Deposits, Small Loans Top of Mind for Credit Unions Serving Businesses

Just before CU Business Group’s 2018 National Business Conference kicked off Sept. 24 in Savannah, Ga., CEO Larry Middleman shared his thoughts on the business lending landscape for credit unions and how CUBG is addressing current business service challenges.

CUBG is a Portland, Ore.-based CUSO that assists approximately 575 credit unions in 47 states with their commercial lending and business services programs. Read on for Middleman’s full conversation with CU Times.

CU Times: At last year’s CUBG conference, you described how credit unions were beginning to make bigger business loan deals. Have you seen that trend continue?

Middleman: Many credit unions are in their 10th year or more of commercial lending and business services. Commercial lending is where there’s a ton of expertise in our industry, there are some heavy hitters from banking that have built some solid programs and have been in the industry for years now, and they are a major player in their marketplace. They are right in there with some of the largest local banks, bidding on big commercial real estate deals – with big deals being $10 million, even $20 million – and credit unions have the expertise to originate those deals, and many now have the infrastructure, systems and processes to participate those. And they can do so pretty effectively, whether it be through CUBG or their own network. Credit unions keep advancing at a rapid pace on large, commercial real estate deals, which is great to see. Ten years ago, we were just getting started in all that.

I separate commercial lending from business services because the deposit side – credit unions’ packages of depository services – is becoming highly important. Many credit unions are experiencing a high loan to share ratio, which means more business deposits are needed to keep your loan portfolio growing. The systems, expertise and infrastructure on the business deposit side are not advancing at the same rate as the lending side. It’s going at a slower pace, so that makes it harder to attract a sophisticated business with large deposit balances because you can’t serve all their needs.

CU Times: How do the topics at this year’s CUBG conference differ from last year’s, and what challenges do they address that may have cropped up or intensified for credit unions in the past year?

Middleman: We’re always very conscious of recruiting really good speakers on the deposit side. Most conferences that are put on by a CUSO or entity like us really focus on lending. And a lot of ours is in the lending area, but we have an early bird session, for example, that spends three hours on how to build a better deposit program. I was talking to one of the attendees and he said, “You know, what I really like about this conference is you have deposit sessions here too.”

One of the challenges of the industry right now is how to efficiently handle small loan requests. Those are very small in dollars and not very profitable just as a transaction on their own. I’m talking about loans less than $100,000 for a business vehicle, small piece of equipment, or couple of credit cards for a small business. With the typical underwriting and processing of those small loans, it’s hard to get them to be efficient. So another one of our sessions is on how to set up an efficient process for small loans. We have a ton of expertise in that, and CUBG has developed a program we call Fast Track, which is designed to process those loans under $100,000. [With Fast Track,] we can have a credit decision back to the credit union on the same day. So we’re addressing that – the big-dollar deals are pretty well-covered in a lot of credit unions, but with the small stuff, there’s still a struggle in how to efficiently do that.

And this is a direct response to all the online lenders that are doing these same types of loans for working capital, small equipment or other business needs, who say, “Go online and apply, and we’ll get a decision to you tomorrow.” CUBG has identified the need to give credit unions the opportunity to really serve their members, and not have them go to an online lender. We can get them set up, underwrite the loan and prepare loan documents, and the total fee to the credit union is $500.

Another thing that our conference is specifically addressing is very forward-thinking. Commercial lending tends to be very paper-oriented – there’s lots of financial information, we have to crunch numbers, and we tend to process the loan in the old school way. Millennials, who are the business owners of tomorrow, aren’t really used to that. [Millennials will wonder,] how do I apply for a commercial loan on my phone? So we have a speaker who has done a ton of research on commercial lending for millennials. It’s hard to see a millennial coming in with all their tax returns, sitting down and having the credit union say, “I’ll get back to you next week if we need anything else, and we’ll get this loan closed in 30 to 60 days.” That just doesn’t fit the millennial.

CU Times: The new MBL rules were another key discussion topic last year. What member business lending-related regulatory concerns do credit unions have now?

Middleman: On the regulatory side, I don’t really see any industry-wide concerns. The NCUA has done a great job of allowing credit unions to manage their own risk parameters. Once the regs changed, credit unions all of a sudden had a lot of latitude – they could essentially set any risk parameters they wanted as long as they justified it. But credit unions haven’t really changed much from their commercial lending risk fundamentals. They might, on occasion, waive a personal guarantee because it makes sense in the relationship. One of the concerns was that credit unions were going to do every deal without a personal guarantee, and that hasn’t been the case. Credit unions are prudent about managing their own risk, so the NCUA really made the right call by handing the keys to the credit union and letting them drive the car. It’s a great time to be a lender; credit quality is good and credit unions really aren’t doing crazy deals.

Last year there was a question: “What are credit unions going to do with this? All of a sudden, they can make their own rules.” It’s like giving a teenager the option to stay out until 3 a.m. every night, but credit unions are still coming home at 11 p.m. and getting a good night’s sleep.

CU Times: In the past year, how has CUBG grown, expanded or tweaked its services?

Middleman: The biggest thing is the Fast Track program for small loans. And you would think the credit union interested in Fast Track would be one that doesn’t have a lot of expertise or resources, is small in asset size and just wants to do small deals. But what’s surprising is it’s not just those smaller credit unions that are interested. I recently talked to a credit union that’s one of the largest in its state and has a large commercial portfolio, but struggles with small loan requests too. They’re working on a $5 million deal, and all of a sudden will get three tiny loan requests. They don’t want to stop what they’re doing, crunch numbers and process those little deals – they want to keep working the big deal. About half of the credit unions in our early Fast Track program are larger and doing a lot of commercial real estate loans, but don’t do the small deal very efficiently or quickly.

We have also become well-connected in the commercial real estate industry, and where a savvy investor will hire an agent and say, “Here’s what I want – go find me the best deal you can get.” So we work with those agents to entertain the loan request and find a home for it with our credit unions. The agent has one point of contact [with CUBG] and access to lenders all across the country. So far this year CUBG has funded about $60 million of those deals. That’s in the first eight months of the year; in the last four, we’re on track to do another $60 million. With this sourcing program, CUBG is essentially serving as a loan officer for credit unions, helping to grow their business loan portfolio.