Despite the temptation of potential revenue, CU Business Group LLC CEO Larry Middleman advised credit unions to rethink business loans that may not be worth the trouble.
“Don’t give in to the temptation to make a loan that should not be made, just because of the high yield and loan fees,” Middleman told attendees at CUBG’s National Business Services Conference in Portland, Ore., on Monday.
Middleman said two key factors for successful business lending are always following prudent underwriting practices and spotting the early detection of problem loans. Credit unions should also keep up with annual reviews, he offered.
With more than 150 attendees at CUBG’s conference this week, which is a record, according to the business lending CUSO, Middleman said the high turnout may be a sign that credit unions are in need of growth and diversification opportunities.
“The industry has advanced considerably in business services,” Middleman said. “But we are all still relatively new in truly serving businesses in the full-service manner they need.”
During a presentation on trends in business lending, Middleman said between 2009 and 2011, credit union business loans increased by 13% while bank business loans decreased by 4%.
“Business loans at community banks with less than $1 billion in assets dropped by $79 billion or 19% over that three-year span,” Middleman pointed out. “This paints a clear picture of the need for credit unions to fill that gap and serve their members and communities.”
Credit union business loan delinquencies as a percentage of member business loans (5.16%) in 2011 were higher than the banking industry (3.71%), Middleman said. He attributed this to banks’ willingness to recognize problem loans sooner and take appropriate action.
“At the start of this recession, many credit unions wanted to ‘hold on’ and wait for things to improve. That turned out to be the wrong course of action in many cases.”
Middleman said the good news is that credit union chargeoffs as a percent of MBLs (0.78%) in 2011, were still lower than banks (0.82%). Over the past five years, credit union MBL chargeoff levels have never been as high as chargeoffs in the banking industry, he added.
CUBG’s business loan delinquencies as a percentage of outstanding member business loans was 1.56% and MBL delinquencies stood at 0.24% as of March 31, according to the CUSO, which serves more 397 credit unions in 43 states.