PORTAGE — In the past, First United Credit Union would consider doing a business loan when a member asked about it.
Now, after signing on last year with a Portage firm, the small Grandville credit union takes a slightly more proactive approach toward business lending to members.
Element 22 Commercial Group LLC gives the credit union access to “a ton of expertise” needed to review, analyze and underwrite credit requests from members who own a small business, said First United President and CEO Mark Richter.
“Our credit union can’t afford to hire guys like that and have them on staff,” Richter said. “Their business model is great for us.”
Under that model, Element 22 Commercial Group essentially acts as a contract commercial-lending arm for small credit unions.
Since partners Kenny Leonard and Ryan Reffitt formed the company in 2018, Element 22 Commercial Group has worked for, or is in the process of working with, 15 credit unions, primarily in western and northern Michigan. The company seeks to work with small credit unions and community banks that “either don’t have the resources or expertise to do commercial lending,” Leonard said.
“On a daily basis, they will get people that walk in and say, ‘Hey, do you do business loans?’ And they just don’t, and they didn’t have a place to send them. Now instead of turning them away, they send them to us and we can work on their behalf,” Leonard said. “There’s just not a lot of bench strength of commercial lenders anymore, or underwriters. We think our model helps solve that. We can find the business and we can do the underwriting.”
Credit unions with $300 million in assets or less represent the company’s “sweet spot,” although Element 22 Commercial Group works with credit unions that are much larger, he said.
Leonard and Reffitt are both veteran commercial lenders in the market. They formed Element 22 Commercial Group as commercial lending by credit unions continues on the upswing.
At the end of the third quarter last year, the most recent period for which data are available, commercial loans by credit unions in Michigan were up by 23 percent from a year earlier, according to a quarterly report by the Michigan Credit Union League.
The partners aim to enable more credit unions to move into commercial lending.
“The credit union industry as a whole is starting to gain some notoriety in commercial lending and business lending, but it has not been historically known as sophisticated, especially when it came to commercial and business lending,” Leonard said. “The industry as a whole is starting to overcome that.”
Through February, the company had worked on a dozen business loans for credit unions totaling $4 million. Element 22 also has a brokerage business that helps companies secure financing. The company has worked on $9 million in financing for clients that are in various stages.
The partners’ business plan was to handle about $1 million in commercial loans monthly by 2020. The company exceeded that amount in February and March and is on track to do the same in April, even as it remains “a little bit in the startup phase,” Leonard said.
Element 22 Commercial Group can handle all of the commercial lending processes “from beginning to end for some of the clients that are really small institutions,” or elements of a loan such as preparing closing documents, structuring and underwriting a credit, and servicing a loan portfolio.
Marshall Community Credit Union has been doing business lending for more than a decade and uses the company for underwriting, document preparation, preparing closing packages, as well as a review of loan processes, policies and pricing strategies, said CEO Heather Luciani.
The credit union, with assets of $200.3 million, has offices in Marshall, Battle Creek and expects to open a location in Coldwater.
Element 22 Commercial Group offered a “fresh perspective” and helped to streamline and customize the process for business loans based on the size of the loan request and type of borrower, rather than using a one-size-fits-all approach, Luciani said.
“It allows us, for the operations of our business lending area, to revisit how we do things and make sure that it still makes sense. Sometimes you get into a rut. ‘This is how we’ve always done it.’ That doesn’t mean it’s still the best way to do it,” she said. “It’s helping us to shift between ‘this is how the process works’ to ‘this is how the process needs to work for that business owner.’”
Element 22 Commercial Group also can work with a credit union on board policies and procedures, and will customize business lending to the credit union’s risk profile “to make sure what they want to do is what they’re comfortable with,” Leonard said.
Final decisions on whether to approve a business loan remain with individual credit unions.
“Each institution has its own risk tolerance,” Leonard said. “We will certainly advise them on the risks related to each of the decisions they make, but ultimately we’re big believers of putting the power in their hands. They know their clients, they know their market. We can help them more on the structure and risk-mitigation side, but it’s really up to them.”
At First United, Element 22 Commercial Group initially performed an analysis of the credit union’s products and services and where they aligned with the competition, as well as helped with preparing marketing materials, Richter said. The firm has helped First United, which operates a single office in Grandville and had $37.5 million in assets at the end of 2018, to put deals together and underwrite business loans, he said.
First United does about a dozen loans a year for members who own small businesses, many of which fall under the $50,000 threshold to qualify as commercial loans on federal regulatory reports. In using Element 22 Commercial Group, the credit aims now to do more and promote business loans to members, Richter said.
“We’re just trying to take care of existing members we have and not go too fast, too much,” he said. “When you have a partner you’re comfortable with, you’re more willing to bring on some deals.”