Commercial Loans Push Forward

Before the ink was dry on his diploma, he went to work for a regional bank in Salt Lake City. The next year he landed a job with Wells Fargo as a vice president and senior business relationship manager. That move gave him a front-row seat to the thrills of the Great Recession that began just a year later.

By 2010, he had rejoined the regional bank, and then got a chance to run commercial lending for Mountain America Federal Credit Union of Salt Lake City ($12 billion in assets, 956,185 members), the nation’s 12th-largest credit union in total assets and the sixth-largest commercial loan producer last year.

Mountain America hired him as vice president of business lending in December 2019.

“I got thrown right into the fire,” Griffiths said.

The pandemic also altered plans at BECU. The credit union was preparing to dip into construction and development lending. And it was planning to leverage its experience in multi-family lending to deepen its commitment to help the community build more affordable housing, a critical need in the Seattle area.

At both credit unions, loan production was heavy in January and February, but came to a near halt after the World Health Organization declared COVID-19 a pandemic on March 11, 2020.

Personnel were shifted to processing existing loans and handling an influx of applications for Paycheck Protection Program (PPP) loans to the U.S. Small Business Administration.

They also began carefully studying their existing loans, not sure where dangers might lie in a pandemic.

Some borrowers have faced severe financial stress – typically hotels, restaurants and some retailers. But overall, the businesses have been surprisingly resilient, and the largest credit union lenders for commercial real estate have shown few delinquencies or charge-offs.

In part, that’s an artifact of accommodations. Griffiths at Mountain America said he expects delinquencies will rise modestly this year.

Perhaps the most surprising trend to emerge from the fourth-quarter 2020 data released by the NCUA on March 4 was that originations of real estate-backed commercial loans continued to accelerate last year. After growing just 4% in 2018 and 13% in 2019, they grew 24% to $25.8 billion in 2020.

At Mountain America, production was $327.7 million. And despite shutting down underwriting for new loans in April and May, it rose 1.2% from a year earlier. “We still had one of the largest years in production to date,” Griffiths said.

Among the 5,244 credit unions in the NCUA’s December data, the growth rate of commercial loans last year was on par with total loan originations, which grew 25% to $677.9 billion on the strength of residential first mortgages.

But the trend has included wide variations among the 1,051 credit unions that originated commercial loans last year.

Among credit unions, the largest producer of commercial real estate loans last year was GreenState Credit Union of North Liberty, Iowa ($7.1 billion in assets, 253,348 members). Last year it originated $587 million, up 56.2% from 2019.

Scott Wilson, EVP of commercial services for GreenState, said the credit union benefited as buyers in the secondary market added requirements that would have been costly to borrowers.

“We received an influx of quality commercial real estate requests due to this and we could compete with similar rates and terms,” Wilson said.

At BECU, the second-largest, commercial loan production last year fell 22.3% to $457.3 million.

Dana Gray, BECU’s SVP of commercial and business services, said BECU originations were bustling in early 2020, but after COVID-19 was declared a pandemic March 11, the credit union pressed the pause button.

It concentrated on getting loans in the pipeline funded, and turned its staff to reviewing each of its more than 600 existing commercial real estate loans. It developed an extensive questionnaire for staff to use as it contacted borrowers, and followed up as necessary.

“It did have an impact on production,” she said.

About two-thirds of BECU’s commercial portfolio is for multi-family housing. There was some weakness in Seattle, where landlords started offering rent concessions in the spring and summer in areas that are generally pricey for apartments. But the impact on loans was minimal.

“Multi-family held up much better than we had expected,” Gray said.

In retail, BECU found unexpected challenges. Long before the pandemic, BECU had developed a strategy of concentrating on loans in strip shopping centers anchored by grocery or drug stores. The idea was to lessen exposure to retailers that might be hurt from competition from Amazon or other online outlets.

In that context, nail salons, barber shops and karate studios were safe bets. But in the pandemic, those personal services had to shut down or severely curtail operations.

BECU responded by developing plans to enable payment deferrals of up to 90 days.

However, Gray said few members needed or requested them.

By the fourth quarter, BECU felt comfortable enough to ramp up production. ”We’re very optimistic where we’re headed,” Gray said.

Loan quality seems to have held up well last year. Among the top 10 commercial real estate lenders, BECU and six others had no charge-offs. And the 60-day-plus delinquency rate among the Top 10 credit unions was 0.05% as of Dec. 31, down from 0.16% a year earlier.

Among all lenders, the 60-day delinquency rate was 3.8% in February, down from 3.9% in January. Among delinquencies of any duration, the February rate was the lowest since April 2020, according to the Mortgage Bankers Association of Washington, D.C.

The MBA data showed the highest 60-day delinquency rates in February were 20.6% for lodging and 10.8% for retail. Rates were 2.7% for industrial, 2.4% for office and 1.7% for multi-family loans.

BECU and GreenState had no delinquencies either year, while the rate at Mountain America was 0.03%, down from 0.34% a year earlier.

GreenState’s net charge-offs last year were $25,695, compared with none in 2019. Mountain America had net charge-offs of $117,270 for 2020, compared with a net recovery of $170,828 in 2019.

“Our delinquencies are at historic lows, the lowest they’ve ever been,” Griffiths said. “It won’t be that way by mid-2021, or maybe the end of 2021. I still think we’re in good shape. It won’t be crazy higher delinquencies, but it will be higher than it is now.”

As of early March, GreenState was continuing to maintain a close eye on retail real estate and hotel portfolios, monitoring their financials monthly.

“What happens after the stimulus packages and government assistance stops? We need to be in communication with our borrowers now more than ever, and we are,” he said. “So far, our loan quality remains strong and we’ve been able to weather the storm.”

As 2020 began, Griffiths had many plans for commercial lending at Mountain America, but none of them included shutting down underwriting in April and May as team members worked 12 to 14 hours a day to navigate 7,200 loans worth a total of $365 million through the SBA pipeline for PPP loans.

The NCUA has required PPP loans to be recorded under the category normally used for unsecured personal consumer loans, so they don’t show up in commercial lending categories.

“We started the year very fast in January and February as far as production. When we hit March, we definitely tapped on the brakes, not knowing where things were going on the commercial real estate side as it related to the pandemic,” Griffiths said.

“As we got more familiar with what the market looked like in 2020, we adjusted our approach as it relates to property types,” lowering its loan-to-value limits in areas impacted by the pandemic, he said.

Mountain America had few loans to hotels, but halted lending in that area. “We got very nervous with retail, and somewhat cautious with office,” he said.

Instead, Mountain America focused on lending for industrial warehouses and multi-family housing, and by year’s end they became larger parts of its overall $1.1 billion commercial real estate loan portfolio.

Commercial real estate as a percent of total loans was 12.5% as of Dec. 31 at Mountain America, compared with about 9% among credit unions that have those portfolios. Griffiths said the board has placed no cap on its business portfolio, and that he expects the portfolio to become a larger part of the credit union.

“This is one thing I absolutely love about Mountain America,” he said. “We are not looking at a percentage; we will go where the need is, and we feel there is a large need on the small business side to help our members with their small business loans.”