The economic slowdown has caused many financial institutions to curtail lending to both consumers and businesses. The March 2008 Federal Reserve Senior Loan Officer Opinion Survey reported that 55 percent of banks have tightened lending standards on commercial and industrial loans.
This market pullback is evident when looking at market share of small business loans. In a recent issue of the American Banker , the front page featured a display on small business market share by financial institution type. National and regional banks posted declines in small business market share, which coincides with the tightening of lending standards.
Community banks however experienced the largest increase in market share according to this study, as these institutions remain active with local businesses. Credit unions also saw their market share increase from 7 percent to 9 percent. This remains low due to the fact that credit unions are still relatively new to the market and have a regulatory cap of 12.25 percent of their assets that can be in member business loans, unless the credit union uses the participation market to manage that cap.
Credit unions remain active in the market. Member business loans outstanding grew 15.7% over the past year as of March 2008 to a $23.4 billion portfolio. With small businesses feeling the effects of tighter bank credit, more are turning to credit unions. MBL originations as of March increased over 20 percent from a year ago to $2.8 billion. Credit unions are increasingly being tapped as a source for small business credit and were highlighted as an option for small businesses in a May Wall Street Journal article . More credit unions are becoming involved with small business lending, as 135 additional credit unions reported member business loans outstanding. The vast majority of business lending (90.4%) remains in commercial real estate.
Breaking down the MBL Portfolio
On the $2.3 billion construction and development loan portfolio, originations were down 40 percent, following the economic slowdown across the nation that has affected home and commercial construction. Agricultural loan originations experienced a 13 percent jump over the past year. Loans guaranteed by the Small Business Administration grew at an annual rate of 29 percent to $454.9 million.
Increasing Their Footprint on the Small Business Market
Eric King came into Delta Community Credit Union ($2.7 billion, Atlanta , GA ) as a former business entrepreneur to help launch their institution into the realm of business services. “We decided that a slow roll-out of our business services programs to clients would be the most beneficial strategy as it would enable us to measure the program's success and serve the members,” explains King. Because of the thought and time they are taking in rolling out their program to the full membership, the member business lending portfolio currently remains small (1.8 percent of total loans outstanding) at $17 million member business loans outstanding and another $13 million in participations, but they are growing it responsibly to ensure future success.
To learn how Delta Community and other credit unions are entering the business services market, download Offering Small Business Accounts: Is it the Right Move for your Credit Union? , and on-demand webinar event available through Callahan's Webinar Library.