When the pandemic began, credit unions with commercial loans on their books braced for major problems.
Fortunately, the kind of problem they feared never happened. Many borrowers have been postponed in the first few months of COVID-19, but the majority of them have not requested an extension and have resumed making regular payments, according to CU Business Group, the largest CUSO of business services.
NCUA data reflects what CUBG saw – as of June 30, 2021, of all outstanding commercial loans from credit unions, only 0.81% were 30-60 days past due, 0.65% were past due for more than 60 days and 0.07% have been written off. (As of June 30, 2020, these percentages were 1.20%, 0.69% and 0.20% respectively.
And the pandemic hasn’t seemed to slow down the willingness of credit unions to go all-out with member businesses. From the second quarter of 2020 to the second quarter of 2021, real estate-backed commercial loan origination increased by 57.9% for all credit unions (for credit unions with $ 4 billion or more in assets, they increased by 95%), according to NCUA data. Deposits of trade shares in all credit unions also increased from $ 59.06 billion to $ 69.15 billion from June 30, 2020 to June 30, 2021.
Looking back, NCUA figures show an ever-growing interest in business services across the industry. Deposits of commercial shares totaled $ 16.24 billion in 2013 and increased every year thereafter, and in 2007, commercial loans accounted for 4.9% of total credit union outstanding loans; in 2020, they represented 8.2%.
Reasons for the rose
The current state of commercial borrowers and business owners, as well as best practices for the credit unions that serve them, were the focus of CUBG’s Virtual National Business Services Conference held from September 29 to 30. CUBG, which acquired the loans to CUSO member companies in March, which led to the addition of SBA loans and lending services to its offerings, is based in Portland, Ore., And serves 640 credit unions.
âThere’s all this turmoil in the business world and a lot of struggling real estate, but the space that credit unions are really playing in doesn’t really touch those areas like restaurants, hospitality, events, all things that made the headlines for being canceled or in bad shape. shape over the past year and a half, âsaid CUBG President and CEO Larry Middleman in an interview with CU time before the conference. “Credit unions have really stuck with their commercial real estate and stable businesses, not so much the types of working capital loans that depend on the business opening its doors every day to make payments.”
Rachel Snyder, SVP / COO of CUBG, noted that credit unions’ growing level of experience with commercial lending has helped them achieve recent success. âThey are now really experienced commercial lenders, so when they apply these prudent commercial lending practices, they can still close a lot of deals,â she said. âCredit unions are looking to make more loans, and real estate investors are on board and haven’t hesitated either. So with real estate investors looking to buy property and credit unions looking to lend, this has created a volume of activity that we see at CUBG and we hear it from other CUSOs as well.
The wave of refinancing resulting from the low interest rate environment also helped. âWhen a business loan is available at a rate that starts with a 3, it’s just unbelievably low,â Middleman said. “It fosters this lending environment for new loans, refinances, and packing deals, where the borrower can have three different loans on three different properties and we bundle them into one bigger loan, which is better economically. for the financial institution and the borrower. “
The commercial real estate market showed strong signs of rebounding in the second quarter of this year, with Real Capital Analytics reporting that commercial real estate sales in the United States have returned to pre-pandemic activity levels in the United States. Q2 2021, Dianne Crocker, senior real estate analyst for investment technology firm LightBox and a speaker at the CUBG conference, pointed out. She also noted that 51% of commercial real estate investment projects during the early stages of the pandemic recovery were refinancings.
âThe fear in the market has really decreased significantly,â Crocker said. âThere is a lot of pent-up demand and there is definitely a lot of house hunting dollars in the US commercial real estate market, so there is this frantic feeling of getting back into business, making up for lost time and profiting. offers while the market is still in very good shape.
Proactive credit risk management
Having said that, it is not uncommon for some loans to become problematic in the past year and a half. In a CUBG conference session, Michael Downey of M Downey Consulting in Santa Rosa, Calif., And CUBG SVP / Credit Administration Justin Conrey recommended that credit unions analyze the financial performance of their current commercial borrowers – using only post-March 2020 data – in order to anticipate potential issues and better prepare for NCUA exams.
Downey and Conrey discussed how they recently helped credit unions assess their existing business loans and compile reports on high-risk loans – mostly loans for types of businesses heavily affected by the pandemic. The next step was to create a âcritical asset action planâ for each high-risk loan, which includes a description of the property, loan status, corrective actions to be taken by the borrower, a risk rating recommendation and how the credit union will monitor the loan in the future.
In one example, a $ 5 million loan on a linear mall with a vacant position raised concerns because five of the tenants were restaurants. But the credit union discovered that the vacant location had been split into two units, one of which would soon be occupied by a new tenant, and the borrower had paid all of its deferred interest from 2020. In view of the new tenant, the credit union projected the borrower’s debt service coverage ratio at 1.29 and planned to reassess the loan once the new tenant started paying rent.
Downey advised credit unions pursuing a similar loan review process to also request updated financial information from borrowers on a scheduled basis, including their monthly cash consumption rates and liquidity; review their business concentrations, especially for hard-hit businesses such as hotels and restaurants; stress test loan-to-value ratios and cash flow data; and carry out on-site visits to companies.
âThe effort here is to be really able to dig deep, understand the issues, make a plan and articulate how you’re going to approach those issues, and then come to a very realistic assessment of what it is. this risk, âhe said. âYou really need to have a process to identify, measure, manage and mitigate potentially problematic credits. “
Look into SBA loans
The Small Business Administration’s Paycheck Protection Program (PPP) first gave many credit unions the opportunity to issue SBA loans, raising awareness of the government agency’s various loan programs.
David Doria, director of SBA loans for America First Credit Union ($ 15.8 billion, Riverdale, Utah), which has been providing SBA loans for about 20 years, shared his best advice with CUBG conference attendees looking to get in. in the space.
First of all, he stressed, it’s important to hire business development officers with specific experience in SBA loans, rather than appointing someone on staff to manage the area. He noted that an experienced SBA lender would expect an incentive program in addition to a base salary, but credit unions should not expect to pay the person much more than a commercial lender. If a credit union fails to make that initial investment in talent, “the learning curve will be long and the road to profitability will be a steeper decline,” Doria said.
Second, Doria recommended avoiding SBA Express loans, which are attractive to credit unions looking to help businesses with smaller loans, but have the highest default rates of any SBA loan and do not. are generally guaranteed only up to 50%. America First mainly grants 7 (a) loans, backed by a 75% guarantee.
One of the downsides to the exceptional growth of credit union stock deposits is that it requires them to lend this money to keep their loan-to-share ratio from dropping too low, which has been a challenge due to increasing competition in the market.
âThere are a lot of competitors, with a lot of banks and financiers playing in the market, and what we’re also seeing in some of the larger real estate deals is that some lenders are willing to offer terms and loans. . structures that credit unions tend not to be very supportive of, like a 10-year term or even longer, âMiddleman said. âIt’s fine for the borrower to lock in a low rate, but it can expose the credit union on the asset and liability side. “
Despite these challenges and the continuing economic uncertainty, the relationship between credit unions and businesses appears to be flourishing. Middleman noted that the 2021 virtual conference attracted around 700 attendees, speaking about the growing interest of credit unions in business services. âIt’s much more prevalent in our industry now than it’s ever been,â he said. “And I don’t see us going back, if anything, it’s going to keep expanding.”