Member Business Lending Activity Gains Ground but Still Not a Staple for Most CUs

WASHINGTON – The data for business lending at credit unions may be a bit skewed when compared to activity at other financial institutions because the latter is likely doing much more in this area. Commercial loans and deposits do indeed represent a larger proportion of competitors’ business, according to Callahan & Associates, Inc., but third quarter data from 2005 show some respectable increases in member business lending. As of Sept. 30, 2005, the industry had $14.3 billion in MBLs, a 6.8% increase over the second quarter which saw $13.4 billion. While MBLs have grown steadily over the past few years, don’t look for them to take over a credit union’s entire loan portfolio, said Jeff Taylor NAFCU senior staff economist. “There’s been significant growth over the past year but from a smaller base,” Taylor said. “They probably won’t become a real staple like car loans.” In 2004, MBLs were the fastest growing component of the loan portfolio for the credit union industry growing 34.2% that year to reach $12 billion overall. Although member business loans comprised only 2.8% of the industry’s loan portfolio that year, they will be making more of an impact in the next few years as credit unions start or expand their programs, Callahan noted. Forty-one credit unions started programs in 2004 to reach a total of 1,642 credit unions in the industry with outstanding balances as of the fourth quarter. There were almost 87,000 business loans outstanding at credit unions as of the fourth quarter in 2004 with an average balance of $147,170. For 2005, final, year-end data will certainly see a boost in total business loans and average balances. One area that is certainly gaining ground is in the loan participation arena. The benefits for many credit unions here is that they can make additional loans to their members, get a return on assets and avoid the federal cap of 12.25% of total assets by selling portions of their business loan portfolio. Since Sept. 2004, loan participations have increased from $1.7 billion to $2.5 billion as of Sept. 30, 2005. Taylor said credit unions are finding that participations are a good way to get a MBL program up and running. “Credit unions are looking to diversify their loan portfolio and they’re able to share the risk with others,” Taylor said. “They offer some good spread.” By nature, business loans carry more risk than other loans but with proper controls and due diligence they can make for sound investments. According to Callahan, business loans have a 60 basis point higher delinquency rate than the overall loan portfolio but the gap has shrunk from a high of 200 basis points in 2001.Strong underwriting and careful selection of loans have contributed to the gap closing. Real estate loans experienced a slight increase in the third quarter of 2005. There was $92 billion in short-term (five years or less) real estate loans, a 3.1% increase over second quarter data. Taylor said the trend of larger credit unions offering these types of loans will continue. “Certain credit unions are looking to do more of these loans” and depending on the region of the country, they tend to be more popular, Taylor said. -