SMALL BUSINESS LENDING OPPORTUNITIES FOR CREDIT UNIONS

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1 SMALL BUSINESS LENDING OPPORTUNITIES FOR CREDIT UNIONS February 14, 2012 Terrence K. McHugh President Commercial Alliance 1 Business Lending in Credit Unions 1998 regulation limits business lending in credit unions to 12.25% of total assets Typically larger credit unions are more involved in business lending Total business loans in Michigan Credit Unions as of 9/30/11 was $1.110 billion Top 40 business lending credit unions in Michigan hold 90% of the outstandings 2

2 Business Lending in Credit Unions (cont.) Business lending is the fastest growing segment of credit union lending by a significant margin More comfortable with equipment and real estate lending although working capital financing is beginning to grow Typical deal is $100,000 to $1,000,000 but through participation network can do larger deals Since recession, credit unions have continued to lend to businesses as other financial institutions have pulled back 3 Small Business Loans at Credit Unions and Banks

3 5 Why enter the MBL market? Serve existing membership base Enhanced perception of Credit Union in community Diversify and enhance earning potential of Credit Union MBL s are fertile cross selling opportunity Garner experience before MBL cap is raised, positioning Credit Union for this future opportunity Everyone else is doing it. Can you afford not to? 6

4 How To Get Involved In Member Business Lending Simply buy Participations from others Start a stand alone In house MBL program Hire an MBL CUSO to do it for you 7 Buy Participations from Others Positives Inexpensive entry into member business lending Build earning assets quickly Deliver earnings quickly to credit union Negatives Not Learning the Business Credit Union place in local financial community remains unchanged Membership business lending needs remain unanswered Perception by Regulators that credit union is simply buying assets Other than earning asset, no benefit of deposits and overall cross selling opportunities 8

5 Start a Stand Alone In House MBL Program Positives All knowledge of MBL housed within credit union Member Business Lending becomes part of culture of credit union Community recognizes credit union as player in local business community New line of business is developed for the long term Negatives Very costly process typically undertaken by larger credit unions Takes a long time to develop Limited by talent hired by credit union Separation of duties difficult based on cost 9 Positives Hire An MBL CUSO To Do It For You Can come to market quickly Little human capital required within credit union Separation of duties at CUSO level Hiring expertise in business lending Ability to diversify through participation Create assets/earnings quickly Negatives Little or no MBL expertise in house Credit union members dealing with only CUSO personnel Culture at credit union does not include MBL because it is not lived at the credit union Perception by Regulators that knowledge rests in CUSO and not credit union 10

6 What Should You Do? 11 All of the Above! It is critical to possess some MBL expertise in house and continue to develop it and the overall knowledge of senior management in Member Business Lending It is important to have a participation network to diversify your risk and be able to do larger deals for your membership base It is valuable to have expertise and experience of CUSO talent to assist you in underwriting, loan servicing, and workouts It is prudent to allow backroom responsibilities to be handled by a higher volume provider (like a CUSO) where expertise and separation of duties is the norm in critical functions Unless Credit Union is of a size where they can develop a full fledged program in house, a combination of knowledge of member business lending within the credit union, with back room expertise and detail provided by a CUSO, with a well defined participation program with like minded credit unions is necessary to do member business lending prudently. 12

7 Government Support Risk Mitigation Programs Small Business Administration (SBA) 504 Loan Program 7a Guaranteed Loan Program USDA Rural Development Business & Industrial Guaranteed Loan Program MEDC Collateral Support Program Loan Participation Program 13 SBA 504 Program SBA Benefits to the Credit Union SBA financing subordinate to credit union Credit Unions sets their own rate and fees No SBA paperwork or ongoing reporting to SBA Allows larger deals with less credit union exposure SBA Benefits to the Member Lower down payment (usually up to 90% financing) Longer terms / amortization Low, Long term fixed rate Typical Uses of SBA Support Startups (< 2 years) Industry risk Insufficient equity 14

8 SBA 504 Program (continued) Who / What s Eligible For Profit Business Owner Occupied Real Estate Machinery & Equipment No Title Vehicles Not Eligible: Working capital, inventory, supplies, rolling stock Interest Rate SBA rate is fixed for the life of the loan Credit Union sets their own rate on their loan 15 SBA 504 (continued) Fees Approx 2.65% of SBA loan plus $2500 plus 0.50% of credit union loan amount Guarantees All owners of 20% or more are required to guaranty Loan Size $200,000 $12,000,000 SBA participation capped at 40% of $5 million Terms 20 years for Real Estate 10 years for M & E 16

9 SBA 7A Credit Union must be approved by SBA before they can submit a request for a Guaranty. SBA 7A is a Guaranty Loan Program Credit Union must underwrite, document, close, service, and liquidate the loan appropriately and, if so, the SBA will share in the liquidated loss 17 SBA 7A (continued) SBA Benefits Credit Union Lower Risk Increase Profits Improve Liquidity Grow Your Portfolio Member Lower Down Payment Longer Terms / Amortizations Eliminate Balloon Payments 18

10 SBA 7A (continued) Maximum Guarantees $150,000 or less: 85% Over $150,000: 75% Maturities Working capital up to 10 years Machinery and Equipment / Furniture and Fixtures generally 10 years Land and Building up to 25 years Fees Guaranty Fee charged on guaranteed portion of the loan guaranty fee % is dependent on loan amount May be passed on to borrower Ongoing Fee o 0.55% annual fee on outstanding balance o Credit Union is responsible for this fee 19 SBA 7A (continued) Rates Fixed and Variable rates allowed Loan Size Up to $5,000,000 Aggregate guaranty limited to $3,750,000 Terms 20 years for Real Estate 10 years for M & E Some lines of credit now eligible Guarantees of Borrower 20% owners must guaranty Additional SBA Information, visit: michigancdc.org 20

11 USDA Rural Development / Business and Industry Guaranteed Loan Program Rural Area Business must be located in a rural area Population of 50,000 or less Website to determine eligibility Eligible Borrowers Cooperative, Corporation, Partnership, Individual, Tribal Group or Public body 51% owned by persons who are U.S. citizens or have been admitted for permanent residence Ineligible Borrowers Churches, Charitable or Fraternal Organizations Lending, Investing, or Insurance Companies Government employees and military personnel who are officers or directors or have 20% or more ownership in business 21 USDA Business and Industry Eligible Loan Purposes Existing or Start Up Business Real Estate Machinery and Equipment Term Working Capital Nearly all business ventures with a few exceptions Ineligible Loan Purposes Agriculture Production Golf Courses Gambling Housing Equity Distribution Lines of Credit Loans with balloon payments 22

12 USDA Business and Industry (continued) Rates and Terms Interest Rate is negotiated between business and lender (fixed or variable adjusting) Maximum Terms o Real Estate: 30 years o Machinery and Equipment: 15 years o Working Capital: 7 years o Debt Refinancing: 30 years 23 USDA Business and Industrial (continued) Percentage of Guaranty and Fee Up to 80% possible Fee is 3% of Guaranteed amount plus annual recurring fee of ¼% Credit Requirements Collateral must be 1:1 on a discounted basis o Real Estate: 75% market value o Machinery and Equipment: 60% market value o A/R and Inventory: 60% of Book Value Guaranty of anyone with 20% or more ownership Additional USDA Information: lisa.epple@mi.usda.gov 24

13 Michigan Economic Development Corp Michigan Business Growth Fund Two programs, one deals with Collateral Value, one with Capacity to Repay (debt service coverage). Designed to work with bank policy and regulatory framework for commercial credit. One enhancement mechanism per borrower. 25 MEDC (continued) Eligibility Manufacturing, wholesale & trade, research & development, high technology, mining, office operations, film & digital media productions No retail or passive real estate Companies with 750 global employees or less. Must be public policy benefit 100% of loan proceeds must be used in the State of Michigan 26

14 MEDC (continued) Collateral Support Program Intended as a collateral gap filling mechanism, not a stand alone asset. Can contribute up to 49.9% of the amount of the loan. Support value of existing assets and support expansion of debt to finance growth. Cash deposit made in lending institution, Deposit Agreement tied to specific account & loan. Claim in the event of both a default and a deficiency. Minimum claim is lesser of actual loss after liquidation of primary collateral or 90% of eligible deposit. Fees 1 3% at closing. 1% of eligible balance annually + deposit rate interest. 27 MEDC (continued) Loan Participation Intended to: facilitate projects with a revenue gap de concentrate credit union reduce debt service demands for a short term period Program can purchase up to 49.9% of a commercial credit facility and forego the receipt of interest as well as potentially defer the receipt of principal. Participation mirrors bank to bank pari passu participations. Interest after the grace period is pro rata as are recoveries. Fees are 1 3% at closing. After grace period, bank rate (pro rata) plus an annual fee of 1% of the programs outstanding balance Additional MEDC information: hannae@michigan.org 28

15 Conclusion There are numerous reasons to become involved in Member Business Lending. If your credit union decides to become involved in Member Business Lending, it is difficult to do it halfway. A real commitment is required from Senior Management to analyze how best to be involved in this opportunity. For medium to small sized Credit Unions, the CUSO route should be analyzed as it is difficult to do things right with limited resources. Expertise and experience are essential elements to bring to the initiative. If involved in Member Business Lending, it is important to expand your offering to members through use of SBA, USDA, and MEDC programs. Numerous resources are available to assist you in this process. 29? 30