Cap waiver allows credit unions to play in small business lending

Many banks still feeling the effects of increased regulation

IQ Community Credit Union

If a business needs a line of credit or a loan, who should they call? “A bank” seems a logical answer, but “a credit union” is also a viable option. For example, Bill Fulk, executive vice president and chief lending officer for Columbia Credit Union, said that in July and August alone, Columbia made $10 million in business loans, and their business loan portfolio is about $127 million.

“We have about $90 million in our member business loan portfolio,” said Joe Amrine, senior vice president and chief credit officer at Fibre Federal Credit Union in Longview. “We’ve become a significant player in the business community.”

However, said Roger Michaelis, president and CEO at iQ Credit Union, many people are unaware that credit unions do business lending.

“Credit unions might just be the best-kept secret in small business banking,” concurred Eric Petracca, chief financial officer for Lacamas Community Credit Union.

An emphasis on business lending

According to Petracca, credit unions have been lending to businesses for a long time. Steve Kenny, president and CEO at Columbia, said they have been making business loans since 1999. Other credit unions have a more recent focus on business lending.

Michaelis said that over the past ten years, iQ has increased business loans for two reasons: iQ’s membership includes a significant number of fairly young school retirees who are starting their own businesses, and business loans provide diversification for the credit union’s loan portfolio.

Holly Wren, vice president at Vancouver-based Child Truck Line Inc., said that two years ago she needed a line of credit to stabilize cash flow, due to volatile fuel prices. A local community bank, with whom she had a business account, turned down her request despite the company’s good credit rating. In contrast, she said, Columbia granted her a business line of credit “within hours.”

Same product, different business model

Ed Franks, vice president and manager of business services for iQ, said that credit unions and banks offer virtually the same business loan products. However, he said, the level of service can attract people to credit unions. Business members, said Amrine, look for a lender who is familiar with the borrower’s particular business and circumstances, and can make credit decisions in a timely manner. While community and regional banks may be able to provide local decision making and loan servicing, large national bank decision makers may not be in your state, let alone in your city, said Franks.

Steve Niemi, president of Battle Ground-based Tradesmen Electric Inc., said he’d had a personal account at Columbia Credit Union since 1995, and was so satisfied with the customer service that when he started his business in 2005, he “naturally went with them.”

Credit unions’ nonprofit business model, where members are shareholders, also differentiates them from banks, noted Amrine.

“It’s a part-owner sitting on the other side of the desk,” explained Amrine. “That requires us to be more responsive.”

One more thing that sets local credit unions such as Lacamas, Columbia, Fibre, and iQ apart from larger financial institutions is their attachment to community.

“100 percent of our business model is right here in Vancouver,” said Fulk.

However, that might not be true for a lot of credit unions going forward, cautioned Brett Bryant, market executive for the southern region of Heritage Bank.

“There’s a lot of consolidation with credit unions across the country,” he said.

Lifting the cap

Since 1988, regulations limit credit unions’ business lending to 12.25 percent of total assets. Franks said this is not practical.

“You have to stop lending until someone pays you off – that doesn’t allow us to serve our members,” stated Franks.

However, there are ways to raise that limitation. One way is to prove to regulators that the credit union has the capacity to grow beyond the established cap, has the staff to manage more loans, and has the same level of expertise as a community bank. iQ was granted a cap waiver in December 2012; the waiver enables them to loan up to 2.25 times the credit union’s net worth. Franks said that will enable iQ to increase their loan portfolio from $60 million to $90 million.

The timing of the waiver was very good, added Michaelis, because banks were turning small businesses away. He said banks don’t like small loans and people weren’t as established as the new requirements dictated.

“It made it difficult for small guys to get their projects completed,” said Michaelis.
Columbia Credit Union has had such a waiver in place for ten years, said Kenny. Their waiver enables them to loan up to 24.5 percent of total assets.

Amrine said Fibre pursued a different avenue to increase business lending capacity, by applying for a low-income designation from the National Credit Union Administration. Granted last month, the designation completely removes the business lending cap.

“Cowlitz County continues to struggle to recover from the economic cycle,” said Amrine. “If we can help facilitate economic growth for our business members, we want to be part of that.”

Lynn Heider, vice president of communications and public relations for the Northwest Credit Union Association, said that pending legislation could raise the business loan cap to 27.5 percent of total assets. However, Michaelis said that legislation, although still desirable, has lost its urgency.

“The biggest need was at the start of the recession. Congress could have provided us greater latitude to help businesses, without costing taxpayers anything. We were willing, but Congress neglected to act at that time,” said Michaelis.

Amrine said that increased business lending opportunities for credit unions will be a “tremendous shot in the arm” for the business community.

“Any time you can increase options, that’s good for us, and for our community,” said Amrine.

Maintaining a perspective

While credit unions pay property taxes and employment taxes, their nonprofit status exempts them from federal income tax. But as credit unions continue grow in size, Bryant questioned, are they still really credit unions? Are they remaining true to the original mandate of serving people of modest means, and limiting membership to a distinctive group of people?

“If you’re going to have a tax preference, then you have to stay true to why that preference was granted,” said Bryant.

However, credit unions claim that they are indeed remaining true to their mission.

“We have strong ties to the communities we serve and we maintain our status of not-for-profit financial cooperatives,” stated Eric Petracca, chief financial officer for Lacamas Community Credit Union.

Steve Kenny, president and CEO at Columbia Credit Union, pointed out that credit unions hold only six percent of total national deposits, and stated that credit unions serve as a “check and balance” for banks.

But Bryant said he will leave policy discussions to policy makers and simply “focus on what we do.”

“There’s enough business to go around,” he said. “Credit unions will have to have a conversation with policy makers as to whether they are banks or not. I’m not interested in having that conversation.”

Perhaps Kristy Weaver, senior vice president and business relationship manager for the greater Portland market for Pacific Continental Bank, summed it up best.

“In Southwest Washington we have a great community and the financial service industry (credit unions and banks alike) support it as a whole,” she said. “I don’t wring my hands over the competition. I just concentrate on my clients and their needs. Broadly, that’s what we all do.”

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