Credit Union Business Lending Rises

Even as credit unions try to raise caps on member business lending, they are also running against barriers related to the higher complexity of business lending, and the movement’s recent and unfortunate experience with a form of commercial loan that soured – loans backed by taxi medallions.

Credit unions increased their business lending faster than banks last year, but the movement is just a drop in a banking ocean.

Credit unions held $65.6 billion in commercial loans backed by real estate at the end of 2018, up 16.5% from a year earlier. Commercial loans not backed by real estate rose 7% to $7.5 billion.

FDIC data showed banks held $2.16 trillion in commercial and industrial loans on Dec. 31, 2018, up 7.8% from a year earlier. Last year’s growth rate was nearly twice that of the 4% growth rate in 2017.

Banks also held $2.33 trillion in real estate-backed loans for business purposes, including construction and development, offices, stores, apartments and farmland. Growth of those business-related loans was 4.3% in 2018 and 5.6% in 2017.

Many credit unions have shied away from business lending because they are too small to afford the personnel and software to keep up with the expectations of small business owners, who are increasingly seeking funding online, Rohit Arora, co-founder and CEO of Biz2Credit, a New York, N.Y.-based fintech firm, said.

“They don’t have the resources and origination tools to invest in the business lending piece,” Arora said. “Credit unions are at a disadvantage from a capital and technology perspective.”

They are also learning from history.

Banks had 44.3% of their loan portfolio in these commercial loans at the end of 2018, the highest level since June 1988, when banks were ending a 2.5-year run when commercial loans were 45% of their portfolios.

Only 46 of the nation’s 5,492 federally-insured credit unions had portfolios with at least 40% commercial loans. Most are rural credit unions with a long history of farm lending. The average last year was 6.9%, up from 6.6% at the end of 2017.

The biggest exception was Progressive Credit Union ($325.6 million in assets, 2,821 members), which had 92% of its portfolio in commercial loans.

But then most of those loans were backed by taxi medallions, which led to Progressive generating the largest losses last year among all credit unions.

2018 might have been the last of the worst years for these loans, which were upended as Uber, Lyft and other ride-hailing services did donuts on the regulated turf of taxi owners. The limited-issue medallions used as collateral fell from a high of $1.3 million in 2011 to $181,000 in June 2018.

The NCUA took in about $1 billion in taxi medallion loans through last year’s liquidations of two New York-area credit unions: Melrose Credit Union ($1.1 billion in assets, 19,864 members as of June 2018) and LOMTO Federal Credit Union ($156.2 million in assets, 2,283 members as of June 2018). Those loans contributed $726 million to the $792.5 million hit the National Credit Union Share Insurance Fund took last year from credit union failures.

Overall the fund’s total assets fell 4.9% to $15.8 billion in the 12 months ending Dec. 31, 2018.

The NCUA’s liquidation of Melrose and LOMTO left Progressive as the last big taxi medallion holder. It lost $103 million last year, including $49.7 million lost in the three months ending Dec. 31, 2018.

The next day it was acquired by Pentagon Federal Credit Union ($24.5 billion in assets, 1.7 million members) in an emergency merger approved by the NCUA.

James Schenck, president/CEO of PenFed, valued the taxi medallion loans at about $290 million, saying they accounted for essentially all of Progressive’s commercial loans not backed by real estate, a portfolio that stood at $270.5 million at the end of the fourth quarter, down from $296.3 million at the end of June 2018.

Those loans also accounted for $86.2 million of Progressive’s $100.6 million in loans delinquent at least 60 days.

PenFed “onboarded” the loans at fair value, which required a $212 million write-down. It ended the third quarter with $99.2 million in taxi medallion and other commercial loans not backed by real estate, with about 74% of the portfolio value at least 60 days past due.

So even with the write-down, PenFed’s 60-day delinquency rate rose from 0.67% on Dec. 31, 2018 to 1.09% on March 31.

Taxi medallions played an outsized role in losses at Quorum Federal Credit Union of Purchase, N.Y. ($817.5 million in assets, 76,954 members).

Quorum lost $8.3 million in 2018, the second-largest loss for 2018 among credit unions. The year’s losses included $4.2 million in the fourth quarter – the 10th biggest loss among credit unions.

Taxi medallion loans and other commercial loans not backed by real estate accounted for just 7.1% of Quorum’s total loan portfolio at the end of 2018, down from 8.8% a year earlier.

But among the $49.9 million in those loans at the end of 2018, $35.4 million were at least 60 days delinquent, accounting for a staggering 92% of all Quorum delinquencies.

However, Quorum remained well-capitalized at the end of 2018 with a net worth ratio of 7.22%, down 60 basis points from a year earlier. Its 60-day-plus delinquency rate was 5.5%, but down nearly two percentage points from a year earlier.

“While 2018 is the third year our earnings have been impacted due to exposure to taxi medallion loan participations, we believe that the brunt of the disruption is behind us, and have seen indications that the market is close to stabilizing,” Quorum President/CEO Bruno Sementilli said in a written statement provided to CU Times.

“Sufficient reserves have been built over these past three years, with our remaining exposure limited to 2% of our loan portfolio. Any further taxi medallion value deterioration would not have a significant impact on Quorum,” Sementilli said. “Through this period, Quorum has enjoyed strong performance in all other aspects of its business, enabling it to remain well-capitalized, continuing to serve its membership, and now poised to return to growth.”

Meanwhile, Arora, a co-founder of the 12-year-old Biz2Credit, said the lending environment is good for small businesses. The Fed is pausing its interest rate hikes, while the economy remains strong and owners optimistic.

“With strong financials from 2018, many small business owners are seeking capital for growth, and they have proven themselves to be creditworthy borrowers,” he said. “Money is flowing to small businesses, while the cost of capital is still reasonable – especially loans from traditional bank loans.”

However, some economists are worried about both the level and quality of corporate debt. Those concerns were also raised in an International Monetary Fund report issued April 10 forecasting reduced global growth.

In the United States, the “Global Financial Stability Report: Vulnerabilities in a Maturing Credit Cycle” said regulators and policy makers should be concerned about growing vulnerabilities among companies and their nonbank financiers, such as hedge funds.

Tobias Adrian, one of the report’s authors and the IMF’s director of monetary and capital markets, said at a news conference April 10 that global growth is slowing, the credit cycle is maturing and concerns are rising about a deeper downturn.

“Financial vulnerabilities continue to build in many countries and could amplify a slowdown,” Adrian said. “In advanced economies, corporate debt and financial risk-taking have increased. The creditworthiness of borrowers has deteriorated. So‑called leveraged loans to highly indebted borrowers continue to be of particular concern.”