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With no PPP loans bogging down business lending departments, I told our staff we are "back to normal." That 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 experienced strong commercial lending this year? If so, you're in good company as record volumes were reached industry wide. The rising interest rate marketplace accelerated demand compared with the previous few years. With the NCUA Call Report data released for mid-year 2022, we have an opportunity to dig deeper into the numbers to see just how busy credit unions were assisting members with small business and commercial real estate investment needs.
The Roaring Twenties Continues for Credit Unions
The first six months of 2022 were a great time to make your loan origination goals for the entire year. A total of $28.3 billion in business loans were originated during the first two quarters by credit unions nationwide. This was up a staggering 50% in a single year compared with the first half of 2021. More incredibly, these origination numbers were up 159% from what credit unions originated just a few years ago during the first half of 2019. The largest credit unions, those with over $10 billion in assets, funded $5.34 billion in business loan originations, or nearly 19% of the industry's total originations. Not only did credit unions fund large overall balances, but they also increased the number of loans they are providing to members. Nearly 5,000 more credit union commercial loans were funded in the first half of 2022 vs. 2021. The average loan size continues to push upwards. The reported average loan size of a credit union business loan surpassed $600,000 vs. 2019 when the average size was $295,000.
Portfolios Grow at Credit Unions Even as Rates Rise
Credit unions reached a milestone in 2022 as commercial loan portfolios passed the $100 billion mark early in the year and continued growing at a solid pace. In only six months, credit union business loan portfolios grew 12.7%, or $12.4 billion. Business lending portfolio balances increased a healthy $15.5 billion, or nearly 19%, in a year. Business loans now comprise 5.12% of total credit union assets nationally. In all practicality, the number is much higher as many residential investment properties and smaller loans are excluded from the official calculations. More impressive was that since June 2019, credit unions have increased their business lending portfolio by $44.8 billion, or 68%. As the industry sees declining residential mortgage volumes, business lending often acts in a counter cyclical manner to residential lending as rates rise. Most business loans will reset every five years causing at least 20% of borrowers to shop the marketplace annually rather than sit on their existing loans.
Business Loan Participations Increase With Slowdown Expected in Second Half of 2022
The participation marketplace is an area to monitor closely in 2022 and could impact loan originations. Not surprisingly, business loan participations also rose rapidly with $3.4 billion funded in the first half of 2022 vs. $2.8 billion last year during the same period. Rising rates, slowing deposits and strong internal loan demand have stressed credit union liquidity for the first time in many years. The pace of participation loans funded slowed only slightly during the second quarter, but it is anticipated that the pace of participation loans funded will slow significantly during the second half of 2022. Credit unions that have been originating larger loans with the strategy of retaining a portion and selling the rest could see that business model stressed.
Credit Quality Remains Strong
While many try to predict interest rates and the economy in the future, some within the industry consider the commercial loan portfolio a leading indicator of your credit practices and local economy. The bad news? Delinquency is rising. Five hundred-twenty million dollars in business loans were 60-plus days delinquent mid-year compared to $399 million at the end of 2021. Nearly 15% of those delinquency figures are tied to a legacy taxi medallion loan portfolio. The good news? The rising delinquency is still just 47 basis points of the overall business loan portfolio. The pace of charge-offs also increased as $44 million in loans were charged-off for an annualized rate of eight basis points. Business loan delinquency bottomed out during the pandemic and was at unsustainably low levels. Credit unions should prepare for delinquency and charge-offs to rise from the practically zero threshold that they have seen during the last few years.
Paycheck Protection Program
I would be remiss if I didn't mention the only loans business lenders in the industry are looking forward to having zero dollars in – the SBA's Paycheck Protection Program. PPP loan balances continue to plummet as the forgiveness and repayment process continues. PPP loans declined from $1.8 billion to $391 million in 2022. It is anticipated that by the end of 2022, only a miniscule 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 Banner Year Assisting Local Businesses
Congratulations! You are having a great 2022 along with everyone else when it comes to business lending. Credit unions are able to offset declining mortgage volumes with a steady flow of business loans. It is sustainable? With incredibly high percentage gains annually and tightening industry liquidity, even a softening or flattening of loan originations will result in very strong numbers overall. Many credit unions did not encourage business deposits over the last couple of years when they were flush with consumer deposits. However, encouraging business services at your credit union will provide a consistent flow of low-cost deposits as other sources ebb and flow. Credit quality is historically low, and with the pullback of government stimulus programs, a return to historically normal levels of delinquency and charge-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 getting close to the tipping point where credit unions are no longer consumer-focused organizations that also do some business loans but rather full-service cooperatives that can serve consumers and small businesses equally.
Mark Ritter Mark Ritter is CEO of the CUSO Member Business Financial Services and its subsidiary, Nu Direction Lending, in Philadelphia, Pa.
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