Photo of the side of a commercial building with a clear sky behind it.

Lending on Real Estate Collateral

By Nick Reynolds, VP/Credit Services Manager

The risks associated with business lending differ significantly from those associated with traditional consumer lending. While consumer information is still an important part of knowing your member, the types of risks associated with commercial loans tend to be more varied and wider in scope. This article is one in a series to help credit unions more clearly understand some of the unique risks of business lending.

If you are a fan of the 1993 Steven Spielberg movie Jurassic Park, you may recall the memorable words of Dr. Ian Malcolm (as played by Jeff Goldblum): “Your scientists were so preoccupied with whether or not they could that they didn’t stop to think if they should.”

So it goes with real estate lending. Huge swings in commercial and multi-family real estate valuations since the financial crisis have rightfully given lenders pause (Fig. 1). Historically, the NCUA has authorized credit unions to lend up to a maximum 80% advance rate on commercial real estate. Recent changes to NCUA’s regulations have removed this prescriptive limit, but it still begs the question of whether you should consider going to 80% loan-to-value (LTV), or even higher, on a particular request.

One question I often receive is: Why is an 80% LTV ratio considered the industry standard for determining adequate collateral coverage? One way to look at this is that 80% represents the breakeven ratio on a typical commercial property, if it goes to foreclosure. You can estimate approximately 10% of property value will be spent on costs associated with the foreclosure process, including legal expense, carrying costs, any needed property repairs, and professional management. Once you factor in the realtor’s commission and any discount the buyer negotiates because it is a foreclosure, total costs may easily reach 20% of property value.

There are a number of factors you should consider when you look at a real estate property. In order to be competitive with other lenders, you often will need to advance 80% to win a deal. Under many circumstances, this will be fine. But you need to consider a few important aspects before approving the loan.

One key factor is the reliability of the appraisal. A real estate appraisal should include several “comparables” or “comps”—nearby properties that are similar in use, condition, and size to the subject property. The more closely these comps resemble your collateral, the greater your confidence will be in its appraised value. One home among a thousand of similar homes, with close, recent comps, will provide you with a high degree of confidence. On the other hand, your level of confidence will be much lower on a property with no local comps or recent nearby sales. After all, an appraisal is simply an educated opinion of value. Some of those opinions are supported better than others. You should take into account the levels of confidence and potential variability in the value in your advance rate.

Similarly, some properties are inherently more marketable. For example, an apartment building, a tilt up concrete warehouse with office space, and many types of retail locations are of general interest and the pools of potential buyers are large. But certain special-use properties don’t offer that same level of general appeal. Such properties include bowling alleys, car washes, gas stations and convenience stores, hotels, water parks, golf courses, and movie theaters. If the property only serves a single best use, you should consider a lower advance rate, because the pool of potential buyers is quite limited. Combined with the fact that, in a foreclosure scenario, the likelihood is high that local market conditions may not support that type of business in that specific location, you are going into a sale at a disadvantage.

There are other factors that may adversely impact the salability of your collateral. Rural locations often have a more limited market, and a lower advance rate is often warranted. The quality of leases and tenants may also impact the value. If the borrower holds a long term lease to a single tenant, the performance of that tenant has an outsized influence on property cash flows, and you may wish to reduce your advance rate. Also, if the current leases are below the market rate the appraiser used, you would want to reduce the advance rate.

Lastly, make sure to consider local economic and business conditions. Some markets, including major metropolitan areas and popular tourist destinations, tend to see much greater volatility in real estate prices than other, more stable areas. If you lend in an area that sees such high fluctuations in property values, consider using a lower standard advance rate than 80%.

Remember that your personal familiarity with your borrower and the local market are major advantages and should factor strongly in your underwriting decisions.


Two people shaking hands

Five Keys to Growing Business Deposits – One Credit Union’s Story

By Larry Middleman, President/CEO

Credit unions are looking to build long-term, meaningful relationships with their business members. Leading business lending credit unions realize that a robust, comprehensive deposit program is often the best way to capture the full relationship of larger, more sophisticated operating businesses.

At CU Business Group’s 2016 National Business Services Conference in Reston, Virginia, Mike Blosser, vice president of business services with Interra Credit Union presented a workshop on “Reaching New Levels in Business Deposits”.

Mike Blosser, Interra Credit Union

Mike Blosser, Interra Credit Union

Interra Credit Union ($1 billion, Goshen, IN) has long focused on the agricultural sector.  With 16 branches and 67,000 members, the Credit Union was embarking on a new strategic vision to serve 100,000 members by 2019. In support of this vision, Interra’s senior management has identified growing business core deposits as a key to the cooperative’s long-term success.

Yet management recognized that the Credit Union faced several daunting challenges in achieving this objective. The first was deciding how to pivot focus from its traditional reliance on small business and consumer members, to larger companies that had a need for cash management and other higher-end capabilities.

The Credit Union also bumped up against the limited operational and reporting capabilities of its core system, and needed to bridge critical training gaps within the IT and eServices departments, as well as among front-line staff.

Bob Brenneman, Director of Lending at Park View Federal Credit Union ($168 million, Harrisonburg, VA) a CU Business Group conference attendee, sat in on Interra’s session. The topic was timely for his organization.

“We are figuring out where we want to be in a couple of years from now,” Brenneman said. “We need to do a lot of strategic planning, get some expertise, and hire a few more people to make that next step. We want to offer more services to capture the full business relationship because we have just been so focused on the lending side.”

As Interra’s management dove into their project, they discovered five keys to creating a successful business deposits program, including:

1. Implement the right technology

At the time, Interra was in the process of implementing Q2, an omni-channel digital banking solution. The Credit Union specifically chose Q2 because it was built on a business banking platform, a rarity in an industry that often takes a “consumer-first” approach. This gave Interra executives the confidence that Q2 would be able to meet the needs of its sophisticated commercial clients.

The Q2 platform also includes a built-in business online banking solution, eliminating the need to integrate with yet another vendor.

2. Ensure the right product mix

From remote deposit capture to sweep accounts, from positive pay to business online banking, Interra was intent on offering commercial clients a full suite of electronic services to address every current need and anticipate future growth.

Prior to 2014, the Credit Union’s business product mix was extremely limited, including just one checking account and a few services such as a debit card, a business credit card, and online banking services built on the consumer platform.

Fast forward to today, and Interra now offers four distinct analysis checking accounts to address the unique needs of a variety of businesses, a true business debit card, and two types of credit cards (with EMV). The Credit Union also upgraded to a robust business online banking platform, supports online account opening, and offers a full treasury management suite including ACH, remote (and mobile) deposit capture, online wire transfers, positive pay, and multiple user capabilities, all available across a range of devices.

3. Staff for success

In his talk, Blosser stressed the importance of ensuring the team is ready and energized to serve the complex commercial market. Since 2014, Interra has aggressively grown the business services department, which includes a business development manager, a treasury management officer, a business services specialist, two business lending specialists, and a credit analyst. The commercial lending team doubled in size from two to four loan officers.

The Credit Union incentivizes its lenders to keep them engaged and focused on growing the portfolio. However, rewards are based on ongoing portfolio performance and loan quality, instead of sales goals, ensuring that individual and Credit Union motives are fully aligned.

4. Invest in comprehensive training

In the past, the Credit Union’s eServices department handled all new electronic banking setups for business members, as it does for consumer members. Yet without a background in business services, eServices staff didn’t have a strong understanding of business member needs.

Recognizing that business development officers are in the best position to serve business members and capitalize on opportunities to grow relationships, management trained them to set up business members on online banking, remote deposit services, and other treasury management and electronic services. The results: growth in eServices adoption and improving member satisfaction.

Interra also offers training in business products to all employees, allowing the entire team to engage in positive and meaningful conversations with business members with less anxiety.

5. Create positive brand awareness

Once the systems and infrastructure are in place, an expanded product mix is deployed, and key sales and service personnel are trained, it’s time to get the word out. Interra focuses on staying involved in the community, building on the brand awareness developed through its consumer and agricultural business lines, and using easy methods of promotion including posting “Financed by Interra” signage at commercial construction project sites.


Interra’s results have been impressive. Today the credit union has 78,000 members.  Business checking and savings accounts have grown by $37 million, bringing total business deposits (including money market accounts and certificates) to a total of $250 million.

Remote deposit capture is now being used at 78 business locations, processing a total of $7 million per month. 130 businesses are using ACH for processing payroll, payment collections, or making vendor payments. Credit card swipes are up by over 500 transactions per month, and over 300 business members are now using the new business online banking platform. Perhaps most impressively, Interra has opened 1,100 new business account relationships since going live with the new strategy.

Park View’s Brenneman found inspiration from Interra’s roadmap, citing Interra’s focus on deep-dive portfolio analysis, and its decision to offer commercial clients a comprehensive business online banking product.

“At our Credit Union, we are at a point where we’ve been all working hard, and we need to make a step to increase our growth trajectory,” Brenneman says. “[This session] provided me with some strategies we can work on to offer a full-service program to our business members.”

Farm equipment cutting down wheat

Securing Your Collateral – Establishing and Perfecting Liens

By Nick Reynolds, VP, Credit Services Manager

The risks associated with business lending differ significantly from those associated with traditional consumer lending.  While consumer information is still an important part of knowing your member, the types of risks associated with commercial loans tend to be more varied, and wider in scope.  This article is one in a series to help credit unions more clearly understand some of the unique risks of business lending.

The Great Recession taught many business lenders the importance of securing collateral. Although credit union business loan delinquencies have dropped back to historically normal levels of around 1%, from a peak of over 4% at the height of the financial crisis, securing your collateral position is still a cornerstone of any successful business lending program.

Credit Union delinquencies and charge-offs as a percent of outstandings.

Credit union MBL delinquencies peaked at over 4% in 2010 and 2011.

The taking of collateral on any loan requires two steps.  The first is establishing the lien, which is done by a security instrument.  For real estate, that is a deed of trust or mortgage, for cash it is an assignment of deposit account, and for anything else it is a security agreement.

The second step is “perfecting” your lien. Once your right to the collateral is established, you need to let the world know it is yours, which is done by a process known as “perfection”.  In real estate, perfection is attained through the filing of the deed of trust.  With cash, perfection is achieved by holding the cash.  For titled vehicles, perfection is achieved by registering your lien with your state’s motor vehicle division or department of licensing.  For everything else, you must use a UCC filing to perfect your interest in the collateral.

UCC filings are subject to the same rules of priority, essentially, as deeds of trust.  The first to file on a class of assets has the first right to the collateral.  Each UCC filing is date and time stamped, and that determines your position in line.

Many items you may want to take as collateral do not have titles or deeds.  Most specialized equipment, such as construction equipment, agricultural equipment, manufacturing machinery, and restaurant equipment typically don’t have titles.  Other assets such as accounts receivable, inventory, intellectual property, taxi medallions, patents, trademarks, and copyrights are also perfected by UCC filings.

There are a few peculiarities of this system that make the process of perfection challenging.  One is how the collateral is described in the filing.  For example, if you have a company that rents equipment out to contractors, and also sells equipment to the public, when you look at a specific piece of equipment it may be hard to tell if it is inventory or equipment.  When you take inventory as collateral, you also need to take “proceeds” of your collateral, which would typically be cash or accounts receivable.  Fortunately many of these items are covered well by loan documentation systems.

However, to use a system effectively, there are a few key tips.  One is to use as general of a description as possible. For example, you should describe the collateral on an operating line of credit as “all business assets,” rather than “accounts, inventory, and equipment.”  This will automatically pick up assets such as sale proceeds and chattel paper that should be part and parcel of your collateral, but won’t be counted if you use the shorter, more specific description.  We also recommend that you use both a specific and a general description of your collateral, for example: “All equipment, including, but not limited to, a 2010 Caterpillar 6D Tractor, serial number CAT###.”  This will also cover you in case of a clerical error in the description.  If the specific equipment is actually a 2009 rather than 2010 Cat, or if the serial number is wrong, you still have perfected the lien under the “All Equipment” part of the description.

It is also worth mentioning a process called a “Purchase Money Security Interest” (PMSI).  This allows the security holder to be in first position on a specific piece of equipment, even if another lender has filed it under “all equipment” ahead of you.  Similarly, your collateral analysis will be impacted if you have an all equipment filing and another lender finances a specific piece of equipment under a PMSI.  In that case, you should remove the value of the equipment from your analysis of collateral value because you are in a second position on that particular asset.

The description of your collateral, the method of perfection, and the documentation of your rights all form the basis of the collateral analysis on a commercial loan.  It is generally a straightforward process, but as with much in commercial lending, the devil is in the details.

Customer Due Diligence

New FinCEN Rules Require Credit Unions to Identify all Beneficial Owners of Legal Entity Accounts

By Claire White, Deposit Services Officer

On July 11th 2016, new FinCEN rules clarifying and strengthening customer due diligence requirements went into effect. Credit unions will have until May 11, 2018 to comply with the rules.

The new rules contain explicit customer due diligence requirements and include a new requirement to verify the identity of beneficial owners of legal entity customers (i.e. business entity members) with certain exclusions and exceptions.

Under the new rules, credit unions will use Customer Identification Program (CIP) procedures, similar to those used for individuals, to identify the beneficial owners of a legal entity. The credit union may rely on copies of the identification documents used to identify the beneficial owner and may rely on information provided by the entity, as long as it has no knowledge of facts that would call into question the reliability of the information.

Legal entity customers are defined in the final rules as a corporation, limited liability company, or other entity that is created by the filing of a public document with a Secretary of State or similar office, a general partnership, and any similar entity formed under the laws of a foreign jurisdiction that opens an account. Sole proprietorships and unincorporated associations are not included in the definition, even if those such businesses may file with the Secretary of State in order to, for example, register a trade name or establish a tax account.

The final rules also include a list of entities that are not included as legal entity customers under the rules. The exclusions begin on page 17 of the link included in this article.

The final rules define beneficial owners as each of the following:

  • Each individual who, directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, owns 25% or more of the equity interests of a legal entity customer; and
  • A single individual with significant responsibility to control, manage, or direct a legal entity customer, including an executive officer or senior manager (e.g. a CEO, CFO, COO, Managing Member, General Partner, President, Vice President, or Treasurer) or any other individual who regularly performs similar functions.
  • If a trust owns directly or indirectly, through any contract, arrangement, understanding, relationship or otherwise, 25% or more of the equity interests of a legal entity customer, the beneficial owner(s) for the purpose of the final rules is the trustee.

CU Business Group recommends credit unions review their Bank Secrecy Act (BSA) procedures and other procedures related to the opening and monitoring of business accounts to ensure compliance with the new Customer Due Diligence (CDD) rules before May 11, 2018.

We have created the following list of action steps to help you get started:

  1. Review your current account opening, monitoring, and any related BSA procedures for business accounts.
  2. Update the procedures if necessary.
  3. Contact your form vendor regarding a Certification of Beneficial Owner(s) or use the form provided in Appendix A of the Customer Due Diligence Requirements at account opening or when significant changes occur.
  4. Determine which areas of operations will be affected by the changes and provide training to staff.
  5. Inform internal and external auditors of the changes.

You can view the final rules on Customer Due Diligence Requirements for Financial Institutions online.

If you have questions about FinCEN’s final rules on CDD for legal entity customers, contact CUBG’s deposit team at 866-484-2876, or

Cowboys riding into the sunset

Global Analysis – The Good, the Bad, and the Ugly

By Nick Reynolds, Vice President/Credit Services Manager

The risks associated with business lending differ significantly from those associated with traditional consumer lending.  While consumer information is still an important part of knowing your member, the types of risks associated with commercial loans tend to be more varied and wider in scope.  This article is one in a series to help credit unions more clearly understand some of the unique risks of business lending.

Standard practice in commercial loan underwriting requires that both the borrower and all guarantors qualify for the credit.  In some cases the borrower may not qualify for the loan and you must rely on the strength of one guarantor to approve the loan.  The assumption that one strong individual can support a weak credit is the basis for a combined analysis of all related parties, better known as “global analysis”.

It is generally believed that this is a valid method of analyzing a loan request, but there are a few reasons to think twice. Foremost among these reasons is that the success rate of having a guarantor service a loan that has gone bad is generally quite low.  Asset recovery experts will tell you that once a project fails, the typical guarantor will either have no assets left to service the loan, or will file bankruptcy to protect what they have left.  Either way, your chance of collecting from a guarantor is minimal.  One option is to make your guarantor a co-borrower, but this can actually be worse from the lender’s perspective because the individual waives some protections as a guarantor that are available to them as a co-borrower.

Despite these challenges, in practice you will need to use global analysis at times.  One of the great benefits of being a credit union is that you know your member.  If you know the business and its ownership, have worked with them for some time, and have a good feel for their integrity, you can avoid most of the problems associated with trying to collect from a guarantor.

Consider a couple of scenarios. One is an investment property that is not quite meeting an adequate debt service coverage ratio, but the borrower has a solid plan to increase rents to market rates over the next year. In this case, with a solid guarantor you can make a case for approval.

On the flip side, you have a borrower that has approached you for financing a large new project with highly uncertain outcomes, such as a new hotel. In this case, your guarantor had better be very strong, with the highest level of integrity.  Most deals will fall somewhere between those two extremes, and your assessment of the guarantor strength should correlate closely to the riskiness of the request.

Timeframe is an important factor as well.  For example, if you are financing a loan to purchase an underperforming property, and the principal has a solid business plan and the available capacity to support the project, it may be an approvable deal.  Today.  But it would be wise to set expectations with the guarantor about what happens if the deal does not perform as expected.  What is the exit plan?  Will you expect additional pay downs from other sources?  What is the timing of those pay downs and will they be tied to a specific measure like debt service coverage ratio?

As a general rule, you should not be locked into an under-performing property forever.  Any decision to lend on a property that does not cover its own debt service should be based on a reasonable expectation that the borrower will raise the property to an acceptable level of performance within a reasonable time.  A strong guarantor is one that has both the capacity and the willingness to ensure the property performs as advertised.  It is this assumption on which the validity of the global analysis method is based.

Question thought bubbles

5 Steps to Help Your Business Services Program Take Flight

By Mike Smith, CUBG VP/Senior Business Services Officer

In today’s challenging economic climate, credit unions are actively seeking new ways to achieve growth and profitability. For many this means taking a fresh look at promoting their business services program, with an eye toward building long-term relationships versus generating individual loan transactions.

At CU Business Group’s 2016 National Business Services Conference in Reston, VA, CUBG led a session aimed at helping credit unions develop a comprehensive marketing plan to target businesses right in their communities. Patrick Farrington, vice president of business services at Hiway Federal Credit Union ($1.1 billion, St. Paul, MN) attended the class.

“Each of the credit unions here seem to have similar issues,” Farrington said. “Whether it’s how to develop business or how to market their business, regardless of size everyone seems to be in the same boat.”

Here are some key steps to help get your credit union’s business services marketing strategy airborne:

Step 1: Establish a high-octane cross-selling program

Your existing membership base is a treasure trove. Most do their business banking at another institution, which means you have a great opportunity to gain member wallet share by offering specific, customized product and service recommendations.

“One thing to remember is that banks are concerned with competition from credit unions because they don’t want to give up a share of the business,” Farrington says. “There’s a goldmine of business and we just need to go after it.”

Key elements of a successful cross-selling system include defining your market, developing the right product mix, and providing your team with the tools they need.

Step 2: Communicate regularly with your members

According to a recent survey of business clients at the top 100 banks in the U.S., between 25 and 40% of business customers leave their bank within the first year, at an average cost to the institution of $400. A rigorous, consistent onboarding system can mean the difference between becoming your members’ primary financial institution and losing them to the competition.

CUBG recommends a multiple-step onboarding process, starting within three days of new account opening, simply to check in and make sure your member’s account is set up correctly. At one week following signup, have a senior executive, such as the vice president of lending, contact the new member. After six weeks, have another senior-level individual, perhaps even your CEO make a call.

At ninety days, it’s time for a face-to-face visit to your member’s business. This is a great opportunity to bring along a representative from another department such as wealth management or commercial lending, to demonstrate your credit union’s ability to meet all of the member’s financial needs. Make sure to celebrate your member’s one-year anniversary with a simple, handwritten card or a small gift.

Step 3: Engage with your community

In the business services arena, involvement in the local community is critically important. But don’t take a shotgun approach. Get involved in organizations and programs that are meaningful to your prospects.

For instance, if your strategy is focused on offering commercial real estate loans and deposit services to larger, more established businesses, it makes little sense to connect with the local Small Business Development Center, which primarily serves startups. Getting involved with organizations like the Commercial Brokers Association may pay greater dividends.

Step 4: Connect through social media and your website

In today’s business climate, engaging in social media is critical to reaching your target audience. According to a 2013 Gallup poll, prospects who research their buying decisions through social media platforms like Facebook or Twitter show a 17.6% greater chance of making the purchase than those who don’t.

In developing a social media program, focus on efficiency, authenticity, and consistency. Fewer than 20% of your posts should sell your credit union’s products and services. Instead, gain your audience’s trust by posting informational and educational articles. For efficiency, use services such as Hootsuite to schedule posts in advance and across multiple social platforms.

Even with the incredible growth of social media over the past few years, your website still serves as your credit union’s primary marketing and informational hub. Transform the business services page to a place where members can link to outside resources and additional services, then sit back and watch as it becomes a go-to destination for businesses in your community.

Step 5: Unleash your branch sales team

Lastly, don’t forget that your credit union already has a built-in, yet often underutilized sales machine: your branches! But in order to start generating referrals from the branches, you must establish clear goals, provide ample training and product information, and hold your branch team and management accountable. Just 20 minutes a day of consistent focus can result in immediate, quantifiable growth in qualified referrals from your branch network.

Follow the above action steps, and your business services program will reach cruising altitude in record time!

Q2 Logo

ACH Risk, Reporting, and Reviews: 3 Considerations for CUs Expanding Business Services

By Brad Johnson, Director of Solutions Consulting at Centrix Solutions, a Q2 Company

More and more credit unions (CUs) are exploring the idea of expanding their business services. Some are well on their way, with commercial bankers recruited and ready; other CUs are a little more cautious—having done little to adopt more complex business services. And caution is more than understandable. Credit unions’ historical focus on consumer offerings gives them unrivaled expertise in retail services, but it also makes the prospect of expanding into the complex realm of business services a bit unsettling.

At the very least, CUs find themselves facing a lot of questions when they start to seriously consider expanding their business services: Is their core equipped for commercial account processing? Will their online platform provide the entitlements control, reporting and other features necessary to serve larger businesses? What transaction channels should be supported—ACH origination, wire, RDC?

And, often, the  answer to one question simply generates more questions.

Take the subject of ACH origination services. A lot of CUs have limited ACH origination activity already, but if they intend to grow their business services, ACH origination volume will no doubt increase. To plan for this, the CU must take a hard look at their current processes and technology and find scalable ways to handle a bigger ACH lift, while simultaneously mitigating risk.

 Three of the biggest ACH considerations around expanded business services are:

 1. ACH monitoring and anomaly detection

New clients represent increased risk. As CUs expand services, they’ll see a sharp increase in the resource requirements necessary to underwrite and manage new commercial members—some of whom might be originating more activity on their own than the CU previously originated from all its members combined (assuming they did any at all).

It’s vital to be proactive, implementing technology before ACH activity begins to spike. CUs must find tools that can automatically monitor ACH activity to detect anomalies, manage exposure limits and provide general oversight of all origination activity.

Starting with a solid, proactive strategy around monitoring and general data management for ACH origination will prove well worth the investment as activity grows. On the other hand, a reactive strategy, and managing the process with a lot of manual intervention, substantially increases both your risk and the stress on your operations staff.

2. Accurate and regular reporting

CUs expanding their business offerings may face an exponential increase in workload, making it next to impossible to track and report ACH activity manually. CUs hoping to scale their business services should not depend on unwieldy Excel spreadsheets, but should instead invest in efficiency-boosting reporting tools.

Even if a credit union doesn’t have the originator volume to support a reporting platform at the start of their foray into business services, by investing in robust, intuitive technology early on—coupling ACH reporting with monitoring and data management functionality—they will ease growing pains and substantially reduce risk. A full-featured ACH reporting platform can save a lot of time and effort by quickly and easily generating reports for the CU’s board or for annual ACH audits.

3. Annual risk reviews: what you need to know

Regulations require a comprehensive risk assessment on each originator at least once per year. But, more than just a compliance box to check, these assessments—if done right—can greatly reduce risk by providing insight into originators’ business activities. CUs should keep in mind that the risk surrounding commercial accounts is made up of more than their ACH activity. A solid risk assessment process, powered by the right tools, will look beyond ACH activity to include the overall financial health of the originator. Assessments should be able to spot red flags in customers’ deposit accounts—like insufficient funds and overdraft activity—as well as their loan positions or past due history. A business that has no anomalous ACH activity may still present significant risk. Identifying the warning signs early can help manage that risk—and the relationship with that business—in ways that ultimately benefit both the CU and the business in the long run.

Expanded offerings doesn’t have to equal increased manpower

Increased services don’t necessarily equal an increase in payroll. With the right tools, credit unions can expand their business offerings, while reducing the ACH-related workload of their back-office employees. CUs on the fence about implementing more business services should remember—the right tools can make the prospect less frightening and the process more profitable.

Confused businessman

The Insider Secrets of Business Lending: Owner Distributions

From Nick Reynolds, Vice President/Credit Services Manager

The risks associated with business lending differ significantly from those associated with traditional consumer lending. While consumer information is still an important part of knowing your member, the types of risks associated with commercial loans tend to be more varied and wider in scope. This article is one in a series to help credit unions more clearly understand some of the unique risks of business lending.


A K-1 is an important piece of analyzing a member business loan.

One important, but often overlooked area of risk is owner distributions. Excessive levels of distributions can have a significant and adverse impact on a business. If the owners withdraw all earnings as distributions rather than reinvesting in the business, then no income is left for equipment purchases, growth in working capital, or repayment of debt. Typical debt service coverage analysis appropriately includes a deduction from income for the amount of distributions.

One of the benefits of using business tax returns to analyze your borrowers is that it is often easy to determine salary paid to the principals. Some partnership and corporate returns have that amount listed on the front page. At other times officers’ salaries are itemized further back in the return.

An officer’s salary should reflect the “market rate” for the work she actually does. If she wasn’t there, she would have to hire someone to take her place. If her salary lines up with typical rates in the local marketplace, then no further analysis is necessary. However, if that salary is greater than you would normally consider reasonable, you should dig deeper to find out why.

Distributions are also typically fairly easy to discern. While you would normally obtain distribution information from the tax returns or K-1s, it is also possible to back into that number with a straight-forward calculation: by definition, a balance sheet should balance, with assets equaling liabilities plus owners’ equity. It should also balance from period to period. Ending retained earnings should equal beginning retained earnings, plus income, less distributions. So, if you know beginning retained earnings, ending retained earnings, and total income earned during the period, you can figure out total distributions.

But the relationship between distributions and salary is a little fuzzy. For example, many owners will elect to take distributions rather than salary to avoid payroll withholdings such as Federal Insurance Contributions Act (FICA) and Federal Unemployment Tax Act (FUTA). In addition, a certain level of distributions is normal to cover taxes paid by the individual on the income associated with an S-Corp. S-Corp income flows through to the personal tax return based on the income shown and may have no relation to the amount of distributions taken. That is why the K-1 is so important to the analysis, as it details those amounts.

Another important factor is notes due to the borrower from the shareholder. If the business pays money to the owner other than salary, it can be in the form of either a distribution of income or a note receivable. Both have the same impact on cash – it leaves! But on the balance sheet, the note shows as an asset, while the distribution reduces equity.

Similarly, the repayment of a note receivable or the contribution of paid in capital both have the same positive effect on cash but disparate effects on the balance sheet.

Most businesses are structured so that the principals own the operating company and also hold ownership in a separate LLC that owns the building the business occupies. Rents may be set at higher than market rates as a vehicle for transferring cash to the owners.

The result of all of these factors is a complex web of payments that can have a significant impact on the borrower’s ability to service its debt. With a little bit of prudent detective work, you can unearth some additional detail that will enable fuller underwriting and a more complete understanding of the borrower’s creditworthiness and true financial position.

Welcome to the team

CUBG Welcomes Credit Union Veterans to the Team

CU Business Group is pleased to welcome two new members to the team.

Rich Muckey, VP/Senior Business Services Officer

Rich Muckey, VP/Senior Business Services Officer

Rich Muckey recently joined CUBG as VP/Senior Business Services Officer.  Rich brings 37 years of financial and commercial lending industry experience to the team. Prior to joining CUBG, Rich served as Chief Lending Officer at Rogue Credit Union where he and his team developed a successful business services program offering a wide array of commercial real estate and business loans, in addition to a full suite of deposit products. Rich’s lending experience spans many industries, including investor and owner occupied real estate, and commercial and industrial loans. Rich also has significant experience in commercial loan portfolio management and lending team program development.  At CUBG, Rich consults with credit unions in the U.S. on all aspects of business services planning, program development, account pricing, and education.

Justin Conrey, VP/Senior Commercial Loan Underwriter

Justin Conrey, VP/Senior Commercial Loan Underwriter

CUBG also welcomes Justin Conrey as VP/Senior Commercial Loan Underwriter.  Justin has more than 12 years of commercial lending experience working in both credit unions and community banks and has a background in all facets of commercial lending. Justin began his career with University Federal Credit Union in Austin, TX, helping to grow their commercial lending program and eventually managing the business lending department.  Most recently Justin served as Chief Credit Officer for a community bank, overseeing commercial, mortgage, and consumer lending.  At CUBG, Justin underwrites and performs credit analysis on all types of commercial loans and consults with credit unions on loan structure, pricing, and other aspects of lending and portfolio management.


Business Deposit - Business Owner

Connecting with Business Members through Deposits

From Larry Middleman, CUBG President/CEO

When CUBG conducted a focus group with business owners near the top of the small business pyramid, the responses reinforced a long-held truism:

Not every business needs to borrow money, but every business needs a strong depository relationship.

The business account opportunity is one that is frequently overlooked by credit unions in favor of a focus on business loans, particularly CRE lending. In order for your credit union to move up the pyramid and capture a larger piece of the small business market pie, you must first shore up the product line to fit the needs of more sophisticated small businesses.

For example, according to a 2013 study by Raddon Financial Group, the majority of businesses with over $5 million in annual sales utilize services like a money market account and merchant services. Other popular services include: remote deposit capture, ACH origination, commercial insurance, and sweep accounts for cash management purposes.

To drill down further, basic consumer-type depository services that most credit unions offer to micro-businesses, such as a business checking account, a savings account, consumer online banking and bill pay platforms, and perhaps merchant Visa/Mastercard services, are not sufficient to be a player with more sophisticated businesses – those that keep six-figure deposit balances and generate significant fee income.

In order to reach this market, your credit union needs to offer a “next level” business deposits package, one that includes services such as: analyzed business checking, advanced-feature business online banking, remote deposit capture, and ACH origination capabilities. Online banking typically serves as the core, central point for businesses to manage the cash inflows and outflows of their accounts.

Do not underestimate the expertise needed to position your credit union as a knowledgeable resource in depository services. You will need to hire a dedicated expert well-versed in the needs of sophisticated small businesses, with a full understanding of the benefits and features of these specialized services. In other words, you will need to hire a Cash Management Officer.

Most credit unions intent on growing a strong and vibrant business loan portfolio will hire three to five commercial lending experts. Yet these same organizations won’t hire anyone to manage the deposit side of the equation. This is not a formula for long-term success.

By the way, did you know that maintaining your business borrower’s deposit accounts may be the best risk management tool that you have at your disposal? Instead of waiting to receive quarterly financial statements or worse yet – annual tax returns – before analyzing your member’s business conditions and ongoing performance, access to the member’s deposits will allow you to observe changes in cash flow in real time, providing you the tools to address issues quickly, before they become real headaches for you and your member.

The future could not be brighter for credit unions in the business lending marketplace. With recent, positive regulatory changes, credit unions’ outstanding reputation for trust and service, and an improving economic outlook, now is the time to take full advantage of this exciting opportunity. With some planning and a dedicated focus on serving business members’ specialized needs, credit unions can capture the full business relationship and become valued partners with larger, more sophisticated, and profitable member businesses.