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April 22, 2013

American Eagle FCU exits commercial lending biz

HBJ File Photo Dean Marchessault, executive vice president and chief operations officer, American Eagle

Inaction by Congress on increasing credit union commercial lending limits is pushing one of Connecticut's largest nonprofit cooperatives to exit the business.

East Hartford's American Eagle Federal Credit Union, which is the second largest credit union commercial lender in the state, has stopped offering business loans.

Dean Marchessault, executive vice president and chief operations officer at American Eagle, said the organization decided at the end of last year to wind down its business lending division because it didn't want to risk investing millions of dollars ramping it up only to eventually hit the lending cap that would limit its scalability.

Currently, business loans can't make up more than 12.25 percent of a credit union's total assets. The industry has fought for years to try to raise the cap, but has faced fierce resistance from banks trying to protect their turf.

That uncertainty, along with a tepid commercial real estate market and increased competition from community banks, is making American Eagle shift its strategic focus to its core retail business instead.

“We aren't sure what scale the commercial lending business is going to be due to regulations and competition from banks,” Marchessault said. “So we feel this is not the time to build up a business lending function.”

Connecticut credit unions aren't big into commercial lending. At the end of last year, the state's 126 nonprofit cooperatives had a collective 299 business loans worth $95.2 million on their books, according to data from the National Credit Union Administration (NCUA). American Eagle, with $1.4 billion in assets, accounted for more than a third of that loan volume, with $33.7 million in small business loans, NCUA data shows.

American Eagle wasn't close to approaching the business lending cap, Marchessault said, but maintaining and growing a commercial lending business is expensive. Without a guarantee that the credit union will be able to significantly ramp up the business to bring it to the next level and gain proper scale, American Eagle didn't want to risk the capital.

Hiring small business lenders, loan servicers, and underwriters and purchasing technology systems is costly, especially for credit unions in Connecticut, which tend to be much smaller than their bank competitors.

The competitive landscape in Greater Hartford has also shifted. After going public a few years ago, two community banks — Rockville Financial and Farmington Bank — have used their freshly raised capital to significantly increase their commercial lending, which is making it harder for smaller players to compete, Marchessault said.

“We are better off focusing on our retail opportunities,” Marchessault said.

Less than a half dozen Connecticut credit unions offer small business loans. Groton's Charter Oak Federal Credit Union, with $763 million in assets, is the market share leader with about $40 million in commercial loans on its books at the end of 2012.

The debate over expanding credit union commercial lending limits has been a heated one.

The credit union industry has long argued that raising the limit would help infuse billions of dollars into the economy, creating jobs and growth opportunities for businesses.

But bankers have stood against the measure, arguing that any increase in credit union business lending would undercut community banks, whose bread and butter is making commercial loans. They also argue it would give credit unions an unfair competitive advantage.

Credit unions were created by Congress — and given certain tax exemptions and regulatory advantages — to serve middle- and moderate-income individuals, primarily through consumer lending.

Allowing the member-owned institutions to expand their commercial footprint would distance them from that mission, bankers argue.

In February, several federal lawmakers in the House introduced a bill that that would increase credit unions' ability to lend to businesses to 27.5 percent of a credit union's total assets, up from 12.25 percent. It's not clear, however, if the measure will gain traction.

Similar proposals have been pitched in the past, but have never gained enough support.

Credit unions turn to commercial lending as a way to diversify, chase after higher yields, or expand relationships with customers.

Rocky Hill's Nutmeg State Federal Credit Union, with about $350 million in assets, got into the small business lending space last year and amassed a $4 million portfolio by the end of 2012.

John Holt, Nutmeg's CEO, said the credit union has committed significant resources to get in on the market. Nutmeg initially tapped an outside vendor to get the business up and running but now the credit union services all of its loans in house and outsources underwriting services to Charter Oak Federal Credit Union.

Nutmeg's three-person lending team has developed a sweet spot in small loans up to about $100,000, which is a space community banks have been skittish about servicing, Holt said.

“A big part of Connecticut's growth is small business and we want to make that a larger part of our portfolio,” Holt said.

Meanwhile, Charter Oak Federal Credit Union has been fairly aggressive expanding its small business lending footprint. Earlier this month, the cooperative hired former Putnam Bank banker Robert Beeckman as its second fulltime commercial lender.

With its larger size, Charter Oak is the only Connecticut credit union with in-house commercial lending analytical capabilities, which gives it an advantage in the marketplace and allows Charter Oak to offer outsourcing services to smaller credit unions, said John Dolan, the senior vice president and chief lending officer.

Dolan said the credit union finds commercial loans attractive because it diversifies its portfolio, which also consists of mortgage and consumer loans. Diversification is also what attracted American Eagle into the business about five or six years ago, Marchessault said, but for now it's not part of American Eagle's plans.

“If the cap were to change, we'd be able to pivot back to that strategy,” Marchessault said.

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