Credit unions are being bombarded with news about a potential recession.
But with most economic indicators still strong, yield-seeking credit unions continue to make business and commercial loans — with their eyes wide open. More credit unions are entering this space, or at least considering the concept strategically, but are being careful to include formalized risk monitoring.
“While there certainly are a lot of pitfalls if you do not fully understand, plan and execute on [member business lending] objectives, there also is a lot of demand from the current membership with many midtier businesses needing more services and attention,” said Tony Ferris, CEO of Rochdale Paragon, a consulting firm.
Commercial loans increased more than 2%, to $73.1 billion, in the first quarter from the end of 2018, according to data from the National Credit Union Administration. Not all commercial loans are counted as member business loans, and because of that, the two types of loans aren't directly comparable, according to NCUA. Still there is much overlap in the two categories.
Ferris does not see a recession taking place "in the immediate term" but he cautions any credit union considering going into the business lending space to ensure it has the right capabilities. This includes the right expertise, process, risk management and analytics to effectively manage and understand the implications and the change in risk profile that making MBLs will add to their organization.
“Credit unions who understand these risk-return trade-offs, and spend the time and money to manage their MBL services and loan programs, can be a big win for the credit union and their members,” Ferris said.
Ferris said the biggest problem in the business lending space is the short-cutting of processes. This is due in large part to the “lack of strategic understanding” as to what the program and different scenarios will mean to the organization from a risk profile standpoint, he said.
“If credit unions do not acquire and develop the appropriate capabilities, it most certainly will come back to bite when the markets take an unexpected turn,” Ferris warned.
Extensia Financial, a credit union service organization in Northridge, Calif., endeavors to make sure its approximately 140 credit union clients are not “overly optimistic” when making commercial loans, said Craig Page, Extensia's president and CEO.
“We tell them to make sure there is some headroom between the value of the property and the amount of the loan in case there is a downturn,” Page added.
Trends in business lending
Extensia, which advises credit unions on commercial real estate-secured loans and member business lending, continues to weigh each deal on its own merits, despite the negativity lately around the economy, Page said. There continues to be growth in industrial operations, especially distribution centers for retailers such as Amazon.
“There is an ‘Amazon effect' as Amazon continues to build more facilities in more markets so it can deliver goods faster,” Page said.
Many of Extensia’s CU clients have not had the appetite for making loans related to large, national distribution centers, but Page said there is interest in lending for smaller, regional centers.
There also are opportunities for credit unions to lend in the multi-tenant retail space, such as strip malls, as businesses evolve to sell more services and experiences rather than just goods, said Dan Gushue, Extensia’s chief credit officer.
One trend Page has seen in recent years is credit unions are making loans for commercial properties in secondary markets, meaning growing areas such as Jacksonville, Fla., Charlotte, N.C., or Phoenix.
“They are looking for high returns, so these markets are more appealing than New York, Los Angeles or Dallas,” he explained.
Mountain America Credit Union in Sandy, Utah, makes a mix of business loans, including owner-occupied, investor real estate and equipment. The $9 billion-asset institution has seen a recent uptick in loan applications for assisted living centers and related businesses, said Dave Poulson, vice president of business lending. It also offers government-guaranteed loans through programs from the Small Business Administration.
Poulson said Mountain America is cautious when offering loans to big-box retailers given the rise of online shopping and has stayed away from riskier development loans.
“While a recession is imminent, at this time, we cannot predict when the next downturn will hit,” Poulson said. “We feel we have implemented strong lending practices and do not intend to make any major changes to our strategy at this time.”
Marketing MBL
Jeremy Nelson, Mountain America CU’s vice president of direct marketing, said brand alignment, engagement, an integrated journey, storytelling and a thorough postmortem are all required for marketing business loans. He noted a JD Power study that found 36% of a financial shopper’s decision is driven by brand image, making it the No. 1 factor.
Mountain America recently asked its members, executives and employees what the credit union stood for. He said members said “trust” is important, but executives and employees had “very different” ideas.
“We came up with ‘guidance.’ Our brand is guiding members to achieve their financial dreams,” he said.
Engagement, integration and storytelling flow together, Nelson continued. He said an integrated journey connects marketing, internal communications, front-line staff, business account executives, and the digital and retail experience.
“The front-line staff needs the right information to get to the right people. When all employees are committed to the principle of guidance, amazing things happen,” he said.
The credit union performs a postmortem after every marketing campaign. Nelson said there are several rules during these sessions, including be brutally honest, measure everything, celebrate the victories, correct the mistakes and listen.
“Everyone wants to improve, and we evaluate everything,” Nelson said. “We have yet to run a campaign that is 100% perfect. We listen to our members, to our employees, to the marketplace, to what our competitors are doing.”
