Published by CU Business
As of January 31, 2021 more than 1,700 credit unions list balances from purchased participations and over 850 Credit Unions list outstanding sold participations on their balance sheets. It may be a seller’s market currently, but there are still opportunities for both buyers and sellers to thrive.
Why Do Sellers Sell?
Even in an environment where institutions are challenged to grow loans, there are many reasons that a credit union may choose to sell loans. The most common include: maintaining loan origination consistency, reducing risk (interest rate, credit, concentration and regulatory limit to single borrower), increasing liquidity (asset and liability management & access non GSE secondary market), and gain on sale/ongoing servicing income.
Why Do Buyers Buy?
While the economic outlook is much more optimistic as we move forward in 2021, your institution may still need to explore new avenues for loan growth. Here are a few of the most common reasons to buy: supplementing organic growth, diversifying asset portfolio (geographies, loan type), balance sheet management (extend or reduce duration, improve efficiency), and removing servicing headache (if servicing retained).
High performing institutions understand the importance of evaluating all asset classes when constructing their balance sheets, including whole loans and participations. Just like a securities investment or loan origination, incorporating loan transactions into balance sheet strategy can often improve institutional performance.
Evaluation Tips for Both Parties
Whether you’re a buyer or a seller, it always helps to start with the balance sheet in mind as participations can have a material impact. Does this transaction help your credit union directionally/strategically?
Next, develop a consistent (risk adjusted, relative value) decision making framework to ensure that your institution is being adequately rewarded for your risk (credit, liquidity, etc.) and that your process identifies and mitigates risks. This may assist long-term with both loan pricing and sales.
Identify & empower key stakeholders to own the process. Finance, Credit & Legal all have a part to play. It’s important to ensure that everyone understands their role to safeguard the best interests of the organization.
Best Practices for Sellers
Successful sellers determine who owns the process internally and get their due diligence items organized for potential buyers.