If there was ever an argument that member business lending is good for credit unions, it's in the state of North Dakota.

Of the Peace Garden State's 23 state-regulated credit unions, about two thirds were originally chartered to provide communities with agricultural business loans, said North Dakota Department of Financial Institutions Commissioner Bob Entringer.

Because of that original charter, those credit unions are exempt from the current member business lending cap of 12.25% of assets, he said.

That loan activity, which has boosted the state's loan to assets ratio, also drives its financial success, Entringer said. The state's DFI monitors credit unions that exceed 85% loans to assets, and even though only four credit unions currently do so, he said, there are “fair numbers that are large and bumping up right against it.”

According to state-by-state statistics released by the NCUA for the second quarter of 2012, North Dakota tops the nation in 12-month asset growth (13.7%), deposit growth (13.2%), loan growth (13.7%) and net charge offs (0.08%) as of June 30. North Dakota's 115 basis points of ROAA ranks sixth in the country and its 0.60% delinquent to average loans ranks second.

SEE the NCUA state-by-state map and more Credit Union Times analysis.

North Dakota also boasts the nation's lowest unemployment rate, at 3.0%.

So why is the North Dakota economy so strong? Agriculture and oil are booming, Entringer said. Agriculture is the state's top industry, and farmers have enjoyed high commodity prices for the past several years. And, oil production in the state is driving an increase in population, with those who move north for oil field jobs bringing loan demand with them.

As he regulates credit unions flush with profits earned from business loans to booming industries, Entringer said he's mindful of concentration risk.

“Agriculture is a very cyclical industry, and we've been through an agricultural crisis in the late 80s and early 90s, so absolutely I worry about that,” he said. “But, I think our credit unions do a decent job of underwriting and take the appropriate mitigating steps to limit their losses.”

Erin Olstad, president/CEO of the $19 million Elm River Credit Union of Kindred, N.D., said her cooperative is among the state-chartered credit unions that were organized to make agricultural business loans. As of June 30, the NCUA reported that Elm River, located in the eastern part of the state near Fargo, had a 95% loan-to-shares ratio.

Despite some pockets of drought in her field of membership, Olstad said she's not worried this summer's dry weather will inflate her delinquency rate, which stood at 0.00% as of June 30. That's because the credit union manager reviews the institution's ag loans each year in December to ensure farmers have enough equity to cover the coming year's operating loan.

One year's worth of bad weather would not be enough to wipe out the farm, Olstad said. Plus, crop insurance covers expenses in the event a crop fails.

“It's kind of like making a car loan and requiring insurance in case something happens,” she said. “So, they may experience a loss, or they may not make the income they expected, but (crop insurance) should cover their expenses.”

Olstad said she also has business loans that aren't agriculture related to help mitigate concentration risk. And, the credit union has developed good relationships with its members.

“A lot of it has to do with good underwriting and having a good relationship with the borrower so they want to pay you back,” she said. “We're located in two small communities, so it's not like we're in Fargo or a bigger community where you don't know everyone.”

If a business owner passes away, she said, the surviving partner or spouse doesn't need to tell the credit union what happened because thanks to small town living, the employees already know.

“We greet them with a hug and we can relate to them as friends,” she said, “and not the nasty, insensitive lender in a suit and tie.”

Agriculture has also performed well in the western half of the state, according to Denton Zubke, president/CEO of the $170 million Dakota West Credit Union in Watford City, N.D. Dakota West was also chartered to make business loans and is about 85% loaned out, he said.

Zubke said he's taken some regulatory scrutiny from the NCUA over his high concentration of business loans, but he credits business lending for his 156 basis points of ROAA as of June 30. The credit union's net worth of 8.16% is below the peer average of 10.24%, but its delinquent loans are 1.18% of total loans, and net charge offs have been at or below 0.00% since March 2010, when the credit union reported 0.01%.

Most of the credit union's farmer members are very conservative, Zubke said, and that conservative management style, which includes crop diversification and expense control, has played well for them during difficult years.

Additionally, the credit union is aggressive when it comes to attracting good borrowers, competing against community banks and the farm credit service system with a combination of reasonable rates and quality member service.

“Anyone can go out and attract a bunch of borrowers; it's the quality that's important,” Zubke said.

The credit union is also aggressive when it comes to collections, but Zubke said “if you're attracting quality borrowers you have less of a challenge in the collections department.”

Olstad credited her 174 basis points of ROAA to making timely adjustments to loan and deposit rates, and being cost-conscious when it comes to operating expenses. The credit union built a new headquarters building in 2000, but chose a manageable-sized design.

“We're not heating or cooling a huge building, and we've made it work for us,” she said.

Additionally, Olstad's husband is an auctioneer, and she filled the credit union with furniture picked up from liquidation sales.

“You can still get something nice that doesn't look tacky,” she said. “I'm not going to buy something that is outdated or looks terrible.”

Instant Insights /

North Dakota: Business Lending Helps Put State Atop NCUA Rankings

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