BY RYAL TAYLOE
Credit unions’ purchased loan portfolios have grown by leaps and bounds over the last half decade. But the window of opportunity hasn’t been slammed shut yet. Find out how your CU can still seize the day with loan participations to compete more effectively with banks on the business lending front. As many credit unions across the country have built out member business lending (MBL) operations in recent years, some have chosen to test the participation loan marketplace as a way to manage and expand their loan portfolios. Consider that at the height of the recession in 2009, the average purchased loan portfolio per credit union was just $1.4 million. As of the second quarter of 2015, the average has doubled to nearly $3.0 million (see chart).
Yet given the credit union industry’s long history of collaborative innovation, there remains a huge opportunity for credit unions to seize the day, using loan participations as a tool to compete more effectively with banks on the business lending front. In addition to capturing more business loan market share, buying and selling participation loans can be an effective tool to help credit unions manage concentration risk, diversify loan portfolios and serve their members more effectively. Credit unions may decide to sell portions of specific loans off their books – to reduce concentrations to a single member – or within a particular geographic area or industry.
A few years ago, I skydived over Capetown, South Africa. As a first-time skydiver, I was naturally a bit apprehensive. So I did a lot of research, selecting a top-notch, reputable diving outfit to guide me through my first jump. And when the time came to make the leap, I not only had a parachute but I also attached myself to an experienced guide.
As in other risky pursuits such as skydiving, it’s advisable to ensure that you have done your research, that you have an experienced guide and that your parachute is in full working order before jumping into loan participations. In this article, I outline some of the key benefits of participation lending along with a few risks to consider before diving into the bright blue sky.
Targeting the Drop Zone through Participation Lending
Participation lending offers a number of advantages to credit unions that are considering making the leap. Participation lending can help you to:
1. Manage Your Balance Sheet Efficiently.
A few years ago, in the depths of the recession, credit unions struggled to keep their loan-to-share ratios at a robust level. Members pulled funds out of the stock market and from accounts at the mega-banks, pursuing a flight to the relative safety of their neighborhood credit unions. It was difficult to pace this sharp growth in shares with new loan generation, and many credit unions searched for innovative methods to grow their loan portfolios.
One way is to pursue a non-member participation purchase program, in tandem with other tactics such as aggressively-priced loan sales and indirect lending. With the economy in the midst of recovery, many credit unions now find themselves with strong loan-to share ratios, and they are looking to sell loans on the participation market.