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April 2, 2007
Union push | In search of customers, credit unions make inroads into Maine's commercial loan market
By Whit Richardson
John Reed, president and CEO of Maine Savings Federal Credit Union in Hampden, is in familiar territory. During the late 1980s, while a commercial banker at Bangor Savings Bank, Reed watched his employer carve out a niche serving small businesses in the state while the larger banks like Peoples Heritage and Maine Savings Bank were preoccupied with expansions, consolidations or going public.
Now, he says, it's happening again, but this time with different players. Banks have continued to consolidate and those same small-business owners and entrepreneurs are finding fewer avenues to secure small-business loans, Reed says. "If consolidating banks want to drive numbers, they don't focus on Maine," he says. "They head south, so resources leave the state."
Now it's the member-owned, nonprofit credit unions stepping in and using their service-oriented, community focus to address Maine's small-business community, which has not been a traditional customer base for credit unions. "It's almost like history repeating itself," Reed says.
In 2006, 31 out of 73 credit unions in Maine reported $68 billion in outstanding business loans, a cumulative increase of 37.8% over the last three years, according to the Credit Union National Association, a Madison, Wis.-based trade group.
Credit unions across the nation are expanding their services to attract business customers. Last year, 22% of the country's 8,698 credit unions had outstanding business loans worth $21.5 billion, a 159% increase over the past three years, according to CUNA.
Credit unions see expanding their services to attract the small business community as an opportunity, but they feel it's also an obligation to serve their members, many of whom own businesses, says Michael Hales, a partner at The Rochdale Group, an Overland Park, Kan.-based consulting firm that serves credit unions. Nationwide, Hales estimates that 10%-15% of total credit union membership, about 87 million, either own or have a controlling stake in a business. "The small business economy has really become the grassroots backbone for the U.S. economy and credit unions realize that," Hales says.
But it's been an uphill battle. Credit unions can't simply jump in headfirst and begin originating business loans overnight. Fact is, many small credit unions don't have the expertise required to originate and service business loans. "Most credit union employees know how to service a car loan, but don't have a clue when it comes to understanding a commercial loan application," Hales says. "To get involved in business lending, credit unions need people well-trained as business lenders, which means hiring them from commercial banks. And they're expensive people."
Hales estimates a credit union could expect to spend $250,000-$400,000 the first year to set up its own commercial lending department ˆ an out-of-reach investment for many small credit unions. Plus, the volume of potential business loans a credit union could service might not warrant the expense of hiring a full-time commercial lender. In the 1990s, Congress capped credit unions' business loan amounts at 12.25% of assets. There's a bill before Congress to increase that cap to 20%, Hales says.
Expertise needed
However, there are ways to overcome these barriers to entry. Credit unions around the country are pooling resources to form Credit Union Service Organizations to help credit unions offer business lending services. CUSOs are not, by any means, a new phenomenon, but they have not traditionally been used to help credit unions with business lending. Currently, Hales says, there are around 30 CUSOs in the country that help hundreds of small credit unions without commercial loan departments offer business loans. "Efficiencies and economies of scale are what's behind that model," he says.
The Maine Credit Union League, a Westbrook-based trade association, in 2005 partnered with five Maine credit unions to form Business Lending Solutions as a subsidiary of CUSO Mortgage Corp., which was founded in 1993 to offer credit unions similar support in the mortgage business. BLS works with credit unions in the state who want to offer their members business loans, but without the added expense of hiring a full-time commercial lender. Maine Savings' Reed heads both CUSO Mortgage and BLS at a joint facility in Hampden.
BLS employs two full-time commercial lenders and an analyst who essentially act as a back office operation for about 10 Maine credit unions. Those credit unions begin by paying a minimum $750 underwriting fee to BLS, which also levies an annual service fee of 0.5% of the principle. (On a $200,000 loan, that fee would start out at $1,000 a year.) BLS' business loan portfolio increased by roughly $10 million last year, Reed says, which he admits is not too impressive in the commercial lending world. But he expects the portfolio to keep growing. "To me, the growth potential for credit unions is astonishing," Reed says. "Small-business lending is really going to fuel the growth of credit unions in the future."
But not all credit unions look to BLS to help them enter the business-lending arena. Evergreen Credit Union, which has three locations in Portland, Naples and Windham and is open to anyone who lives or works in Cumberland County, began offering its members business loans two years ago. Evergreen had a leg up on most credit unions because its president and CEO, Tucker Cole, was a commercial banker for 19 years before taking the reins at Evergreen in 1996.
Cole piloted the business lending operations the first year ˆ a period he jokes resulted in a "whopping" five commercial loans. But in 2006, when Cole hired his first full-time commercial lender, Evergreen increased its business loan portfolio 150%, to 27 business loans. (In 2006, Evergreen also began offering commercial real estate loans.) And, as of March 16 this year, Evergreen already had 13 new business loans on the books, averaging $150,000 each. Those may be modest numbers, but Cole says they haven't even started marketing their business services. "We had such a pent-up demand," Cole says. "We've had members that have been with us for years and many have had deposit accounts, but were waiting for us to get into the lending side."
Cole expects Evergreen's business loan portfolio to increase another 150% this year, and he also plans to hire a second commercial lender next year to keep up with expected demand. Evergreen also recently became one of only eight credit unions certified by the U.S. Small Business Administration as a preferred lender.
Evergreen is rolling out other business services in an effort to attract more business clients. In April, Evergreen plans to introduce remote capture, which allows its business customers to bypass the daily trip to Evergreen to drop off checks, and instead scan them in from the office. (For more on remote capture, see "Remote control" on page 24.) Evergreen also joined a national network of credit unions that share branches, which means a business customer of Evergreen's could enter any one of roughly 50 credit union locations in the state, or 2,500 nationwide, and deposit checks or work on accounts like they were in an Evergreen branch. "This is all part of our business plan for commercial customers," Cole says.
But despite the new services to attract more business customers, Cole says credit unions aren't competing with big banks for big customers. In general, Evergreen targets businesses with less than $10 million in annual revenues. "We focus on smaller businesses," Cole says. "The UNUMs of the world will not be a customer of Evergreen Credit Union, and they're not the target market for us."
Service with a smile
Credit unions still compete with regional banks for business loans. But one area where Cole says credit unions are competitive is in the customer service department. Mary McAleney, the SBA's Maine district director, says it's the community and member focus that sets credit unions apart from other financial services companies. "I think what credit unions bring is the ability and authority to lend on a handshake or on their gut," McAleney says. "I think it's wonderful. The more avenues there are for Maine business owners or entrepreneurs to raise capital, the better off we all are."
Evergreen's Cole says operating in just three locations ˆ in Portland, Windham and Naples ˆ helps the credit union stay involved in its communities. That local focus also helps Evergreen stay involved with the immediate business community. It allows Cole to visit credit union members at their businesses. It's a model he says doesn't make much sense for huge, multi-state banks. "But for us," he says, "it makes perfect sense."
It also makes perfect sense to William Boyle, owner of Portland-based Rainmaker Irrigation, which he says books roughly $3 million in annual sales. A personal banking customer at Evergreen for about 10 years, Boyle was attracted to the credit union's low fees and loan rates, and has secured a handful of automobile loans with Evergreen for company vehicles. But when it came to business loans he always had to look elsewhere.
But that is likely to change now that Evergreen has entered the commercial lending business. In fact, Boyle last fall launched a new subsidiary business, Rainmaker Springwater, and took out a $250,000 commercial real estate loan through Evergreen to refinance the business' building. "If I had the opportunity to give them all my business, I would, because of that personal touch," Boyle says. "They go out of their way for sure, much more than other banks do."
And besides their claim of superior customer service, credit unions also have a competitive edge when it comes to their rates and fees, says Dave Rossignol, president and CEO of NorState Federal Credit Union in Madawaska. Because of credit unions' nonprofit status, their actions are less dictated by driving numbers and the bottom line. "Credit unions are usually a good bargain because they operate under the premise of lower fees," Rossignol says.
Take car loans: In 2004 the average rate charged by Maine's credit unions on a new car loan was 5.17%, according to a report released last year by South Portland-based Planning Decisions Inc. for the Maine Credit Union League. For banks, the average rate was 6.51%.
And lower fees are a godsend for the small-business owner looking to keep expenses down. "Small business is the backbone of the state's economy," says John Murphy, president of the Maine Credit Union League. "So, naturally, small businesses are looking for competitive sources that can assist with small-business loans."
But, while the nationwide 159% increase in lending among credit unions may seem large, the actual number of credit unions involved in business lending is still extremely small, says Mike Schenk, vice president of economics and statistics at CUNA. Nationally, credit unions have roughly $21.5 billion in member business loans, which translates to less than one percent of all the outstanding business loans from the nation's financial institutions. In Maine, credit unions have managed to grab just 0.37% of the business lending market. But Schenk says credit unions, while still small, are a quickly growing presence in the commercial loan market. "I think that more and more small-business owners will recognize that credit unions are a great alternative," he says, "and the growth rate will remain quite high."
To continue to grow, credit unions have to overcome the perception that they're only a place to go for car loans and savings accounts. "It takes a long time," Reed says. "If you drive it into business owners' heads that you don't offer business loans, it's tough to say, 'Hey we're doing it now.'"
Now, he says, it's happening again, but this time with different players. Banks have continued to consolidate and those same small-business owners and entrepreneurs are finding fewer avenues to secure small-business loans, Reed says. "If consolidating banks want to drive numbers, they don't focus on Maine," he says. "They head south, so resources leave the state."
Now it's the member-owned, nonprofit credit unions stepping in and using their service-oriented, community focus to address Maine's small-business community, which has not been a traditional customer base for credit unions. "It's almost like history repeating itself," Reed says.
In 2006, 31 out of 73 credit unions in Maine reported $68 billion in outstanding business loans, a cumulative increase of 37.8% over the last three years, according to the Credit Union National Association, a Madison, Wis.-based trade group.
Credit unions across the nation are expanding their services to attract business customers. Last year, 22% of the country's 8,698 credit unions had outstanding business loans worth $21.5 billion, a 159% increase over the past three years, according to CUNA.
Credit unions see expanding their services to attract the small business community as an opportunity, but they feel it's also an obligation to serve their members, many of whom own businesses, says Michael Hales, a partner at The Rochdale Group, an Overland Park, Kan.-based consulting firm that serves credit unions. Nationwide, Hales estimates that 10%-15% of total credit union membership, about 87 million, either own or have a controlling stake in a business. "The small business economy has really become the grassroots backbone for the U.S. economy and credit unions realize that," Hales says.
But it's been an uphill battle. Credit unions can't simply jump in headfirst and begin originating business loans overnight. Fact is, many small credit unions don't have the expertise required to originate and service business loans. "Most credit union employees know how to service a car loan, but don't have a clue when it comes to understanding a commercial loan application," Hales says. "To get involved in business lending, credit unions need people well-trained as business lenders, which means hiring them from commercial banks. And they're expensive people."
Hales estimates a credit union could expect to spend $250,000-$400,000 the first year to set up its own commercial lending department ˆ an out-of-reach investment for many small credit unions. Plus, the volume of potential business loans a credit union could service might not warrant the expense of hiring a full-time commercial lender. In the 1990s, Congress capped credit unions' business loan amounts at 12.25% of assets. There's a bill before Congress to increase that cap to 20%, Hales says.
Expertise needed
However, there are ways to overcome these barriers to entry. Credit unions around the country are pooling resources to form Credit Union Service Organizations to help credit unions offer business lending services. CUSOs are not, by any means, a new phenomenon, but they have not traditionally been used to help credit unions with business lending. Currently, Hales says, there are around 30 CUSOs in the country that help hundreds of small credit unions without commercial loan departments offer business loans. "Efficiencies and economies of scale are what's behind that model," he says.
The Maine Credit Union League, a Westbrook-based trade association, in 2005 partnered with five Maine credit unions to form Business Lending Solutions as a subsidiary of CUSO Mortgage Corp., which was founded in 1993 to offer credit unions similar support in the mortgage business. BLS works with credit unions in the state who want to offer their members business loans, but without the added expense of hiring a full-time commercial lender. Maine Savings' Reed heads both CUSO Mortgage and BLS at a joint facility in Hampden.
BLS employs two full-time commercial lenders and an analyst who essentially act as a back office operation for about 10 Maine credit unions. Those credit unions begin by paying a minimum $750 underwriting fee to BLS, which also levies an annual service fee of 0.5% of the principle. (On a $200,000 loan, that fee would start out at $1,000 a year.) BLS' business loan portfolio increased by roughly $10 million last year, Reed says, which he admits is not too impressive in the commercial lending world. But he expects the portfolio to keep growing. "To me, the growth potential for credit unions is astonishing," Reed says. "Small-business lending is really going to fuel the growth of credit unions in the future."
But not all credit unions look to BLS to help them enter the business-lending arena. Evergreen Credit Union, which has three locations in Portland, Naples and Windham and is open to anyone who lives or works in Cumberland County, began offering its members business loans two years ago. Evergreen had a leg up on most credit unions because its president and CEO, Tucker Cole, was a commercial banker for 19 years before taking the reins at Evergreen in 1996.
Cole piloted the business lending operations the first year ˆ a period he jokes resulted in a "whopping" five commercial loans. But in 2006, when Cole hired his first full-time commercial lender, Evergreen increased its business loan portfolio 150%, to 27 business loans. (In 2006, Evergreen also began offering commercial real estate loans.) And, as of March 16 this year, Evergreen already had 13 new business loans on the books, averaging $150,000 each. Those may be modest numbers, but Cole says they haven't even started marketing their business services. "We had such a pent-up demand," Cole says. "We've had members that have been with us for years and many have had deposit accounts, but were waiting for us to get into the lending side."
Cole expects Evergreen's business loan portfolio to increase another 150% this year, and he also plans to hire a second commercial lender next year to keep up with expected demand. Evergreen also recently became one of only eight credit unions certified by the U.S. Small Business Administration as a preferred lender.
Evergreen is rolling out other business services in an effort to attract more business clients. In April, Evergreen plans to introduce remote capture, which allows its business customers to bypass the daily trip to Evergreen to drop off checks, and instead scan them in from the office. (For more on remote capture, see "Remote control" on page 24.) Evergreen also joined a national network of credit unions that share branches, which means a business customer of Evergreen's could enter any one of roughly 50 credit union locations in the state, or 2,500 nationwide, and deposit checks or work on accounts like they were in an Evergreen branch. "This is all part of our business plan for commercial customers," Cole says.
But despite the new services to attract more business customers, Cole says credit unions aren't competing with big banks for big customers. In general, Evergreen targets businesses with less than $10 million in annual revenues. "We focus on smaller businesses," Cole says. "The UNUMs of the world will not be a customer of Evergreen Credit Union, and they're not the target market for us."
Service with a smile
Credit unions still compete with regional banks for business loans. But one area where Cole says credit unions are competitive is in the customer service department. Mary McAleney, the SBA's Maine district director, says it's the community and member focus that sets credit unions apart from other financial services companies. "I think what credit unions bring is the ability and authority to lend on a handshake or on their gut," McAleney says. "I think it's wonderful. The more avenues there are for Maine business owners or entrepreneurs to raise capital, the better off we all are."
Evergreen's Cole says operating in just three locations ˆ in Portland, Windham and Naples ˆ helps the credit union stay involved in its communities. That local focus also helps Evergreen stay involved with the immediate business community. It allows Cole to visit credit union members at their businesses. It's a model he says doesn't make much sense for huge, multi-state banks. "But for us," he says, "it makes perfect sense."
It also makes perfect sense to William Boyle, owner of Portland-based Rainmaker Irrigation, which he says books roughly $3 million in annual sales. A personal banking customer at Evergreen for about 10 years, Boyle was attracted to the credit union's low fees and loan rates, and has secured a handful of automobile loans with Evergreen for company vehicles. But when it came to business loans he always had to look elsewhere.
But that is likely to change now that Evergreen has entered the commercial lending business. In fact, Boyle last fall launched a new subsidiary business, Rainmaker Springwater, and took out a $250,000 commercial real estate loan through Evergreen to refinance the business' building. "If I had the opportunity to give them all my business, I would, because of that personal touch," Boyle says. "They go out of their way for sure, much more than other banks do."
And besides their claim of superior customer service, credit unions also have a competitive edge when it comes to their rates and fees, says Dave Rossignol, president and CEO of NorState Federal Credit Union in Madawaska. Because of credit unions' nonprofit status, their actions are less dictated by driving numbers and the bottom line. "Credit unions are usually a good bargain because they operate under the premise of lower fees," Rossignol says.
Take car loans: In 2004 the average rate charged by Maine's credit unions on a new car loan was 5.17%, according to a report released last year by South Portland-based Planning Decisions Inc. for the Maine Credit Union League. For banks, the average rate was 6.51%.
And lower fees are a godsend for the small-business owner looking to keep expenses down. "Small business is the backbone of the state's economy," says John Murphy, president of the Maine Credit Union League. "So, naturally, small businesses are looking for competitive sources that can assist with small-business loans."
But, while the nationwide 159% increase in lending among credit unions may seem large, the actual number of credit unions involved in business lending is still extremely small, says Mike Schenk, vice president of economics and statistics at CUNA. Nationally, credit unions have roughly $21.5 billion in member business loans, which translates to less than one percent of all the outstanding business loans from the nation's financial institutions. In Maine, credit unions have managed to grab just 0.37% of the business lending market. But Schenk says credit unions, while still small, are a quickly growing presence in the commercial loan market. "I think that more and more small-business owners will recognize that credit unions are a great alternative," he says, "and the growth rate will remain quite high."
To continue to grow, credit unions have to overcome the perception that they're only a place to go for car loans and savings accounts. "It takes a long time," Reed says. "If you drive it into business owners' heads that you don't offer business loans, it's tough to say, 'Hey we're doing it now.'"
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