Posts

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 TreasuryMgmt@cubg.org.