The first loan participation Pen Air Federal CreditUnion was involved in teamed the cooperative up with a regionalbank.

It was a big deal within the industry because it was one of thefirst times that a credit union partnered with a bank on aparticipation transaction, said Tom Furr, assistant vice presidentof lending, at the $1.2 billion Pen Air FCU in Pensacola, Fla.

That bank was later taken over by another bank and theacquisition ended the relationship, Furr recalled. The commercialreal estate landscape has changed since the landmark deal as largebanks have ramped up their efforts to outdo their local rivals.

“Up until recently, we've not had a lot of competition. The credit unions stepped up during thefinancial crisis to help the local economy and create hundreds ofjobs,” Furr said. “Banks had no interest whatsoever. Now, they'reoffering rates well below market to get back what they lost.”

To that end, Pen Air FCU teamed up with the $54 billion NavyFederal Credit Union in Vienna, Va., and has scored several majorcommercial real estate deals. One of the latest is the May 2013opening of the Hyatt Place Hotel, a 127-room resort that is connectedto the Pensacola International Airport. Navy Federal funded 90% ofthe project at a cost of $11.9 million and Pen Air provided theremaining 10% at $1.3 million. In addition to giving some of thelarger banks in the area a run for their money, the hotel likelyendeared the credit unions to the more than 350 residents whoreceived jobs as result of the project.

Furr said Pen Air FCU has $48 million in its business lendingportfolio. Of that amount, $17 million in participations have beenpurchased and nearly $30 million have been sold. In spite of itsportfolio growth and the re-entry of banks in to the commerciallending arena, credit unions can't get distracted by noise outsidethe industry.

“On participations, it's extremely important that we all bandtogether to share all the risk instead of creating problems withthe share insurance fund,” Furr suggested.

Still, the competition is hard to ignore. Small business loanapprovals at banks with more than $10 billion increased 17.6% inAugust, which is up from 10.9% in August 2012, according to theBiz2Credit Small Business Lending Index, a monthly analysis of thesite's 1,000 loan applications. However, credit unions are holdingtheir own against the competition. Member business loans haveincreased by 34% since 2008 while commercial loans at banks havedeclined by 10%, according to business services and lending CUSO CUBusiness Group LLC in Portland, Ore. Commercial loans at smallercommunity banks have declined by more than $100 billion or 25%since 2008.

Navy Federal is aware of just how competitive CRE lending hasbecome over the years. The credit union launched its commercialparticipation loan program or C-PaL in July 2012. Partnering credit unions originatethe loan and Navy Federal is the buyer of between 40% and 60% ofthe loan amount. The credit union does not take the lead in theparticipation loan deals but does provide the same underwritingstandards as if the loans were under their total control.

Since C-PaL's debut, Navy Federal has looked at a number ofopportunities but hasn't closed on all of them, said Jim Salmon,vice president of business services at Navy Federal.

“It's getting much more aggressive, particularly in the medicalfield with doctors and lawyers, and especially when the economystarted to turn around,” Salmon noticed. “We've lost quite a fewdeals because of aggressive community and regional banks.”

Navy Federal had enough reach in its portfolio that itcould back away from certain deals, Salmon said. That was the casewith hotel financing, he added. The credit union teamed up againwith Pen Air FCU to finance a 152-room Holiday Inn Resort hotel,which is scheduled to be completed in March 2014 and anotherHoliday Inn Resort in Pensacola Beach, Fla.

Among the other reasons Navy Federal has treaded lightly withloan participations that were on the table were the ownershipstructure was too complex or the terms weren't favorable enough togo in. Some deals called for 30-year amortizations – Salmon said heprefers between 20 and 25 years. He also likes to work with creditunions where Navy Federal has a presence. And, sometimes it's notall about who has the best rates, Salmon noted.

“The relationship aspect is a pretty major one,” Salmon said.“There's the ability to have a relationship with a developmentofficer to bounce ideas off or go to for advice.”

Next Page: Cooling, Who Knows?

The competition has certainly spread within the commercialbanking sector and that could continue for some time depending onhow the housing market will fare going forward, Salmon said.

“When is the residential market going to cool? No one knows forsure,” Salmon said. “A lot of banks are going back to businessbanking. I've heard from business development officers who areshaking the trees and hearing that our members will let us knowthat they're talking to us and others. Some are very loyal butothers want the best they can get.”

The $2.2 billion Coastal Federal Credit Union in Raleigh, N.C., hasoriginated and underwritten MBLs since 2001 and sold participationsto other financial institutions since 2003, said PeteVanGraafeiland, vice president of business lending. The creditunion's involvement in participations helps “to elevate the MBL caprestrictions caused by NCUA regulation.”

Coastal has a long standing relationship with Salmon at NavyFederal that goes back to the design, organization, andimplementation of the CUNA Mutual Group's CU Systems Fund in 2005,VanGraafeiland said.

“Our ability to sell participations to Navy Federal since 2011,has allowed Coastal to continue serving our growing MBL membership,while staying within our mandated 12.25% of assets,” VanGraafeilandoffered.

With the competition for such loans heating up in NorthCarolina, VanGraafeiland said Coastal's ability to sellparticipations to Navy Federal has a two-fold benefit: It allowsCoastal to continue to offer more MBLs to its members and it offersNavy Federal additional sources of diversified net income fromgeographically dispersed loans.

Meanwhile, Furr said it's not the community banks that aresticking it to credit unions.

“Community banks are not creating loan products that areoutlandish. We don't have the ability like banks to borrow fromfederal home loan banks,” Furr said. “A lot of community banks arestruggling with profit and capital. I'm a fan of community banks;hopefully, they will survive.”

For some credit unions, it's also been easier to create loyaltyon the retail side compared to the business side, Furr pointed out.In the end, many business owners just want the best rate, he said,acknowledging that Pen Air FCU just can't compete with what somebanks are offering. Add the latest threat of taxation on creditunions to the mix and the match could become morehard-hitting.

“It would be devastating. With all the restrictions we have asfar as loan to value, limits as a percentage of assets, they areenough of a detriment to us that we don't need further harm byputting a taxation on us,” Furr said.

As the tax fight continues in Washington, Pen Air FCU iscounting on its stability and longevity to stand out among thecompetition, said PatriciaVeal, vice president of marketing. Furr and his teamhave built a reputation of trust, which has helped the credit unioncreate long-term relationships and to compete. she noted.