Business lending by U.S. credit unions continues to grow, and a recent regulatory change could open the door for those institutions to do even more.
At the end of the first quarter, U.S. credit unions had a total of $71.73 billion in member business loans outstanding. That represented 14.3% year-over-year growth.
On May 30, the National Credit Union Administration ruled that federally insured credit unions would no longer have to count loans made on one- to four-unit family dwellings as member business loans. The ruling allows credit unions to make more loans that will not contribute to their statutory MBL cap, which is set at 12.25% of total assets or 175% of net worth.
One- to four-family loans represented about 15% to 20% of the total member business lending portfolio for Elevations CU, which had total MBLs of $166.2 million at the end of the first quarter. That represented 60.7% year-over-year growth.
CFO Michael Calcote said in an interview the Boulder, Colo.-based credit union is "extremely pleased" with the NCUA's decision because excluding those loans from MBL treatment enables Elevations to better serve its communities and provides more opportunity for both its commercial and residential lending activities.
"Last year, we essentially discontinued the origination of non-owner-occupied mortgages in order to retain sufficient regulatory capacity for commercial lending," he said. "This was a material detriment to the communities we serve, as we're the largest mortgage lender in Boulder County and have become one of the largest in our other counties."
Calcote said Elevations serves several college towns, so it is particularly important for it to be able to provide financing for rental housing. With the re-classification, Elevations will again be able to fill that need.
The NCUA action makes sense from an economic perspective too, Calcote said, because those loans have significantly less credit risk than "true" commercial loans. And the re-classification is consistent with the NCUA's previous decision to treat them as residential mortgages rather than commercial loans within its risk-based capital requirements, he said.
Melrose CU was hurt by the sagging taxi medallion business in New York, and in February 2017 the New York State Department of Financial Services took possession of the Briarwood, N.Y.-based institution and placed it under NCUA conservatorship. Still, Melrose had more member commercial loans than any credit union in the U.S. at $1.20 billion after the first quarter. Melrose also had the second-highest concentration of commercial loans at 87.36%.
North Dakota had four of the 20 credit unions with the highest commercial loan concentration after the first quarter of 2018. Jeff Olson, president and CEO of the Credit Union Association of the Dakotas, said in an interview the commercial lending in the Dakotas is attributed primarily to agriculture. Even though North Dakota is now second in the country in oil extraction/production, agriculture is still the number one industry in the state, he said.
The majority of North Dakota's state-chartered credit unions are exempt from the statutory MBL limits as they were chartered to provide business lending in their primarily rural regions and many continue to do so, Olson said. Some of the state's largest credit unions, including Town & Country CU and First Community CU, are heavy into agriculture production or farm and ranch operational lending, Olson said.
Both Town & Country and First Community have been a little more successful in diversifying their business portfolios primarily through their growth in the Fargo market, which was vastly underserved by the credit union sector, he said. Agriculture makes up about one-third of First Community's total lending book.
"And the energy sector is contributing significantly to our local economies too and has had a positive impact on credit unions, primarily on consumer loans including vehicles, homes, home refinance and HELOCs," Olson said.
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