Member business loan balances at credit unions reached $65.8 billion as of June 30, 2017. MBLs expanded 16.7% over the past 12 months and are one of the fastest-growing loan segments in the credit union loan portfolio.
Credit unions added $3.0 billion in MBLs in the second quarter alone and originated $13.1 billion in MBLs during the first half of the year. MBL originations expanded 26.6% annually; 10 percentage points faster than second quarter 2016. Credit unions are increasingly adding member business lending to their overall loan strategy. At the end of second quarter 2017, 37.8% of credit unions held business loans on their balance sheets. That’s an increase of 1.8 percentage points over the first quarter of the year.
Real estate-secured MBLs comprised 87.3% of the industry’s business lending portfolio, an increase of 1.8 percentage points in the past 12 months. Balances for non-farm, non-residential, non-owner occupied MBLs topped $24.6 billion at mid-year. These were the fastest-growing loans in the business lending portfolio — annual balances grew from 20.8% in 2016 to 24.6% in 2017.
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Unsecured MBLs in the portfolio reached $182.4 million in the first half of the year, expanding 23.7% year-over-year. After dipping slightly in second quarter 2016, SBA loans rebounded to $1.7 billion with the average SBA loan across the industry increasing $42,900 to $211,000. The average SBA loan amount was $32,200 less than the industry’s average business loan.
With the growth in balances came an increase in MBL delinquency. As of second quarter 2017, delinquencies were up to 1.61% from 1.48% one year ago. The souring of taxi medallion loans is a factor in the delinquency uptick. As ride-hailing apps continue to pressure the taxi industry, expect to see this trend continue.
Removing the delinquent loans that are secured by taxi medallions puts the overall MBL delinquency rate closer to 0.61%. Delinquency for real estate-secured MBLs was 0.40% in the second quarter, down 15 basis points from June 30, 2016, which highlights the strength and quality of these loans.
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Great Lakes Credit Union | Bannockburn, IL | Assets: $800.3M | Members: 85,179
For Great Lakes Credit Union, constant analysis of its business loan portfolio helps the credit union stay compliant. The strategy also helps the Illinois credit union monitor risk and keep the portfolio top-of-mind in daily operations.
“Loan reviews are critical to the portfolio and risk management of GLCU’s commercial portfolio,” says Eric Vessel, vice president of commercial lending. “They allow us to gauge the accuracy of our loan risk ratings and the overall operational effectiveness of the credit union’s risk-rating processes and procedures.”
That’s why the credit union has developed three rules to glean the most information it can from reviews.
First, GLCU evaluates loans throughout the year — based on the date they closed — rather than in one lump sum at the end.
It also uses each review period to gather new information about the loan. For example, as part of the review, GLCU measures the ability of the guarantor to support the loan as required and uses market data to help determine the strength or weakness of the loans.
Second, the credit union uses data from its loan reviews to determine if there are events or variables that are increasing risk in the portfolio. In this way, the loan review isn’t just a regulatory requirement, it’s an early warning tool to detect possibly problematic loans as well as major industry changes.
According to Vessel, data from the credit union’s loan reviews allows it to manage concentrations, analyze trends, and adjust loan structures and requirements on future transactions. Changes in profit and loss statements and loan-to-value ratios might indicate an economic downturn that could affect the rest of the credit union’s business. And if changes are positive, then the credit union might want to take on more risk.
Finally, GLCU uses a third party to review all transitions initiated through its originations team. If that review identifies a loan as risky, then the credit union has a third-party underwriter review the loan.
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