How Credit Unions Can Strengthen Their Lending Portfolios
To succeed in the long term, credit unions need a way to strengthen their lending portfolios by mitigating concentration risk while increasing their loan-to-share ratio.
For many, the way to accomplish both goals is to expand their lending programs beyond their communities. Doing so allows credit unions to access more borrowers across a more significant geographic region.
Taking this approach, however, presents challenges because it's difficult for credit unions, which are regional, to break into new territories. Therefore, credit unions must partner with CUSOs that offer CRE investment opportunities in retail, multi-family housing, healthcare facilities, self-storage facilities, and hospitality.
Partnering with a CUSO enables a credit union to:
Build a More Diversified Portfolio
Recent rate hikes from the Federal Reserve have highlighted one of credit unions' main risk factors: interest rate risk. Changes in interest rates can reduce a credit union's profitability if they have significant exposure to long-term fixed-rate assets. However, while this risk matters, the heightened focus on this area might distract from another critical threat: concentration risk.
This risk can manifest in several ways. Concentration risk can rise when the credit union has too much exposure to a single asset class. Moreover, this risk can compound within a particular asset class if the borrowers are concentrated within a small geographic area.
Credit unions are especially prone to concentration risk because part of their mission is usually to serve a defined community or a group of people associated with a particular employer, location, or organization.
Managing this risk means finding opportunities to invest in CRE projects outside the credit union's traditional service area. For example, credit unions not located in regions suitable for solar or wind projects do not have access to the growing renewable energy industry. Tapping into this market requires partnering with a CUSO that can connect the credit union to green projects. The opportunities in this sector are considerable given that "It is estimated that only around 5% of the market for commercial solar installations has been developed in the U.S.," according to CBRE.
Simplify Portfolio Management
Navigating new geographic territories when expanding CRE investment can be difficult. There are new risk factors to consider. Many of the CRE projects have characteristics that might be new to the credit union. Therefore, it's crucial to partner with a CUSO that can help simplify portfolio management for the credit union by providing a holistic view of the credit quality within the portfolio.
A more complex lending landscape means credit unions need help handling complex loan scenarios, foreclosures, bankruptcies, loan collections, etc. Credit unions need a partner who can offer their experience in driving successful recovery outcomes and improving profitability.
Effective portfolio management makes it possible to have a diversified set of loans. Without a way to properly manage a diverse array of loans spanning different industries, it's almost impossible for a credit union to gain exposure to the range of CRE opportunities available today. The success of a credit union's lending and investment activity ties directly to its ability to manage risk. A greater exposure to different industries often means having the support of a CUSO that can coalesce the numbers into a single, clear picture.
Benefit From Member-Centric Support
Every credit union is different. The CUSO needs to understand the risk tolerance of the credit union's leadership, the surrounding community's needs, and the key stakeholders' long-term goals.
Given that slightly more than three-quarters of business owners plan to obtain funding for their enterprise in the coming months, it's critical that credit unions partner with a CUSO that can help sift through the various metrics that indicate the creditworthiness of each borrower. A truly member-centric CUSO can pair the credit union with the kinds of CRE projects that fit their long-term vision. This kind of partnership develops when the CUSO is willing to take the time to learn about the credit union while also committing to an ongoing relationship.
We offer business owners fast, flexible, and reliable financing at AVANA Capital. We believe in "Capital for a Better Tomorrow," which means we want to empower businesses with the resources they need to expand. By doing so, we help our borrowers grow in a way that benefits their surrounding community.
We have experience providing the capital needed for owner-occupied commercial real estate transactions.
About Author:
Steven Ellsworth grew up on a small farm and began his banking career in agricultural and commercial real estate lending. He has remained in the industry ever since and now has more than 35 years of experience in commercial banking and problem asset resolution.
Steven joined Avana CUSO, formerly known as Extensia Financial, in 2020 as VP Asset Manager. He works with business owners on how to resolve their problems as it relates to deterioration in business operations that impacts real estate ownership. Prior to joining Avana CUSO, Steven worked at JP Morgan Chase in problem asset resolution, Bank of America in regional credit approval and special assets, and Zions Bank as SVP Director of Credit in the National Real Estate Group. In that role, he oversaw the bank’s nationwide commercial real estate lending platform with a primary focus in SBA 504 lending. During his 13 years at Zions Bank, the National Real Estate Group originated over $6 billion in commercial real estate loans and the securitization of these loans.
Steven earned an M.S. in Agricultural Economics from Texas A&M University. He also graduated with a Bachelor of Arts in Finance from Brigham Young University. In 2002, he also completed a master’s level extension program at the University of Washington’s Pacific Coast Banking School.