PORTLAND, Ore. — Extra due-dilegence on commercial loans and lines of credit, once thought to be the next shoe to drop by economists, is largely paying off in the form of fewer problems and delinquencies, according to a number of CUSOs.
As banks take an ultra-conservative approach to their underwriting, businesses are looking for lines of credit and real estate loans in droves, with application volume and requests spiking precipitously, said Larry Middleman, President/CEO of CU Business Group here.
"The big challenge for the last six to 12 months has been sorting out those applications, (sifting through) the ones that are truly worth pursuing from a credit standpoint and those that look good on the surface but don't have enough substance to pursue," he explained. "The norm in the banking world now is to play defense and to protect your assets and capital, as opposed to putting it at risk, and that has created a lot of opportunities for credit unions."
With the banking industry taking significant writedowns in the construction and development segments of their portfolios, the bulk of their attention is spent on shoring up their losses. That is making businesses look elsewhere for credit line extensions and basic customer service.
"We're getting more calls," said Linda Kennedy, CEO at Business Lending Services. "The requests we are willing to look at are good quality. What we are finding is that a lot of the banks aren't kicking out people, but they're not paying attention to them."
"Commercial banks have certainly made credit more restricted, for even their best performing borrowers," added Mike Hales, CEO of Small Business America and director at NACUSO. "As a result of that there is a lot of frustration in the small business community with commercial banks. The opportunity for CUs is profound and higher than it has ever been."
While areas that have been particularly hard hit by the recession are seeing some major dips in credit quality on the consumer side, the impact is a little more muted on the commercial side. Hales chalked that phenomenon up to due diligence efforts on the part of credit unions and praised their willingness to stick with what works for them. "Credit unions do a heck of better job than commercial banks do in really analyzing the creditworthiness of a small business," he said. "We do a very good job of analyzing a small business, trying to forecast its future financial performance; really working with the business owner and trying to fill those needs without overselling."
Both Kennedy and Middleman said their respective CUSOs have seen volume growth despite actually being more conservative in their lending standards than they were before the recession hit. The "plain vanilla" deals are clearly out there to be had.
"The member business loan cap is definitely coming into play for many credit unions," said Middleman. "What we are seeing is tremendous growth for CU Business Group because CUs are looking to diversify, so that has been a big source of new business for us. Even if they wanted to be more aggressive they can't be because of that artificial cap."
There are segments of the economy that have CUSOs gun-shy-namely the construction and development industries, as well as hospitality. But firms with strong cash flows, strong business models and leaders that have their "heart and soul" in their businesses are good bets even in a rough economy.
"We still think there is a lot of opportunity out there as the banks pull in," said Kennedy. "We are just going to be significantly more conservative than we have in the past because we can pick and choose at this point (and still grow)."
