For more than nine years, Carter Federal Credit Union hummedalong with its business lending program amassing $7 million inloans, relishing the fact that its portfolio never took anycharge-off or delinquency hits.

However, the $182 million CU in Springhill, La., had reached apoint where it wanted to grow business lending even more but lackedthe proper expertise and systems to make that happen, said JamesGibson, president/CEO of the cooperative.

“Even though we had a strong portfolio, we still recognized thatmember business services were not only important to our creditunion but also in the eyes of the regulators to have all thesystems in check” to move forward, Gibson said.

Rather than incurring the costs to bring in more staff to buildCarter FCU's business loan program, a conversation with acommercial lending veteran more than a year ago led to Gibsonrequesting a strategic plan to launch a CUSO that would offer notonly commercial loan origination and underwriting but businesschecking accounts and other related services.

That discussion led to the debut of Business Alliance FinancialServices LLC, a CUSO formed and owned by seven CUs: ANECA FederalCredit Union and Barksdale Federal Credit Union, both inShreveport, La.; Centric Federal Credit Union, West Monroe, La.;CSE Federal Credit Union, Lake Charles, La.; and E Federal CreditUnion and Neighbors Federal Credit Union, both based in BatonRouge, La. Each CU invested $50,000 in the CUSO. The respectiveCEOs make up BAFS' board.

Headquartered in Shreveport, La., the CUSO's primary focus is toenhance and facilitate commercial and business lending activity forCUs through loan underwriting, loan documentation, servicing,review and portfolio management. Richard Guillot, a commercialbusiness lending veteran with more than 25 years of experience,serves as BAFS' president/CEO.

BAFS has hit the ground running since its official launch onJan. 1. Since then, Guillot said the CUSO has received roughly 40applications and has closed on half of those. As of April 1, 16applications have been completed. So far, the largest loan approvedwas $1.3 million and the smallest was $50,000. With “volumeincreasing by the day,” he expects a ramp up since three of BAFS'CU owners were recently brought online. Including Guillot, the CUSOemploys three staffers and is in the process of hiring another.

Guillot, who was in private practice at the time, said he metwith Gibson in November 2008 and the two agreed that there was avoid in the small to medium-size business markets in certain partsof Louisiana. A growing pullback from banks on extending loans tosmall businesses also provided a bigger window for credit unions.Gibson requested that Guillot put together a strategic plan to forma CUSO that would include seven CUs as owners, projections andwhether the entity would be a viable initiative.

Over the next three to four months, Guillot said, afterexercising due diligence in putting the strategic plan together,the next major step was finding the six other CUs to sign on. Aftera statewide search, he found those that were poised to facilitatemember business loans, those that had strong track records and heldstrong positions in their respective communities to help smallbusinesses. The exhaustive search turned out to be worth it,Guillot said.

“There is a lot of synergy between the seven. You really don'tknow that looking at their [respective] numbers, at their growthand posture, but there is synergy among the CEOs,” Guillot said.“They are very familiar with each other.” The CUs' asset sizesrange from $87 million to $912 million.

The seven CUs are considered “series A” members, which givesthem certain rights as owners, Guillot explained. He did notelaborate on what those privileges are. Later this year, BFAS isset to open up membership to other Louisiana CUs, which will beconsidered “series B” members. Eventually, the CUSO has its sightsset on expanding throughout the southeast region and beyond.

Of the seven CU owners, three did not have business lendingprograms in place while others “dabbled a little bit,” Gibson said.To bring everyone up to speed, each of BAFS' CU-owners and theirloan committees, a total of 35 people, recently underwent a week ofunderwriting and other training with the same firm that has acontract to train NCUA field examiners, he added. Since creditunions are mostly known for consumer loans, Gibson acknowledgedthat regulatory authorities “have always questioned the expertiseand experience of committees' to ensure they know how to underwriteloans.”

“One of the things we know the regulators are expecting is theywant the loan committees to have the ability to not only review andunderwrite and application and not to just depend on theunderwriting coming from the CUSO,” Gibson said.

Meanwhile, BAFS' systems are also set up to process SBA 7(a) andother government loans, Guillot said. Working with a third-partyvendor, the CUSO will be able to offer commercial deposits andmerchant processing services. He emphasized that the lendingcomponent 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 otherproducts and services could be important additions.

As some banks continue to turn off the lending spigot to smallbusinesses, Guillot said unfortunately, owners are sometimes caughtin the wrong place at the wrong time.

“When financial institutions have positioned themselves and madesome decisions that have affected their portfolios, they have amandate to adjust their portfolios in a way that is purely abusiness decision,” he said. “A lot of borrowers that we've talkedto-some approved and some not-were caught in a portfolioadjustment. The bad part is there was not a lot of explanation asto why.”

All the more reason for CUs to band together to court thosesmall to mid-size businesses that have been turned away.

“I don't think there is a better time in the history of ourfinancial markets to encourage collaboration among credit unions.There's going to be a time, depending on what NCUA does and on whatthe MBL limits will be, where I think it will be important to havea centralized participation network.”

Gibson said looming legislative risks should be enough of anincentive to look for alternatives now. “We've got threats outthere that could affect our noninterest income and fee income thatwe need to replace with an initiative that comes from somethinglike commercial lending.”

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