As Population Soars, A Niche Is Found
In the Dallas/Ft. Worth metroplex, it seems the only thing moving in faster than people is banks.
Still, the $1.3-billion Texans Credit Unions, founded 50 years ago to serve employees of Texas Instruments but now open to the community, believes it has found a commercial lending niche in a market growing by as many as 150,000 people per year.
John O'Shea, president of Texas Commercial Capital, LLC,) told a meeting hosted by WesCorp and Callahan & Associates that in the last two years 11 more banks have entered the market and built 250 more branches. Overall, approximately 165 banks are operating in north central Texas, which he described as having had no "real credit union alternative for commercial lending." Of those banks, he added, the top five control 60% of the market and the largest locally-owned institution is number 10 on the list.
Where Texans saw an opportunity, said O'Shea, was in the commercial middle market, loans in the $1 million to $20-million range. Not only was there demand, he observed, but it also discovered its risk-adjusted rate of return on its indirect auto lending portfolio was actually below cost of funds, meaning it needed better returns on loans.
O'Shea said Texans investigated microlending/SBA, private banking ("something credit unions typically don't focus on"), commercial and industrial ("typically owner-operator, equipment loans, etc."), industry niche lending (such as healthcare, churches, hospitality), and general commercial real estate.
"We decided to focus on commercial real estate lending, which typically has a good primary and secondary sources of repayment," said O'Shea. "We knew as a credit union getting into this there would be a lot of eyes looking at us, and we decided to get into something that should the market move sideways we would have a better chance of not experiencing a loss."
Among the types of CRE lending Texans has begun to offer are Owner Occupied, Construction and Development, and Conduit/Income Producing Properties, Value Add Niche (someone buys a C property and repositions it as a B, for instance), and other niche real estate.
"We focused on the C&D and the Value Add because we knew we had fairly limited power with the 12.5% cap (for FCUs), and the credit union was looking for relationship lending," said O'Shea.
Texans developed a team with three separate and distinct functions-lending, credit and loan administration. Each has its own checks and balances and has "veto power" over the loan. Initially, the credit union focused solely on the lending side of the business relationship until it was able to put in place a data processing solution that would enable it to handle businesses' cash-management needs.
"The credit union wanted us to focus on the ancillary business," he explained. "But that can have problems with it, as well. Some core processing systems are not meant to handle the cash management systems."
"Bankers typically have a pretty high opinion of themselves," continued O'Shea. "They often feel they can run the person's business better than they can. We decided we have good members, let's make the money available to them and then let them do what they do best."
Response has been positive, said O'Shea, as word spread quickly about TCU's business lending.
Business Owners 'Click' With CU Concept
"There's something that really clicks with business owners about credit unions' cooperative structure," said O'Shea, a former banker, who added, "I am a convert. I've seen the light and have turned from the dark side."
Commercial loans outstanding have grown to $470 million, with strong credit quality-$0 in delinquencies and $0 critiziced assets. Moreover, the credit union has loved the yield (approximately 8% today) and the fees, typically 1% origination, and the floating rate nature of the debt.
"Unfortunately, we were a victim of our own success. We had to move into a CUSO," said O'Shea.
To launch the Texas Commercial Capital, it got a capitalization of $2 million and a small warehouse line of credit from Texans and formed TCC as a wholly-owned commercial lending CUSO. It has subsequently procured warehouse lines from other institutions, too.
O'Shea noted the CUSO allows TCC to operate without being subject to either fields of membership or member business lending restrictions. It has no legal lending limits or concentration issues, an issue on which it obtained a letter of opinion from NCUA. In short, the CUSO allows Texans CU on a consolidated basis to own more commercial loans than it otherwise would be allowed to.
TCC has been able to formulate strategic alliances with other credit unions and is even considering selling ownership to key partners. One concern expressed by other CUs was when the commercial loans were being made by Texans CU that it would cherry pick the quality loans when it sought out others for participations. The CUSO structure has minimized some of those worries, he said.