Auto Lending Portfolios Want to Grow
Jim Adamczyk can remember receiving an increase in calls from banks interested in FAIRWINDS Credit Union’s auto loan portfolio.
That was as recent as 2010, said Adamczyk, executive vice president of lending, for the $1.7 billion cooperative in Orlando, Fla.
“There’s been interest here and there. The characteristics of a credit union auto loan portfolio make it beneficial, but I haven’t heard of any credit unions wanting to sell to banks,” Adamczyk said.
Many agree that the buying and selling of auto loan portfolios are not a new phenomenon within the financial services industry. What has changed, especially since 2008, is an uptick in the number of banks and credit unions searching for more deals.
The increased demand may stem from a strong desire from some to grow their loan portfolios, which were made paltry after the Great Recession essentially all but halted lending as many consumers had difficulty pay their debts because of the downturn and subsequent sluggish growth in the economy.
Credit unions appeared to fare better than their bank competitors with auto loans between 2008 and 2010. Adamczyk said FAIRWINDS had strong portfolio growth during that period and the credit union is currently experiencing more requests for refinancing and new car purchases. As of June 30, FAIRWINDS had $159.6 million in auto loans with delinquencies and charge offs at 0.17% and 0.11%, respectively.
“We would certainly like to have more loans. People have been putting off buying cars for some time but now, we’re seeing that more are in the market to buy,” Adamczyk noticed.
As buyers continue shopping for prime loans, there is a debate on whether a portfolio sale to a bank has the potential to cause reputational harm with members and throughout the industry.
“For me, I wouldn’t consider selling to a bank [because] I wouldn’t consider selling any loan to anyone now, period,” said Don Arkell, vice president of sales for the $217 million Red Rocks Credit Union in Highlands Ranch, Colo. “Would I sell to a bank? Yes. I would have to take a long, hard look at it.”
Arkell said credit unions may be reluctant to sell now because auto loans are the bread and butter of lending and having them on the books is a sound, fiscal move now given how they’re amortizing in the current rate environment.
“Do you know anyone who’s selling?” Arkell quipped. “I just don’t know of any credit unions that want to sell. There’s more of an attitude that people want more loans. Me, I would be happy to have 15% to 20% more.”
Loan growth is certainly being challenged, which has brought indirect lending to the fore as a strategy to consider, said Tom Orman, senior vice president of lending for the $576 million Credit Union of Southern California in Whittier.
While the credit union exited indirect lending several years ago to focus more on the direct side, Orman said the players involved in a portfolio acquisition have several key elements to consider.
“I can’t speak to the issue of whether banks are buying credit union portfolios,” Orman offered. “In general, if the buyer and seller can come to a mutual financial arrangement and the credit risk can be satisfied, then it would be understandable.”
The exchange between banks and credit unions and how members and others with a strong allegiance to keeping the two financial sectors separate may react depends on how the sale is made.
Adamczyk said there are two types of sales: sell and release and sell and retain. If it’s the latter, members are not going to know because the payments and other pertinent information would still come from the credit union. He said it would be similar to an arrangement within the secondary mortgage market should a financial institution sell a loan to Fannie Mae, for instance.
“I can definitely see it being a big issue if it’s a sell and release,” Adamczyk said. “If credit unions are aggregating indirect loans, they don’t really know the borrower and have no history of the borrower. In that case, I don’t know if there would be reputational harm.”
Still, Adamczyk, like others in the industry, said he has not heard of credit unions engaging in these types of deals.
“As far as the borrower is concerned, oftentimes, who ultimately owns the note is not front and center,” Orman said. “It may not be a concern to some.”
Since the start of the year, larger banks have been on a buying spree gobbling up smaller community banks along with their consumer loan, credit card and mortgage businesses. The American Banker recently cited a report from investment bank Keefe, Bruyette & Woods that revealed eight of its top 10 banks expanded their second-quarter loan portfolios through bank acquisitions.
Among them, First Financial Holdings in Charleston, S.C., which added nearly $300 million in loans when it acquired Plantation Federal Bank in Pawleys, S.C. First Financial had $2.7 billion in total loans as of June 30. When the Norwich, N.Y.-based NBT Bancorp bought Hampshire Bank in June, the deal brought in $217 million in loans boosting the NBT’s loan portfolio to $4.2 billion.
The $178.5 billion BB&T Corp. in Winston-Salem, N.C., confirmed that it recently purchased a credit union’s auto loan portfolio. Due to a confidentiality agreement, it could not disclose the name of the credit union.
Indeed, trying to get banks as well as firms that represent financial service providers to talk generally about buying auto loan portfolios has been met with a wall of silence.
A large legal firm in Texas that represents a multinational bank subsidiary in purchasing and servicing automobile loan portfolios opted not to comment on whether there has been an increase in purchases, especially between banks and credit unions.
“The clients whom we represent in this particular area do not approve of us commenting on this subject,” said the firm’s spokesperson.
Meanwhile, with the auto industry in the midst of a rebound and used car loans continuing to be the portfolio leader for many credit unions, a trend of growing interest from nontraditional and traditional players could be a likely outcome.
“Credit unions and other financial institutions like auto loans because they’re very diversified, they pay off quickly and have short maturities,” Adamczyk said. “It’s a fiercely competitive market and credit unions mostly have prime paper.”