Many credit unions are joining the fray and starting or expanding their member business lending programs. Of the 1,985 credit unions over $50 million in assets, 32 credit unions started business lending programs in the past year, including Navy Federal Credit Union in Merrifield, VA, with $22.5 billion in assets, to reach a total of 906 credit unions with programs. For the industry, the average member business loan portfolio is slightly more than $1 million.
Although member business loans account for only 2.7 percent of all credit unions' loan portfolios, they represent a growing portion of the balance sheet as of the third quarter. Business loans grew on average 23 percent for the industry over the past year to reach $11.0 billion. There are currently almost 84,000 loans outstanding with over 35,000 loans originated year-to-date.
Credit union executives beginning to offer member business loans should consider their market entry strategy. As many large banks are increasingly leaving the small business market, credit unions are adept at picking up the business. "The large banks have largely left the small business market; it is ripe for some attention," said Arnie Gunderson, director of business services at Boeing Employees Credit Union (BECU) in Seattle, WA, with $4.9 billion in assets. "Credit unions are positioned so they do not have to nickel and dime the small businesses."
Rather than accept any type of business loan that comes in the door, credit unions have been more successful when they decide which business lines to focus their attention. BECU defines a small business as a company under $10 million in sales and with fewer than 100 employees and may approve related real estate and product lines. In contrast, Christian Community Credit Union in Covina, CA, with $370 million in assets primarily makes business loans to churches and religious institutions.
Before moving ahead with a business lending program, credit unions need to develop institutional support, hire the right staff and account for risk factors.
Institutional support, primarily from the board, is fundamental in a successful member business lending program. BECU gained board support when they launched their program.. "Much of the groundwork had been accomplished before it reached the board, including the writing of a formal business plan," said Gunderson from BECU. "The concept of the business lending program also had been discussed at prior meetings before final approval."
The board at Christian Community takes a more hands-on approach. "While the board relies on the staff for the technical underwriting, they are involved in the approval process of larger loans," stated David Estridge, executive vice president. "They provide a different prospective for the credit union because they are well-connected to the community."
Determining how to staff the business lending program is critical to its success. While federal regulations require officers to have at least two years of experience in commercial lending, most employees have a banking background with several years of experience. Several credit unions also have ongoing training programs for employees. "Employees can sign up for CUNA classes or online courses, and loan officers travel with senior staff to evaluate properties and observe the interaction with member businesses," said Pete VanGraafeiland, vice president of mortgage services at Coastal Federal Credit Union in Raleigh, NC, with $1.4 billion in assets.
Although business loans have a 60 basis point higher delinquency rate than the overall loan portfolio, the gap is shrinking from a high of 200 basis points in 2001. However, with proper underwriting and selection of the loans, business loans are strong investments. "I would place a well-underwritten business loan that focuses on cash flow capabilities versus collateral payback as a close second to a federal government obligation, well ahead of automobile and credit card lending as a secured investment," said VanGraafeiland.