Auto loans continue as a mainstay of credit union service tomembers, but as much as things stay the same, they're alwayschanging, too.

For instance, new car balances are growing as a proportion ofthe total market, and more strikingly, perhaps, indirect lending isbuilding its lead over direct lending in total balances in theindustry – new and used – after first nudging past it in the secondquarter of 2015. That's despite some misgivings among credit unionsabout the stickiness and quality of relationships with members anddealers alike.

Here at Callahan & Associates, we frequently get calls fromcredit union executives considering making the move into indirectlending, and I thought this would be a good time to share some ofwhat the data is telling us.

First, the larger the credit union, generally the more likely itis to engage in indirect lending. That's despite the fact that thenation's three largest credit unions – Navy Federal, PenFed, andState Employees' Credit Union of North Carolina – don't do it. (Achart below shows how uncommon indirect lending is among smallercredit unions, and that more than 234 of the 266 credit unions of$1 billion or more in assets offer it.)

Overall, as of March 31, 2016, 1,941 credit unions of the 6,080reported hold both direct and indirect auto loans. These creditunions represent 31.9% of all credit unions but 81.9% of theindustry's total auto loan portfolio.

Of the 34 credit unions that hold more than $1 billion in autoloans, only five don't participate in indirect lending. For theother 29, the average percentage of indirect loans to total autoloans is 73.5%.

Direct Impact of Indirect

While representing only 31.9% of the industry, credit unionsthat participate in indirect lending are significantly impactingthe auto portfolio.

Nationally, indirect loans reached $142.5 billion in the firstquarter of 2016. Over the past 10 years, indirect lending as apercentage of total auto loans has climbed from 38.2% in the firstquarter 2006 to 52.3% today. For the past few quarters, indirectlending growth has outpaced direct lending. Year-over-year,indirect lending boasted a 19.4% growth rate while direct lendingexpanded 8.8%.

Meanwhile, total auto lending expanded 14.1% year-over-year toreach $272.4 billion at the end of March 2016. Although growth isdown from last year's 16.1% rate, that marked the 11th straightquarter of double-digit national auto loan growth. National marketshare expanded to 17.1%, up from 16.3% in the first quarter of lastyear.

In addition, new car loans are rising as a proportion of theindustry's auto portfolio, up from 35.0% in the first quarter of2012 to 38.1% as of this year's first quarter. And the averagemember relationship (total loan and share balances less memberbusiness loans, per member) at credit unions where there is someindirect lending is $17,491 and $16,618 for those credit unionswith only direct loans, as of March 31, 2016.

Of course, larger credit unions – which tend to be those thatparticipate in indirect lending – also tend to be those that candevote more resources toward segmenting and marketing broaderrelationships to those indirect loan holders. The average memberrelationship, while considered a key metric for measuring overallengagement, could be influenced here by the sheer size of theindirect loan itself. That said, however, we're also seeing aslight raise in the average share balances at credit unions that doindirect lending.

Delinquencies Don't Differ Dramatically

It's also widely assumed that higher delinquency rates are abyproduct of indirect lending. Maybe. Maybe not. While delinquencyrates are considerably lower for new auto loans versus used autoloans, they are not significantly different for direct versusindirect loans.

Nationally, the new auto loan delinquency rate, at 0.35%, sits31 basis points lower than the 0.66% used auto delinquency rate,according to our analysis of first quarter call report data. Forindirect versus direct, the overall delinquency rates as of March31 were 0.57% versus 0.51%, respectively.

Auto delinquency and net charge-off ratios did rise slightlyover the past 12 months. Auto delinquency increased three basispoints to 0.54%, and auto net charge-offs rose nine basis points to0.62%. The auto net charge-offs rate has been creeping up steadilyand is at its highest point in the three-year history of requiredreporting.

The national credit union auto portfolio has grown 32.4% sinceMarch 2014, yet the net charge-off auto amount has grown nearlytwice as fast, at 59.1%, over the same period. The total netcharge-off ratio is considerably down, at 0.52%, since its high of1.20% in December of 2010 following the recession.

Currently, new auto loans comprise 38.1% of the national autoloan portfolio. New auto loans expanded 15.4% nationally to $103.9billion in the first quarter of 2016 over the previous year's firstquarter.

As new auto loans climb, the credit union industry could startto approach a balanced new and used auto loan portfolio. We alsocan expect to see credit unions refining their ability to deepenthe relationships with those new and existing members who get theirauto loans through the indirect channel.

Liz Furman is an industry analystat Callahan & Associates. She can be reachedat 202-223-3920 X212 [email protected].