I recently took a cross country trip with my wife and daughter. While on the trip, I had the opportunity to visit with credit unions in several states. It was fun to learn about different credit unions and visit their communities. I am fascinated with what motivates different CUs and how they seek to better serve their communities and/or membership base.
One of the shops I visited is staffed with a business team who wants to find ways to make their credit union grow. They have done a tremendous job in building a commercial department from scratch, and making it one of the biggest profit and membership drivers for the credit union. The team has great ideas on how to make a real impact in their community.
But they are held back. The leadership of the credit union is afraid of large deals so they keep aggregate credit exposures at a rather limited level. For larger deals, they do have a small participant group they can participate the deal among, but their loan servicer has a very narrow view of projects they will look at.
Some things are off limits such as construction lending, hotels, non-profit lending, and land development. Most of the “off-limit” commercial real estate types are such, because a lender had a bad loan at some time in the past in a particular industry. This limits opportunities that are available in their market.
Now I know that every credit policy should have industries that are off limits. Most of these are standard ones which involve illegal or immoral activities. Some would also be industries that are obsolete. If you brought me a company that manufactures buggy whips, I would probably turn it down due to the industry.
Many credit administration folks keep an off-limit industry list. If you have no familiarity with an industry and have no desire to learn credit skills for that industry, you should stay away. However, a broad prohibited industry list can hamstring the credit union of good deals and relationships that may be available in their membership audience. In any industry, there are good companies that are top performers, even in times when the industry is challenged. A well-run company can manage through tough times in the industry. But, a company that is poorly managed in a strong industry, will face severe challenges at times when the industry faces struggles. Banking the consistent peak performers is a strategy that should over the long run, produce a portfolio that returns principal with minimal losses.
Size also should not scare the lender. Large loans can be placed into a well-managed participation and the risk divided up among several loan investors. I am always amazed at how many CUs will avoid good credits with strong companies that are large. In some cases, the large credit with highly skilled sponsors may be less risk to the loan investor than the small marginal loan.
So, if you come across a project that is outside your initial comfort zone, let us help you. We have experience with a large variety of industries and credits and can help manage credits that would normally be too large for your comfort zone or in an industry that in times past may be have been something you avoid.
In other news, we held our Beginning MBL Lending Boot Camp last week and Trevor had 18 students in Sioux Falls. We have a new Commercial Real Estate class in Minneapolis on May 22 and 23. We will cover topics like managing construction and development projects, analyzing rental data, structuring real estate cash flow, appraisal review, and global cash flow. We will have case studies. Contact us for more information.