By Ray Birch
CHICAGO—One credit union is expecting to reach $100 million in commercial loan participations this year contends the deals not only help hedge commercial lending risk, but also allow small CUs to easily enter the business loan space.
“More and more credit unions are looking to grow their commercial lending programs or get into this area. However, the key is finding a way into the commercial space while feeling comfortable with the amount of risk you’re taking on,” explained Charles Krawitz, VP of commercial lending at Alliant CU. “That’s where participation loans come in. Participation loans allow lenders to team up with other lenders to reduce their risk exposure and increase their profits. These loans can be especially attractive to credit unions that are looking to grow their commercial portfolios.”
Since Alliant, which tops $11 billion in assets, began selling commercial loan participations about a year ago, it has sold 19 participations for just under $70 million, and has six transactions totaling $30 million currently undergoing due diligence review.
“We are knocking on the door of a hundred million dollars—a pretty meaningful number in the credit union space,” Krawitz said.
A Clear Opportunity
The VP explained that when he first arrived at Alliant two years ago it was clear to him Alliant Credit Union would have little trouble making good commercial loans.
“We were not at a loss for good, solid commercial real estate opportunities here. And as I started to venture out a little bit into the credit union space, overall I found there are a lot of credit unions who are commercial lenders that are somewhat limited with good commercial lending opportunities,” Krawitz said. “I soon learned that Alliant could help them with participations and meet a need in the market.”
From Alliant’s perspective, commercial loan participations limit concentration risk.
“It limits risk from a geographic standpoint, borrower type standpoint, and property profile standpoint,” he told CUToday.info. “It has also allowed us to diversify into more property types and at the same time generate some non-interest income from loan servicing, as well.”
Commercial Loans by Sector
Charles Krawitz
Krawitz said of Alliant’s commercial loan participation sales, 32% have been for retail properties, 24% for offices, 21% industrial, 16% multifamily and 7% parking lots.
Alliant’s overall commercial strategy has been to lend to highly experienced commercial real estate owners.
“These are people who are in the business of owning commercial property and not owning commercial real estate as a side investment or a hobby. This is their main business, this is what they do,” he said. “These are highly experienced property owners who typically tend to target assets in primary markets and have multiple demand drivers and are more institutional grade in caliber.”
Alliant’s average commercial loan size has been $14 million, with its largest deal $38 million. Krawitz added most CU participation buyers pay par for the deals, with very few willing to pay a premium.
Alliant’s Philosophy
It is Alliant’s philosophy, Krawitz explained, to retain the majority of the balance on the loans it sells.
“Generally a controlling interest over 50%, but, admittedly, there have been a few loans where we have sold upwards of 90%,” he said. “A lot of the decision here depends on size of the loan. I'm not going to take a $20-million loan and sell off a $1-million participation. I'll take a $20-million loan and sell $8 million.”
Krawitz noted that Alliant is not capital (10.33%) constrained.
“Selling participations certainly makes our balance sheet go that much further, so we are not really looking to originate loans and then push them off to others,” he explained. “We have very solid underwriting and solid risk-management practices, so we should be able to demonstrate that in wanting to retain the majority of the loan. That has generally been our philosophy.”
Advice For Others
If a credit union decides to begin selling commercial loan participations of its own, Krawitz advises they only seek loans they would be willing to retain on their balance sheet at 100%.
“You have to first and foremost look for loans that are strategically beneficial to your credit union, so if you can’t sell part of it, the loan is still aligned with your business plan,” said Krawitz. “Also, if a credit union runs into a loan that is too big for them to make and needs to bring in another credit union to do the deal, the credit union should be very clear to the borrower about this decision. You need to be very transparent with your borrowers, that is important.”