The Rundown

• BB&T latest to buy a credit union's auto loanportfolio.
• Banks with glut of deposits are seeking moreloans.
• Most credit unions are not interested in selling, expertssay.

When it comes to auto loan portfolio acquisitions, some mightsee credit unions as the equivalent of little fish being circled inwaters full of sharks–banks and other lenders.

Indeed, there's plenty of flesh to devour. Auto loan and leaseoriginations topped the $367 billion mark in 2011, a 12.5% jumpfrom $326 billion in 2010, according to according to AutoFinance News.

Within the credit union industry, auto lending continues to be the leader in many loanportfolios. During the first quarter, market share was at 14.6%,with used auto loans surpassing new ones at 19.1% and 11.1%,respectively. Overall, credit unions finished the first quarter at$582.3 billion in total loans.

Some of the nation's largest banks have taken notice as theyseek to expand their auto lending footprint.

The $178.5 billion BB&T Corp. in Winston-Salem, N.C.,confirmed with Credit Union Times that it recentlypurchased a credit union's auto portfolio, said Merrie BetbezeTolbert, vice president of corporation communications.

“However, we have a confidentiality agreement with the creditunion and cannot provide any other information,” Tolbert said.

BB&T is certainly in a strong position to shop for moreassets. On July 31, the bank announced it had received regulatoryapproval to acquire BankAtlantic Bancorp and its $3 billion in coredeposits.

Wells Fargo & Co. also announced it will widen a previousdeal with General Motors Co. to provide financing for Buick,Cadillac, Chevrolet and GMC dealers. The $1.3 trillion bank basedin San Francisco said it provided $20.2 billion in indirect autoloans to nearly 12,000 dealers in 2011.

While the buying of auto loan portfolios aren't new withinthe financial services industry, it's uncommon for banks to bid forthose at credit unions, said Eddie Nevarez, vice president of business development at theNational Auto Loan Network in Newport Beach, Calif., which countsmore than a dozen credit unions among its clients.

“Due to the risk involved, most credit unions are still shyingaway from auto loan portfolio acquisitions,” Nevarez said. “In myexperience with credit unions, most are still very conservative andstaying away from acquiring auto loan portfolios. But, that is notto say that I have not come across some credit unions that areaggressively seeking to acquire what has always been the life bloodof credit unions.”

It may be hard to track data on the number of credit unions thathave either sold off all or a portion of their auto loanportfolios. The NCUA is currently in the process of reviewingseveral bids for the sale of Telesis Community Credit Union's stake in AutolandInc., a vehicle buying CUSO. The financially troubled $307million cooperative in Chatsworth, Calif., was recently liquidated,and its assets were bought by the $1.3 billion Premier AmericaCredit Union.

Melinda Zabritski, director of automotive credit at ExperianAutomotive, said she can see why others outside the industry wouldbe intrigued by what credit unions have to offer.

“I would expect credit union portfolio acquisitions would behealthy acquisitions because they have very low delinquencies,”Zabritski said. “Credit union portfolios would make a lot of sensefor loans in the prime space.”

From the end of 2011 to the end of the first quarter this year,total credit union delinquencies dropped from 1.60% to 1.44%,according to data from CUNA and the NCUA. During the same period,net charge-offs declined from 0.91% to an annualized total of0.79%.

Experian doesn't necessarily track portfolios from a creditstandpoint, but from the consumer's angle, the firm can see whenportfolios are sold, Zabritski said. One example might be when acredit card portfolio changes hands.

“Portfolio acquisitions occur on a regular basis in the autoindustry. It's not something new,” Zabritski noted. “What I tend tosee is more activity in the subprime space and with financecompanies and banks.”

Whether there has been a surge in auto loan portfolioacquisitions depends on the perspective. Rohit Arora, CEO ofBiz2Credit, a New York firm that links lenders with smallbusiness owners, offered insights on what he's observed.

“The auto industry hit rock bottom in 2009. Americans have beendriving older cars, holding onto them five to seven years, whenthey used to trade them in every two to three years,” Arora said.“There was pent up demand, and now, people are buying new carsagain. Thus, auto loan portfolios have become more profitable.”

Typically, credit unions are the sellers and are likely to beopen to sale opportunities in the secondary market, Arora said.Because of their local community ties and reputation for helpingmembers with their financial needs, originating auto loans hasbecome a staple, he said.

Nevarez believes, in general, auto loan portfolio acquisitionshave slacked off. Some notable exceptions are banks such asSantander Consumer USA, Bank of America and subprime financecompanies that have acquired large auto loan portfolios going backtwo to three years.

“The motivation behind purchasing auto loan portfolios variesfrom institution to institution. Some are looking for a return oninvestment, while others are looking for market penetration or anincrease in loan to asset ratio,” Nevarez said.

Another motivation may be purely for profit, Zabritski said.Portfolios are going to generate income without having to incur theinitial origination costs. Many of those interested in buying areindirect lenders, she noticed.

“It's a great way to gain a footprint to diversify theportfolio,” Zabritski said, adding there's a litany of analysisthat goes into purchasing portfolios, from digging throughdelinquency records to deciding whether to purchase just blocksrather than the entire portfolio.

If a credit union is considering selling some or its entireportfolio it should be sure to optimize the revenue from the sale,Nevarez advised.

“Credit unions should be careful to not make hasty decisions tosell and get out,” he suggested. “With the proper portfolioanalysis, either done internally or by a third party, credit unionscan better present the opportunity to potential buyers and receivemultiple bids.”

Like any other investment, Arora advised credit unions to dotheir due diligence and utilize good risk management tools. Justbecause a sale goes through doesn't mean that credit unions arecompletely free to walk away with the funds. For instance, if thenew owner was not responsible with collections, the seller shouldnot be held responsible, he explained.

“You don't necessarily sell once and then get off the hook,”Arora said. “As a period of time goes by, the seller losesresponsibility for defaults. You have to negotiate smartly.”

Some banks are motivated to buy because it's a clear case ofsupply and demand, said Denny Graham, president/CEO of FIStrategies LLC, a St. Louis-based strategic planning firm thatserves credit unions and banks.

“It's no different than what's happening with credit unions.Banks are buried in deposits and they need to get some loans out,”Graham said. “Just from watching the banks, they are interested inincreasing their auto loans.”