A common response to the concerns expressed by bankers about credit unions' expansion of commercial lending is that banks still control an overwhelming majority of that market. That remains true, but credit unions continue to grab an increasingly large share of the commercial business in the U.S.
And the National Credit Union Administration's new rule on member business lending should help credit unions close the gap even more. The NCUA in 2016 approved its final rule on business lending in a move it said would provide a desperately needed credit source for the country's small businesses.
Pennsylvania Credit Union Association President and CEO Patrick Conway said the group has been advocating for an expansion of member business lending rules for the past several years. In an interview, Conway said the rule will open up new opportunities for credit unions, especially in serving very small businesses. The rule will enable credit unions to serve a niche that is not being well-served today. "A member running something out of their home wouldn't necessarily be something that a bank is going to be interested in anyway," he said.
At the end of the first quarter of 2017, U.S. credit unions had a total of $62.72 billion in business loans outstanding. That represented 15.2% year-over-year growth. By comparison, banks grew business loans by 6.2% but had nearly $3.92 trillion at the end of the most recent quarter.
Brea, Calif.-based Evangelical Christian Credit Union had the 17th largest business lending book among credit unions at the end of the first quarter with more than $487 million. President and CEO Abel Pomar said in an interview that the NCUA rule will probably have little impact on the credit union's portfolio because it has already been given some latitude by its regulators compared to a traditional consumer credit union due to its heavy commercial tilt.
Pomar, who was named CEO in February 2016, said commercial lending has been the credit union's focus and priority for years. He said he is pleased with business lending's percentage of the total book but added that Evangelical Christian CU is transitioning in an effort to diversify its commercial portfolio. For Evangelical Christian CU, business loans comprised 84.8% of total loans and leases in the first quarter of 2017.
"We're not at all abandoning commercial," Pomar said. "But we're looking for other areas of opportunity where we can serve our members even better."
Evangelical Christian CU saw an 11.2% year-over-year decline in member business loans at the end of the first quarter. Pomar said some of the dip in commercial loans is the result of focusing on opportunities where a deeper relationship — beyond just a single commercial real estate loan — is possible. It has passed on some opportunities because it wants to focus on long-term relationships. "We're getting much more intentional about who we serve and how we serve," he said.
Pomar said the shift has been a conscious, strategic decision. Many of the credit union's members are churches and ministries and that will continue but it now wants to narrow its focus to serve members of a particular size and geographic region. "We can't be everything to everyone," he said. "And so we're weaning ourselves away from that strategy."
Rod Bollins, vice president of business development for Evangelical Christian CU, said about 99% of the credit union's business loans are for commercial real estate. He said the credit union's sweet spot has been in the $1 million to $3 million range.
Pomar said he expects to see a continued shift from a larger average commercial loan size to a smaller one but with a higher volume of transactions. He said he expects to see slow growth in the portfolio as Evangelical Christian CU investigates entering other commercial business lines aside from only serving churches and Christian schools. "I think once we get those off the ground in the next 18 to 24 months that's when we'll begin to see much more growth in the space," he said.
Bollins listed Bank of the West as probably the credit union's biggest competitor for business loans among a group of national banks, a handful of community banks and other credit unions.
Conway said typically only credit unions of a certain scale — maybe $100 million in assets — will be able to offer business lending, but consolidation in the credit union industry is driving up the average asset size, so more institutions will be able to get involved in the commercial space.
Click here for the credit union regulatory tear sheet template.
Credit unions report balances of outstanding business loans on Call Report Schedule A. The schedule can be accessed under the Regulatory Financials section of an institution's Briefing Book page on SNL.com or in SNL Office.