Dating back to the very first U.S. credit union chartered in 1908, St. Mary’s Bank Credit Union, member business loans have been a part of the credit union business model. However, over the past several years the practice has become a core service offered by a much larger number of CUs and is an important source of credit for small businesses in particular.
With a minor hiccup in 2014, member business loans have been on a steady incline since the Great Recession (see chart). Yet, the rules governing these loans had not changed significantly since 2003, until now.
With certain exceptions, effective January 1, 2017, federally insured credit unions have more flexibility and greater autonomy in making commercial and business loans to their members. The final rule modernizes the process of making business loans by moving from a prescriptive rule to a principles-based rule. NCUA’s oversight will focus on risk management and align more closely with that of bank regulators.
While credit union business lending pales in comparison to that of banks, the NCUA Board believes that the experience gained in the past 13 years in particular, warrants these changes. Not only did they successfully navigate through the recession, CUs have slowly but surely been increasing their investment in member business loans. As a percent of total assets, these loans surpassed 5% for the first time at the end of 2016.
The delinquency rate on these loans peaked above 4% in 2010 and then dropped but has been climbing again for the past two years. As of year-end 2016, the delinquency rate on member business loans is 1.58%.
Page 7 lists the 50 federally-insured credit unions with the most business lending based on 12/31/2016 data. The majority are well rated; the majority also have loans other than business loans rounding out their portfolios. The two with the highest percent:
***Progressive Credit Union, New York, NY (98%) and Zero-Star Melrose Credit Union—Briarwood, NY (89%) have something else in common: a high concentration of taxi medallion loans. We’ve reported on this before (JRN 33:33).
Until recently, a taxicab medallion was considered to be one of the safest and surest investments in the world. Banks and credit unions that specialized in financing them did so with the expectation that they would remain so.
With the rise of smart-phone ride sharing apps, however, the value of taxicab medallions in many U.S. cities has plummeted. The loans made to finance these once elite assets are now faltering. This is what happened to Melrose Credit Union.
As of December 31, 2016, Melrose Credit Union’s capital ratio is just 5.73%, but that doesn’t begin to tell the story. It’s Bauer’s adjusted CR, which factors in delinquent loans is -31.65%. Its $98.7 million loss in 2016 was actually an improvement over the $176.7 million loss in 2015. Melrose CU has been operating under conservatorship since February 10, 2017 and is quite literally fighting for its survival.
While it also has its share of delinquent loans, Progressive CU is much better positioned to weather the storm. It is still very well capitalized (33.55% CR) which gives it a nice cushion absorb losses. While it remained profitable through 2015 it did lose $52.1 million in calendar 2016. During the fourth quarter its delinquency to asset ratio grew only slightly (from 12.23% to 12.32%) but its repossessed assets jumped from $1.4 million to $7.1 million (an indication that it is getting its bad loans off the books). Its Bauer’s adjusted CR is 24.2%.
The only other CU listed on page 7 that has less than a recommended rating of 5-Stars or 4-Stars is ***Evangelical Christian CU, Brea, CA. Its business loans represent 85.6% of total loans. In this case, the CU is actually on the mend. It closed out 2011 with Zero-Stars and has slowly, but surely, been working its way back up.
It’s hard to imagine that the new rules will help in this situation, but we can’t imagine they would hurt either.