In the midst of a still shaky loan environment, Pennsylvaniacredit unions have some good news to share on member businesslending.

Keystone Business Lending Solutions LLC, Member BusinessFinancial Services LLC and the Pennsylvania Credit UnionAssociation reported their findings in a white paper, “Building aFootprint for Solid Member Business Lending Practices.” The PCUAhas a business services division.

Collectively, the report contains information on the 20 creditunions represented by the two CUSOs and PCUA with total assetsranging from $37 million to $1.1 billion.

The group had a combined MBL delinquency rate 1.54% at the endof 2010, while the nation's business lending credit unions averageda higher delinquency rate of 3.76%, according to the data. Since2006, the group found it has significantly outperformed thenation's credit unions as a whole in terms of MBL delinquency.

The group attributes its low MBL delinquency rates to moreconservative borrowers and lenders in Pennsylvania, a more statereal estate market, consistent, sound business loan underwritingpractices and proactive MBL portfolio monitoring.

“It is not 'Back to the Future' for the group; they never reallyleft the past. To clarify, they began their programs with the triedand true banking practices of the past; the five C's of credit, ifyou will. Even during this historic economic crisis, those solidpractices have been a mainstay,” the group wrote. The five C's ofcredit are character, capacity, capital, conditions andcollateral.

While collateral is one of the five C's of lending, members ofthe group said they do not make it their primary focus. Cash flowis the key to ensuring repayment of loans and liquidation ofcollateral is always a secondary or preferably tertiary source ofrepayment.

Regional experience of their own distinct market areas coupledwith experienced staff in positions such as credit analysts, loanportfolio administrators, loan review officers and chief lendingofficers “allows the group to see beyond the numbers to fullyunderstand each business loan request and all of the areas of risksassociated with it.” Experience in collections and business loanworkouts 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 $200,810for credit unions nationwide.

“The philosophy of the group has been to grow their businesslending portfolios in small, manageable increments. Many felt theywanted to fully understand the process and 'the beast' before theirportfolios grew too large too quickly,” the paper said. “Eachcredit union found that this slow controlled growth allowed them tomore clearly define their risk appetite.”

Some members of the group are near or up against their businesslending cap and will often sell part of their loan interests toother credit unions. When making loan participation decisions,several rules of thumb are used including buying an interest in anMBL from only trusted sources and where the collateral is locatedwithin a day's drive. Other rules are only buying a loan that thecredit union would book itself and always having it re-analyzed andthe documentation re-reviewed.

With the exception of one to four family rental units, themajority of the transactions done by the group could be classifiedas commercial and industrial loans, which are dependent upon thecash generated by the business through operations to repay theloan.

Still, the group said it largely secures its MBLs with realestate, an asset in the Mid Atlantic

region that has historically not been overinflated or recentlysubject to swift deflation in values. Over 90% of loans granted bythe group are real estate secured.

“More importantly, this real estate or any collateral is locatedwithin each credit union's local market, a rule they do not strayfrom. 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 fromapproving MBLs. Most of the individual credit unions in the groupsaid they rely on their own internal tiered approval process thatvaries in limit based on whether the credit request is secured orunsecured.

The group said most times loans of a larger size or complexityrequire the approval of a committee or senior staff or boardmembers.

“This type of collective approval process, where many people arefocused on making a single loan decision, provides the opportunityfor the specific strengths and weaknesses of each request to beproperly discussed and weighed,” which is a key risk mitigationtool.