With no PPP lending bogging down corporate lending departments, I told our staff that we were “back to normal.” It was the understatement of the year. Credit union business lending continued at an extremely strong pace in the first half of 2022. Has your credit union seen strong business lending activity this year? If so, you’re in good company as record volumes have been reached across the industry. The rise in the interest rate market accelerated demand compared to previous years. With NCUA Call Report data released for mid-2022, we have an opportunity to dig deeper into the numbers to see how busy credit unions were helping members with investment needs. in commercial and small business real estate.
The Roaring Twenties Continue for Credit Unions
The first six months of 2022 have been the perfect time to set your loan origination goals for the whole year. A total of $28.3 billion in business loans was issued in the first two quarters by credit unions nationwide. That’s up 50% in a single year from the first half of 2021. Even more incredible, those original numbers are up 159% from what credit unions created just a few years ago in during the first half of 2019. The largest credit unions, those with more than $10 billion in assets, funded $5.34 billion in business loan originations, or nearly 19% of total originations of the sector. Not only have credit unions funded large aggregate balances, but they have also increased the number of loans they make to their members. Nearly 5,000 more credit union commercial loans were funded in the first half of 2022 compared to 2021. The average loan size continues to increase. The average reported size of a credit union commercial loan exceeded $600,000 compared to 2019, when the average size was $295,000.
Portfolios grow at credit unions even as rates rise
Credit unions hit a major milestone in 2022 as commercial loan portfolios topped the $100 billion mark at the start of the year and continued to grow at a healthy pace. In just six months, credit unions’ business loan portfolios grew by 12.7%, or $12.4 billion. Balances in business loan portfolios increased by $15.5 billion, or almost 19%, year-on-year. Business loans now represent 5.12% of total credit union assets nationwide. In practice, the number is much higher because many residential investment properties and smaller loans are excluded from official calculations. Even more impressively, since June 2019, credit unions have grown their business loan portfolio by $44.8 billion, or 68%. While the industry sees a decline in residential mortgage volumes, business lending often acts counter-cyclical to residential lending as rates rise. Most business loans will be reset every five years, which will force at least 20% of borrowers to shop around each year rather than sit on their existing loans.
Corporate loan exposures rise with expected slowdown in second half of 2022
The equity market is an area to watch closely in 2022 and could impact loan originations. Unsurprisingly, corporate loan exposures also grew rapidly with $3.4 billion funded in the first half of 2022 compared to $2.8 billion last year during the same period. Rising rates, slowing deposits and strong domestic demand for loans strained credit union liquidity for the first time in many years. The pace of funded equity loans slowed only slightly in the second quarter, but the pace of funded equity loans is expected to slow significantly in the second half of 2022. Credit unions that made larger loans with the strategy of keeping some and selling the rest could see this business model stressed.
Credit quality remains strong
While many try to predict interest rates and the economy in the future, some within the industry view the commercial loan portfolio as a leading indicator of your credit practices and the local economy. The bad news? Crime increases. Five hundred and twenty million dollars in business loans were past due for more than 60 days at mid-year, compared to $399 million at the end of 2021. Nearly 15% of these delinquency figures are related to a old taxi medallion loan portfolio. The good news? Rising delinquency still only accounts for 47 basis points of the overall business loan portfolio. The pace of write-offs also increased, with $44 million of loans written off at an annualized rate of eight basis points. Business loan delinquencies bottomed out during the pandemic and were at unsustainable levels. Credit unions should prepare for delinquencies and charge-offs to drop from the near zero level they have seen in recent years.
Paycheck Protection Program
I’d be remiss if I didn’t mention the one loan commercial lenders in the industry are looking forward to being zero dollars – the SBA’s Paycheck Protection Program. PPP loan balances continue to fall as the forgiveness and repayment process continues. PPP loans have grown from $1.8 billion to $391 million in 2022. It is expected that by the end of 2022, only a tiny amount of loans will remain. Kudos to the SBA staff for continuing to make common sense revisions to the forgiveness portion of this program.
A record year serving local businesses
Congratulations! You are having a great 2022 with everyone when it comes to business loans. Credit unions are able to offset declining mortgage volumes with a steady stream of business loans. Is it sustainable? With incredibly high percentage gains every year and tighter industry liquidity, even an easing or flattening of loan originations will result in very high numbers overall. Many credit unions have not encouraged business deposits over the past two years when they were flush with consumer deposits. However, encouraging business services at your credit union will provide a steady stream of low-cost deposits as other sources come and go. Credit quality is historically low, and with the withdrawal of government stimulus programs, a return to historically normal levels of default and write-offs has arrived. Credit unions continue to be a consistent provider of credit to their local communities and business lending continues to expand. We are approaching the tipping point where credit unions are no longer consumer-focused organizations that also provide business loans, but rather full-service cooperatives that can serve consumers and small businesses equally.
Mark Ritter is CEO of CUSO Member Business Financial Services and its subsidiary, Nu Direction Lending, in Philadelphia, Pennsylvania.