Credit unions that would like to start a program that taps into both large-scale commercial opportunities as well as the local small-business sector could do worse than choosing Greater Nevada Credit Union ($541M, Carson City, NV) as a mentor.
Member business loan growth at this credit union is up 202.7% year-over-year as of first quarter 2015, according to data from Callahan & Associates, compared to 10.8% growth for asset-based peers. And its use of government-guaranteed loans coupled with its focus on holistic business service relationships over one-and-done lending deals has mitigated lending risk to a fraction of what this amount of volume typically presents.
Jeremy Gilpin, Vice President of Business Services, Greater Nevada Credit Union
In fact, since the credit union relaunched its business efforts two years ago under Jeremy Gilpin, vice president of business services, it has not reported a single delinquency.
Here, Gilpin talks about the approaches and policies his six-person team uses to support a dynamic-yet-sustainable department.
What is your background? What are your main areas of responsibility at Greater Nevada?
Jeremy Gilpin: I was in banking for 21 years. My last nine years were spent as a senior loan officer, executive officer, and credit administrator for several banks in Oregon and Washington state.
Today, I oversee Greater Nevada’s business services. We say business services versus business lending or MBL because we take a holistic approach to deposits, lending, cash management, remote deposit capture, and merchant services.
Why did Greater Nevada enter business services? How did you decide what products to offer?
JG: Our approach was to think of all of the business service products that could help us compete with the larger regionals and then throw in the exceptional member service that credit unions are known for to give us the edge over the competition.
We secured the expertise needed to offer these services as packages rather than piecemeal. But we designed it in steps knowing we would be hiring and rolling this out over several months.
We completely revamped our deposit products and made them more electronic friendly. We do not charge for electronic deposits because we know that’s how our merchants do business. We were also able to create some ancillary products for which we knew there was pent-up demand, and these have helped drive our depository services versus your standard, ‘Let’s open a checking account and try to start selling ancillary products’ approach.
Lessons From The Panic Room
“One of the things our department has adopted from the tech influence in Reno is team-building days,” says Jeremy Gilpin, Greater Nevada’s vice president of business services.
But that’s doesn’t mean trust falls and a catered lunch. The credit union has participated in activities such as the local escape challenge theme park.
“You basically go through a door, an alarm sounds, and they lock the door behind you,” Gilpin says. “A hour-long countdown begins, and you have to work together as a team to find clues and a key that will let you out.”
Approximately 10% of teams make it out within the time limit, but Gilpin’s group completed the challenge with one of the best scores on record.
“It’s a fun way to learn to work together in a stressful environment,” Gilpin says. “So when it’s real life, you’ve already overcome those obstacles and are a cohesive unit.
“You also get to see everyone’s strengths and weaknesses when stress hits,” he continues. “One person will be creative, another will be analytical or organized. So you can use that information to adapt your business processes.”
What have been the benefits of offering merchant services?
JG: We expect our ancillary products and depository services to generate a large increase of non-interest income over the next 12 months. We consider merchant services an asset we’re servicing because we look at these on a per-transaction or per-swipe basis, not necessarily by the balance in the account.
These holistic relationships help us with our loan pricing and depository pricing. So now a member with five employees can get the same treatment from us as a large tech company would receive from a major retail bank.
What does the credit union’s business loan portfolio look like?
JG: Like most credit unions, we are heavy in commercial real estate, mostly owner-occupied residential or commercial real estate. We have the capabilities for more commercial and industrial (C&I) lending, but we also do agricultural lending, which is a nice diversification for us.
How does Greater Nevada mitigate the risk of these loans?
JG: We’ve taken a different approach where we do a lot of guaranteed lending, including SBA 7(a) and 504 as well as a lot of industry loans and USDA business loans in our rural communities under 50,000 in population.
Although we are real estate heavy in our portfolio from a risk standpoint, a lot of these loans carry up to 80% guarantees. All of the agriculture loans we currently have are guaranteed as well. So our risk is small in comparison to our portfolio.
We’ve also taken a different stance from what credit unions have done in the past by stressing business services first. All of our lending requires businesses to open primary operating accounts with us.
We also concentrate on assets under management versus assets on the books. This approach allows you to, in essence, have a much larger portfolio that you are servicing and managing but is not necessarily on your books.
What loans does the credit union typically sell?
JG: We have started selling the guaranteed portion on some of our USDA loans on the secondary market and are earning non-interest income there while maintaining the servicing. We’ve stared taking that step with our SBA 504 portfolio as well.
This further mitigates our risk because those guarantees become unconditional once they’re sold. So the person buying has an actual guarantee, whereas if you hold them, they are conditional guarantees, meaning there is a small chance to compromise the guarantee and lose it.
Are there any other benefits?
JG: This approach helps shield us from interest rate risk as well, which is crucial in this rate environment. For example, we just sold a loan that had a balance of $402,000. Our interest rate was in the low 6s.
We were able to sell off 80% of that loan, and our year-one return was 58% because we got a non-interest income premium from the sale. Going forward, our liability is the remaining $80,000 loan, and with the servicing we retain, our effective rate of return is 8.71%.
This gives us some room in a moving rate environment to maintain the health and quality of our portfolio without having to go after the B, C, and D credit tiers.
What are other lending-specific areas of opportunity you see in the near future?
JG: We have been approved to be an SBA Express lender, as several of our partners and our members have expressed a need for that niche.
There’s no one really doing microlending in the state of Nevada because so many community banks were acquired or just went away. So instead of creating additional interest rate risk by dropping our rates to compete on large projects with Wells Fargo and Bank of America, we’ve started to offer microlending with a $25,000 or less line of credit.
The average microloan size is going to be around $16,000, but in some cases, a borrower might only need $5,000. We’re here to serve that $5,000 member, too. Such loans carry a 50% SBA guarantee, unless it’s tied to exporting and then it’s a 90% guarantee.
One of the big struggles that small business owners have is time. We want our members to have access to something that’s as quick and efficient as applying for a business credit card but without the burden of a higher rate.
Some of our new software in which we can plug in our specific credit guidelines will make automated preapprovals available from our website. Once approved, a loan would be tied to a checking account, and it would sweep the payment. Cash management and remote deposit capture allows us to also offer this product in areas of Nevada where we do not have a physical branch because everything would be electronic.
That’s important because one of the big struggles that small business owners have is time. We want our members to have access to something that’s as quick and efficient as applying for a business credit card but without the burden of a higher rate.
How are you tracking your success as a department?
JG: We certainly want to generate revenue. Those premiums off the sales of the guaranteed portfolio alone have the potential to produce $1 million to $1.5 million in non-interest income on an annual basis. That’s straight to the bottom line, straight back to the membership.
When we achieve that, we can afford to give our business members everything they would find at a larger institution and still provide better customer service. At large banks, these borrowers are a number, but we’re looking to give small businesses back their name.
How about in terms of indirect benefits?
JG: Our biggest source of new business membership and new growth comes from government agency referrals. We’ve become the go-to source for United States business and industry loans, so now those agencies are driving business into our credit union, which allows us to focus on member service.
Out of our first quarter growth, 30-40% has come from governmental agencies that have referred businesses to us. So instead of taking the typical approach and hiring several originators to beat the streets, we’ve formed great partnerships that are helping to build a stronger foundation for us.