CENTENNIAL, Colo. -- Peak5, which rose from the ashes of failed Centrix earlier this year, is looking for a buyer.
CEO Kevin Barry said his auto loan servicing firm's contracts have run their course, with very little business coming in to replace it, and he's got three choices: find a buyer, raise rates and ride the market out another year or close his doors by year-end.
"Basically, we've got a similar story to everything people have been and hearing lately; we're suffering from cash and cost crunches and are not in a healthy revenue position at this time," Barry said.
Auto loan originations are down, which means less servicing business, Barry said. And, the auto loan servicing business is a high-volume, low-balance business compared to mortgage servicing, he said, making a healthy profit margin even more difficult to achieve.
According to CUNA's monthly credit union estimates, new auto loans outstanding have decreased nearly 6% since December 2007. CUNA's numbers also show that new and used auto loans are decreasing, representing only 31.5% of all credit union loans in August 2008, compared to 34% in August 2007.
"The majority of our credit union clients have diminishing auto loan portfolios," Barry said, "to the extent that in excess of 90% of them would be at or near run off by next year."
Barry said he's got two interested buyers, from outside the credit union industry, although they both have some credit union clientele. Those few credit unions that have brought in new business would receive the same, if not better, service if either deal works out, he said.
Another alternative is to raise rates and stay in business for another year, with the hopes that auto loans will pick up.
"We'd rather do that on a collaborative basis rather than force it," Barry said, leaving the choice of door No. 2 up to his customers.
If a merger deal can't be reached and clients don't approve rate increases, Peak5 will "work toward an orderly wind down with all parties through the end of the year," he said.
"The worst case scenario is kind of a nuclear winter, a three to four month ramp down," Barry said. "That's not my anticipation or hopeful expectation, but we are trying to be as transparent and up front about our situation as possible."
Peak5 has already sent two letters to clients regarding the situation and plans weekly updates. Barry said Centrix's failure to communicate its problems early have absolutely influenced his proactive communication efforts now.
A merger deal is Barry's first choice, and the CEO said there's a "high probability" he'd stay on with the new entity. Once the economy recovers and liquidity-strapped lenders start approving loans again, he said, business will likely return.