Credit Unions Now Factor in Secondary Capital, Asset Securitizations

Historically, credit unions have been tiny players in asset securitization and subordinated debt. In the last few years, they have been playing a larger role.

At a symposium Monday in New York sponsored by the NCUA, some credit union leaders and financial experts said the reasons for the maturation in asset securitization and subordinated debt activity include the growing size of credit unions, their mission of meeting the needs of some investors and the NCUA gaining the capacity to accommodate such deals.

Frank Stantucci, managing director of Stifel, Nicolaus & Co. Inc. of St. Louis, said credit union growth has made them a factor.

Stantucci said the average credit union had $50 million in assets 35 years ago. As of Dec. 31, NCUA data showed the average is $450 million. Of the nation’s 4,863 credit unions, 427 have more than $1 billion in assets, and nearly half of all credit union assets are held by the 107 credit unions with more than $4 billion in assets.

Four years ago Stifel was helping to put together the $175 million auto loan securitization by GTE Financial Federal Credit Union of Tampa, Fla. Stantucci recalled when they took the deal to the Standard & Poor’s ratings agency.

“They said, ‘What’s a credit union?’ We literally had a six-hour meeting with them about what is a credit union, how do they work, what are the regulations,” Stantucci said. Stifel had similar conversations with other ratings agencies.

Much of the growth in secondary capital is among Community Development Credit Unions (CDFIs). Cathie Mahon, president/CEO of Inclusiv, which represents CDFIs, said credit unions are getting more notice because they fit what social-impact investors are looking for from lenders.

“We have a great story to tell,” Mahon said. “With a growing community of social-impact investors, the credit union movement hits and rings every bell as far as our openness, our governance structure, our accountability to the communities that we serve.”

Part of the NCUA capacity enabling growth in secondary capital and asset securitizations has been built by adopting rules that make it easier for credit unions to use secondary capital and sell securitized assets.

There have been only four asset securitization sales by credit unions. They raised $1.2 billion from securities backed by auto loans:

• GTE Financial ($2.9 billion in assets, 231,992 members as of Dec. 31) sold $175 million in November 2019.
• Unify Financial Federal Credit Union of Torrance, Calif. ($4.1 billion in assets, 298,750 members) sold $300 million in March 2021.
• Pentagon Federal Credit Union of Tysons, Va. ($35.5 billion in assets, 2.8 million members) sold $460.3 million in August 2022.
• Oregon Community Credit Union of Eugene ($3.5 billion in assets, 260,993 members) sold $275 million in October 2022.

James Schenck, president/CEO of PenFed, credited the NCUA with maintaining good communication and being flexible enough to accommodate financing strategies uncommon to credit unions, like asset securitizations.

“When we did ours, we had one or two ahead of us that had already gone through the process,” Schenck said. “They asked the hard questions from the governance perspective, the risk perspective, but they were supportive throughout the process.”

Schenck said his strategy is to make sure the credit union is deploying as much of its assets as possible to generate maximum income. “I always want to be a hundred percent loaned out,” he said.

He tries to maintain a loan-to-share ratio of 100% to 105%. It stood at 111% on Dec. 31, 2019 — three months before COVID-19 was declared a pandemic. Then it fell to 96% by the end of 2020, reflecting the pandemic-era savings boom. It rose to 103% by the end of 2021, and hit a high of 117% in June 2022.

At the time, Schenck said PenFed was pivoting from fast loan growth to building capital, deposits and liquidity. He said production would fall in the second half of 2022 as the Federal Reserve continued to raise interest rates. And so it did. Total originations, which were $19.4 billion in the second half of 2021, fell 75% to $4.8 billion in 2022′s second half.

PenFed’s balance of total loans ended 2022 at $29.7 billion, down by $884.2 million from June 30. Its $460.3 million auto loan securitization took out the biggest chunk, but Schenck said the other strategy was to raise interest rates on loans to reduce production volume.

PenFed’s loan-to-savings ratio ended the year at 107%. In a later interview with CU Times, he said the ratio was down to 103% by March 31.

“You want to have balanced growth,” he said.