Small-Business Owners' Uncertainty May Set Stage for Credit Unions to Pursue
OVERLAND PARK, Kan. -- Mike Hales recalls making his first business loan in 1968 after returning from deployment in Vietnam. Over the past four decades, he has seen the commercial lending peaks and valleys both in the credit union and banking arena
Hales is a partner with the Rochdale Group Inc., (www.rochdalegroup.com) a firm offering consultation services to credit unions looking to build in a number of areas from CUSO development to nonearning asset analysis and everything in between. He previously served as president of another consulting firm, Counter Intelligence Associates, before it was acquired by Rochdale.
As a former commercial loan officer, branch manager, trust officer, sales manager and regional administrator for Bank of the West, Bank of America and Union Bank of California, Hales is convinced credit unions have business lending advantages that banks don't have. The industry veteran and NACUSO board member has helped create 12 business lending CUSOs now serving more than 100 credit unions and is often called on to present conference sessions on collaboration.
Credit Union Times recently spoke with Hales, a former community bank president, on a number of issues the industry is dealing with especially as the financial services landscape continues to find its footing amid a struggling economy.
Credit Union Times: These are some tough economic times. What is your assessment of how this downturn has impacted business lending within the credit union industry.
Hales: Some credit unions still have very strong demand. Based on some of the feedback from all over the country, there has been a slowdown, but I have not yet been able to say if it has anything to do with the downturn other than uncertainty. It's just a question of people sitting back and wondering what am I going to do. Am I going to hold out for the long term or will I have enough to make payroll.
CU Times: The subprime crisis--with the exception of some credit unions feeling the sting--industry economists have said that most credit unions were buffered from the impact, unlike other financial institutions. What are your thoughts?
Hales: Within the past two weeks, I've talked to a $20 million credit union and an $8 billion credit union, and they both told me the same thing: they made the decision to not be involved in high-risk activities. But I think some credit unions are feeling...they're guilty not by omission but by commission. I'm talking about money that was lent to small businesses with employees. Those employees are being impacted. This whole economic crisis and subprime market is creating a difficult environment. That's where credit unions come into play. We still don't have enough credit unions offering business loans. I think credit unions are well prepared today do more business lending than banks. They have to aggressively go out and talk to businesses. The opportunities are there.
CU Times: What do credit unions need to do to stay competitive?
Hales: We have very strong and viable business lending products and services that every credit union can offer regardless of their core system. There are still those fears of it's going to cost too much, I have to invest thousands of dollars, or my branches are going to be filled with people making all their business deposits at one time. It's still an educational process.
CU Times: What are your thoughts on regulatory efforts to raise the member business lending cap from 12.25% to 20% of assets. Is that enough?
Hales: No, I don't think it's enough. It's a great start but I really don't think it's going to happen. For several credit unions because of their size and activity, that 12.25% is a real road block. We're trying to involve credit unions in ways to serve their business members without the cap. One alternative is loan participations. We're supposed to be promoters of collaboration and [loan participations] are a good example of this. As a tool, it's a great way to meet demand and mitigate risk. I would like to see the cap go away but at the same time, we need to become more responsible as an industry. Credit unions are the only insured lending institutions that are not required to have a third-party independent review. Banks are. We should too. It's one way to monitor the safety and soundness of the portfolio. There will be losses but we can demonstrate that we have safeguards in place and we know how to manage our business loan portfolio. Congress will have more confidence in knowing we can stand on our own.
CU Times: As a former banker, what do you say to those in the banking industry who say credit unions are expanding beyond their original intent, for example, with business lending?
Hales: It's such a short-sighted argument. The banks that are making these arguments are not community and smaller banks, they're ABA, the Wachovias and Bank of Americas. Some banks have relegated their business services to Web sites and 1-800 numbers. Small-business owners want and need that personal contact more than anybody else. There's an opportunity right there for credit unions. Banks have enough problems competing among themselves. Their arguments are misguided. Credit unions are fulfilling a need. We do not pose a threat at all.
CU Times: In these financially troubled times, what are some other issues credit unions need to be aware of as they move their business lending programs forward?
Hales: It's probably never been a better time for credit unions to be involved in business lending. They can do it expansively through collaboration and innovation. Regional CUSOs are an effective way to get involved. At the same time, we have to become more diligent in how we manage the business lending process. Because of the economy, we're doing some things we need to beware of. We can't take things for granted. Look even deeper into that borrower's ability to repay. There are some standardizations that need to happen on [the credit union and banking] playing field.