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 r...