Texans CU Is Moving Forward to Pull Its Business Lending Out of a Downturn

Though it is not set in stone, loans under the $1 million mark are more likely to be entertained, Davis pointed out. Anything over that has to be "something special." Texans is also going through contracts with a much finer comb, he said. Before giving out a draw request, the credit union wants to see everything in the contract before they will consider re-underwriting it.

"On the commercial lending side, there is so much competition out there that sometimes the underwriting criteria may be a little lessened. Some of the details get loose as well," Davis said. "But when times get difficult, you don't necessarily do fewer things, you follow the details and the process even more."

Davis said Texans has identified struggling business loans in its portfolio and found that the delinquencies are traced to eight companies in and outside of Texas. The credit union's delinquency record dropped from $83 million in the first quarter of 2008 to $73 million in the second quarter, he said. Texans reported that since 2005, its residential mortgage loan delinquency ratio had decreased from 0.24% to 0.04%, which is a reflection of its conservative loan underwriting guidelines, Davis said. Total delinquencies have dropped from 5.67% as of March 21, 2008 to 5.36% as of June 30, the credit union reported. As Texans ramps up efforts to continue pushing down delinquencies, Davis said, Texans will be more aggressive with commercial and development loans.

"There is much less demand now for C&Ds, but there are businesses that are also counter cyclical," Davis said.

In one of several letters posted for members on its Web site (www.texanscu.org), the credit union acknowledged that Texans' delinquencies "rose sharply" in late 2007 compared to 2006 and 2005. That increase, the credit union wrote, is tied to commercial and real estate lending.

"Large commercial lending relationships are different. Commercial borrowers understand that they do not always have to make payments on time should they need short-term cash flow. As a result, a loan will become delinquent when there is little to no likelihood that the loan will 'go bad.' Additionally, when dealing with real estate lending, the value of collateral generally increases over time, enabling the lender to recover funds after the property has been foreclosed and resold," the credit union wrote.

Meanwhile, Texans is also aiming to focus more energy on building business deposits. The challenge, Davis acknowledged, is it will be hard to get those deposits unless the credit union is also the lender.

"As the market opens back up, and we have more clarity, we plan to meet both of those needs more," Davis said.

Texans has loan participations with more than a dozen credit unions, Davis said. The arrangements have been successful and opened up opportunities for peers to buy loans, he added. While Texans initially set out to work with smaller credit unions, the issue has been the inability on their part to underwrite the loan for themselves.

"If they don't have the capability to do that in-house, unfortunately, we can't sell them the loan," Davis said.

Launched in May 2004, Texans Commercial is the same CUSO that funded the sale of ALM First Financial Advisors LLC from its parent, Eastern Corporate Federal Credit Union in 2005. In December 2004, Texans Commercial also funded the acquisition and construction financing for Prism Hotel's purchase of the 280-room Radisson Memphis Hotel in Tennessee. Some of the CUSO's financing deals have ranged between $10 million to $30 million range. (See CU Times, Feb. 2, 2005.)

Davis said one of the main reasons for the credit union's entry into business lending came from its "high-tech, well-educated members." Many worked for companies like Texas Instruments and had become financially successful over the years. However, when some of those high-tech companies started to downsize, members launched their own businesses. Several years ago, Texans had more than 1,000 business accounts that were being managed like retail accounts, Davis said. Requests for loans came in, but at the time, Texans did not have the resources to accommodate members.

"C&D lending was very popular when we started. At the same time, we felt we could generate more margin than what auto paper was doing here in Dallas, where it is so competitive," Davis said.

The CUSO grew over time, employing more than 60 employees and bringing in fee and spread income for the organization and to meet members' financial needs. Texans described itself as a niche C&D lender, Davis said. While it wanted to concentrate its lending in North Texas, it turned to a history lesson in its decision to diversify to states like Oklahoma and North Dakota among others.

"Bankers learned a lesson back in the 1980s that to concentrate in one area, you could lose your business," Davis said. "If we would have stayed in our market, maybe it would have been a different scenario."

Texans continues to reassure its members that the financial institution is safe and sound. Business lending is still a part of its product roundup but on a smaller scale for now.

David Addison, Texans president/CEO, told members in an online letter, "While we continue to make consumer and business loans, Texans is being very prudent in doing so."

–msamaad@cutimes.com