Haul Down the White Flag! Take out the Checkered One: Auto Lending Belongs to Captive Finance Companies and Credit Unions, Right? Not So, Say Banks That Still Find Opportunities in the Auto World

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Talk to many community and midsize banks, and when the subject of automobile lending comes up, the conversations frequently shift into reverse--that is, the past tense.

The bank used to make auto loans, but the captive finance companies, "moving iron" for their carmaker parents, undercut rates too far to follow. Or, the bank used to buy paper from all the dealers around here, but then those tax-protected credit unions cranked up dealer operations and left it in the dust.

Or there's this response: "Sure, we make car loans; we make them to well-heeled customers buying luxury models because we really want their commercial loans or trust business."

You've heard it before--maybe said something like it yourself.

But there are banks out there that not only continue to finance cars and trucks, but do well at it. Some specialize, some aim at a piece of the car credit mix, and some simply built up formidable teams of managers and lenders who simply won't be beaten.

The five case studies that follow show how these banks continue to succeed in an inhospitable market.

Morgan Bank Ohio auto powerhouse

To the casual visitor, Morgan Bank, N.A., Hudson, Ohio, looks like a typical community bank. What's not obvious is Morgan's aggressive "bank within the bank."

Founded in 1990, the bank was pretty much traditional for the first half of its history. But in 1998 William "Wink" Dougherty, now president and CEO, joined the staff, and things began to change.

Dougherty came to the bank with an extensive background in indirect auto lending. He started with a large-bank indirect lending operation in the 1970s, buying paper from electronics dealers, financing things like big-screen TVs. From there he moved into auto paper lending for several employers. When he arrived at Morgan, Dougherty saw the opportunity to take the bank into opportunities it hadn't exploited.

"Indirect auto lending can be a profitable business, if done properly," Dougherty insists. He doesn't minimize the competition. Captive finance companies "dominate the business right now," and credit unions would seem to have advantages.

But for Dougherty, those facts are a beginning, not an ending. "You have to pick and choose your strategies and put a program together that makes sense for the dealer and that makes sense for the bank," he says.

Can this be done? Morgan Bank serves as proof it can. About 65% of the bank's loan portfolio consists of indirect auto paper, 70%-80% of it prime, "A" quality credit, with the rest "B" credit. (Dougherty says he doesn't feel the bank is qualified to deal with subprime.) The bank does about $7 million a month in auto paper purchases, about 60% new vehicles and 40% used. This is an incredible amount for any community bank, especially one with $126.6 million in assets.

The bank works with a network of about 220 dealerships, mostly in northern Ohio.

The bank does not provide floor planning nor leasing. Dougherty considers the latter too fraught with administrative details for no more gain than the bank would have from a straight loan. Increasingly the captives have the upper hand in leasing, he says, because they can work deals based on numbers that help them "move iron," while bank lessors must find their profits strictly in the lease.

At Morgan, everything is about the dealer. This is key to its auto lending success.

"An indirect lender is a completely different creature titan a branch lender," explains Dougherty. "Your customer at the point of sale is the dealership, not the customer whom you are approving for the loan."

The dealer can find any number of different lenders to take the customer's paper, the banker continues. "So relationships are important, and hard to develop," he says.

Between Dougherty and the three bankers directly managing the auto operation, there are six decades of experience with auto credit, much of it with the dealers the bank is now serving. …