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The Small Business Role of Credit Unions

Small business lending caps pose niggling but growing concern for state’s credit unions.

David Dalton (left) and John Cook (right), of Redstone Federal Credit Union, meet with Brad Stell and take a look at his Stell Enterprises — one of the small businesses Redstone Federal finances.

David Dalton (left) and John Cook (right), of Redstone Federal Credit Union, meet with Brad Stell and take a look at his Stell Enterprises — one of the small businesses Redstone Federal finances.

Credit unions have never been larger or made as much money as they did in 2016.

According to the National Credit Union Administration, assets in federally insured credit unions reached a record $1.29 trillion last year, a 7.3 percent increase over 2015. Outstanding loans grew by 10.4 percent, to $869 billion, while net income increased 10.6 percent, to $9.6 billion.

Those percentage increases are in line with results posted by some of Alabama’s largest credit unions, which traditionally have made most of their money from credit cards, mortgages, car loans and various unsecured loans. Although income from those sources remains the rule, credit unions across the nation and in Alabama are finding their small business lending is a growing — but still relatively small — part of their business.

Such is the case at the state’s largest credit union, Huntsville’s Redstone Federal Credit Union, where assets total $4.7 billion. The dollar amount of Redstone Federal’s booked loans increased by 345 percent last year, but that figure is skewed due to one much-larger-than-usual transaction.

“Without that one loan, dollars booked for business loans still increased by 89 percent in 2016,” says John Cook, vice president of lending. “So far, 2017 looks like it will follow that growth trend based upon the number of applications and booked loans year-to-date and a significant pipeline.”

Small business lending represents about 5 percent of Redstone Federal’s total loans. To enhance its business lending, Redstone Federal has turned to a mentoring program that qualifies small businesses for loans and helps prepare them for success. “If we can’t help them directly, we’ll put them in touch with the people who can,” Cook says.

Redstone Federal also continues to tweak a scoring model for small businesses that makes the loan application process more efficient, while reducing the credit union’s expenses. This year, there is a chance that the amount for approved business loans using that model might be increased from $50,000 to $100,000. That, in turn, would help drive the amount of business loans.

Birmingham-based America’s First Federal Credit Union, the third largest Alabama-based credit union, with assets of $1.4 billion, began a small business loan program in January 2016 and grew it to just under $1 million in loans booked by year end, says President and CEO Bill Connor.

“Our small business lending is focused primarily on those companies who belong to our Benefit Partner program,” Connor says. “Areas in which we have found initial success include HVAC, electrical, plumbing, veterinary and pharmacy.”

The size of America’s First business loans is typical among credit unions. “We have been very deliberate in how we structure and promote our small business lending initiative,” says Connor. “It is just that — small business. We are not commercial lenders, so you will not see shopping center or condo project loans on our books. Our typical small business loans have been for vehicles or lines of credit. The average amount is $40,000, while the range has been between $10,000 and $170,000.”

Alabama Credit Union, the sixth largest based in the state, increased its business loans by about 10 percent last year. Such loans make up only about 5 percent of total loans on its books, but Alabama Credit Union expects continued growth in that area. “We had a good year and expect something similar in 2017,” says Steve Swofford, president of Alabama Credit Union, which has $737 million in assets.

Credit unions’ growth in small business loans is due at least in part to banks’ reluctance — for whatever the reason — to pursue that segment of the market. But the credit unions’ activity in the business loans arena has contributed in a big way to the running feud between banks and credit unions.

Here’s why. A lending cap for credit unions that dates to the Clinton administration limits business loans to no more than 12.25 percent of a credit union’s assets. Yet it is legal for credit unions designated as having “low-income” memberships to have business loans that exceed the 12.25 percent cap.

The number of low-income credit unions more than doubled nationally between 2011 and 2016, to 2,491. Assets in those credit unions ballooned from $47.4 billion to $409 billion, and membership increased from 6.3 million to 39.3 million during that time. Of Alabama’s 115 credit unions, 66 have the low-income designation that allows them to exceed the 12.25 cap.

Banks have taken legal action against credit unions that have surpassed the cap — so far unsuccessfully — but the issue is not going away. The Credit Union National Association and League of Southeastern Credit Unions & Affiliates have long worked to have the cap on business lending increased to 27.5 percent for all credit unions. That would infuse more capital into the economy and create more jobs, credit union sources say, but as of now no such legislation has been introduced, as Congress tackles other issues.

Redstone Federal, America’s First and Alabama Credit Union are nowhere close to the 12.25 cap. Neither is Birmingham-based Avadian Credit Union, the seventh largest based in Alabama. But the cap is going to be an issue at some point, says Linda Cencula, president and CEO at Avadian.

“The business lending cap is prohibitive for all of us,” says Cencula. “Now, Avadian is nowhere near our cap, but eventually we will get there. I really hate to take an approach of, ‘Well, let’s not do anything about it now’ because eventually we will be up on it. But there are credit unions who are approaching their cap, and the limitations really impact the consumer. 

“Many of these people are just regular consumers. They have small businesses or maybe even larger ones, but our focus is on the smaller businesses. Nonetheless, it’s an issue that’s still out there, and really, there’s no legitimate reason for there to be a limit on credit unions.”

Fight to preserve tax-exempt status always in the wings

The banking industry’s long-running attempt to repeal the tax-exempt status of credit unions is more than well documented. In short, credit unions are tax-exempt because they are nonprofit organizations owned by their members. Banks, however, contend that credit unions operate much like banks and, therefore, should be taxed.

The credit unions’ tax exemption is not a front-and-center issue these days as Congress grapples with health care, immigration and alleged Russian meddling. But give it time, like to when Congress gets around to considering tax reform. “Anytime there is a (chance), the banks are going to bring up our tax exemption, and sure, absolutely, we expect that,” says Alabama Credit Union President Steve Swofford. 

It is ironic that credit unions and banks are in total agreement that all financial institutions are over-regulated and that a rollback of Dodd-Frank legislation would be welcomed. But given the infighting in Congress, such a rollback probably will not be considered this year, according to Credit Union Times.

Charlie Ingram and Dennis Keim are freelance contributors to Business Alabama. Ingram is based in Birmingham and Keim in Huntsville.

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