Loans With Collateral

Business services remain a bright spot

The U.S. economy, commercial deposit and lending services, and the outlook for commercial real estate loans topped the agenda at CU Business Group’s (CUBG) 2021 National Business Services Conference.

Larry Middleman, president/CEO at CUBG, a CUNA associate business member at the associate level, provides some highlights from the event.

CUNA News: What were some of the big conversations during the conference?

Larry Middleman: Mike Schenk, CUNA’s chief economist, gave quite a positive outlook on the economy in general. We also heard from Dianne Crocker of LightBox on the forecast for commercial real estate (CRE), which right now shows many sectors are performing very well.

Hospitality and office industries have bounced back well after big drops in 2020.

Another hot topic was how to get branches more involved in commercial lending. Dana Gray of BECU in Tukwila, Wash., spoke on how the credit union has used commercial loan specialists in their branches to bridge the usual gap between the central commercial lending area and the branch network.

There was also much discussion about using technology to enhance efficiency in the commercial lending area through commercial loan origination systems, which make end-to-end processing more efficient.

Additionally, there was some great dialogue around providing lending and deposit services to non-profits in your community, something truly at the heart of the credit union mission. 

Q: What were some other highlights?

A: Our conversations with credit unions before, during, and after our event continue to indicate that commercial loan programs are not just surviving the pandemic, most are thriving. 

Lending activity between credit unions and CRE investors is very strong. Overall, commercial loan balances have increased despite the pandemic, and the same goes for commercial deposit balances. 

Click to enlarge.  Total commercial share deposits.

Commercial deposits rose approximately 50% in 2020 and another 15% so far through June 30, 2021.

Paycheck Protection Program (PPP) lending has raised awareness of and interest in Small Business Administration (SBA) lending programs. Many credit unions are considering expanding beyond conventional loans into SBA lending.

Q: What are the biggest business lending opportunities today?

A: Three areas stand out as the biggest areas of opportunity today:

  1. Developing programs for processing small loans efficiently. This type of lending is the heart and soul of helping small business members in any credit union.
  2. Implementing a formal loan origination system to support and manage the commercial lending process from end to end.
  3. Expanding into SBA lending using the momentum the PPP has generated.

Q: What are your biggest concerns related to business lending?

A: Credit unions are facing a few big challenges right now.

First is the difficulty of finding, hiring, and retaining experienced commercial staff. Credit union loan volumes are higher than ever, and it is a significant challenge to recruit and retain the right staff to support operations.

Second, the low-interest-rate environment is challenging for credit unions as borrowers want to lock in low rates for long terms, such as a 10-year fixed-rate commercial loans. This presents a challenge for asset/liability management in credit unions, where the desire is to originate loans with shorter fixed-rate terms, such as five years.

Finally, an overriding concern is how to keep loans and ultimately grow the commercial portfolio. Borrowers are refinancing and consolidating loans at today’s very favorable rates and terms. 

Some credit unions have to generate 15-20% portfolio growth just to offset runoff from loans exiting for those reasons.

Q: How are your clients addressing business lending risks related to COVID

A: There continues to be uncertainty, but so far credit unions have escaped from any big loan losses or problem loan issues. The June 30, 2021, NCUA statistics bear this out.

Click to enlarge.  Credit union commercial loan performance.

One session at the conference delved into how credit unions are addressing COVID-specific risks such as collateral valuation, current loan-to-value ratios, etc., providing a blueprint for how to assess loans and collateral currently in the portfolio that may be undergoing stress.

As are the general trends today, several of the conference presentations discussed the need for best-in-class digital services, remote access, and the benefits of cloud computing. What used to be “fancy mobile technology” is now standard in day-to-day operations.

Q: What’s the CRE outlook in the coming months?

A: Credit unions have truly established themselves as a viable option for commercial financing and depository services. Sophisticated commercial real estate investors are always looking for additional lending sources, and credit unions are now in that mix.

The forecast for CRE is quite rosy for the near future. The sectors which were hardest hit by the pandemic—hospitality and office—have rebounded and are making a solid comeback. The industrial, manufacturing, and self-storage segments are performing well and were not really impacted by COVID.

Q: What were some key takeaways/insights from the conference?

A: One big lesson was best practices in setting up and organizing the commercial areas: sales, service, underwriting/credit, deposits, branches.

Credit unions are looking to diversify beyond CRE. There was high interest in products such as SBA loans, small loans, treasury services, etc., all of which provide future growth opportunities.

Credit unions also need to have a variety of sources for loan growth. These include buying participations and using third parties such as CUBG to source, process, and originate loans.

Q: Is there anything else you’d like to add?

A: Attendance at CUBG’s national business services conferences continues to rise rapidly. This was our 15th year holding a national conference, and attendance has risen from less than 100 people in the early years to more than 700 at our 2021 virtual event.

This truly illustrates the interest credit unions have in helping small businesses and diversifying their loan portfolios.