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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
Questions?
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