The Philadelphia-based American Heritage Federal Credit Union ($4.8 billion in assets, 315,518 members) expects to close Nov. 20 on the sale of $300 million in securities backed by some of its prime auto loans.

Pre-sale reports from Moody’s and Standard & Poor’s showed the loan pool consists of 85% used cars with 50% of the borrowers from Pennsylvania and 34% from New Jersey.

Moody’s and S&P have assigned preliminary investment-grade ratings to the issue, based in part on credit supports. Both Moody’s and S&P presale reports released Nov. 7 said a major strength of the deal was the high quality of the loans. The average weighted FICO score for the pool was 763 with a minimum of 640.

The average FICO score “is at the higher end compared to the other credit union deals we rated, but is generally lower than the captive- and bank-sponsored deals we have recently rated,” Moody’s said.

With the sale, credit unions will have issued nearly $5.8 billion in securities backed by auto loans since 2019, including $2.4 billion through six deals this year, surpassing 2023’s record $2.1 billion.

Stifel, Nicolaus & Company and BofA Securities are lead underwriters of the issue: American Heritage Auto Receivables Trust 2024-1. It consists of four senior tranches maturing from Nov. 17, 2025 to June 17, 2030 and three subordinated tranches maturing from Sept. 16, 2030 to Jan. 18, 2033.

The cumulative net loss for AHART 2024-1was projected at 1.50% by Moody’s and 1.65% by S&P.

The sale will help free some cash for American Heritage, which agreed earlier this year to pay LINKBANK more than $130 million by year’s end when it closes on the purchase of three of the bank’s branches in southern New Jersey.

American Heritage’s costs for the branches include the $123 million in face value of loans acquired and a $7.3 million premium on $105 million in deposits assumed from LINKBANK. The credit union also agreed to pay the book value of the fixed assets and real estate for the branches in Moorestown, Marlton and Cherry Hill, according to the agreement filed with SEC.

The S&P presale report noted the concentration of 84% of the loans in Pennsylvania and New Jersey as one of the deal’s risks.

“Despite this, American Heritage’s top state concentrations are not as high compared to some of its credit union peers, such as Ent Credit Union, GTE Federal Credit Union and Oregon Community Credit Union,” S&P said.

A factor mitigating risks cited by both credit rating agencies was American Heritage’s long experience with auto lending.

“Although the company makes some loans directly (approximately 12%) to its members through internet, phone and in-branch channels, it originates most loans through indirect lending (approximately 88%) via relationships with franchised dealerships that sell new and used vehicles,” S&P said.

“As of July 2024, American Heritage had 396 active dealership partners, and approximately 85% of the network dealers were franchised. Indirect originated loans represent approximately 91% of the AHART 2024-1 collateral loan pool,” it said.

NCUA data pulled from Callahan's Peer Suite showed American Heritage sharply increased its auto portfolio in the past two years, especially indirect loans and used cars loans. The fastest growth occurred in 12 months ending Sept. 30, 2023, when its auto portfolio grew 34%, compared with 10% for other loans.

The auto portfolio grew 8% to nearly $1.1 billion on Sept. 30, compared with a 1% drop in the balance for all other loans over the previous 12 months.

New cars have been steady at about 6% of total loans, while used cars have risen from 17% in September 2022 to 23% this September. Indirect auto loans were 26% of total loans Sept. 30, up from 19% two years earlier.

S&P found 0.62% of the credit union's $966.3 million managed portfolio of auto loans were at least 60 days late on payments as of Sept. 30, up from a delinquency rate of 0.44% a year earlier and 0.33% at the end of 2022.

Its net charge-off rate was an annualized 0.46% for the nine months ending Sept. 30, up from 0.21% a year earlier and 0.9% for the full 12 months of 2022, S&P said.

Moody’s said other risks include the credit union’s lack of securitization experience and the possibility that used car values will decline further.
Moody’s said used car prices have fallen from their high levels of 2022, and have continued to soften in recent quarters.

“Used car prices remain at risk of falling should demand subside further as a result of slowdown in economic activity,” Moody’s said. “Falling used car prices expose the transaction to lower recovery rates, higher loss severity and consequently higher net losses.”

The previous five deals this year were:

• PenFed Credit Union of McLean, Va., just outside Washington, D.C. ($32.7 billion in assets, 2.8 million members), which closed on $447.4 million Aug. 29.
• Space Coast Credit Union of Melbourne, Fla. ($8.8 billion in assets, 667,013 members), which closed on $485 million July 24.
• First Community Credit Union of Houston ($2.4 billion in assets, 165,959 members), which closed on $256 million May 30.
• Valley Strong Credit Union of Bakersfield, Calif. ($3.9 billion in assets, 332,896 members), which closed on $331.7 million March 26.
• GreenState Credit Union of North Liberty, Iowa ($10.7 billion in assets, 455,892 members), which closed on $400 million March 14.