Extra Credit

Photography by Brucie Rosch By Johannes Werner February 28, 2009

So you're out of a job, and thinking about getting a bank loan to start a business. Think again.

Since the crisis hit, commercial banks have tightened their credit standards. Even the Small Business Administration’s 7(a) guaranteed loan program, designed for businesses that cannot get conventional loans, is reporting a significant drop in loans granted, partly due to tighter standards.

And if you do get a loan, it’ll likely be costlier. Seventy-five percent of U.S. banks surveyed by the Federal Reserve in October—the highest number since 1990—reported that they recently raised their interest-rate spreads and fees on small-business loans.

But amid the economic mess, a new type of lender is emerging: Credit unions are eager to find business clients these days.

Although the financial cooperatives have been around for exactly a century in the United States, their venturing into business lending is relatively new and “an absolutely growing trend,” says Mike Hales, a consultant with Kansas-based Rochdale Group Inc.

Sarasota’s largest credit union is the local poster boy of that trend. The $228 million (in assets) Sarasota Coastal Credit Union, founded in 1953, has offered business lending from Day One, according to President Tom Randle. And while still comparatively small, the business loan portfolio at the 25,000-member co-op has been growing fast recently.

As of September 2008, the credit union had 66 member business loans for a total of $7.9 million on the balance sheet. The loan amount was up 42.3 percent from a year earlier, when Sarasota Coastal had a portfolio of 40 member business loans. As recently as five years ago, Sarasota Coastal had none.

Business loans so far are a very safe business for credit unions, with tiny default rates. (Typically, credit unions ask for owner-occupied commercial real estate as collateral.) Not surprisingly, Sarasota Coastal is planning to increase its business loan portfolio by $5 million—a hefty 63 percent—in 2009.

Randle would like the growth to be bigger. But it’s not easy to convince businesses to borrow these days, since by far most existing small businesses aren’t seeking to expand right now.

“The economy hit the skids,” he says. “And we’ve had turnover at the sales positions that originate small business accounts.”

It’s also tough to get business owners to change financial institutions. Randle says that, for fear of disruptions, many owners prefer to wait to switch to another lender until a loan matures.

Meanwhile, the 800-pound gorilla in the region, the $6 billion (in assets) Suncoast Schools Federal Credit Union, is just beginning to get into business lending. The Tampa-based co-op has five branches in CollierCounty.

“We haven’t been very aggressive about this in the past,” says Tom Dorety, president and CEO. “We only started three or four years ago with business lending.” As of September, Suncoast had a portfolio of 57 business loans totaling $17 million.

“But as we go forward, I think some point of time in the next year or 18 months is going to be a very good time for small business owners to get out there and get something going. There’s a great opportunity as this economy flattens out. We project [our business lending] to go up in 2009, absolutely,” Dorety says.

Credit unions’ venturing into business lending is not without controversy. In 1999, commercial banks were able to get a statute passed that caps credit unions’ business lending at 12.25 percent of assets. But now—arguing a credit crunch for small business—the Credit Union National Association is planning to ask the incoming Congress to lift that cap. Commercial banks, particularly community banks, aren’t happy because their not-for-profit competitors are tax-exempt.

To be sure, so far credit unions have captured a tiny 0.9 percent of the U.S. business loan market. They typically don’t chase commercial real estate developers or bigger fish, and the Southwest Florida co-ops aren’t an exception. Their lending more often resembles micro-loans, $50,000 and up. At Sarasota Coastal, the average business loan is $125,000; at Suncoast, it’s $200,000. That’s less than the typical business loan of community banks.

Credit unions “are focusing on the side of the business that commercial banks are not focusing on: small loans of an average $140,000,” says consultant Hales. “Most large banks are only looking for the middle market and multinational relationships, while credit unions are looking at micro business.”

Credit unions “are more apt to go after that market. It’s an issue of economies of scale,” Hales says. “The reason banks don’t go after that smaller market is that they don’t have the resources.”

What Hales is talking about is that, although—or maybe because—the average credit union is smaller than even community banks, they typically do have access to more resources, thanks to sharing.

Sarasota Coastal, for that matter, is processing its business loans through Member Business Solutions, a Credit Union Service Organization (CUSO). Tallahassee-based MBS, like other CUSOs, is owned by a group of credit unions, including Sarasota Coastal, and performs back office operations small credit unions couldn’t afford to do by themselves.

Typically, a credit union collects information from a prospective business borrower, and overnights it to the CUSO. The CUSO then underwrites, performs background checks, and prepares a closing packet. The originating credit union, finally, approves or denies the application. Pooling loan resources also lowers the risk for participating credit unions, allowing those with high liquidity to buy loans, while others can sell. Finally, CUSOs can serve as a “business loan warehouse,” a temporary parking place for up to 180 days where business loans can be bundled before they are sold.

Consultant Hales has helped set up 16 CUSOs nationwide, and is trying to convince credit unions to start more. At least four business-lending CUSOs are already operating in Florida. The most recent one, started by Miramar-based Eastern Financial Credit Union with 35 credit unions as partners and clients, began lending operations in 2005.

CUSOs have a history of working with small-business incubators. Because of that, they could become an integral part of President Barack Obama’s plan of investing $250 million a year to create public and private incubators in disadvantaged areas throughout the nation, says Hales.

Obama’s plans also include expanding the Small Business Administration’s loan programs—another chance for credit unions to increase business lending. (As background, the SBA has been partnering with credit unions for quite some time. The number of credit unions participating in SBA 7(a) loans has increased steadily since 2003, but they still only make up only 2.6 percent of SBA’s total lending program. Of course, credit unions see lots of potential for growth.)

“Another reason credit unions are performing well is their stronger relationship with members,” says Hales. “They know their borrowers very well.” Even the two credit unions in the region getting hit by bad mortgages have stellar-performing business loan portfolios. There are no defaults at Sarasota Coastal or SuncoastSchools among their business lenders.

Many of the small business owners who decided to come to Sarasota Coastal did so because they “were so angry at banks that they were willing to do anything to change,” says credit union president Randle.

Most small-business owners become familiar with the credit union through personal accounts. Another reason to join is competitive rates.

“Most companies are small and come to us because the owners have personal accounts here, or because our fees and rates are better,” Randle says.

Even if they don’t offer business loans, credit unions’ support can be crucial for small business owners. Sarasota Municipal Employees Credit Union, for instance, provided two brothers, who had been long-time members, with personal loans a few years back. They used the funds to start an electrical contracting business.

“No bank would lend them money to get it started,” says president Elaine Karins. “We gave them each our maximum unsecured line of credit, and today they own one of the largest electrical contracting companies in the area.” 


Not all is happiness.

Credit unions have also been hit by the economic downturn, some more than others. As of November 2008, there were 15 credit union failures in the nation for the year, at a cost of $229 million to the fund set up to guarantee credit union deposits.

The two largest credit unions in Southwest Florida, meanwhile, are bleeding substantial amounts of red ink. Suncoast Schools Federal Credit Union, Florida’s largest credit union and the biggest financial co-op in CollierCounty, suffered a whopping net loss of $51 million during the first nine months of 2008. Sarasota Coastal Credit Union, the largest player in the Sarasota-Manatee area ($228 million in assets), lost $1.29 million during the same period. And West Coast Federal Employees Credit Union in Sarasota ($28 million assets) had accumulated a $94,000 loss for the year as of September.


How they’re performing

Select data of Southwest Florida credit unions

(as of September 2008)

Credit union                  Members          Assets (mln$)   Branches          Net income (loss)**    

Suncoast Schools         476,719           6,069                           50                    (-$51.9 mln)

Sarasota Coastal          25,516             228                              5                      (-$1.29 mln)

Sarasota Mun. Emp.     2,447              19.3                             1                      $107,000        

West Coast Fed. Emp. 3,673               34.8                             2                      (-$94,700)

Tropicana FCU            3,566              23.4                             2                      $143,300

Lee County Postal        1,038              3.8                               1                      (-$9,126)

Lee County Mosquito

Control                 190              0.4                               1                      $6,128

**1st-3rd quarter 2008

SOURCE: National Credit Union Administration

Why they’re different, and how they’re similar to community banks.

Credit unions are cooperatives owned by their depositors. Each depositor becomes a member by buying one share. And each shareholder, no matter how big his or her deposits are, has one vote.

The cooperatives’ primary mission is providing lower fees for services, as well as offering higher interest on savings while charging lower interest on loans. It’s not about maximizing profit for shareholders. 

Ownership control by depositors, and not by outside investors, gives credit unions a leg up in times of sinking confidence in the banking system when it comes to credibility. For one, they make it more difficult to allow people controlling the institution to grab the money and run. In theory, their ownership structure also makes it more difficult to fall into greedy investment or lending traps.

As not-for-profits that distribute gains among their members, they are tax exempt, a privilege that has been under increasing attack by banks.

On the other hand, credit unions cannot freely expand beyond a certain clientele. Originally, membership was restricted to very well-defined groups such as employees of a corporation or state institution. Today, membership limitations of bigger credit unions are just geographical, such as residency in a particular county. Sarasota Coastal Credit Union, for instance, now offers membership to anyone residing in

Sarasota, Manatee or CharlotteCounty.

In boom times, with solid confidence in banks and easy credit, credit unions’ comparative advantages vanished. This made them sometimes hard to distinguish from thrifts and community banks.

In many ways, they copied bank patterns. During the fat years, mergers were a hallmark of the credit union landscape. Some credit unions absorbed so many of their smaller peers that they effectively have the coverage of a regional bank today.

Suncoast Schools Federal Credit Union, for that matter, merged in 2006 with the City of Naples Federal Credit Union, making the Tampa-based co-op the only remaining credit union operating in CollierCounty. A year earlier, Suncoast absorbed HSN Federal Credit Union, and in March 2008, Suncoast took over Times Staffers Federal Credit Union in St. Petersburg.

Despite their ownership structure and supposed nonprofit motive, credit unions have not been able to avoid risky behavior altogether. Some credit unions, particularly in real-estate boom states such as Florida, have plunged into adjustable-rate, balloon, interest-only and other mortgages that now show elevated default rates. 


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