GREENWOOD VILLAGE, Colo. – Colorado's number two rank in market share for auto lending may be a blessing and at the same time the cause of loan loss situations some CUs are finding themselves in. Callahan & Associates/AutoCount USA data for January 2004 showed Colorado having 33.2% total auto loan market share, 36.2% loan share, 26.3% new auto loan share, and 43.0% used loan share. Most of that volume is through the indirect lending channel. While that's good news for Colorado CUs, it also means they're more susceptible to state economic swings. In fact the state's economy is still soft and is lagging behind the rest of the country in showing a recovery. Callahan data show the return-on-assets for the first quarter 2004 nationally at 0.9%, but the Colorado Credit Union System shows the ROA for Colorado CUs for the first quarter 2004 at 0.6% – a drop from the .71% posted for Colorado CUs for all of 2003. "The bottom line is that in Colorado we have a local economy that's worse that the national picture," says Bellco CU President/CEO Douglas Ferraro. Although he said there are small signs the state's economy is slowly recovering, Ferraro said, "Traditionally Colorado tends to lag behind what's happening with the national economy. Exacerbating the situation is the fact that Denver has become a very high-tech city. Companies like Quest and Lucent had massive layoffs and they haven't recovered yet or started rehiring," he explains, noting that companies such as these are among the major credit union select employee groups, "so credit unions with those companies in their field-of-membership are going to experience more loan losses than other credit unions." Credit unions such as Bellco that are major indirect lending players have all felt the impact of the condition of the state's economy on their auto lending portfolios. Some like New Horizons Community CU in Denver have decided to discontinue indirect lending because, said president/CEO Tom Gressman, "the CU's loan loss ratios were too high." Other CUs have chosen to ride out the state's soft economy and continue indirect lending while they wait for things to turn around. Bellco does about three-and-a-half times indirect loans as it does direct. The credit union is one of 61 shareholders – 60 are Colorado CUs and one is Cheyenne, Wyoming-based Warren FCU – of CUILA, dba CUDirect Connect LLC. Ferraro said the credit union has less cars that default on indirect loans, but the CU still shows higher losses from indirect loans because dealer agreements require Bellco to fund more of an indirect loan than if it was a direct transaction. Even so, said Ferraro, the credit union doesn't see many indirect loans "go bad" because most of those loans are for A-plus paper. Bellco is currently 106% loaned out, and although Ferraro said he would prefer if that figure was around 98-99%, he still says "it's respectable. We've swung from a low of 89% to a high of 100% in the last five to six years. We're comfortable with that range." One of the reasons for Ferraro's attitude is that the credit union because of its size – $1,437.8 billion – has the ability to borrow money to fund loans. It recently borrowed $100 million from the Federal Home Loan Bank. "It's an economic issue that we're currently loaned out," he says. "Three years ago we weren't. Our priority is to stay in business and find a way to serve members' needs. Borrowing money gives us that ability." Another thing to keep in mind, says Ferraro, is that consumer loans tend to be paid off quickly – car loans roll over every 20 months. "If we stopped making indirect loans now, our cash flow would become so positive that our loan-to-share ratio would drop. We'd defeat our purposes." Public Service CU in Denver has been involved with indirect lending for about 10 years, and CFO Joe Hasto said while the $559 million credit union did about $12 million a month in indirect loans in 2003 – about 10% came through CUDirect Connect – the loan volume hasn't increased as much as PSECU anticipated. Hasto attributes that to Colorado's economy. In 2003, PSCU's charge-off rate for direct loans was .85%, and for indirect loans it was .77%. That's a higher figure for indirect loans that in 2002 – .59% – but Hasto says that's due to the increase in volume of indirect loans the credit union has seen. "If you look at the total yield, it was slightly higher for the direct loans because of the fees we have to pay with the indirect loans," he said. Still, he emphasized, "There will always be lower yields for indirect loans they will always be lower, but that's no reason for us to discontinue indirect lending." Hasto explained that, "We've found that a lot of credit unions are focusing on the 1% of bad loans instead of the 99% of loans that are good. We advocate looking at your portfolio as a whole. My collections manager will tell you he's never seen a good loan. You just have to determine what your yield should be. You have to do the math and get the appropriate data on your system. Pricing decisions can be the difference between not pricing a credit score range correctly and losing your shirt over it." Commenting on New Horizon's decision to pull out of indirect lending, Hasto said, "It's a choice they made," speculating that "their loan balances may be higher or collections could be an issue." Hasto explained that PSCU does risk-based auto lending "because we don't think we should just loan to people with super high credit scores. People with all types of credit scores still need reliable transportation. "We realize that we'll take some losses, but that's our decision, and we have to price our loans accordingly. You have to look at the yield, not just loan losses. That's a very small piece of the picture." He continued that, "A lot of credit unions say 60% of their losses come from indirect lending. But 89% of non-real estate loans come from indirect lending. My comment to these credit unions is it's going to increase proportionately." Hasto says he's seeing some positive signs that Colorado's economy may be starting to turn around. Job growth, for example, is starting to come back up and unemployment has dropped a bit. There are little predictive signs that the state's economy will get better in six months to a year, he says. Even at Public Service CU there are indications conditions are beginning to improve – the CU's delinquency rate for the first quarter 2004 was 0.85%, down from 1.20% at the end of 2003. PSCU finished 2002 at 1.8% delinquency. -

[email protected]