Two Strategies (One CU) To Build Biz Lending
Coastal FCU has built a commercial lending operation in a unique way-actually, two ways.
As Pete Van Graafeiland, VP-mortgage services, explained, the credit union has two distinct MBL programs. The first provides and services the typical $50,000-$100,000 loans, such as those often seen through SBA. A separate and distinct staff services the $500,000 to $20-million loans on the commercial side.
"We started on the retail side very modestly," said Van Graafeiland. "That puttered along, and we added a second individual, and finally the board decided to really get into this business." That's when Van Graafeiland was hired.
Van Graafeiland reported that CFCU got into MBLs because of member demand from a sophisticated membership base, as the CU was formerly an IBM credit union. But it also saw the income opportunity, wanted greater asset diversification, and asset growth. "This and indirect auto lending have been two of the greatest factors in Coastal's growth," said Van Graafeiland, who joined CFCU three years ago when it had $1.1 billion in assets. Today, it has $1.6 billion.
"You have to have board support, you can't imagine how difficult it is without it," he said. "It takes a quantum leap in faith to get into the member-business lending activities."
Coastal FCU has marketed its MBL program through Van Graafeiland's own network of commercial real estate brokers, along with other networks of real estate brokers. Its major trade area is the Carolinas and Virginia, but it does make loans outside those markets on occasion. It also has a strong interaction with local CPAs, said Van Graafeiland.
"We also get a lot of referrals from commercial banks. Commercial banks don't want to do smaller, long-term, fixed-rate loans. We do. That's our niche," said Van Graafeiland. "They like to do construction lending, and do a lot of it to our members. Attorneys are another great source of business. Often, attorneys who are closing our loans refer their clients to us. They like our documents and like our flexibility. We have no prepayment penalties. We've turned that into an asset, I know a lot see it as a liability"
CFCU annually originates $60-$80 million in loans, and has been participating out a large percentage of those loans in order to remain under the MBL cap for FCUs.
CFCU's Commercial Loan Program was designed to be "user friendly" according to Van Graafeiland. That program makes loans from $500,000 to $20 million. It uses a prime flatting or fixed-rate loan with spreads over Treasury. Terms are five to 10 years, without prepayment penalty. Amortizations are 10 to 30 years, depending on product type, with the preponderance being 30-year amortizations, while retail is based on anchor tenant's remaining lease term plus up to five-years "hang out" for land value.
On commitments, its typical term is 60 days with the rate lock and funding period, with a floating rate thereafter. The credit union will sell a forward commitment up to 12 months. It has a good faith deposit of 1% of the loan amount (primarily to pay the legal fees.
"Our documents are onerous," he acknowledged). "It can be long and ardous but if you want to borrow from us that's the price to dance with us."
Knowing commercial real estate and how it can fluctuate is a key. Van Graafeiland pointed out that 20 years ago having a K Mart as anchor tenant was an ace in the hand for someone borrowing for a strip mall or plaza.
Similarly, Winn Dixie was a significant grocery chain that is downsizing considerably. Van Graafeiland said he's seen what has happened in commercial real estate lending in the past and the credit union treads cautiously as a result. In terms of other properties it will make loans on offices, medical offices, apartments, industrial facilities, etc.
Coastal FCU will do LTV to 80%, depending on quality type. But it monitors very closely lease rates of the property. It also requires third-party reports from a professional engineer on what over the next 10-12 years will need to be replaced or repaired.
It also has an environment reports (its law firms have environmental attorneys on staff), and gets another appraisal.
The credit union charges a minimum management fee of 5%, 1% on a 10-year minimum term, credit lease with direct rental payments deposited into a Coastal account.
It also allows borrowers to either grow or shrink the loan. It will add a second mortgage behind its first, and as noted, doesn't charge a prepayment penalty.
It charges an upfront processing fee of $6,000 that is nonrefundable. "This is a very reasonable fee. We really have very little or few complaints about the fee," said Van Graafeiland.