Pa. Provides MBL Bright Spot Thanks to Conservative Borrowers, Stable Economy
In the midst of a still shaky loan environment, Pennsylvania credit unions have some good news to share on member business lending.
Keystone Business Lending Solutions LLC, Member Business Financial Services LLC and the Pennsylvania Credit Union Association reported their findings in a white paper, "Building a Footprint for Solid Member Business Lending Practices." The PCUA has a business services division.
Collectively, the report contains information on the 20 credit unions represented by the two CUSOs and PCUA with total assets ranging from $37 million to $1.1 billion.
The group had a combined MBL delinquency rate 1.54% at the end of 2010, while the nation’s business lending credit unions averaged a higher delinquency rate of 3.76%, according to the data. Since 2006, the group found it has significantly outperformed the nation’s credit unions as a whole in terms of MBL delinquency.
The group attributes its low MBL delinquency rates to more conservative borrowers and lenders in Pennsylvania, a more state real estate market, consistent, sound business loan underwriting practices and proactive MBL portfolio monitoring.
"It is not ‘Back to the Future’ for the group; they never really left the past. To clarify, they began their programs with the tried and true banking practices of the past; the five C's of credit, if you will. Even during this historic economic crisis, those solid practices have been a mainstay," the group wrote. The five C's of credit are character, capacity, capital, conditions and collateral.
While collateral is one of the five C’s of lending, members of the group said they do not make it their primary focus. Cash flow is the key to ensuring repayment of loans and liquidation of collateral is always a secondary or preferably tertiary source of repayment.
Regional experience of their own distinct market areas coupled with experienced staff in positions such as credit analysts, loan portfolio administrators, loan review officers and chief lending officers "allows the group to see beyond the numbers to fully understand each business loan request and all of the areas of risks associated with it." Experience in collections and business loan workouts are also helpful.
Meanwhile, MBL growth has been "slow and steady and controlled," with the average loan size in 2010 at $186,580 compared to $200,810 for credit unions nationwide.
"The philosophy of the group has been to grow their business lending portfolios in small, manageable increments. Many felt they wanted to fully understand the process and ‘the beast’ before their portfolios grew too large too quickly," the paper said. "Each credit union found that this slow controlled growth allowed them to more clearly define their risk appetite."
Some members of the group are near or up against their business lending cap and will often sell part of their loan interests to other credit unions. When making loan participation decisions, several rules of thumb are used including buying an interest in an MBL from only trusted sources and where the collateral is located within a day’s drive. Other rules are only buying a loan that the credit union would book itself and always having it re-analyzed and the documentation re-reviewed.
With the exception of one to four family rental units, the majority of the transactions done by the group could be classified as commercial and industrial loans, which are dependent upon the cash generated by the business through operations to repay the loan.
Still, the group said it largely secures its MBLs with real estate, an asset in the Mid Atlantic
region that has historically not been overinflated or recently subject to swift deflation in values. Over 90% of loans granted by the group are real estate secured.
"More importantly, this real estate or any collateral is located within each credit union’s local market, a rule they do not stray from. We know our own markets and feel comfortable lending in them. It just makes sense," the group wrote.
NCUA Regulation 723 prohibits third-party providers from approving MBLs. Most of the individual credit unions in the group said they rely on their own internal tiered approval process that varies in limit based on whether the credit request is secured or unsecured.
The group said most times loans of a larger size or complexity require the approval of a committee or senior staff or board members.
"This type of collective approval process, where many people are focused on making a single loan decision, provides the opportunity for the specific strengths and weaknesses of each request to be properly discussed and weighed," which is a key risk mitigation tool.