Credit Unions & Members Benefit From New PPP Round

Credit unions are preparing for another round of Paycheck Protection Program loans this month as many business members have been stretched thin by nine months of disruption from the pandemic.

The $900 billion relief package worked out by Congress in December includes $284 billion for another round of Paycheck Protection Program (PPP) loans for small businesses. The loans are guaranteed by the U.S. Small Business Administration, and are designed to be forgiven in whole or part by the SBA.

CUNA and other trade groups had been pushing Congress for more relief, including PPP funding.

Jordan van Rijn, senior economist for CUNA, said the relief will help businesses and allow credit unions to continue to serve their members.

“It’s getting really tough,” van Rijn said. “At the beginning, a lot of people thought businesses could close for two or three months and reopen again, but now this is dragging on seven, eight, nine months, close to a year now. It’s really hard for businesses to weather that storm without significant relief.”

The SBA is expected to begin taking applications Jan. 14, “if not sooner,” said Jeremy Gilpin, EVP for Greater Commercial Lending, a CUSO of Greater Nevada Credit Union, Carson City, Nev. ($1.3 billion in assets, 77,511 members).

In the first rounds, Greater Commercial Lending granted $583 million out of a $600 billion pool. Greater Commercial Lending’s share in the first rounds was about 0.1%. If that holds for the new round, as Gilpin expects, it would grant about $276 million this year.

From April through July, 934 credit unions granted 1.2 million PPP loans for $9.7 billion, supporting 1.2 million jobs, according to SBA data. Banks accounted for 95% of the $521 billion in PPP loans granted through July 31. Credit unions granted 2% of the total value of PPP loans, but 4% of the number of loans.

This round allows previous recipients to apply again, but has restrictions designed to ensure small businesses get more of the money, including lowering the maximum loan from $10 million last year to $2 million this year.

Loan proceeds can be used for a broader array of expenses and remain forgivable, and the law contains new provisions designed to allow more tax deductions.

The program allows credit unions to deepen their relationships with business members. And it has more tangible benefits as well. For one thing, SBA pays lenders fees when the amounts are forgiven.

Fees are 5% of the amount granted for loans up to $350,000, and 3% for loans between $350,000 and $2 million and 1% for loans of $2 million or more.

In the previous rounds, if all credit union loans had been under $350,000, they would have received $485 million in fee income.

An amount that size would have given a significant boost to non-interest income, which rose 14.4% to $12.2 billion.

It also comes out to an annualized gain of 0.07% of average assets in the second quarter when annualized returns on average assets was 0.61% and another 0.07% in the third quarter when ROA was 0.80%.

“We saw a big spike in that and assumed some of it was related to the PPP lending. Some of it is also due to mortgage fees and mortgage sales to the secondary market,” van Rijn said.

“We thought credit union income was going to fall due to the low-interest-income environment, but all of this fee (and other operating) income actually boosted credit union earnings in the third quarter. Part of that was due potentially to these PPP loans,” he said.

The PPP loans accounted for about 4.6% of bank loan portfolios, but less than 1% of credit union loans as of Sept. 30.

However, PPP loans also had an outsized impact on parts of credit union portfolios.

For example, the volume of all non-real estate loans originated between April 1 and Sept. 30 was $179.5 billion, 3.7% greater than the six month period in 2019. However, if you removed the $9.7 billion in PPP loans, non-real estate loan production fell 1.9%.

PPP loans had to be recorded somewhere, and the NCUA chose to instruct credit unions to place them on the balance sheet under the “All Other Unsecured Loans/Lines of Credit” account — typically made up of consumer signature loans.

PPP loans are excluded from caps for Member Business Loans, so placing them under unsecured personal loans keeps them out of commercial loan calculations.

The balance was $53.7 billion as of Sept. 30, up 17.7% from a year earlier. Total loans are up just 6.3%.

“That category over the last 12 months had grown faster than any other category,” van Rijn said. “That’s probably a big part of it — the PPP lending. Once they’re forgiven, that could cause a drop in this category.”

For example, if PPP loans were excluded from the Sept. 30 balance, unsecured personal loans would have fallen 3.6% to $44 billion.

And while the loans boost a credit union’s assets, van Rijn said the amount is excluded from its net worth calculations, preventing the loans from eroding net worth ratios.