Creating And Sustaining Your MBL Competitive Advantage Jim Devine, CEO, Hipereon, Inc. Let s Define Some of The Strategic Concerns For Member Business Lending Where are we Now? There are 2,000+ Credit Unions now actively engaged in providing MBS/MBL Services 1
Let s Define Some of The Strategic Concerns For Member Business Lending There is now over $34 Billion in MBL on the Books of CUs MBL is one of the Most Rapidly Growing Segments of CU Loan Portfolios. Over 75% are linked to Real Estate transactions Let s Define Some of The Strategic Concerns For Member Business Lending What is the Driving Reason behind the Desire to offer MBS/MBL Services? Does the Board of Directors clearly understand the range of Risks involved in MBS/MBL Activities? 2
Let s Define Some of The Strategic Concerns For Member Business Lending Average Loan Size for MBLs is Much Larger than Consumer Loans - +$200,000 Average Loan Interest Rates are typically Higher and Cross Selling Opportunities are also Greater Let s Define Some of The Strategic Concerns For Member Business Lending Average Deposit Sizes for MBs is typically Much Larger than Consumer Deposits Fee Income Potential is also typically Much Higher 3
Let s Define Some of The Strategic Concerns For Member Business Lending Has the CU established Specific Targets for their MBS/MBL Activities? Does the CU know How Many of it s Existing Members are Small Business Owners? Elememts of a Successful MBL Let s Define Some of The Strategic Concerns For Member Business Lending Is the Primary Objective to Service Small Businesses Owned By Existing Members? Is there desire to also Utilize MBS Services to Expand The Current Membership Base of the CU? 4
Let s Define Some of The Strategic Concerns For Member Business Lending Is the Primary Objective to Generate Working Assets while serving Existing Members? Is the Primary Objective to simply Increase CU Revenue Potential? Let s Define Some of The Strategic Concerns For Member Business Lending What Is The CU Value Proposition? Nicer? Faster? Cheaper? Better? 5
Let s Define Some of The Strategic Concerns For Member Business Lending What Value Proposition constitutes a Sustainable Competitive Advantage? Let s Define Some of The Strategic Concerns For Member Business Lending Your capacity for MBL will be driven by the following factors: Regulatory limitations Your capital structure Your ability to organize an integrated MBS/MBL game plan 6
Let s Define Some of The Strategic Concerns For Member Business Lending What is needed to Successfully Deliver MBS/MBL services? Competitive Product Mix Compatible Core Processing Systems Business Credit Underwriting Capabilities Let s Define Some of The Strategic Concerns For Member Business Lending What is needed to Successfully Deliver MBS/MBL services? Viable Business Credit Administration Ability to Manage Problem Loans Ability to Attract and Retain quality MBS/MBL staff members 7
Let s Define Some of The Strategic Concerns For Member Business Lending 723 limits total MBL loan volume to 12.25% of Total Assets CU Asset Size $100 Million $500 Million $1.0 Billion Maximum MBL @ 12.25% $12.25 Million $61.25 Million $122.5 Million # of MBL @ $210,000 58 Loans 292 Loans 584 Loans Net Interest Income @ 3.25% $398,125 $1,990,625 $3,981,250 Let s Define Some of The Strategic Concerns For Member Business Lending Other 723 limits -Total MBL loan volume CU Net Worth Size $10 Million $50 Million $100 Million Single Borrower Limit @ 15.0% of Net Worth $1.5 Million $7.5 Million $15.0 Million Unsecured MBL @ 10.0% of Net Worth $1.0 Million $5.0 Million $10.0 Million Unsecured Single Borrower @ $100,000 or 2.5% of Net Worth $250,000 $1.25 Million $2.5 Million Total Construction & Development Loans @ 15.0% of Net Worth $1.5 Million $7.5 Million $15.0 Million 8
Let s Define Some of The Strategic Concerns For Member Business Lending Who developed the CU s Member Business Loan Policies and Procedures? Does Everyone on the CU staff Clearly Understand their MBS/MBL Policies and Procedures? Let s Define Some of The Strategic Concerns For Member Business Lending How will the CU address its Member Business Loan Underwriting Needs? How will the CU Review and Approve/Decline MBL requests? 9
Let s Define Some of The Strategic Concerns For Member Business Lending Managing MBL Underwriting and Loan Review MBL Loan Review process Who sits on the Loan Review Committee? Do they have Business Lending Experience? Let s Define Some of The Strategic Concerns For Member Business Lending Managing MBL Credit Administration Ability to Administratively Monitor MBLs on an ongoing basis Development of a viable MBL Risk Rating System 10
Let s Define Some of The Strategic Concerns For Member Business Lending Funding the MBS/MBL. What will the Funding Commitment be to Develop the MBS/MBL Infrastructure? What is the Timeline the CU will consider reasonable for Incubating the MBS/MBL? Let s Define Some of The Strategic Concerns For Member Business Lending MBL origination. Does it Matter If the Loan is to a Local Business Entity? Will the CU consider Loan Participation Opportunities to generate New Working Assets? 11
Let s Define Some of The Strategic Concerns For Member Business Lending What Comes First? The development of Critical Mass in the Loan Portfolio or the development of an Experienced MBL Staff? How does this Chicken vs The Egg situation play out properly? Let s Define Some of The Strategic Concerns For Member Business Lending Many CUs have utilized Loan Participations to create Critical Mass in their MB Loan Portfolios Is the objective to create a Funding Source to justify the Development of The MBL Staff? 12
Let s Define Some of The Strategic Concerns For Member Business Lending How do Loan Participations serve the Existing Membership Base? If a CU is the Lead Lender in a MBL Participation, does it Know How To Manage the process? What are the related Recourse Liability issues? Let s Define Some of The Strategic Concerns For Member Business Lending CUs Are Typically Choosing One Of Two MBL Delivery Profiles: In-House Underwriting Outsourced Underwriting 13
The NCUA established Minimum Staff Experience Requirements for CUs planning to offer Member Business Lending services The Minimum Requirements are Two Years Of Working Experience Underwriting Business Loans - 723 Is Two Years of experience Enough? Let s Define Some of The Strategic Concerns For Member Business Lending Internal underwriting requires Adequately Trained Staff Members They must have an Integrated Underwriting Process that can be Efficiently and Consistently executed 14
Let s Discuss Some of the Strategic Concerns For Member Business Lending Consistent underwriting processes clearly define Primary and Secondary Sources of Repayment Do All MBL Staff Members utilize the Same Underwriting Process? Let s Define Some of The Strategic Concerns For Member Business Lending Who Designed the CU s Underwriting Process? Who is Training And Supervising the MBL underwriters? 15
Where Do Credit Unions go to find Qualified Staff Members that meet the NCUA Minimum Staff Experience Requirements Hiring Bank Staff Members has become the Default Strategy for meeting the minimum experience requirements Is Two Years of bank experience Enough? When Did They Start Their Banking Career? Prior To 1985 Commercial Lending Officers Had Very Extensive Internal Training and A Formal Career Path They Paid Their Dues The terms Banker and Lender were Almost Synonymous 16
When Did They Start Their Banking Career? Prior To 1985 Most All Of The Bank Lenders That Went Through Formal Training s Are Now 50+ Years Old There are Not Many highly trained and experienced Commercial Lenders in the 30 50 Year age bracket Succession? When Did They Start Their Banking Career? Since 1985 Very Little Formal Commercial Lender Training s Have Been Offered Most Underwriting is done in a Centralized and Automated Loan Center Environment Very little Business Expertise exists at the Point Of Sale for most Banks 17
So, When did The New-Hire Candidates from the Banks Start their banking careers? So, Who are the CUs Hiring? Do the Experienced Bankers they are hiring Know Anything about Underwriting Business Loans? Where do Credit Unions find Qualified Staff Members to establish their Member Business Services? Are Existing Staff Members qualified? If not, Who is responsible for Hiring? Do they Really Know what to look for? 18
Is the CU Outsourcing its MBL underwriting? What are the Risks and Issues associated with Outsourcing these services? How do you pick a Qualified Provider for Outsourced MBL Underwriting? Who establishes the Selection Criteria? 19
How do you pick a Qualified Provider for Outsourced MBL Underwriting when you have Little If Any Business Lending experience? Can you Control the Outsourced Underwriter Turnaround Time for an underwriting package? What Quality Control Measures does the CU employ to Monitor Outsourced business loan Underwriting Standards? 20
Does the CU also have a Direct Ownership Interest in the CUSO? To make the CUSO viable you need Adequate MBL underwriting Deal Flow Are there any Conflicts Of Interest? Is there a Formal Loan Committee in place that Reviews And Approves all of the MBL Underwriting Packages? Who serves on the Loan Review Committee? Why? What Business Lending Experience do they bring to the process? 21
Have all of the Loan Committee Members received Adequate Training to be capable of Reviewing And Approving or Declining MBL underwriting packages? And Now The FUN Really Begins The Real Risks To The CU Come AFTER The Member Business Loans Are Booked 22
Who is Monitoring the Business Loans once they have been Approved And Booked? Is Credit Administration separated from Loan Production activities? Is the CU utilizing a Loan Grading System for Monitoring Risk? In the event a Problem Loan arises, Who is Responsible for Managing the Workout Process? 23
The Loan Grading System should score the following factors: Ability to Pay Business/Personal Financial Condition Management Experience and Ability The Loan Grading System should score the following factors: Existence of Collateral and Guarantees Business Loan Structure Industry and general Economic Conditions 24
To mitigate potential lender liability CU lenders should make sure to: Put everything in Writing Always complete a formal Loan Application Confirm all business loan Commitments in Writing To mitigate potential lender liability CU lenders should make sure to: Complete all Negotiations before Closing Be sure to Fully Disclose all Conditions before Closing The Loan Make all related Loan Documentation Available For Review 3-5 days before Closing The Loan 25
To mitigate potential lender liability CU lenders should make sure to: Confirm The Borrower has All Of The Loan Documents before Closing Recommend the borrower Retain Professionals to help them understand the loan process Make sure to take Adequate Time to Close The Loan properly To mitigate potential lender liability CU lenders should make sure to: Control Disbursement of The Loan Proceeds Make sure that any subsequent Loan Agreement Modifications must be In Writing Make sure to Listen Carefully to all Conversations With The Borrower 26
To mitigate potential lender liability CU lenders should make sure to: Never Ignore any Loan Defaults Don t interfere directly with The Borrower s Business Management practices Stay off of The Borrower s Board Of Directors/Advisors To mitigate potential lender liability CU lenders should make sure to: Utilize Legal Counsel whenever necessary Not make any Misrepresentations to The Borrower Above all, Tell The Truth 27
How does the CU monitor Business Loan Performance and Loan Structure compliance? Is this effort Also being Outsourced? In The Event Of A Problem Loan: How will the CU Manage the situation? How will Performance Measurement and Accountability be administratively handled? 28
Beware of the Loan To Value illusion for Collateral Does the CU know how to transition the Secondary Sources Of Repayment into the Primary Sources Of Repayment? So, what is the Collateral Conversion Plan? How will Loan Loss Provisions be addressed? Can the CU act quickly and decisively to assure they Maximize the results of their Recovery Efforts? 29
The Loan Administration process for CUs: The Objective is to Monitor Actual Business Performance Trends against Business Plan Objectives Corrective actions may involve the need to utilize Outside Consultants to Help Execute Plans to adjust and recover All Loan Files should be Periodically Reviewed to make sure everything is in proper order The Loan Administration Process For CUs: Make sure the Loan Files contain Adequate Legal Protection regarding the lender s Collateral Position Collateral documents may be Incomplete and they may also contain Improper Dates or the dates may have Lapsed If the Collateral has been Inaccurately Described, the lender May Not be Legally Able to perfect their interest 30
The Problem Loan Administration Process: Identify Debtor Defenses Attorneys representing the borrower will most likely Subpoena the Lender s Credit File Records They will look for any File Documentation that indicates The Lender was effectively In Control of the business The Loan Administration Process For CUs: Periodically review the Public Records to make sure the information furnished by the borrower can be Verified The Public Record should verify that the Lender s Interests are Perfected as Originally Intended The Public Record should also contain information on any Other Parties that may have also Filed A Claim 31
Specific records that should be checked include: Real Estate records should reflect the Legal Ownership of the properties The records will also reflect any Liens made against the property and in What Name the Liens Were Filed The records will show any Sales or Title Transfers as well as any Foreclosure Proceedings made on the property by Other Creditors Specific records that should be checked include: The UCC Filings will determine the Security Interests Filed by Other Parties against the Borrower s Personal Property There may be a need for the lender to file Continuation Statements to Extend the Lender s interest in the collateral 32
For MBS/MBL Credit Unions Need To: Make sure everyone in the organization is On The Same Page Determine if their MB Loan Officers have the Background And Experience to Also manage Problem Loans Reality Business Credit Risk Is A Choice Need THOROUGH CONSISTENT Credit Analysis Need TRAINED Staff Members More Than Ever 33
So, When Is A CU Ready For Business Lending? Must establish the use of a Standard Business Credit Memorandum Must use Consistent definition of Cash Flow Must use Consistent definition of Debt Service Coverage So, When Is A CU Ready For Business Lending? Must use a Consistent Business Loan File structure Must Monitor Business Loan Performance closely and Act Immediately if Out Of Compliance Must create Viable Career Paths for Business Lenders/Relationship Managers 34
So, When Is A CU Ready For Business Lending? Must develop a viable Loan Review Process Must have a Strategic Context for Member Business Asset/Liability Planning Must establish Quality Controls and Corrective Action Plans So, When Is A CU Ready For Business Lending? Must realize that Depth In A Relationship is the Key to both Profitability and Retention Bank Studies show at 4+ Product Relationships overall Profitability Soars At 4+ product relationships Account Retention Levels Exceed 95% 35
So, When Is A CU Ready For Business Lending? Must Address The Things Small Business Owners Want: Safety And Security Access To Capital Convenience/Multiple Channels Of Delivery Relationship Stability Advice And Help From A Business Expert So, When Is A CU Ready For Business Lending? CUs can t simply utilize an Outsourced Underwriter and Limit the rest of their Internal Commitment to Member Business Services CUs must be internally capable of Identifying, Soliciting, And Managing Member Business Relationships and their related Risks 36
So, When Is A CU Ready For Business Lending? CUs can t make Commercial Real Estate Loans synonymous with Member Business Loans CUs can t simply believe If You Have The Dirt You Can t Get Hurt! What makes a Credit Union different? What is their Sustainable Competitive Advantage? They must be As Good or BETTER than their competitors The Ultimate Differentiator The Quality, Stability And Skills of their MBS Staff 37
The Bottom Line is To Be Successful You Can t Be A PRETENDER In MBS/MBL The Bottom Line is To Be Successful You must focus on Business and Personal Financial Services needs and recognize business and personal financial services needs Evolve over Time 38
The Bottom Line is To Be Successful You must learn to Profile Needs and be both Proactive and Anticipatory You must learn to be a financial issues Problem Solver/ Solutions Provider Questions Regarding Business Lending Training Can Be Directed To Jim Devine, CEO / Bob Hogan, President/ or Greg Devine, Vice President Hipereon, Inc. 4048 148 th Avenue NE Redmond, Washington 98052 (425) 702-9200 bob.hogan@hipereon.com jim.devine@hipereon.com greg.devine@hipereon.com 39