Bethpage FCU Tightens Its Credit Box

Bethpage Federal Credit Union on New York’s Long Island is one of the largest commercial lenders among credit unions.

Over the past 15 years, Bethpage ($13 billion in assets, 455,751 members) has grown to dominate commercial lending on Long Island, and in recent years it is extending its reach to the South. Closing loans further from home both allows Bethpage to reduce risk from geographic concentration and reduce risk by expanding in the relatively safe sector of loans for apartments and other multi-family properties.

Robert Fish, Bethpage’s vice president of commercial lending, said the South is not only where multi-family growth is hot, it is also where many of Bethpage’s longtime customers are seeking to expand.

Bethpage held $1.7 billion in commercial loans on June 30, up 14.1% from a year earlier. Commercial loans were 19.3% of total loans, twice the proportion for other credit unions.

Bethpage’s commercial portfolio – all but $10.6 million backed by real estate – ranks No. 7 among the 1,814 credit unions with any commercial loans.

But measuring balances doesn’t reflect flow, and a large proportion of Bethpage commercial loans flow out as participations.

Fish said Bethpage tries to sell about 30% to 35% of its originations as participations to other credit unions. Last year, Bethpage produced $846.9 million in loans and sold $285.6 million as participations to other credit unions.

“If it’s $3 million or less, we probably just hold that loan on our books,” he said. “But if it’s over that threshold, we like to find other participants ideally in that geography.”

Lawrence Jones, now Bethpage’s chief lending officer, started the credit union’s commercial lending program when he joined Bethpage in 2008. Bethpage increased its commercial loans from $121.3 million at the end of 2008 to $539.1 million in 2013, when Fish came to Bethpage.

Fish graduated from Michigan State University in 2003 with a degree in accounting, and launched his career in commercial banking in Michigan and Florida. He moved back north to work in New York for TD Bank in the inauspicious moment of August 2007.

Fish rode through the Great Recession and beyond with TD Bank before joining Bethpage as a senior commercial underwriter in 2013. He rose to his current position in 2020. Commercial loans ended 2019 at $1.2 billion.

Fish said Bethpage’s secret sauce was developed by Jones. Many of Fish’s peers were recruited from banks, but Jones also developed a “farm system” that groomed interested and promising credit union employees.

“Some of our best successes were tellers or other employees from the credit union that had an interest and wanted to learn commercial lending,” Fish said.

Jones quickly built a good sales team, and next worked on building its team of underwriters and others in credit operations. Fish said the synergy enabled Bethpage to put together larger deals than 10 years ago.

“Back then, a $10 million deal was a big deal. Now that’s more commonplace,” he said. “Our bread and butter is between $5 million and $15 million.”

So far, Bethpage’s largest loan was $105 million for a new multi-family property in Long Island City, N.Y., in 2022.

Bethpage’s commercial portfolio had dipped to $1.1 billion in September 2020, when Fish took over the department near the height of the pandemic.

The pandemic contributed to Bethpage’s commercial delinquency rate. It was 2.4% in June for loans at least 60 days past due – second only to 3% at PenFed Credit Union of Tysons, Va. ($35.5 billion in assets, 2.9 million members).

Fish said the delinquency rate is primarily from about five or six loans, including a larger one affected by the pandemic.

The pandemic changed commercial lending dramatically. Many offices were vacant or nearly vacant as people began working from home. It was a change that came suddenly, but one that has lingered as working from home has become more common.

Big-box retail began shrinking well before the pandemic with the impact of online shopping and quick home delivery.

“That kind of shook up the retail world, but retail has pivoted pretty well and is having a little bit of a rebirth. And landlords obviously are learning to have more service-oriented tenants versus the big box retailers,” Fish said. “And restaurants, even though they took their lumps during the initial wave of the pandemic, they kind of came back as well.”

Since the pandemic, Bethpage has had a moratorium on office and most retail, each of which accounted for about 30% of its portfolio before 2020.

For retail, “we stick to pretty much grocery anchored,” he said. “We like to have an anchor driving traffic to that retail center to make sure that the inline tenants are still getting good foot traffic.”

What has taken the place of office and retail has been multi-family properties, which have soared from 14% in December 2019 to 30% in June.

Much of Bethpage’s multi-family expansion has come from its existing customers’ appetite for multi-family taking them where population growth is high.

“We kind of followed them down South,” Fish said. “They would buy these properties in the South, spruce them up, inject some money into them, update the units, and then they would release them out because demand was so high.”

With relatively low purchase prices and high net operating incomes, “their investments probably yield in a 9% return.”

Historically, about 80% of Bethpage’s loans were on Long Island and 90% were within the Tri-State area of New York, Connecticut and New Jersey. Of Bethpage’s $1.7 billion in loans outstanding in June, about $1 billion are in the Tri-State area, or 60%. About $300 million is in the South, including about $50 million in Texas. The rest are in other states.

As a credit union, Bethpage is prevented from charging prepayment penalties, which are common among banks. The reasoning is that commercial loans are expensive to produce, and the fees mitigate the risk of losing loan income to refinances when rates fall.

“In this environment right now, we have a competitive rate and we are winning deals,” Fish said. “But I do think that if we do a look back two, three years from now and rates come down, there probably will be an enhanced prepayment of our portfolio versus a commercial bank’s portfolio for that fact. For sure.”

At the time of the interview Oct. 4, Fish had been watching Treasury rates rise and reading a report from Goldman Sachs that the Fed was likely to start cutting rates in next year’s second quarter.

“Ultimately, that’s why we’ve tightened our credit box, because there is that uncertainty in the economy,” he said. “What we put on our books are strong asset classes. We’re sticking to multi-family. We have higher debt service requirements than we did historically. And we’re building in some additional cushions.”

With those measures, Fish said that even if there is an economic storm, Bethpage should be in position to ride through it – “however long that storm is.”