Two years ago (JRN 36:15), we predicted that Credit Union net member business loans would see more robust growth than the paltry 1.9% the industry reported in 2018. Of course we had no way of knowing at that time that we would be facing a pandemic that would lead to the creation of the Paycheck Protection Program (PPP).
These circumstances made our prediction more true than we ever dreamed. Between the end of 2019 and June 30, 2021, net member business loans realized growth of 23.7%. In general, the 50 credit unions listed on page 7 had at least a 2% year-over-year increase in NMBL (June 30, 2020 to June 30, 2021). But there is a caveat.
A change to NMBL definition went into effect in 2017 making it difficult to perform a true comparison. For example, under the new definition, a loan with a balance under $50,000 may not be reported as a NMBL, even if that same loan was reported as such previously, when the balance exceeded $50k.
Understanding this caveat, and the fact that PPP played an integral part in the growth, the list is quite telling.
Here are a just a couple of examples. The 8th bank on the list, 4-Star Elements Financial FCU, Indianapolis, IN, acquired the failed Zero-Star Indianapolis’ Newspaper FCU in April 2021. It would be logical to think that was the cause of its significant NMBL growth. But it’s not. The failed credit union had just $4.4 million in total loans and none of them were NMBLs.
Second thought would be that Elements increased its PPP portfolio. Again, that would be false. While Elements participated heartily in the program, its PPP loan portfolio was reduced during the 12-month period from 107 loans with $4.6 million outstanding to 92 loans with $3.3 million outstanding.
In fact, Elements total loans decreased over the year—from $1.295 billion at June 30, 2020 to $1.267 billion this June. What it did was switch up the concentration of its loan portfolio to help its member businesses during this trying time.
On the other hand, 4-Star Arbor Financial CU, Kalamazoo, MI (#3 on the list) grew its total loan portfolio by $86 million, much of which was by lending to “nonmember” businesses. At June 30, 2021, Arbor Financial had total assets of $858.056 million. That included $652 million in total loans, and $89.3 million NMBL. Arbor Financial’s PPP portfolio did contribute (slightly) to the growth – from 195 loans totaling $5.327 million outstanding a year ago to 248 loans with $5.892 million this June. Arbor Financial’s loan portfolio leans heavily (over 67%) on First Mortgage Real Estate loans, including NMBLs.
You can see that most of the credit unions on page 7 are well-rated by Bauer. But, 1-Star Nassau Financial FCU, East Meadow, NY is a notable exception. With roughly 20,000 members (out of a potential 1.357 million), this community credit union excels in all the wrong places. It had 767% growth in its net member business loans but:
- A)none of them were PPP loans;
- B)Its commercial loans NOT secured by Real Estate earn a lower interest rate than those that are secured by real estate; and
- C)Its net interest margin to average assets of 2.07% puts it in just the 17th percentile for its peer group.
Nassau Financial FCU has been on Bauer’s Troubled and Problematic Credit Union Report since the fourth quarter of 2017 and has been rated 1-Star since the first quarter of 2020. And its easy to see why. At just 4.77%, its regulatory capital ratio is half that of its peer group (9.79%); it has been posting consistent losses; and its loan quality is less than stellar.
While Nassau Financial FCU’s employee compensation and benefits costs are in line with its peers, at 7.5% its office expense is double the 3.7% of its peer group. In addition, Nassau has 12 outstanding loans to credit union officials and senior staff totaling $1.382 million.
Nassau Financial has been undercapitalized for several quarters and its capital ratio continues to drop. Yet, as of June 30th, it had total uninsured shares and deposits of $14.5 million. These members need a wake-up call.
In spite of that, Nassau Financial, as well as all of the other credit unions listed on page 7, are doing what they can to help their member businesses in need. The majority are doing so without compromising lending standards, and that deserves credit.