KBRA: CU Auto Securitizations Likely to Rise More

More credit unions are likely to be turning their auto loans into securities as a way to improve their liquidity, according to a report by the Kroll Bond Rating Agency.

KBRA’s report, “Rise in Credit Union Auto Securitizations,” looked at the sharp increase in issues sponsored by credit unions in the past five years.

Altogether 11 credit unions have sponsored $4.3 billion in deals since the first $175 million issue in 2019.

There were no deals in 2020, but volume rose from $300 million in 2021 to $735 million in 2022 to $2.1 billion in 2023. So far this year, three credit unions have sponsored $987 million in deals. The latest was a $255.5 million securitization that closed May 30 sponsored by First Community Credit Union of Houston ($2.6 billion in assets, 162,097 members).

KBRA’s report issued May 9 said credit unions traditionally have relied on funding from member deposits, wholesale borrowings and, to a lesser extent, loan-participation sales.

“However, with pressure on credit unions’ balance sheets and liquidity concerns due to higher interest rates, some of these not-for-profit financial institutions are turning to the ABS market for sources of liquidity, using securitization to bolster their liquidity profile while diversifying funding options,” the KBRA report said.

“We expect credit unions to remain active in the ABS primary market in 2024, with a continued level of auto loan originations for the industry,” the report said.

KBRA’s report was backed up by NCUA data.

Credit unions sponsored eight deals worth $2.1 billion last year: Six closed in the second quarter, five in the third quarter and two in the fourth quarter. CU Times analyzed NCUA data gathered from the Callahan & Associates / Peer Suite and found the sales led to marked improvement of loan-to-share ratios and lessened dependence on borrowing.

Among the eight deals that closed in 2023, NCUA data showed the average loan-to-share ratio was 104.1% at the end of the last quarter before the deal and fell 400 basis points to 100.1% at the next quarter-end date.

Among all credit unions, the average change was a 140 basis-point increase from 82.9% at the end of one quarter to 84.3% three months later.

Borrowings fell from an average 8.9% of assets before the eight securitizations last years to 7.3% after. NCUA data showed borrowings for all credit unions rose an average 140 basis points from 5.3% at the end of one quarter to 5.4% three months later.

KBRA said the Fed’s rate increase starting in early 2022 reduced the value of auto loans on credit union balance sheets, and increased the cost of interest on deposits.

“The not-for-profit institutions have been slow to adjust interest rates on new loans at the same pace of rate increases due to their stated mission of supporting their members,” the report said.

Credit unions’ cost of funds climbed to 1.4% in last year’s fourth quarter from 0.4% in the third quarter of 2022. Net interest margins also began falling in the third quarter of 2022.

KBRA also found auto securitizations sponsored by credit unions have performed better, with generally lower net losses and delinquencies, than other issues that had comparable credit scores — ranging from 700 to 745.

Compared with the securitizations by captives, banks and other for-profit companies, credit union auto loan securitizations have lower weighted average credit scores, higher loan-to-value ratios and longer terms. They also tend to have higher weighted average interest rates, “which is consistent with a risk-based pricing perspective,” the report said.

KBRA also found credit union securities have a higher geographic concentration than others. The prime 2023 vintage credit union securitizations show that most deals have more than 90% of the borrowers in one to three states. ABS transactions sponsored by captives or finance companies exhibited loan pools spread across multiple states. For example, 2023 vintage Ford (FORDO)-sponsored transactions showed the highest concentration of loans in Texas (16.5%), followed by California (10%).

The overall prime auto sector exhibited a WA original term of 67 months, while average terms for the six 2023 credit union deals ranged from 73 to 81 months.

KBRA looked at six of the eight deals last year:

1. GTE Financial Federal Credit Union of Tampa, Fla. ($3 billion in assets, 238,585 members as of March 31) sponsored a $203 million issue in April 2023. The weighted average APR was 6.6%, the average credit score was 730, the average term was 77 months and the average loan-to-value ratio was 102.4%.

2. Veridian Credit Union of Waterloo, Iowa ($7.6 billion in assets, 336,698 members) sponsored a $300 million issue in May 2023. The weighted average APR was 7.92%, the average credit score was 737, the average term was 75 months and the average loan-to-value ratio was 105.4%.

3. General Electric Credit Union of Cincinnati ($5 billion in assets, 286,382 members) sponsored a $300 million issue in August 2023. The weighted average APR was 8.19%, the average credit score was 743, the average term was 81 months and the average loan-to-value ratio was 104.4%.

4. Oregon Community Credit Union of Eugene ($3.4 billion in assets, 262,770 members) sponsored a $258 million issue Thursday Sept. 26, 2023. The weighted average APR was 7.19%, the average credit score was 727, the average term was 79 months and the average loan-to-value ratio was 104.8%.

5. Ent Credit Union of Colorado Springs, Colo. ($9.9 billion in assets, 538,328 members) sponsored a $243 million issue Friday Sept. 27, 2023. The weighted average APR was 8.75%, the average credit score was 733, the average term was 79 months and the average loan-to-value ratio was 109.1%.

6. Space Coast Credit Union of Melbourne, Fla. ($9.2 billion in assets, 654,671 members) sponsored a $422.2 million issue in December 2023. The weighted average APR was 7.4%, the average credit score was 770, the average term was 73 months and the average loan-to-value ratio was 95.7%.