‘Rocket fuel’ for credit unions

As consumer lending declines, many are focusing on loans to small businesses

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Print this page by Tim Loughran

Lisa Carter, an owner of Albemarle Countertop Co., turned to the University of Virginia Community Credit Union in 2008 for help when she “desperately” needed an emergency line of credit to make payments on a $200,000 stone-cutting machine the company bought to increase productivity and profits. The crashing economy had prevented many of her customers from paying bills on time.

“The customer service we received at [our previous banks] was ridiculously bad. The only thing they said was, ‘Fax us your tax returns.’ That was it. No one called.  No one visited. They did everything but laugh at me.”
A member of the Charlottesville-based credit union since 2002, Carter had no idea that her financial co-op had begun to expand its lending activities from auto loans, mortgages and credit cards to a variety of “member business loans,” or MBLs.  Carter soon was overwhelmed by the attention she received from Michael D. Lyster, UVACCU’s vice president of business services.

“I can’t tell you how many times he came over to our offices to help us figure everything out . . . He created a plan for us . . . He put in a ridiculous amount of work. He ended up suggesting an [America Recovery Capital] loan guarantee from the [Small Business Administration] … That’s what really saved us.”

Commercial bankers say thousands of smaller companies can no longer meet their industry’s tougher loan standards. “The recession has moved a lot of businesses that used to be cash-flow positive into the ‘don’t qualify’ category,” explains Bruce T. Whitehurst, president and CEO of the Virginia Bankers Association.

More retail credit unions — seeing an excellent, higher-margin niche in business loans — want to fill that lending vacuum, since most of their members have all but halted demand for the traditional consumer loans that have defined the industry since the first U.S. credit union was established by French-speaking Canadian immigrants to Manchester, N.H., in 1908. They are paying down debts and salting away cash in case even tougher economic times are still ahead. 

And demand for business loans is robust. Preliminary data released by the Lynchburg-based Virginia Credit Union League indicates that during a 12-month period ending last June 30, MBL activity among the state’s credit unions jumped 30 percent. That’s down from one-year MBL surges of 35 percent in 2009 and 50 percent in 2008, but still quite a bit higher than the 6 percent increase in business lending reported in 2006, the year before the economy went into freefall.

“Business banking is the rocket fuel of the credit-union industry,” says John Beiler, CEO of the Harrisonburg-based Park View Federal Credit Union, formed in 1969 by faculty members at Eastern Mennonite University. “I don’t advertise my business-lending program all that much; if I did [because of existing federal regulatory caps on business loans], I’d have to turn away about 99 percent of new customers.”

Currently, Congress limits business lending at retail, or “natural person,” credit unions to 12.25 percent of total assets, a regulatory cap the credit union industry has fought for more than a decade. The industry failed to raise the cap to about 25 percent during this past summer’s debate and subsequent passage of the Obama administration’s newest small-business lending law.

Much like UVACCU, Park View FCU restricts its downside risk by limiting the size of its loans and focusing its MBL efforts on owner-operated companies. In addition to merchant banking, checking, credit cards, IRA programs and cash management services, both credit unions offer revolving lines of credit as well as loans for vehicle fleets, capital equipment and a limited number of real estate transactions.

As with commercial banks, loan amounts vary, depending on the specific need of the company and the limits that individual credit unions place on its business portfolio to keep risk balanced. At Park View FCU, for example, the average MBL so far is “about $47,500,” says Beiler; while at the UVA Community Credit Union, “our average is in the $300,000 to $400,000 range,” according to Lyster.

Mixed results

On balance, the past four years of economic turmoil have been mixed for Virginia’s credit unions. As of June 30, the total number of credit unions in the state had dropped to 189, from 209 four years earlier. Industry officials blame the decline on the inability of many smaller credit unions to remain competitive as demand for consumer loans has lagged and regulatory costs have risen.

Yet, membership at Virginia-based credit unions is up a whopping 20 percent since 2006, to 6.7 million people. That was fueled by a 7 percent rise last year as many Americans followed the same “flight to quality” migration pattern to credit unions that previous banking system meltdowns had sparked.

If those numbers seem a little large, given the commonwealth’s overall population of 7.8 million, it’s because two of the nation’s largest credit unions — Navy Federal and Pentagon Federal — are based in Virginia and serve a worldwide membership of retired and active-duty U.S. soldiers, sailors, Marines and airmen as well as many civilian employees of the armed forces and their families.

“The bank-bashing has really cost the banking industry a lot from a public relations standpoint,” says Jane Watkins, CEO of Richmond-based Virginia Credit Union, a 15-branch operation formed in 1928 to benefit state employees.  “That’s not necessarily a good thing, but people are looking for alternatives.”

In Virginia, the chief beneficiaries of the current popularity of credit unions are the full-service co-ops that compete most directly with larger banks, offering online banking, numerous ATMs and a full range of loans. Through June 30, the state’s 36 largest credit unions saw membership rise almost 7 percent during the last year, to almost 6.2 million people, while membership at the state’s smallest co-ops (with less than $5 million in assets each) declined 3.4 percent. 

“Our strategy has always focused on service,” says Watkins, whose institution manages about $2 billion in assets for about 200,000 members. “It’s the best way to grow. Testimonials from existing, satisfied customers lead to endorsements. The word of mouth really triggers the action to join.” 

Not for everyone

While business lending seems a win-win to many Virginia credit unions, others — both large and small — are not sure it’s the best strategy. Primarily, the cost of hiring experienced business loan officers who know how to underwrite and properly monitor business loans, along with new business loan computer software, can be very high. Additionally, shareholder boards of directors at many credit unions are often very conservative and oppose taking risks with members’ savings.

From her 20-year career as a banker in California, Catherine McDermott, the new president and CEO of Richmond’s RF&P Federal Credit Union, fully recognizes the important pricing and customer-service advantages that credit unions can offer companies. But her 12- to 24-month strategy to upgrade operations, increase membership and open a new headquarters building doesn’t include business loans. “It’s not something that our current membership values all that much, but if we grow sufficiently with new members, that is something we may look at.”

One of the most vocal opponents of credit unions increasing business lending is Ronald L. Burniske, president and CEO of Chartway Federal Credit Union, based in Virginia Beach. It has $2 billion in assets and serves more than 150,000 customers in multiple states, including Texas, Utah, Ohio, Rhode Island, New Jersey, Florida, Arkansas and Georgia.

“I totally disagree” with the push toward business lending, Burniske says.  To him, the trend “will hurt credit unions in the long run. It’s way beyond the expertise and the budgets of most credit unions. It’s not just a larger consumer loan.”

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