Credit unions are making community banks sweat in the small business lending arena.
A recent survey of banks with less than $10 billion in assets conducted by FIG Partners in Atlanta, found that CUs and other nonbank lenders are a mounting concern for community banks.
Take Ken Trautman, president and CEO of $209.5 million People's Bank of Commerce in Medford, Ore.
Though Trautman did not participate in the survey, he said CUs that compete against People's Bank are starting to hire commercial lenders away from local banks.
"They're beginning to nip at our heels," he said. "Everyone is fighting for the same clients."
Even though CUs are currently more active as third-party purchasers of small-business loans, rather than as originators, many of the bankers surveyed viewed those institutions as an immediate threat, said Chris Marinac, an analyst at FIG Partners who supervised the survey.
Steve Williams, principal with Cornerstone Advisors, Scottsdale, Ariz., told Credit Union Journal the traditional scenario was larger credit unions would generate product that then was purchased by smaller credit unions.
That had mixed results in the last financial crisis, he pointed out, as many business loan participations went bad.
"Today there is still participation activity, but it is more blended," Williams said. "More importantly, I see more credit unions looking to create that business lending activity on their own."
Much of the impetus for increased small business lending is credit unions seeing the need for diversification. Williams said many CUs want to improve their loan-to-share ratio and want to grow, and view small business lending as important.
Since the financial crisis there has been a big influx in deposits with not enough direct-to-consumer lending to balance, Williams pointed out. Small business lending puts those share deposits to use, he said.
"It is important for credit unions to take a balanced approach — meaning taking a look at both the lending and deposit side," he said. "Don't just look to do business loans, also take business deposits. This of course needs technology to support that channel. Today's business client wants mobile banking technology, so that is necessary if a credit union is going to be a full-service provider."
Williams is also seeing CUs hiring commercial lenders away from banks.
"Credit unions are beginning to attract community bank talent because of their workplace," he noted. "There was a lot of disruption in banks due to the financial crisis, and today there is a lot of merger activity. The bankers see credit unions as an attractive workplace with less threat of change, and credit unions are using that to their advantage."
Trade associations representing credit unions are continuing to push for a loosening or elimination of limits on business lending. Such activity is currently capped at 12.25% of a credit union's total assets. Raising that cap would be a disaster for community banks, according to Trautman.
Despite anxiety over competition, then FIG survey seemed to point to generally good times ahead for small-business lending — at least in the short term. Most survey participants reported growing portfolios. A whopping 85% of respondents said their borrowers' financial positions had improved, leading to stronger credit quality.
What is good for banks is good for small-business borrowers, too.
Richard Pickett, executive director of the East Colorado Small Business Development Center in Greeley, said he has noticed a definite uptick in the amount of credit available to his clients.
"There's definitely more money out there," Pickett said. "Banks are eager for deals."
How eager? Pickett said he is often able to schedule back-to-back meetings with several banks for clients, something that was unthinkable a few years earlier. "In 2008, when I started this job, finding banks willing to lend to a small business was a problem," he said.
Interestingly, SBA lending got a lukewarm reception in the FIG Partners' survey. Only 12.5% of those surveyed mentioned SBA loans when asked what small-business product generated the most revenue.
"I thought SBA carried more weight," Marinac said. "That was probably my biggest surprise."
Adding weight to that finding, Pickett said he has noticed an increased willingness among lenders to leave the SBA out of deals. "More are opting to take the whole thing," he said. "They are willing to take on a little more risk."
