With a robust business deposit program and ample room to grow its business loan portfolio, Navy Federal Credit Union wants to create alliances across the country to help other credit unions expand too.
On July 1, the $49 billion cooperative in Vienna, Va., launched its commercial participation loan program in an effort to help credit unions grow their business lending programs. Through C-PaL, partnering credit unions would originate the loan and Navy Federal would be the buyer of between 40% and 60% of the loan amount, said Jim Salmon, executive vice president of business services at Navy Federal. The entire transaction, including the loan amount, would be looked at on a case by case basis, he added.
“We kind of had feelers in the marketplace to participate with other credit unions and to assist them in getting business deals with their members,” Salmon said. “Quite frankly, Navy Federal came out in a very good place over the last couple of years. We have room to grow.”
Navy Federal has more than 40,000 business members, business accounts in all 50 states, $280 million in business deposits and $179 million in its business loan portfolio, according to Salmon. The credit union’s 40-employee business services team is fanned out across the country in Jacksonville, Fla., Norfolk and Virginia Beach, Va., Pensacola, Fla., Seattle, San Diego, a small presence in Atlanta and the home base around the Washington, D.C., area.
“Unlike other programs out there that are not lending, we’ve focused on our deposit program to build the relationship to keep members within Navy Federal,” Salmon said. “We do have a lot of money on hand.”
With C-PaL, Navy Federal will not take the lead in the participation loan deals, choosing to appreciate and respect the fact that other credit unions may want to maintain current relationships and run the daily interactions with members, Salmon said. At the same time, Navy Federal will still hold the partnering credit unions accountable to the covenant of their participation loans, he added.
Even though C-PaL is new, Navy Federal has not changed any of its underwriting standards, Salmon said. That consistency is vital to help maintain the credit union’s strong track record.
“Me and my shop have a fiduciary responsibility and most importantly, to senior management to hold the course and do what we’ve been doing over the last seven plus years. We’ve been successful,” Salmon noted.
So far, Navy Federal has secured roughly six deals but has not closed any new transactions as of press time, Salmon said.
Nearly 1,500 federally insured credit unions have $13 billion in participation loans, according to the most current NCUA data. While the regulator requires those credit unions to enter into a written master participation agreement, there isn’t much guidance on what should or should not be included, according to E. Andrew Keeney, a credit union attorney with more than 35 years of experience.
“Clearly, loan participations have a lot to offer but also include a lot of risk,” Keeney wrote in an guest opinion article published in Credit Union Times. “With basically no return on overnight funds and the loan demand from the members a little soft, some credit unions that have loans to sell through loan participations are helping the yield of other credit unions so long as the transaction is properly structured and as many protections are in place as possible.”
Keeney reminded credit unions to refer to Section 701.22, the NCUA regulation on loan participation, which details steps for the non-originating lender. He also said NCUA Letter No. 08-CU-26 continues to be the leading authority on the subject as it considered the template for future NCUA examinations.
In light of the recent turmoil with loan participation scrutiny surrounding the collapse of Telesis Community Credit Union, Salmon said Navy Federal has several layers of protection in place.
“I am a screaming advocate of the ‘five Cs.’ If the cash don’t flow, the loan won’t go,” Salmon emphasized. “We look at each loan like they’re our own deals. We don’t take someone’s credit analysis as gospel. We reconstruct them ourselves.”
Salmon said he also has faith in his business development team’s expertise to ferret out any potential issues. Simply put, if the Navy Federal is offered participation loan transactions that don’t pass the smell test, they will be turned away, he reiterated.
For partnering credit unions, Navy Federal said the plus would be reducing the hit toward their loan cap while retaining the servicing commitment and the member relationship. While the member business lending cap has not been an issue for Navy Federal because of its size, Salmon said C-PaL can help smaller credit unions that are bumping up against their thresholds.
“This will free up [the] cap, help continue to grow a credit union’s program or retain the business members that they already have and not risk losing them to another financial institution,” Salmon said.
For a period of time in the late 1990s and early 2000s, Navy Federal felt the sting of an exodus of members who left because the credit union did not offer business loans, Salmon recalled. Mortgages, credit cards and auto loans were the core products for the cooperative’s four million members. With the addition of business loans and lately, online banking and mobile deposits, a shift is occurring.
“A common practice at banks is if you have the business loan, you’re likely to have all of the other relationships,” Salmon said. “Our primary focus is to help emphasize that members can make Navy Federal their financial institution for life.”