Continuing their strong performance, business loans outstanding grew 25.8% in the 12 months ending June 30, 2006, to $17.7 billion, while the overall loan portfolio grew 9.7%. While business loans comprise only 3.5% of the loan portfolio, the market is growing for credit unions and is receiving more attention across the industry (note the Sept. 14 NCUA webinar on SBA lending). Below are the components of the business loan portfolio:
According to the data, every component of the business lending portfolio, with the minor exception of unsecured business loans, grew in the double-digit range in the 12 months ending June 30, 2006. By far, the largest category is commercial real estate loans, which make up 81.1% of business loans by dollar amount. As credit unions enter the business lending market, they tend to offer commercial real estate lending as one of their first product lines due to its lower risk level and the similarity with the residential real estate lending programs. These loans also tend to be for larger dollar amounts than other business loans.
Origination volume in the first six months of the year remained strong as well. The amount increased from $1.9 billion in 2005 to $2.2 billion in 2006 as the average business loan originated during that period rose from $214,606 to $258,455.
While business loans traditionally have had a higher delinquency rate than the overall loan portfolio, the trend has recently reversed. Business loans excluding agricultural loans reported a 0.44% delinquency rate, while the overall loan portfolio had a 0.58% delinquency rate. While many credit unions have been cautious about diving into the business lending arena, many of them have documented overwhelming member demand to warrant investigating various business models to offer or expand their offerings.
There are multiple business models that credit unions can choose from to offer competitive business services:
- Participation loans— Credit unions can purchase business loans from other credit unions that are either close to the regulatory limit (currently 12.25% of assets) or that do not meet their portfolio criteria. The originating credit union will underwrite and approve the loan and then send it to interested parties who will perform their own underwriting analysis before purchasing it.
- Multi-owned CUSOs— Credit unions can join a multi-owned business services CUSO that will perform the underwriting and assist with the marketing and technology efforts. According to Callahan’s 2006 Directory of Credit Union Service Organizations, there currently are 28 multi-owned business services CUSOs in existence. Alternatively, a credit union can establish a multi-owned CUSO if it can find other regional credit unions that have similar interests, risk guidelines, and goals.
- Wholly-owned CUSOs— Credit unions can also elect to create a wholly-owned CUSO which is separate from the credit union. Reasons to choose this route include wanting to include other investors down the road, offering more competitive rates than the credit union can provide, and establishing a board comprised of internal and external directors. According to Callahan’s 2006 Directory of Credit Union Service Organizations, there currently are 10 wholly-owned business services CUSOs in existence.
- Standalone program— The credit union can choose to portfolio the loans and run the program in-house. Credit unions that choose this route typically hire an experienced commercial lending officer to galvanize the program and dedicate a marketing budget to build awareness of the program in the community. Credit unions can choose to apply for SBA lender status or can sell business loans or participations to other financial institutions if appropriate.
Each of these business models offers unique competitive advantages that vary based on risk tolerances and profit expectations. There are many small business owners amongst almost every credit union’s field of membership, and catering to their business needs can help not only retain their relationship, but also provide them an incentive to move existing accounts from other institutions to your credit union so that they can do all of their business at one institution.
To read find out more about the CUSOs mentioned above, order your copy of the 2006 Directory of Credit Union Service Organizations. Along with key contact information for all multi- and wholly- credit union owned CUSOs in over 30 service categories, it also includes updated information on every CUSO's financial, ownership and customer metrics in this year's just launched CUSO Guide Online. Online access is free with your purchase of the publication.