IBM Downsizing Spawned Budding Entrepreneurs, Coastal FCU Responds with MBL Launch, Real Estate Lending Entry

RALEIGH, N.C. – During the heady days of IBM’s reign over the personal computer realm, members of what was then known as IBM Raleigh Employees Federal Credit Union reaped the benefits of the company’s success with attractively high salaries. The $1.4 billion credit union was founded in 1967 by eight IBM employees. When the late 1980s and early 1990s arrived, IBM, known for its innovation in the unbundling of hardware, software and service offerings, fell out of step with its integrated business solutions as hand-held computers and other more efficient technology surpassed Big Blue’s creations. IBM’s downsizing left many of Coastal Federal Credit Union’s (the name change came in 1993) members out of jobs but with enough cash to start their own businesses. There was enough pent-up demand from former IBM employees who had hopes of becoming entrepreneurs that Coastal explored the idea of launching a member business lending division. Implementation would have to wait though as the credit union began an ambitious effort to expand its membership beyond IBM to include employees of more than 1,000 select employee groups throughout the Research Triangle and Charlotte areas. Coastal now serves nearly 140,000 members. The MBL launch came in 2003. In less than two years, the credit union has closed $120 million in MBLs and sold $63 million in loan participations. Its seven-member department helped account for 14% of Coastal’s net profit in 2004. “We were a very large, white-collar membership,” said Peter VanGraafeiland, Coastal vice president of mortgage services. “These individuals had a higher net worth, an entrepreneurial spirit and wanted their own independent businesses.” Coastal started off with a traditional MBL program with loans ranging from $10,000 to $500,000, which were mostly used for equipment and trucks by landscape businesses, dry cleaners and restaurants. There were also many requests for office condos, small apartment complexes and several church and non-profit loans. The average loan fell between $30,000 and $300,000 – considered the “sweet spot” – as most of the transactions fell within this range, VanGraafeiland said. “Most of our acquisitions are here, we’ve done several loans to contractors, and we’ve had several restaurants wanting to expand (here),” VanGraafeiland said. After seeing strong numbers early on, Coastal decided to venture into larger, more complex real estate loans. Here, loans were above the $1 million mark with the average loan being about $4.2 million. VanGraafeiland said they probably get more requests from members who are looking to start businesses versus established business owners. He cautioned that it doesn’t mean Coastal approves all of them. Indeed, one out of four may get the green light. “One of the biggest problems with start-ups is that someone may have an idea or concept but they won’t have a business plan,” VanGraafeiland explained. “We can’t help them with their business plan. Sometimes, it may mean taking another six months to a year to rewrite (or write) a business plan.” As typical with most established businesses looking for additional financing, Coastal will look at the person’s historical record. To mitigate risk, especially with start-ups, Coastal became an SBA lender early on, attracted to its widely-popular guarantees, VanGraafeiland said. Twenty-percent of the credit union’s loans have an SBA guarantee. There are approximately 50 SBA loans on Coastal’s books totaling between $12 million and $15 million. “They take a lot of pressures off of us with the guarantees,” VanGraafeiland said. “If there’s a member with a higher risk mortality rate (business idea) say, like a restaurant, we can look to the SBA for a second set of eyes to review our position.” That partnership is similar to the one that Coastal has with several credit unions through loan participations. Rapid growth with real estate originations pushed Coastal eerily close to NCUA’s 12.25% of assets MBL cap. VanGraafeiland said by taking on participations, Coastal not only helped other credit unions that didn’t have an active MBL program but helped itself through sales that would not count against the MBL limit. It is currently working with credit unions in North Carolina, Virginia, Oregon, Texas and Florida and is doing so well that it will have to “replenish its stock” to about $80 million. Another partnership has proved beneficial. When Coastal aligned with Bankers Systems, it cut the number of hours it took to document an average business loan from approximately six hours to one hour or less through the use of the Rembrandt Lending System, said Sue Pogatschnik, Bankers Systems credit union market segment manager and Anita Stoering, marketing product manager. More than 400 credit unions use Bankers Systems’ software, electronic documents, or paper documents for business lending, according to the company. While much of the push has been on building the lending side, Coastal is arriving to a place where it can beef up its business deposit account side, VanGraafeiland said. The credit union’s switch of its operating system coupled with several branch openings and other internal activities, has pushed business checking to the back burner. “We know that it’s a good source of income and we’ve earmarked 2005 to get some of it done,” VanGraafeiland said. “We’ve really taxed our information technology department. We’re trying to let them catch their breath before moving to business accounts.” Meanwhile, business credit card services are robust with several hundred cards in rotation with limits ranging between $25,000 and $100,000, VanGraafeiland said. Looking forward, Coastal wants to continue expanding its real estate lending program and assist other credit unions with underwriting services and feedback on MBL program launches. For those pondering the latter, VanGraafeiland suggested credit unions strongly consider buying participation certificates from CUNA Mutual Group or from larger credit unions. And, as many industry experts have advised, MBL programs aren’t for every credit union. “You have to understand the risks,” VanGraafeiland said. “Whether you make the determination to start from scratch, hire outside trainers, go to CUNA schools, this is not something you can do on a casual basis.” Even more pressing is hiring people with the right experience – ideally beyond the two year minimum required by NCUA. At Coastal, staff members have an average of 20 years of business lending experience, VanGraafeiland said. “We would rather spend some of our time helping credit unions stay out of trouble. It’s smart business because if things start going poorly in business lending, it will affect every one of us.” [email protected]