Business Services CU Conference

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DependabilityExperienceSimplicityValue

CU Conferences – Business Lending and Other Services

Gary Hess, PresidentRTE Financial Services, LLC

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Weather the Tough Times…

or Summer in Minnesota!

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July 27, 2011 Walking back from lunch at the Lake Calhoun Beach Club

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Target FieldThe summer we do not tell anyone about.

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Agenda• The Economic Climate – 2007 to 2010

• Business Lending Survey

• Conclusions

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Common Assumptions• Banks quit making commercial loans. Did

they?

• MBL delinquencies sky rocketed. Did they?

• Commercial Real Estate Loans crushed the MBL CUSO providers. Did it?

• MBL has not recovered due to the economy. Has it?

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Credit Market - NFIB• 2011 – 92% are having needs met or do not

need to borrow (only a 2 percentage point variation since 2007)

• 2011 – Only 3% list credit as #1 business problem

• Loan availability – worst in 2009 and 2010. About half way back to 2007 levelsSource: National Federation of Independent Businesses’ Small Business Economic Trends Report 6/11

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NFIB Loan AvailabilityYear Loan availability2007 -52008 -72009 -132010 -142011 -10

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What does the Federal Reserve

have to say about this??

Bank Commercial Lending2007 to May 2011

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Bank Performance 2007 to Present• October 2008 - peaked at 1.6 trillion dollars

• January 2011 - lowest at 1.2 trillion dollars

• October 2010 - 1.211 trillion dollars

• Current - 1.263 trillion dollarsSource: Federal Reserve Bank of St. Louis research

Member Business Lending2007 to 2011

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Member Business Loan Participation

2089 of 7651 credit unions participating• 2007 – 25.2%

• 2008 – 27.2%

• 2009 – 28.6%

• 2010 – 30.2%

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Member Business Loan Participation

• Year over year rate has been up and down • Total MBLs outstanding is up:– 2007 – 17%– 2008 – 18.1%– 2009 – 9.9%– 2010 – 6.2%

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How did MBL CUSOs Handle the Recession?

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Survey Purpose• What has been the MBL CUSO experience

from 2007 to 2011?• What did they do to counter the economic

reality?• Are MBL CUSOs still a viable alternative for

MBL Lending?

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Survey Questions• Primary types of loans in 2007• Performance issues: 2007 to 2010• Reaction to the issues: What worked?• Loan performance variation?• Underwriting adjustments?• MBL CUSOs vs. Banks• The Recessions Financial Impact?• Permanent changes to minimize future issues?

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Loan Portfolio Type – 2007• “Consensus”:– Commercial Real Estate– Term– Lines of Credit

• SBA – 40%• 1 – business acquisition, construction,

commercial investment/owner occupied

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Commercial Loan Volume• 2007 to 2008 – half up; ¼ down; ¼ even• 2008 to 2010 – up, down but by 2010 even or up• One participant example– 4 to 5 years to lend its first $1 Billion– 18 months (09-10) to loan its next $1 Billion

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Loan Performance Issues 2007 to 2010

• General Recession issues– Weakening of business financials

• Unexpected Issues– Lack of credit union understanding of SBA

benefits– Lack of understanding by examiners– Easy credit from competition (banks)

looking for loans

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Loan Performance Issues 2009

Business Loan Charge Offs – Dec. 31, 2009• All Banks – 2.45• Banks < 1B in assets – 1.59• All Credit Unions - .65• Survey Group - < .5

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Loan Performance Issues 2010

Business Loan Charge Offs – Dec. 31, 2010• All Banks – 2.27• Banks < 1B in assets – 1.51• All Credit Unions - .82• Survey Group – increased by at least 60%

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Response to Loan Issues• Increased portfolio management– Internal groups and/or personnel– Working with owners

• Aggressive poor credit management– Loan reviews, reports, etc

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Loan Performance Variations2007 - 2010

• 40% saw it equally across all loan types• Other– Small unsecured– Commercial Real Estate (CRE)– SBA???

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Underwriting Standards2007 - 2010

No major changes but more a “tweaking” of the process• Verify Guarantor capability• Closer review of tenant finances• Use more SBA • Lower LTV

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CUSO vs Banks• Majority reported banks losing

customers/members– Not lending– Not renewing– Declines

• Majority made more loans• Fewer loans: due to poor credit quality and

not banks stopping lending

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Financial Impact• CUSO – majority saw it as positive for the CUSO– Better financial performance– Credit Unions need CUSOs

• CUSO – unexpected negative for the CUSO– Given negative economy CUSO owners leery

of investing• Members – generally good– Lower fees– More owners

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So, what have we learned and what should we do about

MBLs?• Turn off Fox Business Channel• Turn off CNBC • Embrace the MBL product; research the MBL

CUSO; trust the basics.

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Looking to the Future• Tweaking of the underwriting– Repayment sources– Monitor and focus– Change loan terms: reduce amortization– Lower LTV

• Diversification– Some had already done so

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Conclusions• MBL CUSOs were well positioned• No major changes• Many minor changes• MBL CUSOs continue to bring value to owners

and associate members

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Thank you and have a great summer.

Come visit me in Minnesota anytime!

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DependabilityExperienceSimplicityValue

Gary Hess320-281-9765

[email protected]

Questions?