Navy Federal Business Loan Program Poses New Banking Threat

Credit unions are determined to make more business loans regardless of stalled legislative efforts to aid them.

Navy Federal Credit Union is leading the charge with a participation program for business loans that it is marketing mostly to credit unions that have hit the regulatory cap on such loans. The timing of the July 1 launch is uncanny since lawmakers shelved a proposal in late April to double the existing cap to 27.5% of assets.

"We have money to lend and a lot of credit unions are at their cap," says Jack Gaffney, Navy Federal's executive vice president of lending. "We just saw this as an opportunity to reach out to those credit unions."

The $49 billion-asset Navy Federal has hardly scratched its regulatory max. It has about $180 million in business loans, or $6 billion away from its cap.

Tax-exempt credit unions have long posed a threat to banks but it has mostly been on the retail side. While some credit unions participate in commercial loan pools, Navy Federal's new program, dubbed C-Pal, towers above past efforts. For bankers, it adds a new level of competition.

This program "will present huge competition issues for community banks" in their markets, says John Corbett, the president and chief executive of CenterState Banks of Florida. Smaller banks are "dying to make loans …in a period where loan growth is anemic."

Commercial banks still hold a majority of U.S. business loans, but credit unions are approving a higher percentage of loan applications, according to the Biz2Credit's small-business lending index. Credit unions approved nearly 56% of such applications last month, compared to 47.5% approval among banks with less than $10 billion in assets.

Bigger banks approved 11.1% of applications, the study found.

Gaffney says the program is not meant to compete with banks. "Our interest was to provide money to loan out to credit unions that have expressed a general interest" in business loans, he says.

Navy Federal isn't the only credit union pushing business loans.

"We're ramping up investment in business lending and business accounts," says John Hirabayashi, the president and CEO of Community First Credit Union of Florida. "We see an opportunity to get in now. By the time you wait for a recovery to kick in all the way, it's hard to hire people and get relationships built."

The Credit Union National Association has argued that more than 500 credit unions will soon hit the existing cap. Still, credit unions averaged 4% in member business loans to total assets at March 31, according to CUNA.

"There's plenty of capacity to expand credit union member business lending if they want to," says Paul Merski, the chief economist for the Independent Community Bankers of America. "You can't be a full-blown commercial bank and not pay taxes. Some credit unions are trying to do both and that's really the heart of the matter."

Many bankers were relieved that Congress failed to raise the credit union business threshold. They feared that by not paying taxes, credit unions could offer lower rates on such loans or have lighter underwriting standards.

"No, there's no correlation" between rates and not paying taxes, Hirabayashi says. "Our prices are pretty much controlled by the market."

Hirabayashi agrees with bankers who are worried about the risks tied to loan participations, given the number of credit union and bank failures associated with such pools.

"The troubling thing is that these loan participations turned out to be the most dangerous things credit unions have ever been involved with" Merski says. "As lawmakers look at tax reform and reduction measures, if credit unions don't distance themselves from commercial banks, they're going to be taxed like any other business."

Gaffney says Navy Federal will underwrite any commercial loan a credit union brings to it, which should address concerns.

"I don't expect to get enough demand generated from this to cause us to hit our cap or generate any concerns," with the regulator, Gaffney says. "We will just let the program play out and look at how the demand is generated."

Credit unions grew business loans to their members by 1.5% in the first quarter, compared to a quarter earlier, to $39.7 billion, according to the National Credit Union Administration. Banks grew those types of loans by 2%, to $1.4 trillion, according to the Federal Deposit Insurance Corp.

Gaffney did not provide origination targets, though he says that Navy Federal will look at any business loan opportunity throughout the nation. He cautions, though, that the credit union will continue to stick with its core retail segment of military and their families.

"Lending is our business and if we can do so effectively, we will," Gaffney says. "But our primary focus remains to members in the retail space."