Are you ready for the strong growth ahead?
A recent Credit Union Management magazine article addressed what is ahead for lending in 2016, including member business lending. It’s no surprise to those of us who travel the country and work with credit unions on a daily basis that the forecast looks promising. In our home city of Seattle, for example, the construction market is booming.
There are over 100 issued permits in downtown Seattle for buildings 10 stories or taller, perhaps the most active construction timeline in the city's history. Recovery is slower in other areas, such as the Midwest, but it is still steadily improving. While the slight bump in interest rates last year and another anticipated this year might flatten the mortgage market, it shouldn’t have much of an impact on business lending. This category has experienced double-digit growth over the past few years, which is expected to continue.
What does this mean for credit unions? Many of the organizations we work with are trying to broaden their portfolios from a traditional real estate focus (mortgages) to a hybrid one that includes commercial and industrial lending. This will necessitate increased competency at these institutions, not only in originating loans, but also in portfolio management. Recent rule changes from the National Credit Union Administration create an additional sense of urgency for credit analysis and credit decision-making skill development. NCUA’s focus has shifted away from putting up barriers toward holding credit unions accountable if things aren't done right. The privilege of flexibility comes with the responsibility of increased diligence. The core principle of business lending is cash flow analysis.
Commercial lenders need to understand how a company generates cash flow and how to anticipate a borrower’s ability to repay debt in the future. This is much different from just looking at historical performance. To be sure, financial analysis is not enough to reach success in member business lending. Credit analysis--determining a company's ability to repay based on projected cash flow--is needed. Member business loans tend to be larger and more complex than consumer loans, but they are worth it—they yield a higher net interest margin, which all credit unions sorely need.
They also yield the potential for booking additional business products and services, contributing to your non-interest income revenue stream. The challenge is making sure you have the expertise to build and manage your program With skilled loan officers at the ready, you can pursue deals that will add maximum value to your portfolio, rather than just taking whatever comes in the door.
This shift may be looked at as moving away from selling credit to anyone, to granting credit to targeted, creditworthy borrowers. Business owners want local decision-making and to work with a lender who is knowledgeable and experienced. If your credit union has those traits in place, you are at the right place at the right time to help small businesses in your market.
To take advantage of the anticipated double-digit growth, all you have to do is make sure your member business lending program and staff are up to the challenge.
James R. Devine is chairman and chief executive officer and Robert J. Hogan is president and chief operating officer at Hipereon, Inc. They are well known for their training expertise and business lending acumen. As lead instructors for CUES’ series of business lending schools, they enjoy improving credit competency throughout the industry. Learn from the best—register now for CUES School of Business Lending™ I.