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PORTLAND, Ore. — There’s no doubt that the industry has experienced some troubled spots in business lending over the past few years. However, activity continues to increase as credit unions look to business deposits and other related services to be one-stop shops for small business owners.Larry Middleman, president/CEO of CU Business Group LLC, a CUSO serving more than 300 credit unions, shared these findings with the 70 attendees who tuned into a Dec. 5 Webcast on trends in business services.Loan participations have helped credit unions boost their business lending activity, Middleman said. Still, while some industry data has shown that 2,000 credit unions have business loans on their books, Middleman said, he did some digging and discovered that if you eliminate those that have less than $1 million in their business loan portfolios, there are roughly 1,000 credit unions that have active programs. Smaller credit unions, defined as those with a median size of $13 million in assets, according to CUNA, Middleman noted, are having a tough time getting business lending programs off the ground.“The fear factor is huge. There is not one credit union I’ve walked into over the last year that said ‘my people need to get over that fear factor,’” Middleman said. “Training and education is critical.”With all of the emphasis on business lending, business deposits are not getting their day in the sun, he said. One advantage, unlike with business loans, is that there are no caps on business deposits, Middleman pointed out. “We should be going after them with a vengeance in the business community” as they make for strong fee income relationships, and credit unions may have an edge with pricing. In its efforts to develop its research center efforts, CUBG plans to devote more data production on business deposits in 2009.Other nonlending areas that deserve more emphasis are merchant credit cards, ACH and remote deposits, he said. Banks are well ahead of credit unions with the latter. It’s not all about having the scanner equipment needed to offer the service but having a complete program that has a simple desktop one-page printer.Whatever the services but especially with lending, one of the biggest mistakes credit unions make is with pricing, Middleman told attendees. Rather than price based on risk, many CUs are opting to price based on what they want to charge. Establishing a rate floor helps. Middleman said he likes a 6% floor because rates like prime are probably not the best indicator of what to give to borrowers right now.As for seeking additional streams of income, credit unions have options, Middleman said. For instance, federal credit unions are not permitted to charge a prepayment penalty.“One little gem is credit unions are allowed to build a reimbursement [fee] for making the loan if it is paid off within a certain amount of time. If they pay it off within the first two years, you can get some compensation for that.”Participations continue to be an option as well. These days, however, there are more sellers than buyers, Middleman said. A “real healthy secondary market” has opened up. The caveat is that given the hits the NCUA’s insurance fund has taken over the past year because of troubled loans, credit unions can expect more scrutiny of the originators and the loan. And, there’s really not a model of the type of credit union that are looking to buy participations. Middleman recently visited two healthy credit unions in Arizona with well over $100 million in their respective portfolios. Both were looking for participations to buy.“One thing that is absolutely critical is the due diligence on who you’re working with,” Middleman advised. “Who is the lead lender? The idea is everyone working together to get the rate and package right so that it fits.”Middleman ventured into the “dark side” of business lending during the Webcast, spotlighting the trouble spots that have affected the credit union industry. The data is not as bleak as some would expect. Looking at the 420 credit unions with more than $10 million in their business loan portfolio, only 16 had a 10% delinquency rate, according to CUBG data as of June 30. Well over the majority either had a 1% or zero delinquency rate. Of the 420, four had charge-offs.Those that took huge hits to their portfolios were top heavy in construction, had “highly speculative” deals in the multimillion dollar range “and it came back to bite them.” Unfortunately, some of the largest charge-offs came through brokered deals, Middleman said, emphasizing that “there can be good brokers and not so good brokers.”One noticeable stride is the inroads credit unions are making in business lending. According to the latest FDIC data, banks with less than $1 billion in assets have $133 billion in commercial loans. Credit unions have grown their portfolios to $29 billion,Middleman said. While a large gap still exists, small businesses are now turning to credit unions as their first or second lender of choice rather than the last lender to consider.“It’s rather eye opening,” Middleman said. “Over the last five years, credit unions have made inroads in the market share of what I call the community banks. No wonder [banks] are paying more attention and hollering at us. We’re giving the community an alternative and better pricing.”–[email protected]

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