Veridian CU Sells $300 Million in Auto Loan Securities

Veridian Credit Union, one of the largest auto lenders among credit unions, closed Tuesday on the sale of $300 million in securities backed by prime, indirect auto loans.

This marked the fifth auto loan-backed securities sale by a credit union, and brings total asset-backed securities (ABS) sales to more than $1.5 billion since 2019.

Moody’s and Standard & Poor’s gave investment-grade ratings to the notes, which mature from May 2024 to September 2031.

The Waterloo, Iowa-based credit union Veridian was the nation’s 61st largest credit union based on assets at the end of 2022, but it was the nation’s 15th largest in auto lending, holding $3.2 billion in new and used car loans on its books Dec. 31.

“The market for asset-backed securities is strong, and securitization will be an ongoing tactic for Veridian to achieve several of our strategic objectives,” Veridian CFO Keith Mesch said. “It’s a highly scalable way to manage risk and liquidity, and it allows us to benefit from market discipline in risk-based pricing while growing production and maintaining dealer relationships.”

The sale slightly reduces Veridian’s unusually high loan-to-share ratio and its concentration in auto loans. Also, Veridian retained servicing rights, which will earn it 1% of the balance, or close to $3 million in its first year.

May 18 pre-sale reports from both Moody’s and Standard & Poor’s cited Veridian CU’s experience and the high credit quality of the pool’s borrowers as positive factors supporting their ratings. Moody’s said the average weighted credit score was 737 with a minimum of 620. About 90% of the borrowers had a credit score greater than 660.

They cited risks that included having 56% of the loans originated in just two Midwest states and having many loans with terms of six years or more.

About 38% of the loans were originated in Iowa and 18% in Nebraska. “This concentration in just two states is significantly higher than the concentrations in typical auto loan transactions and exposes the transaction to worsening performance stemming from regional economic trends or idiosyncratic risk,” Moody’s said.

However, S&P noted that Veridian’s top state concentrations were not as high as those of previous credit union ABS deals by GTE Financial Federal Credit Union of Tampa, Fla. in November 2019 and Oregon Community Credit Union of Eugene, Ore. in October 2022.

The ratings also take into account the risk from an economic downturn, which would cause delinquencies and charge-offs to increase. S&P forecasts a recession late this year with slight GDP contraction in the second and third quarters of 2023 that will lower GDP growth to 0.7% for the year.

“In our view, changes to the unemployment rate are a key determinant of charge-offs in the auto finance industry,” S&P said.

Veridian’s 60-day-plus delinquency rate for its auto loans stood at 0.62% on March 31, up from 0.30% a year earlier and down from 0.70% on Dec. 31. From 2016 to 2019, year-end delinquency rates ranged from 0.47% in 2018 to 0.69% in 2017.

Its net charge off rate was an annualized 0.12% for the first quarter, up from 0.4% in 2022’s first quarter and 0.10% for all of 2022. Pre-pandemic charge-off rates ranged from 0.29% in 2017 to 0.69% in 2016.

“While net charge-offs continue to remain relatively low, delinquencies are normalizing above pre-pandemic levels after the lows experienced in 2020 and 2021,” S&P said.

Moody’s found risk of further decline in used car prices. “Used car prices have softened somewhat in recent quarters, and have come down from the high price levels of last year. This is due to the easing of supply shortages for new vehicles and reduction in pent up demand,” it said.

Veridian CU had a loan-to-share ratio of 109% on March 31. Had the deal closed March 31, it would have reduced Veridian’s loan-to-share ratio to 104%.

At the end of the first quarter, Veridian’s auto loans accounted for 48% of its total $6.2 billion in total loans. Had the deal closed March 31, it would have reduced that concentration to 45%.

At the end of the first quarter, Veridian’s indirect auto loans accounted for 91% of its total $3.2 billion in auto loans. Had the deal closed March 31, it would have reduced that concentration to 90%.

The four previous credit union ABS sales were:

1. GTE Financial Federal Credit Union of Tampa, Fla. ($.9 billion, 233,992 members) sold $175 million in November 2019.
2. Unify Financial Federal Credit Union of Torrance, Calif. ($4.2 billion in assets, 299,999 members) sold $300 million in March 2021.
3. Pentagon Federal Credit Union of Tysons, Va. ($35.3 billion in assets, 2.9 million members) sold $460.3 million in August 2022.
4. Oregon Community Credit Union of Eugene, Ore. ($3.5 billion in assets, 264,849 members), sold $275 million in October 2022.