10-$25,000
Board members SEGs Vendors Friends, neighbors, and relatives
Implementation Considerations
•Regulatory Guidelines NCUA Rules and Regulations Part 723 Illinois Department of Financial Institutions
Section 190.165•Develop Loan Policy•Develop a Loan Application•Establish Underwriting Procedures•Establish Loan Approval Guidelines
Implementation Considerations
•Develop Marketing Strategies to Attract and Retain Business Relationships•Develop Loan Documentation Capabilities•Develop Commercial Deposit Capabilities•Develop Loan Participation Documents•Establish Monitoring Procedures•Develop Loan Work Out Capabilities
Solutions
Hire internally
AdvantagesControl your own destiny
DisadvantagesHigh costLack of DepthSuccession
Solutions
Outsource to a CUSO
Advantages Dramatically lower costs – about 10% of the cost
of staffing internally Increased lending capacity through CUSO
membership Diversification of portfolio risk Lower dollar exposure through participation of
loans Market expertise in a broader market of CUSO
members
Disadvantages Lack of control over management
Our MBL Results
Loan Yield 5.273% on total portfolio net of .5%
servicing feeLoan Quality
$37,957 over 30 days delinquent of .12% of total loans
$157,374 on non-accrual or .5% of portfolio Lifetime charge of total of $1.66 million or
annualized at less than 1% per annum Watch list total of $688,532 or 4,7% of portfolio
Performance Current CUSO cash position is 75% of the total
invested funds by owners after 6 years of operations
Net income has exceeded budget every year by a minimum of 2X and as high as 10X
4X ROI to owners before C/O 3.5X ROI to owners after C/O
QUESTIONS?
DAN BLEIL
SPECTRUM BUSINESS RESOURCES, LLC
4343 COMMERCE COURT
LISLE, ILLINOIS 60056
630-799-1800
WWW.SBRLLC.COM