Selling loans to other financial institutions can be an effective way for a credit union to manage its liquidity and interest rate risk. It’s no surprise, then, that this activity is growing in both volume and amount.
As of third quarter 2016, 6.7% of credit unions nationwide reported selling loans to another FI a strategy known as participation lending. Between September 2015 and September 2016, U.S. credit unions increased loan participation sales by 14.8%,and fourth quarter data suggests a similar concentration for the industry at year-end 2016.
Nationwide, credit unions are on track to hit $2.3 billion in participations sold in the fourth quarter. This is the highest ever balance on record. Year-over-year, the industry sold participations totaling nearly $611.6 million and expanded 38.8% betweenDec. 30, 2015, and Dec. 30, 2016.
The Push For Participation Sales
Several trends are at play as credit unions work to manage their balance sheets. For example, investment yields remain at historically low levels and different fields of membership are exhibiting varying levels of loan demand.
In many respects, the dynamics for broader secondary market sales also hold true for participation loan sales. Specifically,sales of participation loans incrementally increase when loan growth outpaces share growth. According to fourth quarter datacurrently available, annual loan growth is on track to outpace share growth by 2.9%, making liquidity management an important consideration for the year ahead.
As credit unions seek to free up capital, they are taking steps to convert assets into liabilities so they can redeploy usable funds to areas that better fit their operational goals.
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A Leader Among Cooperatives
Such is the path for Bellco Credit Union ($3.8B, Greenwood Village, CO). The credit union’s business loans and participation sales totaled $136.8 million in 2016,place it third among the 2,7000 credit unions reporting fourth quarter data.
LEADERS IN PARTICIPATION LENDING
FOR U.S. CREDIT UNIONS | DATA AS OF 12.31.16
Callahan & Associates | CreditUnions.com
| Rank | Credit Union | State | YTD Business Loans And Participations Sold | Growth In Business Loans And Participations Sold | Total Assets |
|---|---|---|---|---|---|
| 1 | Bethpage | NY | $218,911,537 | 35.93% | $6,918,649,939 |
| 2 | Town and Country | ND | $163,895,670 | 29.60% | $389,693,484 |
| 3 | Bellco | CO | $136,783,181 | 62.73% | $3,769,852,518 |
| 4 | Evangelical Christian | CA | $133,684,860 | -60.08% | $814,436,197 |
| 5 | Elevations | CO | $111,755,787 | 61.52% | $1,795,289,631 |
| 6 | California | CA | $85,504,153 | 27.96% | $1,593,799,644 |
Source: Callahan & Associates
Bellco got serious about business lending approximately seven years ago, when banks were heavily pulling business capital out of their community. The credit union was forming an ALM strategy at the time and wanted to tighten its loan-to-share ratio. Becauseof the MBL cap, making and selling loans made strategic sense.
Bellco ventured into participations first by forming a project team. Systemic risk was of particular concern during the height of the financial crisis a handful of CUSOs and credit unions in Bellco’s area took down others during 2007 so getting buy-in across the institution was key to success.
Our team was proactive, says Dan Kampen, chief financial officer at Bellco. We reached out to regulators early on to ensure we had a cohesive plan. Ultimately, we felt we knew what we needed to do, yet there were also learning curveswhere we stubbed our toes a few times.
Bellco is proof that experience is the best teacher. The credit union is now taking on deals upwards of $50 to $60 million. A critical component of its success is knowing what buyers want, and in specific circumstances, underwriting together toward closing.
Our due diligence packets are second to none, Kampen says. We make sure we have economic data, which is vital for repeat buyers.
Relationships And Locations
A large part of Bellco’s success is the result of how it sources business. Through its Friends and Family Program, the Colorado cooperative has strengthened new and existing relationships with its members.
We built a local reputation, Kampen says. Referrals stop if you can’t deliver.
Bellco has also embraced geographic diversity as a means of growth and diversification. It started small through the purchase of five mortgages from five towns and now writes and sells paper all over. And its CUSO relationships are second to none.
At year-end 2016, Bellco belonged to more than 20 CUSOs across the country. Leveraging this network, and key partners within it, has made Bellco a leader among leaders.
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