Credit Union Business Loan Portfolio Expands

As the credit union MBL portfolio increases, the nation’s cooperative financial services providers find ways around the lending cap.

Member business lendinghas increased in importance at credit unions over the past few years. Outstanding MBLs at credit unions was slightly less than $35 billion at June 30; that’s up 8.3% from one year ago. Growthin the member business loan portfolio has picked up from last year,and member business loans now comprise 5.9% of the total loan portfolio.

At the end of second quarter 2012, nearly 30% of credit unions nationally reported outstanding member business loans,which indicates a steady increase in the number of credit unions participating in this form of lending. The 2,121 credit unions that participated in member business lending originated $6.8 billionin business loans through June 30.

Data As Of June 30, 2012
Callahan & Associates |

<p”> Generated by Callahan & Associates’Peer-to-Peer Software

Although the business loan portfolio is strengthening, there is a lending cap for the industry. Currently, unless they have an NCUAexception, credit unions are not permitted by lawto have outstanding member business loans exceed 12.25% of their assets. The Small BusinessLending Enhancement Act (S. 2231) is pushing to increase this limit to27.5% of assets, but Congress has not yet reached a decision to pass or kill this bill.

Although the lendingcap remains in place, opportunities to lendremain. In August, NCUA passed a streamlined process that opened up the low-income designationto more than 1,000 credit unions, thereby removing the MBL cap. In a speech at a MACUMA conference in Washington, DC, NCUA board chairman, Debbie Matz, said more than 600 qualifying credit unions had taken the necessary steps to become low-incomedesignated.

Another way credit unions are working around the member business lending cap is to participate out their own business loans. Members 1st($2.2B, Mechanicsburg, PA) has a programin which it originates business loansand sells them to other credit unions. During an on-site visit with Callahan in July, Mark Ritter, vice president of business lending at Members1st, had this to say about the credit union’s approach to business lending:

Our goal was always to be a source of financing for the business community … and that really involves much more around cap management and strategies for growth. We started managing our cap six or seven years ago, before we were even close toapproaching the member business lending cap, to make sure we could always serve the local business community.

So the credit union brought together credit unions from throughout the region and formed a business-lending workshop. According to Ritter, topics at the workshop cover business services and what’s happening in the marketplace. The formation of aformal network for this kind of participation program is still an unusual strategy, but it has benefitted the participating credit unions.

Like Members 1st, other credit unions across the country sell their member business loans. Barring the decline during the height of the recession, the amount of business loans and participations sold YTD has generally trended upward. As of June 30, creditunions sold an annualized $2.1 billion in business loans and participations.

Data As Of June 30, 2012
Callahan & Associates |

Generated by Callahan & Associates’Peer-to-Peer Software

Member business lending is an area in which credit unions have an opportunity to gain market share. Commercial and industrial loans, the equivalent of commercial real estate loansfrom banks,total $4.7 billion and make up 13.3% of the member business loan portfolio, down slightly from 13.4% last June. Business lending at banks has decreased since the financial crisis and those banks that still offer such services have tended to tightenup their lendingstandards.

In October, BB&T announced plans to slowly get back into making commercial loans. As small businesses regain their footing after the recession, there is ample room for credit unions to fill the commercial lending need.

April 29, 2014

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