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Credit union MBLs hit a bump in Q2, but reg change could help


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Credit union MBLs hit a bump in Q2, but reg change could help

Member business lending by U.S. credit unions slowed in the second quarter, but a recent regulatory change could entice more of those institutions to look at that lending line.

At the end of the second quarter of 2018, U.S. credit unions reported a total of $68.12 billion in member business loans, or MBLs, outstanding after holding $71.68 billion in the linked quarter. Still, that total represented year-over-year growth of about $2.34 billion in MBLs.

In May, the National Credit Union Administration ruled that federally insured credit unions would no longer have to count loans made on one- to four-unit family dwellings as member business loans. The ruling allows credit unions to make more loans that will not contribute to their statutory MBL cap, which is set at 12.25% of total assets or 175% of net worth.

Nutmeg State Financial CU had $28.6 million in commercial lending in the most recent quarter, which equated to a 14.3% quarter-over-quarter increase. About 14.2% of the Rocky Hill, Conn.-based credit union's MBL cap was in one- to-four family.

President and CEO John Holt told S&P Global Market Intelligence that credit unions that have a larger pool of one- to four-family investment properties and are approaching the portfolio cap will now have some additional room to lend out to a wider range of businesses.

"In essence, they have the ability to take on additional loans for operating entity-type businesses, or true commercial loans," he said.

At the moment, Nutmeg is well below the maximum loan amount, so Holt does not think there will be any short-term impact to the credit union. Longer term, though, it will allow Nutmeg to have more flexibility with lending to both real estate investors and commercial businesses.

"It could impact our earnings as commercial loans tend to be more profitable than consumer and real estate loans," he said.

Cornerstone Credit Union League President and CEO Caroline Willard told S&P Global Market Intelligence the additional wiggle room under the cap will be a big deal for some credit unions, and she has encouraged more institutions to get involved in that space. But she said asset size is often the largest barrier to entry in that lending line. "It's not something you want to dabble in," she said. "You want to have someone on staff who's got some deep expertise."

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Alliant CU, the eighth largest credit union in the U.S. by assets, had MBLs totalling $547.7 million at the end of the second quarter for an 8.8% quarter-over-quarter increase. CFO Harry Zhu said in an interview the credit union sees more runway to grow that book, especially in CRE and one- to four-family. Zhu said the cap itself is not yet a constraint for Chicago-based Alliant.

Alliant has a digital platform and a national footprint, but the two states in which it does the most business lending are Illinois and California, Zhu said. He called CRE the bread and butter for Alliant in terms of business lending and added that Alliant is watching credit quality, but has not incurred much loss yet in the CRE space.

Willard said it is expensive and difficult to attract commercial lending talent from the banking side, and there are "horror stories" about lenders who have joined a credit union and not been good executors of the MBL program. "And that creates a little chilling effect," she said. But she added that there is definitely a niche consisting of loans too small to attract the attention of large banks that credit unions could fill.

Holt said Nutmeg only began offering business products about five years ago and has steadily expanded its offerings, but MBLs still comprise only about 3% of total lending. About 80% of the commercial book is in CRE. But Nutmeg is the only credit union in Connecticut that offers business lending and it is now looking at bigger deals. "It's a really good revenue producer," he said.

The primary competition for those loans comes from Webster Bank NA and Farmington Bank, but Holt said some of the largest banks in the market are not interested in loans as small as Nutmeg is making. "So I think that's where we have a nice niche for it," he said. That is especially true with smaller business lines of credit, Holt added.

Nutmeg has made most of its commercial loans in the Hartford area but would like to do more in the New Haven area, Holt said.

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