When asked how he sees the state of business services and lending among credit unions, Larry Middleman teeters on optimism and concern.
“It’s a mixed bag,” said the president/CEO of CU Business Group, a Portland, Ore.-based business services CUSO that serves more than 350 credit unions.
“Many credit unions are trying to take it up a notch. Some have problem loans, and you have some that are looking at different products such as remote-deposit capture and ACH.”
Middleman shared his observations during a recent CUBG webinar on trends in business services. More than 30 credit unions tuned in to hear the highs and low that have occurred over the past year.
In business lending, the focus has shifted from since what Middleman described as the go-go years. Back then, it was all about origination. Now, there is a stronger emphasis on risk monitoring prompted by examiners who are looking more closely at things such as a lack of an annual review.
“What we want to get to now is a balance. We’ve been through a couple of cycles,” Middleman explained. “We want to originate, but we need to take care of our portfolios.”
Scanning the country, Middleman said there are pockets of progress including in Michigan, a state hammered hard by the recession due to its heavy dependence on the auto industry. Credit unions here have grown their portfolios by 20%, he noted.
“Credit unions, overall, have an advantage because we have ducked the bad press that the banking industry and other Wall Street firms have been mired in for the last few years,” Middleman said.
Over in Phoenix, some credit unions are getting many opportunities to look at deals but are not able to approve them due to the still recovering economy. Middleman said he recently heard that frustration from a credit union representative in Arizona.
The downward pressure on interest rates where competition is more intense is also having an impact. Middleman told attendees of a refinancing deal involving a credit union and CUSO in Maine. The large refinance was for a medical office building with five years of history and solid people behind the deal, he said. The credit union and CUSO wanted to participate out the loan because of its large size. Middleman said the deal was doable but it would have to be priced to the borrower based on market conditions below 4.5% and a yield in the high threes.
“That sounds outrageous but to get deals to A-plus borrowers, that’s what’s going to happen,” he offered.
While some credit unions are reporting success with SBA loans, Middleman is hearing something different. He said he thinks dollar amounts are down because the agency’s programs for smaller loans have gone by the wayside.
“It’s tough to make them unless you have the volume to justify. There’s a desire to do more but it’s tough to put good deals on the books.”
Still, credit unions continue to carve out lending niches such as the $1.6 billion Melrose Credit Union in Briarwood, N.Y., with its taxi medallions and the $1.4 billion Evangelical Christian Credit Union in Brea, Calif., and its church loans.
Commercial real estate, when done prudently, can also create opportunities, Middleman said. Community banks that were hammered by development loans and a heavy local CRE concentration have had to shrink their loan portfolios just to stay afloat.
“That reduction, combined with life insurance companies that lay in the CRE market – some are retreating from some of their efforts,” Middleman said.
While there are strong signs for credit unions to grow, problem loans have plagued the industry. Middleman spoke again about the $1.4 billion Texans Credit Union saying its business loan portfolio has not only eaten up all of its capital, it was placed under conservatorship and received $60 million from the NCUA to keep it going.
“They are the poster child of how to do it wrong,” Middleman said of Texans. “The success caught up with them and heads got too big. They exceeded their clear market definition and they just weren’t able to keep up on the deals and manage them right.”
The loan troubles at $231 million AEA Federal Credit Union in Yuma, Ariz., may have been linked to a lack of supervision, Middleman said. The credit union’s former lending officer, William Liddle, was recently convicted of more than 50 counts of fraud involving a kickback scheme. The NCUA placed AEA in conservatorship in December 2010.
“AEA management didn’t have proper oversight and that helped [Liddle] do things he knew he shouldn’t be doing,” Middleman said. “My point to you on this is if you’re a business lending manager, make sure senior management knows what you’re doing and has the proper oversight. Don’t just take someone’s word for it.”
On the business deposit end, Middleman expressed skepticism about the demand.
“Right now, who really wants deposits? Credit unions would love to have fee income,” he said. “I see a lot of credit unions want to ramp up and reach a more sophisticated client that will bring in more fee income.”
While there is a ton of potential out there, Middleman said very few credit unions are doing their deposit programs well. A few of the components of a strong lineup include a solid basic checking account, RDC, ACH origination and higher volume business members who use services such as account analysis.
As for regulatory best practices, Middleman said effective training is among the top priorities. In August, CUBG will survey attendees at its annual conference on their business services staffing levels to create a benchmarking database.