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Taking up Slack in Business Lending

Credit unions have played a significant part in supplying commercial credit during the bank-led financial crisis.

Joe Newberry, CEO of Redstone Federal Credit Union, the state’s largest credit union, where small business loan activity has grown from $8.8 million in 2010 to nearly $20 million in 2011—reflecting area growth owing to the 2005 Base Realignment and Closure order.

Joe Newberry, CEO of Redstone Federal Credit Union, the state’s largest credit union, where small business loan activity has grown from $8.8 million in 2010 to nearly $20 million in 2011—reflecting area growth owing to the 2005 Base Realignment and Closure order.

Photo by Dennis Keim

It wasn’t too long ago that small business owners might walk right past a credit union on their way to their local bank when they needed a loan. But times change.

Venturing into the deeper water of small business lending has been profitable for those Alabama credit unions that have tried it—typically the larger ones. While slow improvement in economic conditions has helped, the larger factor for 2011 was what Patrick La Pine, CEO of the League of Southeastern Credit Unions, called the “flight of businesses from bank” resulting from bank mergers and tougher lending standards.

“We have seen increases over the last couple of years in Alabama and Florida. We started seeing demand go up when banks started curtailing their lending, which hit small business hard. We know they were trying to limit risk,” La Pine says.

Ed Grimes, small business lending manager at Montgomery’s Maxwell Federal Credit Union, says small business loan activity increased “about 50 percent” in 2011 over 2010. Maxwell’s business lending office has built relationships over the years with area developers, and Grimes attributed a major part of that gain to a few large commercial real estate deals.

Huntsville’s influx of Army commands, government contractors and jobs resulting from the 2005 Base Realignment and Closure decisions has helped Redstone Federal Credit Union become the biggest in the state. And its small business loan activity has more than doubled, from about $8.8 million in 2010 to nearly $20 million in 2011. “We’re in a good place here,” says Joe Newberry, CEO.

Redstone’s numbers are unusual, but credit union lending to small businesses nationwide increased by 5 percent in the period, the Credit Union National Association (CUNA) reports, while bank lending to small business dropped almost 2 percent.

“We’ve always had the ability to do that type of lending, but most small businesses never saw us in that light,” La Pine says. He says credit unions often make the smaller business loans that banks tend to ignore, and generally make their decisions more quickly than the banks.

“We loan to the small company that needs a new piece of equipment, for example,” La Pine says. “Most of our loans are under $200,000, whereas community banks typically make small business loans in the $1,000,000 range.”

Credit unions also have the reputation of being more willing to lend than small banks. Nationally, credit unions granted more than 57 percent of business loan applications in 2011 compared to about 47 percent for banks, despite what RFCU’s Newberry terms a more conservative loan approach. “Credit unions have tended to avoid some of the business lending and investment practices that proved to be the downfall of some banks,” he says.

Newberry says one example of that approach is Redstone’s practice of making business loans for short terms, typically 3 to 5 years, at which time the loan is renegotiated. Similar in concept to residential adjustable rate mortgages, he says loan re-pricing is based on an index, such as the prime rate, plus a margin. “This allows us to make sizable loans while limiting our exposure.”

Redstone Federal ventured into Small Business Administration lending several years ago, and has since become the largest credit union SBA lender in Alabama. SBA loans are attractive, says LSCU’s Director of Communications Mike Bridges, because they fall outside current limits on business lending.

With credit unions increasingly flexing their muscles in the realm of small business lending, they would like Congress to increase their limits, currently set at 12.5 percent of assets. The Credit Union Small Business Jobs bill, sponsored by Sen. Mark Udall (D-Colo.), would raise the limit to 27.5 percent of assets. Such a move, CUNA says, would release some $3 billion in credit union capital, with economic projections of up to 140,000 new jobs created.

“We hear politicians always saying small business is the backbone of the economy, the job creators,” La Pine says. “We see ourselves as true partners, helping Main Street. Our small business lending makes loans that will help jump start our economy.”  

Mike Kelley is a freelance writer for Business Alabama. He lives in Huntsville.


Alabama's Largest Credit Unions, Ranked by Total Assets

The source for this information is the National Credit Union Administration’s most recent available year-end data. Compiled by Megan Boyle.

Click here to download the PDF.

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