The first loan participation Pen Air Federal Credit Union was involved in teamed the cooperative up with a regional bank.

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

That bank was later taken over by another bank and the acquisition ended the relationship, Furr recalled. The commercial real estate landscape has changed since the landmark deal as large banks 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 the financial crisis to help the local economy and create hundreds of jobs,” Furr said. “Banks had no interest whatsoever. Now, they're offering rates well below market to get back what they lost.”

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

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

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

Still, the competition is hard to ignore. Small business loan approvals at banks with more than $10 billion increased 17.6% in August, which is up from 10.9% in August 2012, according to the Biz2Credit Small Business Lending Index, a monthly analysis of the site's 1,000 loan applications. However, credit unions are holding their own against the competition. Member business loans have increased by 34% since 2008 while commercial loans at banks have declined by 10%, according to business services and lending CUSO CU Business Group LLC in Portland, Ore. Commercial loans at smaller community banks have declined by more than $100 billion or 25% since 2008.

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

Since C-PaL's debut, Navy Federal has looked at a number of opportunities 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 medical field with doctors and lawyers, and especially when the economy started to turn around,” Salmon noticed. “We've lost quite a few deals because of aggressive community and regional banks.”

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

Among the other reasons Navy Federal has treaded lightly with loan participations that were on the table were the ownership structure was too complex or the terms weren't favorable enough to go in. Some deals called for 30-year amortizations – Salmon said he prefers between 20 and 25 years. He also likes to work with credit unions where Navy Federal has a presence. And, sometimes it's not all 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 development officer to bounce ideas off or go to for advice.”

Next Page: Cooling, Who Knows?

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

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

The $2.2 billion Coastal Federal Credit Union in Raleigh, N.C., has originated and underwritten MBLs since 2001 and sold participations to other financial institutions since 2003, said Pete VanGraafeiland, vice president of business lending. The credit union's involvement in participations helps “to elevate the MBL cap restrictions caused by NCUA regulation.”

Coastal has a long standing relationship with Salmon at Navy Federal that goes back to the design, organization, and implementation 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,” VanGraafeiland offered.

With the competition for such loans heating up in North Carolina, VanGraafeiland said Coastal's ability to sell participations to Navy Federal has a two-fold benefit: It allows Coastal to continue to offer more MBLs to its members and it offers Navy Federal additional sources of diversified net income from geographically dispersed loans.

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

“Community banks are not creating loan products that are outlandish. We don't have the ability like banks to borrow from federal home loan banks,” Furr said. “A lot of community banks are struggling 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 loyalty on 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 some banks are offering. Add the latest threat of taxation on credit unions to the mix and the match could become more hard-hitting.

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

As the tax fight continues in Washington, Pen Air FCU is counting on its stability and longevity to stand out among the competition, said Patricia Veal, vice president of marketing. Furr and his team have built a reputation of trust, which has helped the credit union create long-term relationships and to compete. she noted.

Instant Insights /

Banks Swoop Back in on CU Commercial Real Estate Prospects

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