For more than nine years, Carter Federal Credit Union hummed along with its business lending program amassing $7 million in loans, relishing the fact that its portfolio never took any charge-off or delinquency hits.
However, the $182 million CU in Springhill, La., had reached a point where it wanted to grow business lending even more but lacked the proper expertise and systems to make that happen, said James Gibson, president/CEO of the cooperative.
"Even though we had a strong portfolio, we still recognized that member business services were not only important to our credit union but also in the eyes of the regulators to have all the systems in check" to move forward, Gibson said.
Rather than incurring the costs to bring in more staff to build Carter FCU's business loan program, a conversation with a commercial lending veteran more than a year ago led to Gibson requesting a strategic plan to launch a CUSO that would offer not only commercial loan origination and underwriting but business checking accounts and other related services.
That discussion led to the debut of Business Alliance Financial Services LLC, a CUSO formed and owned by seven CUs: ANECA Federal Credit Union and Barksdale Federal Credit Union, both in Shreveport, La.; Centric Federal Credit Union, West Monroe, La.; CSE Federal Credit Union, Lake Charles, La.; and E Federal Credit Union and Neighbors Federal Credit Union, both based in Baton Rouge, La. Each CU invested $50,000 in the CUSO. The respective CEOs make up BAFS' board.
Headquartered in Shreveport, La., the CUSO's primary focus is to enhance and facilitate commercial and business lending activity for CUs through loan underwriting, loan documentation, servicing, review and portfolio management. Richard Guillot, a commercial business lending veteran with more than 25 years of experience, serves as BAFS' president/CEO.
BAFS has hit the ground running since its official launch on Jan. 1. Since then, Guillot said the CUSO has received roughly 40 applications and has closed on half of those. As of April 1, 16 applications have been completed. So far, the largest loan approved was $1.3 million and the smallest was $50,000. With "volume increasing by the day," he expects a ramp up since three of BAFS' CU owners were recently brought online. Including Guillot, the CUSO employs three staffers and is in the process of hiring another.
Guillot, who was in private practice at the time, said he met with Gibson in November 2008 and the two agreed that there was a void in the small to medium-size business markets in certain parts of Louisiana. A growing pullback from banks on extending loans to small businesses also provided a bigger window for credit unions. Gibson requested that Guillot put together a strategic plan to form a CUSO that would include seven CUs as owners, projections and whether the entity would be a viable initiative.
Over the next three to four months, Guillot said, after exercising due diligence in putting the strategic plan together, the next major step was finding the six other CUs to sign on. After a statewide search, he found those that were poised to facilitate member business loans, those that had strong track records and held strong positions in their respective communities to help small businesses. The exhaustive search turned out to be worth it, Guillot said.
"There is a lot of synergy between the seven. You really don't know that looking at their [respective] numbers, at their growth and posture, but there is synergy among the CEOs," Guillot said. "They are very familiar with each other." The CUs' asset sizes range from $87 million to $912 million.
The seven CUs are considered "series A" members, which gives them certain rights as owners, Guillot explained. He did not elaborate on what those privileges are. Later this year, BFAS is set to open up membership to other Louisiana CUs, which will be considered "series B" members. Eventually, the CUSO has its sights set on expanding throughout the southeast region and beyond.
Of the seven CU owners, three did not have business lending programs in place while others "dabbled a little bit," Gibson said. To bring everyone up to speed, each of BAFS' CU-owners and their loan committees, a total of 35 people, recently underwent a week of underwriting and other training with the same firm that has a contract to train NCUA field examiners, he added. Since credit unions are mostly known for consumer loans, Gibson acknowledged that regulatory authorities "have always questioned the expertise and experience of committees' to ensure they know how to underwrite loans."
"One of the things we know the regulators are expecting is they want the loan committees to have the ability to not only review and underwrite and application and not to just depend on the underwriting coming from the CUSO," Gibson said.
Meanwhile, BAFS' systems are also set up to process SBA 7(a) and other government loans, Guillot said. Working with a third-party vendor, the CUSO will be able to offer commercial deposits and merchant processing services. He emphasized that the lending component is what is done directly and is the most critical piece. Still, because it is important to have some depth with members, there will be some evaluation later to determine whether other products and services could be important additions.
As some banks continue to turn off the lending spigot to small businesses, Guillot said unfortunately, owners are sometimes caught in the wrong place at the wrong time.
"When financial institutions have positioned themselves and made some decisions that have affected their portfolios, they have a mandate to adjust their portfolios in a way that is purely a business decision," he said. "A lot of borrowers that we've talked to-some approved and some not-were caught in a portfolio adjustment. The bad part is there was not a lot of explanation as to why."
All the more reason for CUs to band together to court those small to mid-size businesses that have been turned away.
"I don't think there is a better time in the history of our financial markets to encourage collaboration among credit unions. There's going to be a time, depending on what NCUA does and on what the MBL limits will be, where I think it will be important to have a centralized participation network."
Gibson said looming legislative risks should be enough of an incentive to look for alternatives now. "We've got threats out there that could affect our noninterest income and fee income that we need to replace with an initiative that comes from something like commercial lending."