For much of their history, local credit unions’ fortunes followed a path laid down by working-class consumers. But at a growing number of Massachusetts credit unions, the golden road to new-customer opportunity now seems to be paved with commercial loans.
And that means the Bay State’s biggest credit unions are suddenly battling the region’s smaller community banks for lucrative busi-ness lending clients.
“Anyone looking to expand right now is looking on the commercial side,” says Denise Toomey, partner at Boston-based Wolf & Co., which assists some of the state’s largest credit unions in risk management.
New Blood
Robert P. Cipriani agrees. He’s president and chief executive officer of three-year-old Octant Business Services, a consortium of eight Massachusetts-based credit union owners plus about 30 in- and out-of-state partners that use its commercial loan underwriting services.
“The residential market is stressed right now. Business loans offset [that],” said Cipriani, who works from Octant’s headquarters in Littleton, above a branch office of Digital Federal Credit Union. Digital is one of its owners.
Commercial loan customers pay higher interest rates and often require additional services, such as business checking, that pay off well for institutions that can offer business lending services as an entry point for the customer, said James Blake, president and chief executive officer of HarborOne Credit Union in Brockton.
Until recently, credit union members who wanted a business loan would often go to a bank, take out a home equity loan or use a credit card, he said.
Today, Blake said it’s not uncommon for customers to do the reverse, pulling out of banks to move their business to a credit union.
Strength In Numbers
HarborOne is a member of Keene, N.H.-based Northeast Member Business Services, another business loan consortium for Massa-chusetts credit unions.
Octant and NEMBS, which also formed in 2005, are Credit Union Service Organizations, or CUSOs – so-named by regulators because they allow credit unions to provide a service they wouldn’t otherwise be allowed to provide.
Some smaller credit unions that never before considered doing commercial lending – in part because until 1998, state law wouldn’t al-low state-chartered credit unions to do so – can now enter the field because of CUSOs, which have hard-to-find and expensive-to-hire commercial lending underwriters on staff, said Daniel F. Egan Jr., president and CEO of the Massachusetts Credit Union League.
About half the Massachusetts credit unions seriously involved in commercial lending participate in a CUSO, he said.
He and Blake estimated there are roughly 50 credit unions doing significant commercial lending, out of 229 total in the state.
More are becoming interested, added Frederick D. Healey, president and CEO of $604 million, Fitchburg-based Workers Credit Union, a NEMBS founding member.
And, he added, “everyone’s cost and risks are mitigated [with a CUSO].”
Workers started off doing small business loans under $100,000, but now offers commercial real estate loans averaging $500,000, Healey said. Its business loan portfolio now totals $26.5 million, or 4.5 percent of its assets.
HarborOne has $30.6 million in commercial loans in portfolio, less than 2 percent of its assets. Blake said its loans are mostly single-family construction loans and loans to small businesses such as landscapers, doctors’ offices or small restaurants. They average around $100,000.
Stunted Growth
By law, credit unions must maintain their total commercial loan portfolio at less than 12.25 percent of assets, following a hard-fought national battle between banks and credit unions in the late 1990s that ended with a cap being imposed for the first time. Massachusetts credit unions and MCUL are among those lobbying Congress to raise the cap to 20 percent.
Banks, except just 18 in Massachusetts regulated by the Office of Thrift Supervision, do not have a commercial loan cap, though many choose to limit the loans for safety and soundness reasons.
Some credit unions are separately asking the National Credit Union Administration, their insurer – and the regulator for federal credit unions – to change regulations so that commercial loans made in lower-income areas are exempt from the cap, Healey said.
Some of the state’s larger credit unions are approaching the commercial loans-to-asset size cap. Digital Federal is at 8.5 percent, Greylock Federal of Pittsfield at 9 percent, and Webster First Federal Credit Union in Webster at 11.4 percent.
Webster First Federal President and CEO Michael Lussier said the credit union converted from a state to federal charter in 1995 partly so it could offer commercial loans.
“It’s an additional source of revenue, and has allowed us to remain competitive,” he said. Webster First has $440 million in assets and $50.2 million in outstanding business loans. Like at least three of the state’s other largest credit unions, it is not a member of a CUSO.
“We were able to afford our own commercial lending program in-house,” Lussier said. “We decided to do it for efficiency.”
One of the state’s and nation’s largest credit unions, $4.4 billion Digital Federal, does some commercial lending in-house and some through a CUSO.
Digital spokesman Tim Garner said the credit union gives loans between $100,000 and $500,000 to Octant for processing.
“Its underwriting system and servicing capabilities are really ideal for the smaller loans,” he said.
DCU keeps its larger loans, including loans of more than $1 million, in-house.
Credit union CEOs say the state’s third-largest credit union, $1 billion Greylock Federal in Pittsfield, keeps its business loans in-house. Greylock, which announced Aug. 11 it had made more than $100 million in small business loans, refused Banker & Tradesman’s re-quests to discuss its business lending.
Business lending may be a great expansion idea for credit unions, but there’s one strong interest strongly opposed: bankers.
Community Concerns
“If a customer moved their business outside the credit union’s geographic region, where would that leave the small business owner [that got a local credit union loan]?” asked Gerry Nadeau, executive vice president for commercial lending at $3.4 billion Rockland Trust in Rockland, noting that many credit unions are limited to making loans to those who live or work in a certain area.
And if a small business happened to be located locally, but didn’t serve the local community, he wondered, how would it fit in with credit unions’ general defined mission of focusing on their members and regions?
“If it’s a small business that serves the community, it’s hard to argue with that logic,” he said. “But then I’d go back to the old argument that they are not paying corporate income taxes. If they aren’t paying taxes, why isn’t their loan pricing any better?”
Nadeau said he’s long thought that if a certain amount of a credit union’s business comes from commercial loans, they should be taxed, just as certain activities of non-profit organizations are taxed if they become involved in activities not directly related to their pri-mary mission.
Credit unions are not considered non-profits, but both are exempt from paying corporate income taxes.
But Egan, of the Credit Union League, said national and “super-regional” banks already have 65 percent of the nation’s banking cus-tomers.
“The concentration is just incredible now. What you’ve got is limited access to alternatives,” he said.
Credit unions, he said, just want to offer more alternatives – and bring some of those customers to their side.
