Marc O’Leary is not given to scheduling out-of-town trips in November. That’s the height of baking season at Strawberry Hill Povitica in Lenexa. Along with his co-owner brother, Dennis, O’Leary is usually neck deep in dough for the crushing demand of an approaching holiday season. Last fall, though, there was reason to get out of town for a few days.

Small business owners made a trip to Washington, along with credit union executives, to press lawmakers for a bill that would sharply boost business lending levels for the nation’s credit unions. That activity is now capped at 12.25 percent of assets. “It was our busiest time of the year,” O’Leary said, “and it was my first attempt at doing something like that. I was surprised with the lackluster feelings that the politicians had with regards to credit unions.”

But he was there out of a sense of self-preservation. As a customer of the region’s largest credit union, CommunityAmerica, and as a business owner who has run into barriers with loan requests from commercial banks that balk at highly seasonal businesses, O’Leary sensed that he could make a difference by arguing the small business case in Washington.

“The benefits from doing my commercial business with a credit union is, I get to talk to people—I know the faces, the names of people who make the right or wrong decisions,” O’Leary said. “In a bank, that’s not necessarily the case. I know at some point in my business here, I’m going to use up what CommunityAmerica has to offer, and unfortunately, I’m going to have to find another provider, and I just don’t want to do that.”

Marla Marsh, president and CEO of the Kansas Credit Union Association, said it’s important to note that business lending is not new to credit unions; they’ve been at it since their inception in the early 1900s. But, she says, “the average member business loan size in Kansas is slightly over $63,000, much lower than you would generally see on the for-profit banking side. Credit unions are truly serving small businesses.”

That federal cap is a barrier to what credit unions can offer their members, she said, and it dissuades some from providing that service. That’s why her organization is aligned with efforts to back a House bill that would raise the cap to 27.5 percent of assets. The credit-unions sector says the higher cap would free up $13 billion for small business lending and could help create more than 140,000 jobs.

If approved, that would be a marginal boost to what’s been happening with business lending nationwide over the past year. After the financial crisis of 2008, bank lending volumes declined as many moved to meet increased reserve requirements. That nearly closed the spigot for construction and development lending, which didn’t significantly rebound until 2012.

Even greater freedom to issue commercial loans, some credit unions will take a measured approach, offering business loans to help solidify relationships with individual members. That’s the approach at CommunityAmerica, said CEO Dennis Pierce.

“If we have a member who has a business and is looking for an opportunity, we will try to do that,” Pierce said, “but we haven’t grown the portfolio that aggressively.” The reason for that, he said, is the same one that drove commercial banks to pull in the lending reins: Risk assessment. “From the institutions’ standpoint, there’s a merit to being cautious, because a high percentage of new commercial businesses fail,” Pierce said.

Still, he said, there are opportunities for CommunityAmerica. “We’re getting ready to step up a bit. We think we have more competency in real-estate transactions, so we might look more aggressively at some of those kinds of opportunities.”

Rental properties, he said, are closer to an extension of personal business, “but again, our focus is coming out of an extension of an existing relationship for the most part, someone who already has done personal business with us. We look at them first to provide opportunities to expand our business.”

Brandon Michaels, president and CEO of Mazuma Credit Union, the region’s second-largest, cited the chilling effect of the federal cap. “I think credit unions have done what we can, but the cap is still in place,” he said. “Why would a credit union that does not engage in member business lending today invest all of the time, resources, and money into developing the program, knowing that they could fund only a few loans?”

The fixed costs of developing such a program make the move prohibitive, he said. “This isn’t just about the cap and the number of credit unions who are or are not up against it,” he said. “It’s about the number of credit unions who would get into member business lending if the cap was raised or eliminated altogether.”

That could be a promising line for Mazuma, which has funded several successful small businesses over the years, he said, and could assist more businesses whose financials are not as strong as they once were.

Back at the Bank

The credit union bill is working its way through Congress against a backdrop of increased commercial lending by banks nationwide since the start of 2012, a trend that hit a small snag in the first quarter of this year, but one expected to resume throughout the rest of the year, bankers say.

“Last year, we were pleased; we budgeted 4 percent loan growth and ended up about 7 percent,” says Tom Fitzsimmons, CEO of Metcalf Bank. “Half of that was organic growth and half came on acquisitions we made. The net result was, we met our target and picked up a little extra.”

The first two months of this year continued that trend, he said, before things hit a wall in March, leaving the bank about where it hoped to be after one quarter. “There’s still strong interest,” he said, “but for whatever reason, we’ve not closed the books on some of these yet. Some of that is natural delay with timing, waiting for an appraisal, or some businesses electing to sell vs. borrow.”

Like a lot of other banks, though, Fitzsimmons says Metcalf has stepped back from commercial real estate lending, which is still a lukewarm proposition at best. Instead, it has attempted to diversify into commercial and industrial lending and SBA lending opportunities. Still, with surveys indicating that as many as 80 percent of small business owners saying they don’t anticipate trying to borrow this year—even with the added incentive of low interest rates—the customer pool isn’t very deep.

Chuck Stones, president of the Kansas Bankers Association, said a renewed regulatory focus on concentrations of credit could present new challenges for commercial lending.

“A lot of banks in Johnson County and in Missouri were focused on commercial real estate and CRE development” heading into 2008, Stones said. “If they’re not able to have as many within their loan portfolio as in the past, what will that do, first, to the market, and two, to the loan mix? I try not to blame the regulators, but that is a focus and it will continue to be. I would guess that as banks try to find a little more diversity in their loan portfolios, they will be looking at different classes of commercial loans and real estate.”

As for the slump that set in during the first quarter, he said, “there could be a lot of reasons for that; it’s hard to tell just looking at one quarter. Some could be weather, some banks adjusting for year-end and seeing where they were.”

But if regulators continue to insist that banks increase their capital reserves, he said, “there are only two ways to do that: go find new capital, or ‘shrink’ the bank, so your current dollars of capital make up a higher percentage. We could be seeing some of that from year-end numbers.”

Looking ahead, Stones remains generally optimistic. “The economy in general is not a raging fire, but there are signs recovery,” he said. “Banks are always looking for good loans and will continue to do that. I think there’s more competition out there for borrowers to look at, and banks are looking for good customers.”

The current lending environment, he noted, is fundamentally different than the one we had in 2008, and a nearly five-year stretch of recession and weak recovery may have helped wring out some of the risk that bankers must weigh with their commercial lending. “I would assume so,” Stones said. “After all, struggling businesses weren’t getting any money the last four years, so it would be surprising if they could continue to exist.”

 

 

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