Coast to Coast, CUs Capture New Biz Lending in a Sluggish Market
Whether they call the pristine greenery of the Pacific Northwest or the rolling hills of New England home, many credit unions share a common approach when it comes to business lending: They are meeting the growing demand by staying local and continuing to take the conservative, proactive steps that have carried them through the worst of the recession.
With the exception of those cooperatives whose business lending portfolios got pummeled by speculative, often out-of-state loans, the industry continues to hold its own compared to its banking brethren. Granted, charge-offs are up, but the increase is still very low at 0.69% versus banks at 1.98%. Even though CUs have been making business loans since the movement started in 1908, they only account for 6% of all loans, with roughly one in four CUs offering them, according to CUNA research data. As of March, 59% of loans were for $50,000 or less and the average loan amount was nearly $222,084, a Treasury Department study revealed.
Sen. Mark Udall (D-Colo.) recently introduced a bill amendment to increase the member business lending cap from 12.25% of assets to 27.5%, and CUs are optimistic that the lift would give them the ability to make loans previously out of their grasp.
The $788 million Metro Credit Union in Chelsea, Mass., has turned to participation loans to stay under its MBL cap, said Robert Cashman, president/CEO. Having a loan network of 16 other CUs served by Northeast Member Business Services LLC has helped Metro meet its members' needs. According to NCUA call report data, Metro had 218 outstanding participation loans totaling $1.7 million as of March.
"We're seeing people who are not happy with their [previous] relationships," Cashman said, adding that many people have lost their appetite for relationships with larger banks.
Indeed, Metro is getting a tremendous number of calls from those whose extended lines of credit were scaled back just as they needed to expand their businesses. The CU, however, errs on the side of caution, choosing to work with people who have been in business for at least two years. Those coming over from the banks meet that criterion and then some, Cashman said. Metro's $25 million business loan portfolio is diverse with commercial real estate, collateralized loans, SBA loans and refinances. With 10 branches and 1,800 select employee groups, the credit union is experiencing a growing request for mixed use buildings, such as small grocery store-apartment combos, but very little demand for strip malls.
"The MBL cap needs to be raised," Cashman said. "Millions could flow back to Main Street and more jobs will be created. National, regional and local banks have pulled back. We have been the solution, not the problem."
The $1.6 billion Lake Trust Credit Union has received a number of calls for participation loan alliances, said Bill Thiess, president of the Lansing, Mich.-based cooperative. Lake Trust is the result of a recent merger between Detroit Edison Credit Union and NuUnion Credit Union. Working closely with business lending CUSO Michigan Business Connection, Lake Trust places a heavy emphasis on monitoring participation loans, which number 717 purchased outstanding and total $25 million, according to NCUA data as of March.
"We're reviewing deals we haven't seen in the past, we're seeing a higher quality of loan and much larger volume," Thiess said.
One of the deals involved a piece of property in northern Michigan with a lease that goes through 2021. Participation loans help to fund larger loans, spread the risk and keep the reach local. Lake Trust, Thiess said, has also seen an uptick in SBA loan requests (the CU is considering expanding its SBA program) and deals from applicants whose loan terms were not renewed despite their having made all their payments on time. But high demand does not make expertise any less important.
Thiess said most of the people working at the Michigan Business Connection have extensive backgrounds in commercial lending at banks. "It's not the same as writing an auto loan," he pointed out. "Obviously, everyone is not as skilled to do business lending."
Stephen Wymer, business and commercial services manager at the Northwest Community Credit Union, boasts a banking career that encompasses a number of areas that have helped him understand the uniqueness of commercial lending.
"I have a banking background but a credit union filter," he said. "It's not something you can just pick up off the shelf."
That perspective has helped Wymer's $639 million, Springfield, Ore.-based CU grow its business loan portfolio to $70 million with the aid of CU Business Group, a business lending CUSO in Portland. About 20% of that is participation loans with a mix of SBA 504 loans and others making up the rest. The largest chunk has come from commercial real estate and investors as well as service-oriented businesses such as auto detailers, convenience stores and restaurants. The largest loan on the books is $3 million and the average is $250,000. The few start-ups that come in are linked with SBA loans, Wymer said. Like many credit unions, Northwest Community believes it is critical to keep its relationships local.
"We purposely stay in our marketplace [and] we have not participated outside of the area," Wymer said. That includes parts of southern Oregon hit hard by depreciation and overpricing.
Lately, the CU has seen former bank customers who are looking for a safe haven. They have solid track records and credit histories but are frustrated with the cold shoulder their banks have given them when it comes to refinancing and extensions. And even though the area's community banks are the credit union's competition, they can still be allies as well.
"We've done participations with banks," Wymer said. "I look at it from a very collaborative standpoint. If it's a good deal, we can partner." Besides, he added, Oregon is overbanked. There hasn't been a clearing out for some time and the saturation has steered several opportunities to the CU, including some from the larger regional and national banks.
While banks are still key competitors, it's the smaller community banks that are trying hardest to keep up with credit unions in the business lending space, said Adam Quinlan, vice president of commercial services of the $265 million Coventry Credit Union in Rhode Island. Since Quinlan's arrival in October 2008, business loans at the CU are nearing the $3 million mark. Coventry spent the last year planting seeds and marketing the loan program, especially important in a small state like Rhode Island, which has a proliferation of large banks, Quinlan said.
"We're anticipating, we're doing stress testing with applications to see what kind of changes in lines of credits can occur should rates moves and if a business can handle them," Quinlan said.
Coventry is also seeing people who were laid off from large corporations venturing out to become entrepreneurs. The fledgling businesses range from ice cream stores to restaurants to those that don't require a lot of start-up funds. Quinlan said there's also demand from real estate investors seeking foreclosed properties. These requests are put through the due diligence wringer and approvals are only granted after close scrutiny since any problems that arise later could affect collateral.
When it comes to SBA loans, members are doing their homework more than ever, Quinlan said. Businesses that have been in place for less than a year are typically directed to the loans because of the government guarantee. What has helped is Coventry's community partnerships, which have volunteers who provide assistance with business plan write-ups and other things that get budding entrepreneurs ready to meet with the CU's business lending staff. Coventry also offers free sessions on a number of start-up and operational topics.
The CU does not yet do participation loans, but when the day comes, the emphasis will be Rhode Island-based, Quinlan said. Engaging in this type of loan helps many CUs navigate under the MBL cap, a threshold Quinlan said needs adjusting given the recession.
"It's pretty tight and credit unions can hit it quickly," he said. "There has to be some room." Even if the cap were completely removed, the markets served by large banks and credit unions might still be vastly different.
"Larger banks are going after bigger players," Quinlan said. "It's just a matter of what institutions are designed to serve. Credit unions clearly serve a different type whereas large commercial banks do more specialized lending."
In the banking world, the commercial mortgage slump grew in 2009 as vacancies shot up, said Rick Slater, chief operating officer of Northeast Members Services, the CUSO that partners with Coventry. But when signs started showing in 2008, Northeast took an aggressively conservative approach, which included using more SBA loans. The few loans Northeast approves are in the $500,000 to $1.5 million range, and commercial mortgages are not one of its specialties. Slater said the CUSO has stayed away from multi-million dollar participation loans. Northeast currently has $170 million under management through 18 credit union clients.
"I've been in the business for 20 years so I've seen the cycles and the signs," Slater said. "As the CUSO evolved, we were closely monitoring [the lending environment] and started putting in tighter credit standards especially with commercial mortgages."