Commercial Real Estate Lending

If your credit union is looking to venture into the waters of the commercial real estate lending market, it’s probably best not to dive immediately into the deep end of the pool. CUs with experience in this market advocate proceeding cautiously. As you gain experience and expertise, you can more fully immerse yourself and take full advantage of having a commercial real estate lending program.

“When we began, we decided to focus on asset quality even if it meant slower growth,” says Mike Donadio, SVP/lending at $906 million Seven Seventeen Credit Union, based in Warren, Ohio. “That was the decision we made 15 years ago, and it’s been our approach ever since—to emphasize quality over growth for growth’s sake. And even though we adhere to that decision, we grew over 25 percent in commercial loans last year. ”

Currently, Seven Seventeen CU’s commercial loan portfolio is at $90 million. “It seems like the growth followed, based on how we set our priorities,” Donadio says. “I think our reputation has helped us. We’re perceived in the business community as a trusted lender.”

The Need for Board Oversight

As part of a careful and methodical approach to commercial lending, credit unions will need to rely on their boards to play a pivotal strategic role. This business line—perhaps more than any other—will require boards to be diligent in their oversight. After all, the dollar amount of a single transaction is much larger than that of an auto loan and even a mortgage for that matter.

“If you take a loss on the business side of the house, it’s generally big,” says CUES member Gail DeBoer, president/CEO of $850 million SAC Federal Credit Union, Omaha, Neb. For that reason, SAC FCU has set a policy to have its board of directors review commercial loans that exceed a set dollar amount.

As DeBoer explains, “We’ve kept that dollar amount pretty conservative because we believe it’s important that the board understands the risk that might be involved in one borrower and that they’re comfortable with it.”

Since entering the market 11 years ago, SAC FCU has grown its commercial lending program to nearly $75 million with the majority of the growth occurring in the last two to three years. Once again, it was a careful and meticulous approach that eventually fueled the growth.

“We started the business lending division in a very measured, controlled, phased-in and sound way,” says CUES member Alan Stoltenberg, SAC FCU’s chief lending officer. “First we developed what we consider to be very strong policies and procedures. We began small by focusing on loans that we were comfortable with and building our experience. Along the way, we took the time to educate our board of directors and worked with them so they were learning this process right along with us.”

At SAC FCU, the success of the commercial lending program begins with the board of directors’ oversight. “This takes place at our strategic planning meeting, where our board sets the direction and our goals for the next three to five years,” says DeBoer. “This includes determining just how involved in business lending they want us to be, and they’re very engaged in the process.”

$1 billion Arkansas Federal Credit Union has likewise found it important to have strong board oversight and involvement in its commercial lending program.

“Personally I think it’s absolutely critical that the board be involved,” says Alan Harrison, VP/member business services for this Jacksonville, Ark.-based CU. “We have an MBL committee, which consists of our president/CEO, our chief lending officer and myself, and we make it a point that our board be aware of what we’re doing.

“Any time there is a loan or an aggregate relationship over $3 million, it’s going to go before the board, and we don’t just do a rubber-stamp process. We actually sit in the board meetings with them, go through the spreads, talk about the ratios and the cash flows, and we usually include some pictures of the project.”

Arkansas FCU launched its MBL program in 2014, bringing Harrison on board the following year. Since the beginning of 2015, the credit union has grown its commercial lending portfolio from $7 million to more than $30 million. However, Harrison stresses that this robust growth was accomplished with a detailed plan in mind.

“We have been very strategic, meticulous and cautious,” he explains. “We gave careful consideration to the markets we wanted to be in.”

Helping Arkansas FCU in this endeavor was Hipereon Inc. “They helped us identify what segments of the market to go after and what products we needed to have in place.”

Diversification and Education

Commercial real estate lending has proved a good fit for many CUs, giving them the opportunity to diversify their business and develop a strong member base that includes both consumer and business members.

“When you look at the overall loan portfolio that is in existence for member business lending in the credit union space, there’s a little over $52 billion in loans right now, about 95 percent of which has either been done for commercial real estate or is secured by commercial real estate,” reports Jim Devine, CEO of Hipereon Inc., Redmond, Wash. Devine is also lead faculty for CUES’ business lending schools and CUES Advanced Director Strategy Seminar, which will teach directors about how to envision the strategic context for member business lending.

“Credit unions have built a comfort level with commercial real estate based on its tangible nature,” Devine adds. “They are comfortable with the collateral, and they don’t see real estate lending as having as many moving parts as commercial or industrial loans, where you’re lending money to a functioning business and you have to understand the mechanics that dictate cash flow that’s unique to the loan design for that particular business.”

As boards set strategic direction for their credit unions’ commercial lending programs, it’s important that they remain knowledgeable and informed about what these programs entail.

“They should surely have an understanding of what level of concentration the loan portfolio has that’s dedicated either to commercial real estate or construction,” Devine says. “They should also be familiar with the processes that are in place to underwrite and manage those credits.”

As part of its oversight, the board should ensure that the CU is not venturing into lending areas that are beyond the organization’s capabilities, Devine stresses.

Another key component that boards should understand is the CU’s underwriting mechanics and administration capability. “They need to know what you’re doing is what is planned to be done, and it’s not being cobbled together cavalierly,” Devine says. “That’s accomplished by having the right people with the right training as well as systems in place that allow” monitoring.

Devine also stressed keeping up on the pending regulations from the National Credit Union Administration, since they will have a major impact on CUs’ MBL activities when the rules go into effect Jan. 1, 2017.

Regular education is key to keeping the board adequately informed about the complexities of commercial lending. And, in many cases, directors themselves can be an excellent source of expertise.

Arkansas FCU is benefitting from the knowledge and experience present on its board of directors, including public accounting, law, business, military leadership and government service.

While “there’s a tremendous amount of prior and current institutional knowledge on the board” of Arkansas FCU, according to Chairman Jerry Spratt, a CUES Director member, he and other board members are dedicated to continuous MBL learning.

“The board has taken a hands-on governance approach concerning the MBL program, because it’s new and also because these loans are fairly substantial,” Spratt reports. “It’s been a great process designed to increase our knowledge of the program, which requires board approval for secured loans in excess of $3 million and for unsecured loans in excess of $100,000.”

At SAC FCU, Chair Jim Rockwood sees a diverse board as being better able to serve its function of offering effective strategic input and oversight. “Our current board includes CPAs, attorneys and a university professor, which gives us a broad range of expertise and experience to assess and evaluate the program,” he says.

Working together, the board and staff of a credit union can create great results.

“I see this as an opportunity for us to set the streets on fire,” Harrison says of member business services in general and commercial lending in particular. “When people think of credit unions, many times they think of their house or their automobile. We want to realign our members’ thinking so they also see us as offering support for small businesses, large businesses—you name it. We have the capacity and the expertise to do everything that the big guys do, and we want to earn the opportunity.”

Diane Franklin is a freelance writer based in Missouri.