Successful Business Lending Strategies

How Richard Odenthal led Central Minnesota FCU to become a Top 100 CU

By Rory Rowland

Central Minnesota Federal Credit Union is a Top 100 Credit Union in Business Lending. The majority of their loans are in business loans. That is their niche and they are good at it.

Top100CU.com asked President and CEO, Richard Odenthal, what he saw are the keys to successful business lending and what are some of the pitfalls to avoid? Number one, Richard says, he agrees with Jim Collins, author of Good to Great, when he says, “People are not your most important asset, but the right people are your most important asset.”   He credits much of the credit union's success to “having good people with loads of business lending experience and success. That is the key, the right people in the right spots.” Richard has a Commercial and Agriculture Lending staff with about 12.5 years average in the business.  Richard says, “There is the key to our success, the right people. Period.”

Key statistics of Central Minnesota FCU

“We have a lot of local people working for the credit union. They know most of the members by reputation, and we have a very good grasp of the character of our borrowers. The management staff knows the members very well.  This helps us assess the character of the member and their abilities to make the loans work. We know what type of business people they are; we have known many of them since they were children. That helps tremendously, but you also have to correctly evaluate the cash flow and collateral,” Richard said.

Diversification is the key—the credit union has nine branches and none of them are in a community larger that 5,000 people. This is clearly another example of their rural roots.

Central Minnesota Federal Credit Union has a higher cost in its loan officer staffing.  The employees that manage the business loans are more specialized and are therefore more expensive. Again, Richard says, this is one of the keys to their success.

Another key to success, Richard says, “We don't try to be good at business lending—we try to be first class with business lending.  You have to be a credit union the members are proud to do business with, and then word of mouth will keep the credit union going.”  Richard says they only spend about $350,000 per year on marketing—a relatively small figure for a credit union $330 million in assets. Richard attributes the lending success to their member's word of mouth about the credit union.

Richard says that Central Minnesota FCU has 72 loans member business loans over $1 million dollars per loan. That makes up the bulk of their business lending foundation. The largest loan they carry is $6.8 million.

Richard recommends that if a credit union wants to enter into business lending, it should start on the depository side. That is the key to success. Once you have the deposit business, and you get a track record of the history of the cash flow, then that helps you spot lending opportunities. He also, says it is very difficult to succeed if you only have business loan products that will not allow you to service the accounts the way the business owner wants. So start with the deposit side, and don't be afraid to charge for your business services.  “Our goal is service, but we can't give it away,” he said.

Also, if in doubt of the member's ability to repay the loan, get monthly financial statements. Once a history has been established and you see how the business is functioning, then you can loosen the requirements for your better borrowers.

Here are Richard's recommendations on where to start with member business lending.

What factors are important to succeed in member business lending?

1)       Business products and services first.
2)       Commercial real estate is next.
3)       Self-Employed business loans.
4)       Chattel loan types, in which you may have large collateral items. 
5)       Operating line of credit.

Again, when asked to rank how to get started, Richard said you have to start with business products and services.

One way to assure that lines of credit perform is to step up a sweep account, which helps monitor the cash flow. This saves the member money and helps the credit union monitor the activity in the business accounts.  If someone starts to abuse their line of credit, or if the cash flow declines, they know early. We always require the business owner's lines of credit to be attached to their business checking account. This reduces the member's interest expense. This also makes it tough to take the relationship elsewhere.  This helps us keep a stronger business relationship with our members.

We do our business lending on Symitar, and now they have a relationship with Jack Henry (a typical bank data processor), which does a lot of work with banks, this will help the Symitar systems become more robust and business lending friendly. The Symitar folks are amazed at the amount of reports we generate with their systems to manage the business lending function.

How to start a member business loan department

Richard said “It would be money well spent to have a good operation person, and a good commercial lender and then you need the back up staff such as audit and compliance to make sure you have all your ducks in a row.”

Richard also said, “Be good at something, but remember your ALM responsibilities.”

He also recommends having a specialized knowledge that no one else would have.  For example, Richard thought one day, “I bet we can track deposits to the price of milk.” So one day he had an employee chart the two, and there was a direct correlation between the two.  Most people wouldn't know that.  Specialized knowledge about your business can be the key to being good at business lending, or being an expert in business lending. Richard says, “We are good at the black and white cows in the pasture, but we need a little diversification.  But get good at something.”

What are some of the pitfalls to avoid?

Richard said, “Putting too much emphasis on character. You have to look at the person, but you have to look at the collateral too. It is a mistake to go completely off an appraisal when the property has special characteristics. For example, a member came to them and wanted to put a loan on a building to repair boom trucks. It had a 50-foot ceiling.  If the credit union had to repossess the building, they would be stuck with a building with a 50-foot ceiling that would have limited marketability.  In special cases like this, make the member put even more into the deal to limit your risk, and solidify their commitment to the deal.

In addition, Richard said credit unions should not be afraid to charge origination fees; one loan netted the CU 10K in origination fees. That extra income really helps the CU maintain much higher than average ROA, and higher than average capital position.

Central Minnesota FCU is very good at member business loans. They have an over 70% of their portfolio in member business loans.

In closing Richard said, “We give the advice for free, and we don't guarantee the results.” However, being Top 100 CU in Lending it is important to note that he would be a good example to follow and emulate in the business-lending arena. It is not a mistake that Central Minnesota FCU is a Top 100 CU.

Central Minnesota Federal Credit Union
Richard J. Odenthal, President/CEO
20 S. 4th Ave. E.
Melrose , MN 56352
Assets:    $336,849,287
Members:    26,928
Phone:    (320) 256-4269