Credit Union Commercial Lending: Why the Trend?

Ashley Garrison: Hello again, and welcome to Baker Hill’s Lending Made Easy. 

I’ve got Brian Peckinpaugh and David Catalano here to talk a little bit about credit union commercial lending. So whether you call it member business lending or commercial loans through credit unions, we’re seeing a lot of trends around credit unions looking to enter this space.

So, Brian just get your perspective on, why do we think credit unions are expanding? How much of the small business PPP program initiated change and where do we see credit unions going, in the next decade or so?

Bryan Peckinpaugh: A lot of it is just natural evolution.

Credit unions and their heavy consumer focus and the charters that they operate under, you can reach a point of market saturation. How do you continue to grow as a financial institution to better serve the members that I have, right?

At the end of the day, that’s their goal and purpose is serve those members. To do that, to continue to bring funds into the institution, I have to lend that money back out in some way, shape or form and there’s only so many car and home loans available depending on what the specific charters might be.

It’s natural progression to get into this world of commercial lending and continuing to serve the members that those credit unions serve.

Being able to provide those member business loans and again, just grow the financial products that they offer across small business owners who happen to bank with the credit union. 

It’s also just a challenging market.

You’ve gotta be able to capture those loans that are larger in scale that have more income to the credit union so I can continue the operations to support technology requirements, brick and mortar requirements, whatever that might be given the institution. Again, to serve those members.

Ashley Garrison: David, your take?

David Catalano: Yeah, credit union commercial lending or member business lending is definitely hot right now.

Loan to share ratios are low. So they’ve got a lot of deposits on hand. If you think about how flush we are, as a financial institution whether we’re a credit union or a bank, with deposits. What do you do with those deposits? And one way to lend them out in a larger format would be with commercial lending.

So credit unions getting into commercial lending shouldn’t surprise anyone. Hopefully they’re hiring a seasoned commercial lender that can bring them into commercial lending in a safe way.

We’re pretty long into a run right now and you see all sorts of different things at the end of runs. But you don’t want to get too far out ahead of your ability if you’re moving into commercial lending for the first time or expanding aggressively.

At the end of the day, you’ve got deposits. It’s a great way to serve your members because there’s lots and lots of members that own businesses that you’re not serving.

If you move into that space, you have a natural customer there that’s already a member. You may be able to expand into new members through small business lending or niche commercial lending in certain industries that maybe you hire someone who understands really, really well. But I think it’s a great opportunity for credit unions to expand their reach, expand their members, and serve more people.

Ashley Garrison: How much of this landscape that we’re seeing is due to that enhanced what I would call Amazon effect on I wanna be everything to everyone. Is there pressure for credit unions to, to be everything to everyone? So Brian, your thoughts?

Bryan Peckinpaugh: I don’t think there’s pressure to be everything to everyone. As an example, I don’t foresee a world of high-end treasury services, as an example, of what they’re gonna provide to members. But I think there is an aspect of it that is the desire to meet as many needs as they can of the members they serve.

Like I was saying earlier, I think it’s a natural progression to go into the world of credit union commercial lending because so many of my members, or the direct relationships of the members I have, own a small business, or wanna start a small business.

In the gig economy that we’re operating in, there’s so many people looking to just start an Etsy shop and I need to buy materials or whatever they may want to get into. I think they just feel the need to up their game as it relates to this side of the relationships. And to that end, I think it’ll be critical, as David mentioned, to continue to look to the right employees. Right? 

Bringing across not just commercial lenders from the banking space, but those that fit the kind of ethos of the credit unions, making sure that they are completely member-focused and driving the right behaviors through these commercial lending processes inside the credit unions.

Ashley Garrison: So, David question for you, just in terms of thinking about "I’m a credit union. I’m looking to enter into this space. What would you say are things that I should be thinking about aside from bringing in talent?”

Brian hit on that one, bringing in somebody who has been a commercial lender been successful in that space, but what else should I be thinking about if I want to grow or start a commercial portfolio?

David Catalano: When it comes to credit union commercial lending, you need to think about these three things: 

• Policy
• Process
• Technology

Technology’s not gonna solve your process or your policy questions. However, a loan origination automation software provider, someone with deep experience in commercial lending could help you knock out your policy, knock out your process.

You don’t wanna underwrite, as an example, you don’t wanna underwrite every single loan the same way. It’s a commercial loan. Let’s underwrite it in this way. 

Well, if it’s a big commercial loan, it’s a little different than a small commercial loan. That’s a policy question. What’s your policy allow you to do and just make sure you’re not building in policies or don’t have policies that prevent, an awesome commercial customer experience.

So with credit union commercial lending, you want to create awesome experiences because you’ve done that on the member side, on the consumer side. Do it on the commercial side. Make sure your policies allow you to create those experiences. The person you hire should help you with that. Work with a technology subject matter expert like Baker Hill.

I mean, we could help you with that on our advisory service. It’s not a problem. You can engage us just to do that if you want. And, I would encourage you to do so.

That’s because it’s so key to start out correctly and its policy, then what processes am I gonna build or am I gonna use to underwrite, to originate, document fund and service my commercial loans? 

And then which digital lending platform should I put together to make all this easy to do? So, those are the three areas that I would think about before I enter into the space.

If I’m already in there, I would evaluate those three areas. And technology doesn’t solve bad process, right? It’s an opportunity to create best process. Just think about it that way.

Bryan Peckinpaugh: Couldn’t agree more and what you closed with, David, is the key.

The benefits I think that the credit unions have, at least those that have not dipped their toe into this space yet, is they have an opportunity to build the policy, the processes and the technology with a modern lens. 

They’re not beholden to legacy approaches, beholden to potentially legacy infrastructure. They can think about lending workflows from the bottom up to be experience focused, which is the heart of the credit union. Their ability to provide that wow experience to their members. 

You can do that by starting with the experience in mind and what do my policy and processes need to be to deliver on that and how do I empower it with technology?

So, it is really just that deliberate thinking of what do you want to provide to your members when they move from retail focused to commercial or business focused with you? That I continue to provide the same level of experience (with loan decision workflows) that I do in the retail or consumer space in this new offering or expanded offering of the world of commercial lending.

Ashley Garrison: So last question for you guys. What do you think banks are thinking about when they see commercial portfolios growing with their credit union competitors?

Bryan Peckinpaugh: I don’t know about you, David, but I think it depends on the bank. I certainly have talked to some where it’s like, oh, that’s cute that somebody else is getting into this space, but you know, they won’t be able to compete for the business that I want to win.

Then there’s others who are very worried about it, especially those community banks that are deep into the communities they serve that feel they might lose some market share to the credit unions.

At the end of the day I think it’s just great all around. It’s putting more money into the communities that need it and have to get the the dollars out there to drive the small businesses.

As we’ve talked in the past, it’s a tough market for the small businesses today with layoffs and businesses failing. So more money, we can get back into the economy through the small businesses that typically the credit unions serve the better.

Ashley Garrison: David?

David Catalano: If I was a community bank and I woke up one day and the one of the largest credit unions in my area was moving into commercial lending, I would think that would be a problem. 

They’re well capitalized and they have the ability to move aggressively. That said, they’re not gonna be as smart on the lending side.

There are some very, very smart commercial lenders that work very, very well and know exactly what asset class to go to and who to work with. They’ll be tough to beat because of that domain knowledge. So it’ll be interesting to see how it plays out.

Ashley Garrison: Awesome. Thanks, David and Bryan, for another great conversation.

If you are interested in credit union commercial lending, consult with an experts.

Here, at Baker Hill, that’s what we’re all about. We’ve been doing this for over four decades. Give us a call. We’d love to help you out.