South Carolina CUSO Seeks Controlled Growth to Nurture Local Business Lending
o Alliances with business lending CUSOs closer to home are a growing option for some credit unions.
o Credit unions in the Carolinas are being courted by Innovative Business Solutions.
o IBS welcomes growth but not at the risk of being unfamiliar with the markets that CUs serve.
For some credit unions, it's really all about location, location, location when it comes to which partnerships will win out for their business loan program development.
As the lending environment continues to morph under the weight of a sluggish economy, tightened capital access and legislative efforts to expand the industry's ability to loan to small businesses, some credit unions are rethinking their alliances with existing vendors while others yearn for a more hands-on approach with their business services programs.
When former banker Nicol Morris came on board as chief operating officer at the $226 million Charlotte Metro Credit Union in November 2007, one of her strategic goals was to refuel the cooperative's business deposit and business loan program. Still in contract with a national CUSO at the time, the Charlotte, N.C.-based CU faced some logistical challenges that hampered progress.
"We had issues with timing because of the time zones," Morris recalled. "There was a lot of lag time. Additionally, they didn't know our market area. Those factors led us to make the decision to get more involved."
By the time CMCU's business loan program launched in 2008, it had grown to roughly $1.5 million. Morris said Bob Bruns, president of CMCU, received a call from Steve Harkins, president/CEO of SC Telco Federal Credit Union, asking if he would be interested in an opportunity for the credit union to become an owner of a new CUSO.
Today, both CUs, along with seven others, are co-owners of Innovative Business Solutions, a Fort Mill, S.C.-based CUSO that launched in March 2009 to provide underwriting, loan closing documents, financial analysis, annual portfolio reviews and training. Last year, it closed on nearly $15 million in loans, said Mike Gudely, president/CEO. IBS has closed on about $8 million so far this year and is in the process of moving loan servicing into its fold.
Not bad for a staff of two working with CUs with an average asset size of $200 million.
"Tough times call for straight talk," Gudely said. "There are potential members coming from banks, and they could provide good financing opportunities for credit unions. By the same token-and this is where the straight talk comes in-unfortunately, because of the [member's] financial condition, as much as the [credit union] wants to help, they can't."
That's because IBS ultimately does not want one of its CUs or their members to be put at an undue risk of loss, Gudely explained.
"We want to make sure we don't sugar coat things. We feel a strong responsibility to the credit union even though it's not always what they want to hear."
That strict due diligence is fine with the $190 million SC Telco FCU in Greenville, S.C. Like CMCU, it previously partnered with a national CUSO to service its business lending program, said Harkins, who also serves as board chairman of IBS. The CU was ready to reignite its slowed portfolio activity and sought out a more local connection to make it happen.
"Quite frankly, we didn't have the internal knowledge," Harkins said. "Working with [IBS] has increased our knowledge, which has really helped us."
SC Telco grew its business loans to $8.5 million and business deposits have passed the $3.5 million mark, Harkins said. The CU said it has the best of both worlds through IBS: local ownership and control in addition to cost efficiencies through collaboration with the CUSO's other owners.
Gudely said IBS was originally headquartered at a CU in Columbia, S.C. In March, it moved offsite to a business park in part to heed NCUA's guidance of having arm's-length service between CUs and CUSOs. The underwriting would also not have the appearance of being biased, Gudely added. Eight of the CUSO's CU owners are based in South Carolina. Going forward, IBS plans to expand its reach throughout the Carolinas. The CUSO is starting to build a presence in upstate North Carolina and is in talks with CUs wanting to stay closer to their home base. Still, while growth is almost always a good thing, Gudely said the CUSO does not want to spread itself too thin.
"We don't want to take over the world and be a national CUSO," Gudely said. "We understand the Carolinas, its environment and the real estate here. We don't think we could do as good of a job if we got too big."
About 90% of business loans and MBLs are secured by real estate, Gudely noted. In places like Orlando, Atlanta, Washington and certainly California, it's very specialized. For that reason, IBS would not be comfortable underwriting loans in those areas, he explained. The CUSO recently talked with a Carolina CU that had an existing MBL program. The deal wasn't sealed because the CU wanted to work with loan brokers, a move Gudely frowns on. He advises IBS' CUs not to use loan brokers because they tend to work with high-risk loans.
Looking ahead, IBS is in the discussion stage of building a loan participation network, Harkins said. Adding residential mortgages to the lineup is also an early consideration, Gudely added. Vendors have submitted proposals for services such as remote deposit capture. Both Harkins and Gudely agreed that any add-ons would have to complement what IBS currently offers its CUs. Gudely said the CUSO would never turn down working with a CU because of its asset size, but those in the $100 million to $400 million range are likely the ideal niche.
"If you get too small, particularly under $100 million, it may be hard for them to have the critical mass to make it work," he said. "When you get to $500 million or close to $1 billion, it makes more sense to bring the MBL program in house."
The CUSO is also focused on business development training to build new relationships within the small business market. That includes accounting firms and other entities that serve entrepreneurs. Most are not aware that CUs offer business loans and deposits, said Gudely, who came to IBS from the banking industry with 30 years of commercial lending experience. And, membership eligibility remains confusing for many.
"We're trying to let people know it's not a mystery," Gudely said. "You don't have to meet in a graveyard and do a secret handshake to become a member."
Gudely has found that once CU staff gets out into the community they are pleasantly surprised at the reception from business owners, who like to be called on. Morris, who is also on IBS' board, said CMCU has run many commercial ads, including local ones during the Super Bowl, to get the word out. It has helped that the trend of consumers switching from banks to credit unions has received a lot of press, she added.
"It's still a best-kept secret," she said. The differences between her experiences working for banks and CUs have convinced her that the cooperative model is one that members relish.
"It's about personal service and local decision making," she said. "Not discounting the numbers, but you're going to dig deeper and look at collateral and other things to make it work without adding extra risk."
Innovative Business Solutions CU Owners
Carolina Trust Federal Credit Union
Greenville Federal Credit Union
SPC Credit Union
Carolina Collegiate Federal Credit Union
Carolina Foothills Federal Credit Union
Health Facilities Federal Credit Union
Community1 Federal Credit Union
Charlotte Metro Credit Union
SC Telco Federal Credit Union