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Credit union business lending ticks up, but rising rates worry some

After a dip in the previous quarter, member business lending by U.S. credit unions moved slightly higher in the third quarter, although the rising-rate environment is having an impact on some lenders.

At the end of the third quarter of 2018, U.S. credit unions reported a total of $67.96 billion in member business loans, or MBLs, outstanding after holding $67.52 billion in the linked quarter. Still, that total represented 2.7% year-over-year growth in MBLs.

Member commercial loans rose about $1 billion to $59.86 billion in the most recent quarter.

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Albuquerque, N.M.-based Nusenda FCU has seen a couple of trends impacting its business lending growth this year. The local market is stronger in 2018, and overall activity and loan requests are up, but the company has tightened underwriting standards to account for the rising-rate environment.

Nusenda had the 20th-largest commercial portfolio among credit unions at the end of the third quarter at $412.5 million. But that total represented just 1.9% year-over-year growth, the third-slowest among the top 20.

Chris Clepper, senior vice president of business services at Nusenda, said the credit union has also experienced a healthy amount of payoffs from borrowers selling assets, and in some of those situations the credit union decided not to offer financing to the new buyer, which often is an out-of-market investor.

"We're reading this as, asset values have peaked in these areas," he said.

Clepper said the credit union is also seeing a significant shift to more construction lending. And with the recent rate increases, refinance opportunities are largely limited to maturing loans or a cash-out event. The shift to construction financing at the end of the year has meant that the credit union's outstanding loan balances are relatively flat until those projects are built out and the commitments advance, he said.

"Taken all together, we have not seen the same level of net growth as we had in prior years, but our pipeline remains healthy going into 2019," he said. Nusenda has also seen "some very aggressive competition on rates from the national and regional banks," Clepper added.

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One challenge credit unions often encounter with business lending is that the lending line has traditionally fallen primarily to banks, and consumers tend to think of credit unions more for auto loans or mortgages. But some credit unions continue to hold their own in the corporate space. Jackson, Miss.-based Hope FCU had the 15th-highest concentration of commercial loans among U.S. credit unions with at least $250 million in assets at the end of the third quarter. That quarter, Hope had $79.8 million of its portfolio tied up in business loans, or 35.8% of its loan book.

CEO William Bynum said in an interview that the credit union has a long history of making commercial loans, having formed as a business lender about 25 years ago. Hope has seen steady demand from small businesses for affordable capital and has expanded to become a significant lender for affordable-housing development.

Bynum said he anticipates business lending in 2019 to be similar to this year or potentially slightly higher. The credit union will be helped by its recent expansion into Alabama, he said.

"We anticipate increase in lending because of our increase in that market," he said. "But we have been fortunate to see a relatively consistent level of demand."

The same has been true of New Berlin, Wis.-based Landmark CU, which had the 16th-largest commercial portfolio among credit unions at the end of the third quarter at $528.2 million. That represented year-over-year growth of 29.1%.

Adam Newman, business lending manager for Landmark, said in an interview that the credit union has been fortunate to operate in Wisconsin's healthy economy. Wisconsin's real estate sector in particular has been strong, he said.

The credit union's charter has also expanded significantly during the past three years to allow for more business lending. Traditionally, most of that lending was done in southeast Wisconsin, but it has begun shifting north to Green Bay and west to Madison and northern Illinois.

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