During a challenging economy the traditional school of thought is that most businesses will reduce their appetite for loans, tighten their belt and wait out the economic storm.
The “wait and see” game means that financial institutions struggle to fill their pipeline with loans and the industry as a whole enters into a dark period of increased delinquencies and charge offs.
While this thinking may be commonplace, David Smith, an economist at Pepperdine University’s Graziadio School of Business and Management shatters this notion in a recent study, concluding that credit unions do not experience the same commercial loan dips and setbacks as their banking counterparts.
Data gleaned from Smith’s study” Commercial Lending During the Crisis: Credit Unions Vs. Banks,” featured by the Filene Research Institute, point to credit union commercial loan activity and quality as steady and strong during recessionary times.
This isn’t the first time Smith investigated how banks and credit unions handle commercial loans during tough periods. An initial study by Smith and Stephen Woodbury in 2010, “Withstanding a Financial Firestorm: Credit Unions vs. Banks” found that credit unions’ aggregate loan portfolios appear to be approximately 25% less sensitive to macroeconomic changes and disturbances than those of banks.
As Smith’s recent report is studied and discussed, credit unions wait for S2231’s hopeful passage, which will allow credit unions to increase the member business lending cap from 12.25% to 27.5 of its assets.
This report may prove to be one more feather in the credit union movement’s collective hat as banks push against increasing the cap, declaring that raising the cap gives credit unions an unfair advantage due to their tax exempt status and freedom from other regulations.
However, credit unions insist that the industry is only helping the business owner who can’t obtain financing from a bank. "We are getting business that the banks aren't eager to get," said Joe Mecca, spokesman for Coastal Federal Credit Union ($2 billion, Raleigh, NC).
Mecca has been a vocal proponent for boosting the cap for some time, speaking to Credit Unions Online last month about the topic saying, “It’s interesting that it’s the community bankers who are the most vocal because they won’t lose business to us,” he says. “We often work together with a community bank to help the member secure lending and in many cases, they are sending business to us. However, they won’t say that to their senators.”
While Smith’s study is significant, news that credit union loans have been a pillar during a rocky economy is no secret. Last summer FDIC data revealed that from March 2009 to March 2011, total loans by banks declined by more than $500 billion. Plus, this year alone, banks experienced a 3% drop whereas CUNA reported that credit union business lending was up by 5%.
Credit Unions Provide Possible Reason Why Loans Have Remained Strong
According to Paul Stull, SVP/Strategy and Brand for Arizona State Credit Union ($1.3 billion, Phoenix, AZ) credit unions are able to lend because their asset quality and capital has remained high in the face of challenges arising from the financial system crisis. “Unlike banks, mortgage loans originated by credit unions were generally traditional, conforming loans,” he explains. “Because credit unions are owned by their borrowers, these institutions originated very few sub-prime loans and other so-called toxic loans. As a result, national credit union loan growth continued to rise in April and May 2011 with these financial institutions still actively lending and helping members survive challenging economic times, diversifying their real estate portfolios – and everything in between.”
Stull backs up the point made by Mecca about how credit unions are many business owners’ (and consumer’s) best alternative to banks. “While credit unions are not immune to the effects of the less-than-optimistic economy, there are numerous headlines incorrectly touting the idea that these financial institutions are not lending at this time,” he adds. “It may be difficult to find credit unions with the same lending flexibility that existed several years ago but they are still actively lending. In fact, many consumers and businesses unable to obtain loans from banks turn to credit unions to fill this void.”
Credit Unions Report Consistent Commercial Lending Activity
Earlier this month Craine’s New York Business examined a local entrepreneurial trend of hitting up the local credit union for a business loan instead of a bank. “Credit unions are filling a void in the marketplace that has existed because many commercial banks have abandoned the small business sector,” Rohit Arora, chief executive of Biz2Credit told Craine’s.
In New York City alone, 21% of its local credit union base offers member business loans with many holding a very low delinquency rate. For example, Bethex Federal Credit Union ($28 million, Bronx, NY) touts a 1% small business loan delinquency rate because not only does the credit union provide the financing, it also extends financial counseling and educational services.
Joy Cousminer, Bethex's president and CEO told Craine’s, “The credit union's mission is to help low-income people in the area get a firm financial footing so they can improve their lives. Entrepreneurship is a path many take toward the American dream.”
Credit unions like SEFCU ($2 billion, Albany, NY) originally set a goal of $70 million in new commercial loans this year. However as of May, Tom Amell, president of commercial services says, “We have over $100 million in our sales pipeline, in various stages.”
Teresa Halleck, President/CEO San Diego County Credit Union, ($5.7 billion, San Diego, CA) added that “The quality of our member business loans is good compared to the national average. Currently, SDCCU’s MBL delinquency ratio is less than 2%. Our MBL portfolio continues to perform well due to our underwriting standards and prudent portfolio management.”