Know Your Borrowers And Other Business Lending Best Practices

Leaders from Illinois-based 1st MidAmerica Credit Union share what an MBL program 10 years in the making looks like.

 
 

Establishing a successful member business lending (MBL) program takes time. 1st MidAmerica Credit Union ($633.8M, Bethlato IL), has been in business lending for more than 10 years. It has the history, staff experience, and operational structure to make wise loan decisions, yet it still doesn’t advertise or aggressively market the program.

In this Q&A, Greg Worthen, chief operating officer, and Jeff Whitaker, vice-president of commercial services, discuss what the credit union has learned through more than a decade of business lending experience.

Can you describe 1st MidAmerica’s MBL program and internal structure?

Greg Worthen: We view business loans as a service we want to offer our members as they need it. We’ve been in business lending for about a dozen years now. We started out slowly, and we still don’t advertise or aggressively market the program. Businesses come to the credit union primarily through word of mouth or they’re contacts we’ve known or worked with in the past.

CU QUICK FACTS

1st Midamerica Credit union
Data as of 09.30.15
  • HQ: Bethlato, IL
  • ASSETS: $633.8M
  • MEMBERS: 59,098
  • BRANCHES: 12
  • 12-MO SHARE GROWTH: 7.96%
  • 12-MO LOAN GROWTH: 7.83%
  • ROA: 0.64%

We have a separate business lending department within the credit union and we consider it its own branch. Jeff is our vice president of commercial services and has been on board for eight years now. He oversees the operation and has two staff members who support our business efforts.

How many member business loans does the credit union have today? Do you keep them in-house?

Jeff Whitaker: Overall, we have approximately 256 member business loans. Our outstanding balances plus outstanding commitments totals about $35 million. We’ve purchased some participations, but we’re not close to our cap so we’ve kept all our loans in-house. 

You cover a variety of business needs, from small non-profits or sole proprietors to larger corporations. Is there a certain type of business the credit union tends to serve?

JW: We don’t have a specific niche that we focus on; although, we do have a number of churches that tend to come to us. Overall, we’re looking to match member needs with what the credit union is comfortable financing from a risk management perspective. This isn’t like a car loan, it’s a lengthy process and it takes time to get to know the borrower and understand the business. We’ll look at virtually all types of loans, but we’re not afraid to say no if it’s something we’re not familiar with or not comfortable doing.

What are some of the lessons you’ve learned about member business lending over the past 10 years?

JW: Know your borrower. Most business members are not one-time borrowers, so it is critical to get to know both the business and the owner. When they see your credit union is the type of organization that takes the time to truly understand their needs, they will often pick you as their financial institution of choice and bring their personal business, such as home loans, to you as well.

At 1st MidAmerica Credit Union, business borrowers meet the whole department and usually senior management during the loan process. When they need another loan, it becomes easier for both sides as we’ve already built the relationship.

How much patience does it take to launch a new MBL program?

GW: It does take patience, but it also takes understanding. For example, the first few years for us were tough as senior management wasn’t familiar with business lending and we said no to some deals that today we would approve. It takes time to build a comfort level in this area as it is very different from consumer lending.

There is an education process for borrowers, staff, and management.  These are larger loans, which is why knowing your borrower is vital. As a credit union, you need to understand the type of loan and feel comfortable with it. That usually comes with the experience of analyzing actual loan deals. 

Tell me more about the education process.

JW: Although there are a lot of good outside training options I’ve used and would encourage others to explore, we’ve found on-the-job training has been the most effective for our credit union.

there has to be a complete and full understanding of what your credit union is doing in the member business lending area.

I have 30 years of banking experience with 20 years of that in commercial lending, and I’m still learning new things. I provide a write-up on each deal for our MBL committee members. In the beginning, I spent a lot of time defining and explaining the various terms and how the deals compared with industry standards. The board of directors receives the same write-ups.

I also spent time at the board level making educational presentations. We would discuss the ratios we’re looking at and why, what concerns we have, and the pros and cons of each deal. The repetition of this process aids in learning as everyone becomes familiar with the common terms and everyone’s comfort level grows.  

How does the approval process work? Who is involved?

JW: I have a lending limit for loans that I can approve myself and anything above that amount, either per deal or in aggregate for that borrower, goes on to our MBL committee for review.

The MBL committee has five members: the credit union’s president, COO, CFO, CLO, and myself, the vice president of commercial services. A minimum of three of us must be present to approve a deal within the group’s limit. The MBL committee can approve loans up to $350,000 in the aggregate. Anything more than that must also go the board executive committee for approval. That committee is composed of four members; three must approve the request. 

What changes has 1st MidAmerica made to its MBL program since its inception?

JW: We’ve only cut one product. The credit union used to offer SBA type 7(a) loans, but we didn’t have someone well-versed enough in that specialized area. There is a lot of reporting and documentation required for those loans, and we felt it was something that made more sense to refer out to other lenders because of the time it was taking.

Some credit unions use a third party to manage SBA loans, which can work, but we are focused on delivering a hands-on experience from start to finish. We want them to know when they apply for a loan, we handle it locally and don’t need to send it off to another entity for a decision.

Down the road, if we see more member needs or requests for SBA loans, we might decide to bring in someone who can focus on that type of lending.  

Do you have any other advice for credit unions looking to start or enhance an MBL program?

GW: Yes, there has to be a complete and full understanding of what your credit union is doing in the member business lending area. It is important to have someone in the commercial lending position that understands the type of loans and the needed analysis to make a solid decision.

It goes back to being comfortable with the loans you make and how the credit union reaches those decisions. CUSOs or outside parties can give good advice, but at the end of the day, your credit union is the one that needs to live with it and understand the analysis.

JW: And don’t be afraid to say no. 

 

 

 

Nov. 16, 2015


Comments

 
 
 
  • We have also been offering business loans here at Directions Credit Union for about the same time. I agree with everything that 1st Mid America has said in this article. I can't emphasize enough the importance of knowing your business member and knowing the industry. If you don't understand it, don't do it. We currently are considering SBA loans and whether we should do them in house or use a third party vendor. Thanks for sharing!
    Patricia DeCesare
     
     
     
  • It sounds like 1st MidAmerica has a good program. It is certainly important to know your member. You mention how hard it is for Management to understand. I think all CU's go through that. A good way to get your Management comfortable is to have annual reviews of the loans performed by an outside independent reviewer. Annual reviews are not only encouraged by NCUA, but the give comfort to your Management that you are not taking on undue risk and all the little details of lending are covered.
    Carol Wakefield