Credit Unions Find Appetite for Loan Participations
Loan sales have risen since the pandemic’s start as buyers seek to redeploy their savings.
Back in 2008, Alliant Credit Union started selling loans for recreational vehicles.
Despite the Great Recession, they kept at it and got good at it. They knew the process, they knew the quirks and in 2013 they began teaming up with large RV franchises as an indirect lender.
While Alliant had developed an efficient RV lending machine, the production was more than it wanted to hold in its portfolio.
So, it has been selling them under the system peculiar to credit unions known as participations: Alliant sells 90% of the loan, and keeps 10% in its portfolio.
Based on NCUA data, Alliant ($15.2 billion in assets, 646,111 members) was the fifth-largest seller of non-real estate loans last year. It sold $1.1 billion in loan participations in 2021, more than double the $425.6 million sold in 2020.
All credit unions ($2.08 trillion in assets, 131 million members) sold $22.7 billion in non-real estate loans in 2021, up 69% from the $13.5 billion in 2020.
Only 410 credit unions sold any amount of participations last year. They represented about a third of the movement’s assets and members, and their sales were $22.7 billion in non-real estate loans in 2021, up 69% from the $13.5 billion in 2020.
John Toohig, head of whole loan trading at Raymond James Financial in Memphis, Tenn., said the appetite for participations came with the pandemic-era surge of savings, which drove loan-to-share ratios down.
CUNA showed the loan-to-savings ratio was about 70% for most of last year, compared with about 82% in February 2020, the month before COVID-19 was declared a pandemic. It’s been trending up since last fall, but was still only 70.9% in January.
Toohig said he thinks the need to boost that ratio will be driving credit unions to buy participations for another 12 to 18 months.
“We have a hell of a hole to dig out of,” he said.
In the last two quarters, participations in auto loans has been high.
Credit unions that choose to give up on interest income down the road by selling participations gain premiums up front that usually are about 100 basis points of the loan balance at sale.
For the 10 largest sellers of non-real estate loan participations, those premiums would have been worth about $138 million last year, or about 0.23% of average assets. These 10 credit unions had returns on average assets of 1.51% in 2021, compared with 1.07% for all credit unions.
The Top 10 for loan participation sales ($66.3 billion in assets, 4.4 million members) sold $13.8 billion in loans in 2021, nearly triple the $4.8 billion sold in 2020. They are:
1. PenFed Credit Union, Tysons, Va. ($32.5 billion in assets, 2.6 million members) sold $6.4 billion in loans in 2021, up nearly four-fold from the $1.6 billion in 2020.
2. Oregon Community Credit Union, Eugene, Ore. ($2.8 billion, 227,973) sold $1.6 billion in loans in 2021, up more than 11-fold from the $143.3 million in 2020.
3. Evansville Teachers Federal Credit Union, Evansville, Ind. ($2.8 billion, 260,793) sold $1.4 billion in loans in 2021, up 28% from the $1.1 billion in 2020.
4. Lafayette Federal Credit Union, Rockville, Md. ($1.3 billion, 45,920) sold $1.1 billion in loans in 2021, up nearly three-fold from the $402.9 million in 2020.
5. Alliant Credit Union, Chicago ($15.2 billion, 646,111) sold $1.1 billion in loans in 2021, more than double from the $425.6 million in 2020.
6. General Electric Credit Union, Cincinnati ($3.9 billion, 226,609) sold $490.1 million in loans in 2021, up more than three-fold from the $137.6 million in 2020.
7. Quorum Federal Credit Union, Purchase, N.Y. ($1 billion, 66,084) sold $476.2 million in loans in 2021, up 60% from the $298.5 million in 2020.
8. Amplify Credit Union, Austin, Texas ($1.4 billion, 58,014) sold $463.2 million in loans in 2021, more than double from the $208.6 million in 2020.
9. American Heritage Federal Credit Union, Philadelphia ($4 billion, 247,199) sold $401.5 million in loans in 2021, more than triple from the $123.3 million in 2020.
10. Collins Community Credit Union, Cedar Rapids, Iowa ($1.4 billion, 90,979) sold $390.5 million in loans in 2021, up 3% from the $380.3 million in 2020.
At Alliant, RV loans have been accounting for a large portion of its participation sales.
RVs account for about $1.5 billion of Alliant’s $10.1 billion loan portfolio as of Dec. 31. A March 21 news release from Alliant said RV loans are similar to auto loans, but their risk-adjusted returns tend to outperform auto loans.
Charles Krawitz, who is chief capital markets officer and head of commercial lending at Alliant, said credit unions are becoming more comfortable buying RV participations as they grow in popularity and they gain confidence in Alliant’s knowledge of the lending niche.
“Through loan sales, we are able to manage concentration risk while providing attractive opportunities to other credit unions. It is a win-win,” Krawitz said.
The RV Industry Association reported a record 600,000 RVs were sold last year. It says about 11.2 million households own an RV — up 62% from 20 years ago, and about 9.6 million households intend to buy an RV within the next five years.
Toohig said RV loans got a particular boost from the height of the pandemic, when vacation cruises were cancelled and people became leery of non-essential flying.
So for those who wanted to travel, RVs became a hot option. And that pattern translated into a surge in sales of participations in RV loans, he said.
“Volume certainly went up because of the pandemic,” Toohig said.