Presentation on theme: "How to Tiptoe (Rather Than Stumble) into Member Business Services Jeff Stone EVP, Member Business Services North Island Credit Union"— Presentation transcript:
How to Tiptoe (Rather Than Stumble) into Member Business Services Jeff Stone EVP, Member Business Services North Island Credit Union
Management wants to pursue Member Business Lending (MBL) and Deposit Services Management wants to pursue Member Business Lending (MBL) and Deposit Services How should the Board of Directors respond and what kind of due diligence and preparation should they be looking for??? How should the Board of Directors respond and what kind of due diligence and preparation should they be looking for??? What is a Board of Directors to Do? In short, what questions should you be asking?
Does Management Have a Business Plan? Buy Loans Only (In-Participations) Buy Loans Only (In-Participations) Originate Commercial Real Estate Loans Only Originate Commercial Real Estate Loans Only -- OR -- OR Build a Full Member Business Services Infrastructure (including deposits)—and if so, have they identified a niche to serve? Build a Full Member Business Services Infrastructure (including deposits)—and if so, have they identified a niche to serve? Have they determined what your credit union will do with the MBL Product?
Early on Board Education Do you have Enough Information to: Do you have Enough Information to: Understand the Paradigm Shift from Consumer Lending? Understand the Risks of these New Products? Determine if your Credit Union has the Resources to pull off the plan over the next 2-4 years? Decide: is the right move in today’s Economic Conditions? Has Management Explained the Details and Sought out Your Input? Has Management Explained the Details and Sought out Your Input? Have you Determined the Level and Process for Ongoing Board Oversight and Involvement? Bottom Line: Do you “Buy In” to the Concept? Bottom Line: Do you “Buy In” to the Concept?
Policies MBL Policy must be in place Before you do or buy your first loan MBL Policy must be in place Before you do or buy your first loan Must Conform to the Requirements of 12 CFR Section Should Quantify your Potential Exposure in Terms of Percentage of Net Worth If your Credit Union will buy and/or sell Loan Participations, the NCUA also requires that you have a Separate Participation Policy If your Credit Union will buy and/or sell Loan Participations, the NCUA also requires that you have a Separate Participation Policy Policies vs Procedures Policies vs Procedures The NCUA has recently indicated that Procedures should also be approved by the Board
Continuous Monitoring via: Policy vs. Regulatory Loan to One Borrower (LTOB) Limits Policy vs. Regulatory Loan to One Borrower (LTOB) Limits The Board may wish to set an Internal Policy Limit that is Lower than your Regulatory Limit (15% of Net Worth) All Policy Exceptions should require Board Approval Prior to Loan Funding All Policy Exceptions should require Board Approval Prior to Loan Funding Quarterly Reports on All Aspects of the Program Quarterly Reports on All Aspects of the Program Especially on relationship to MBL CAP and Procedural Exceptions
Which Road to Take? What steps should your Credit Union take to get to the planned objective? What steps should your Credit Union take to get to the planned objective? This Presentation will use North Island as an Example This Presentation will use North Island as an Example Because we lingered at many of the possible stopping points as we wandered down our Road Also, there are several CUSOs that have been created to assist you in this process Also, there are several CUSOs that have been created to assist you in this process
The North Island Approach: What We Will Cover Why Do Member Business Services? Why Do Member Business Services? The How and What of North Island’s Program The How and What of North Island’s Program Risk Mitigation and Board Oversight Tools Risk Mitigation and Board Oversight Tools
Why North Island Went Down this Road
Member Business Lending: The Starting Point ALCO Asset Diversification Strategy ALCO Asset Diversification Strategy Enhanced Profitability—Alternative “Investment” Strategy—but these are all Loans and not Investments Enhanced Profitability—Alternative “Investment” Strategy—but these are all Loans and not Investments A Means to Build Core Deposits A Means to Build Core Deposits
Asset Diversification New Loan Types New Loan Types Commercial Real Estate (CRE) Loans—to Start SBA 504 Loans Secured & Unsecured Lines of Credit Equipment & Auto Term Loans SBA 7a and State Government Guaranteed Loans
Portfolio Yield 4-5 years ago CRE Loan yields were 200 bps over the portfolio average 4-5 years ago CRE Loan yields were 200 bps over the portfolio average Its still over average, even with the current tighter margins and intense competition, but now the bump is down to 60 bps Its still over average, even with the current tighter margins and intense competition, but now the bump is down to 60 bps However, Loan Fees and Servicing Income add greatly to total income
Ability to Attract Low Cost Deposits Conversion to a Community Charter Helps Conversion to a Community Charter Helps Bank Consolidations = CU Opportunities Bank Consolidations = CU Opportunities Displaced Bankers Are Source of Experienced Staff Displaced Bankers Are Source of Experienced Staff CU Service Levels Get Results CU Service Levels Get Results Can Outsource other Fee Driven Services Can Outsource other Fee Driven Services
How We Got Started: The Gradual Approach
The Progression 1)Six Month Due Diligence Process 2)Built Portfolio & Infrastructure by Buying Loan Participations 3)Established Wholesale Lending Pipeline by Establishing Broker Network 4)Managed the CAP by Selling Participations 5)Created Relationships (and Core Deposits) with Direct Lending through Branches
The Due Diligence Process Spent 6 Months on a Consulting Contract to Determine Feasibility Market Niche Created by Bank Mergers Focus Groups to Ask Existing Business Like Members and Previous Clients what they Valued Most. Step by Step Plan to Create Products & Services Cost Analysis
Loan Participation Purchases No Need to Hire Staff at the Outset Due Diligence Can Be Performed by: A Consultant OR Another Credit Union/CUSO with the Required Expertise Your Credit Union Has to Make Final Decision on All Loans Loans Typically will Fit on Your Existing Real Estate System Low Cost of Entry into a New Line of Business:
Loan Participation Sales Provide Full Service to Members Provide Full Service to Members Acts as a Tool to Deal with LTOB Limitations Acts as a Tool to Deal with LTOB Limitations Mitigates Impact of MBL CAP Mitigates Impact of MBL CAP 156% Without Participations 156% Without Participations Increases Loan Yield Increases Loan Yield Prepayment Penalties and Servicing Fees Prepayment Penalties and Servicing Fees
Accounting Benefits of Loan Participations Sales The Fee Income Associated with the Sold Portion Goes to the Bottom Line The Fee Income Associated with the Sold Portion Goes to the Bottom Line The Remainder Needs to be Amortized Seller Collects a Servicing Fee Seller Collects a Servicing Fee The Servicing Fee is Capitalized—It Too Goes to the Bottom Line The Servicing Fee is Capitalized—It Too Goes to the Bottom Line The Expense is then Amortized over the Expected Life of the Loan Prepayment Exposure—Primary Reason for Penalties
What Came Next?
The Jump to Business Services Add Services as Members Request Them Add Services as Members Request Them Limited Suite of Products Like North Island—Move Quickly to Full Product Line Like North Island—Move Quickly to Full Product Line Requires Willingness to Make Expenditures for: Experienced Staff Powerful Host System—with Open Architecture, or Bolt On Middleware Two Approaches—Depends on Your Market & Comfort Level —Prepare a Business Plan and Choose:
Our “Lucky” Breaks Changed Charters to Community Changed Charters to Community Businesses themselves could now join Host System Conversion Host System Conversion Old Legacy System was going out of service New system handles both consumer and business transactions Costly—but the income from several years of CRE Loan production helped pay the way Bank Mergers made Staff Available Bank Mergers made Staff Available
Branch Staff’s Role Training a Must Training a Must We Have Our Own Six Week Omega Based MBS Training Program for Branch Managers and others Incentives and Sales Culture Incentives and Sales Culture New Accounts Training New Accounts Training Internal Website Provides the Tools Internal Website Provides the Tools
Branches Business Deposits Basic, Classic and Analyzed Checking Savings, Money Market & CDs Loans Overdraft Lines of Credit Approved at Branch Through Credit Scoring Fed Tax Deposits
Branches with Business Services’ Support Deposit Services Business On-line Banking ACH Origination Sweep (on balance sheet) Zero Balance Accounts What did you say??? Business Loans Business Auto Loans Unsecured LOC’s Business Debit Cards
Through Business Services Business Loans –Commercial Real Estate Loans (Wholesale/ Direct and Participations) –Secured & Unsecured Lines –Government Guaranteed Loans
Through Vendors –Payroll –Merchant Credit Card –Business Credit Cards –Courier & Armored Car –Lockbox –Processing of payments from our Members’ customers –Equipment Leasing –Letters of Credit –Insurance & Investment Services - Referred to Investment Dept (former CUSO)
Vendor Due Diligence Several of the Vendors were known to us from our Previous Lives Several of the Vendors were known to us from our Previous Lives Others We Checked Out via References and Test Cases Others We Checked Out via References and Test Cases On others, we used Multiple Vendors On others, we used Multiple Vendors And in one case (Letters of Credit) we use a Statewide Bank And in one case (Letters of Credit) we use a Statewide Bank Regulators want the credit union to know who they are dealing with Regulators want the credit union to know who they are dealing with
Employee Benefits 401K and Pension Cafeteria Group Insurance Medical Term Life Auto Insurance Long-Term Care Educational Workshops Insurance & Investment Services Dept. Cross Sales
Web Based Components - Public - Public Public Public –Public –Public Islandnet – Corporate Intranet Islandnet – Corporate Intranet
myisland.comConsumer myisland.com ( Consumer )
myisland.comBusiness myisland.com ( Business )
Phase III Introductions –Account Analysis Enhancements –Off Balance Sheet Sweep (future) –Positive Pay (on the way) –Third Party CD’s (done) –Remote Deposit Capture (this year)
Other Considerations Considerations
Staffing—The Relationship Managers Former Bankers Former Bankers Business Bankers from a Community Bank Easier Fit in Credit Union Culture Plus Usually Well Rounded Often More Costly than Consumer Lenders BBBBecoming Harder to Find EEEEspecially with Required Experience—7 to 10 years BBBBank Mergers often make talent available TTTTraining/Succession MMMMarketing Support
Underwriting More Intensive than Consumer Loans More Intensive than Consumer Loans Financial Statement Analysis How the Business is performing in relationship to its Peers and your Underwriting Requirements Tax Analysis Evaluating the Business Owner’s Tax Returns is quite Important—since most of us are Lending to Small Businesses with One or Two Owners In other words, the financial capacity of the Business and its Owners are linked together
Credit Scoring Cost of System vs. Credit Analyst Cost of System vs. Credit Analyst Determine Maximum Loan Size to Credit Score Determine Loss Tolerance—especially in current economy Look for Single Data Entry Capabilities Can It Interface with Doc Prep and Host?
Loan Documentation Look for Recognized System Look for Recognized System Multiple options available Again—Be aware of systems ability to interface with existing programs!!
Quality Control Audit Need Independent Person Reviewing New Loan Files Need Independent Person Reviewing New Loan Files Ours comes in once a month Selects a Sampling of loans to review Does a Comprehensive Report on both technical issues and credit quality Report sent to EVP Risk Management Copy to Business Services Dept. Head for a Response
Annual Loan Reviews Commercial Real Estate Loans Commercial Real Estate Loans Annually we Inspect the Properties for Each Participated Loan We Obtain Updated Rent Rolls and P&L Statements on the Property We request Full Financials if Screen Reveals any Issues or Covenant Violations Business Loans Business Loans Site Visits, Covenant Tracking and Financial Updates on Business Loans WWWWe run a Negative Screen Credit Report on the Principals
Asset Quality Monitoring Monthly, Our Credit Administrator prepares a Report to our EVP Risk Administration, who is in charge of the Loan Loss Allocation, regarding the Status (and Workout Progress) of all our Classified Member Business Loans Monthly, Our Credit Administrator prepares a Report to our EVP Risk Administration, who is in charge of the Loan Loss Allocation, regarding the Status (and Workout Progress) of all our Classified Member Business Loans Stay on top of Problem Loans!!!!!
Quarterly Board Reporting
What We Report Year To Date Production Results Year To Date Production Results Loans Deposits Fee Income Commitments over $3MM with Procedural Exceptions Commitments over $3MM with Procedural Exceptions Attach Both the Exception and Mitigant Discussion from the Loan Memo Delinquent Loan Status Delinquent Loan Status
What We Report—cont. The Concentration Reports The Concentration Reports The CRE Portfolio Breakdowns The NAICS Code Breakdown The Stress Test Results Industry Trends Industry Trends Our Evaluation of What is Happening in Our Market—Price Wars, CAP Rates, etc. Articles on the Status of the Market for the Various Property Types
Commercial Real Estate Concentrations
Dollars by Zip Code
Commercial Loan Distribution
NAICS Codes for All Business Loans
Sample Industry Report
So Why Go Through All This? Serve your Members!!! Serve your Members!!! Many want these products Usually depends on Field of Membership Grow the Credit Union Grow the Credit Union Lower your Cost of Funds (the Core Deposits) and Lower your Cost of Funds (the Core Deposits) and Diversify your Asset Base Diversify your Asset Base