Most credit unions do commercial lending, but when business members seek loans above a certain dollar amount the credit unions often have to decline.
So four credit unions based in and around Minnesota’s Twin Cities decided to work together to keep those loans on their own books and out of the hands of banks.
Affinity Plus Federal Credit Union in Saint Paul, Spire Credit Union in Falcon Heights, Hiway Credit Union in Saint Paul and TopLine Federal Credit Union in Maple Grove recently created United Financials Capital, a credit union service organization focused on commercial lending.
Commercial lending was a logical starting point for the project because all four credit unions already do a lot of lending in that space, said Michael Dalglish, president and CEO of the new CUSO.
Each credit union’s sweet spot for loans now is $5 million and below, but UFC will give them a chance to fund loans up to $50 million — loans for large commercial and infrastructure projects across the upper Midwest that the credit unions would have had to pass on previously, he said.
One factor that constrains loan size is the member business lending cap, which currently limits credit union lending activity to 12.25% of assets. Risk and simple wherewithal also make it hard for smaller institutions to approve large loans.
“Before we would have had to say ‘no it’s too big,’” he said. “Now we don’t have to say ‘no’ to our members anymore.”
Bank trade groups have long argued against proposed changes to the member business lending rule, claiming the MBL cap already contains a number of exceptions that undermine its purpose and integrity. In recent years, credit unions have taken an increasingly large bite out of the banks’ historic dominance in the commercial lending market.
For UFC, the plan is to eventually expand its portfolio beyond commercial lending, Dalglish said, but he declined to speculate about how else the credit unions might collaborate.
“As this organization grows, there’s no doubt we will look at other businesses that make sense to us,” he said.
The $1.7 billion-asset Hiway Credit Union had $115 million of commercial loans on its books at the end of 2021, according to call report data.
The four credit unions will split each loan, although not necessarily evenly, Dalglish said. Factors including member business lending caps, capital and loan book makeup might play a role in how much each institution takes on.
There is also a possibility that additional credit unions could be brought in to partner on specific loans or even into UFC as members, but Dalglish said it’s too early to talk about that.
“We do look to grow this platform and expand it, but today we’re just focused on getting this moving forward with the four of us,” he said. “But it’s going to be bigger than just the four credit unions [in the] long term.”
And UFC could be at the forefront of a movement toward more such partnerships, said Tim Scholten, president of the credit union and the community bank consultancy Visible Progress.
That’s because such organizations allow smaller players to compete on a bigger scale and acquire the expertise needed to effectively compete and maintain strong credit standards. Many smaller organizations may not have the expertise or asset size needed to float larger loans alone, Scholten said.
“This shared approach allows them to compete on a bigger scale and deliver more sophisticated services to their member base. I think this is a trend that we will see more of,” Scholten said.
Dalglish was less sure. “This is a lot of hard work and it takes a special group of people to come together to do something like this. That’s why you don’t see this popping up just anywhere.”
He said talks on launching the group started in 2020, but the pandemic slowed its progress at the start. The group has already put some loans on the UFC books, Dalglish said, but he declined to get into specifics.
Commercial lending is strong in the Twin Cities today, and UFC will bring a unique option to middle-market companies looking to borrow because of the not-for-profit nature of the partner credit unions, Dalglish said.
“There’s nothing else of the sort in our market,” he said.