Credit unions get down to business.

Credit unions are finding yet another new business opportunity in the relentless spate of bank mergers--business banking.

As banks grow larger and larger they have become less interested in making micro- and small business commercial loans, and credit unions are stepping in to fill the gap.

The number of credit unions that have moved into business banking is still small, but those who do are seeing the number of loans they make rise substantially. At the same time, a number of other credit unions have begun to explore similar moves.

"Because they're generally good, solid loans, their numbers add up quickly on the balance sheet," said Richard Cooper, vice president of government and community relations at Chatsworth-based Telesis Community Credit Union, among the earliest entries when it began making business loans about two-and a-half year ago. "They're generally low delinquency and a loan with a business is usually one of the first steps where you're going to be working with that client on a variety of levels."

Credit unions, which evolved as financial institutions for members of a specific group, usually employees of a large company or a labor union, have in recent years expanded their membership to the general public and, as they have, they have also increased the personal banking services they offer. So that now, most credit unions are competitive with banks in the personal banking arena, offering a complete range of products from home mortgages to car loans and online banking options.

In a sense, credit unions have taken over the role once played by community banks, most of which have been swallowed up by far larger banking institutions.

Now, a similar pattern is emerging with respect to business banking. With community banks taken over by super banks, there are fewer and fewer outlets for business lenders seeking loans smaller than $5 million, the area in which credit unions typically operate.

"What I've seen is there's been a vacuum" said Marge McNaught, vice president of lending and technology at Premier America Credit Union in Chatsworth, which entered the business banking sector last year. "As the banks have pulled away from the micro and small business market there is a vacuum that the credit unions are stepping in to fill."

Premier America currently offers products for commercial light duty vehicle loans, residential income and commercial property loans.

"We think it's going to take some time to develop those relationships" said McNaught. "It's not knocking us over yet, but we hope to grow it."

Wescom Credit Union, which opened its third San Fernando Valley branch, in April announced that it was entering the commercial real estate market.

The credit union hired Dean Lambertson as vice president to head the unit and plans to focus on multi-family residential property as well as industrial, retail and office property loans of up to about $5 million.

"We've been doing one- to four-unit residential lending and we've had lenders inquiring about larger investment properties," said Lambertson. "We've never had a product we could support the membership with."

But those banks that entered the market earlier are reporting considerable success.

Building a portfolio

Telesis followed a typical route in building its business lending segment, beginning with real estate lending services and later expanding to business banking and SBA loans and now has a business loan portfolio totaling $240 million.

In addition, Telesis runs a credit union service subsidiary that partners with other, smaller credit unions across the country for business lending.

"It distributes the risk of the loan and it also allows us to fund more loans in our individual areas," said Cooper.

As of the end of 2003, credit unions still accounted for only 0.03 percent of business lending by all depository institutions, according to the industry trade group, Credit Union National Association (CUNA), and only a little more than 2 percent of the loans they make are for business clients.

But the statistics don't tell the whole story because credit unions typically make such small loans that their numbers are dwarfed by traditional banks.

According to the Small Business Administration, credit unions accounted for 298 SBA loans amounting to $33.4 million in 2003, up from 63 or $7.7 million in lending in 1999. The average business loan they write amounts to just $112,073, SBA data shows.

Still the activity has been brisk enough to prompt a reevaluation of an existing cap on the amount of business lending credit unions can do. A bill currently before Congress seeks to raise the cap to 20 percent of total assets, from a current limit of 12.25 of assets.

"There is a growing number of credit unions that are at or near that cap, and that has the effect of drying up the available funds for small businesses," said Mark Lowe, a spokesman for CUNA. "The loans that credit unions make for business purposes tend to be around $100,000, and banks generally don't make business loans of that size."

More experienced staffing

If only the largest credit unions have entered the market so far, it is because making business loans requires a different level of staffing that smaller credit unions simply cannot afford.

"Doing business lending is a slightly more sophisticated operation than doing auto loans, which has been the bread and butter of credit unions," Lowe said. "It's considered, not just by credit unions, but by everybody, a more risky venture."

Credit union loan officers typically have less experience than do those who specialize in business banking.

"You can have a loan officer with two or three years experience write car loans all day," said Cooper at Telesis. "When you're talking about tens of millions of dollars you have to have somebody that has the expertise."

Many credit unions don't have the resources to hire those experts, but those who have entered the market point out that business banking can subsidize the cost of providing other member services and diversify a credit union's lending portfolio so the risk is spread over a larger group of loans.

For all those reasons, more and more credit union officials say they are considering a move into the market.

"We are in the very preliminary stages of looking at it," said Mike Gomez, CEO of Fiscal Credit Union. "It will probably be a year or two before we jump in. There's some great growth opportunity there, especially when you're talking about small business. They tend to be neglected by the banks."