Indirect Lending Grows Its Direct Impact On Credit Unions

New car balances take up more of the portfolio, but big credit unions find big business in indirect lending.

 
 

Auto loans continue as a mainstay of credit union service to members, but as much as things stay the same, they’re always changing, too.

For instance, new car balances are growing as a proportion of the total market, and more strikingly, perhaps, indirect lending is building its lead over direct lending in total balances in the industry — new and used — after first nudging past it in the second quarter of 2015. That’s despite some misgivings among credit unions about the stickiness and quality of the relationships with members and dealers alike.

LEADERS IN INDIRECT LENDING

FOR U.S. CREDIT UNIONS* | DATA AS OF 03.31.16
© Callahan & Associates | www.creditunions.com

Rank Name State Total Auto Loans (In Millions) Indirect Loans (In Millions) Direct Loans (In Millions)
1 Security Service TX $5,423.5 $5,028.0 $395.5
2 Alaska USA AK $3,655.3 $3,649.2 $6.1
3 The Golden 1 CA $2,920.1 $2,365 $555.1
4 America First UT $2,728 $1,879.4 $848.6
5 Boeing Employees WA $1,908.2 $1,544.3 $363.9
6 Mountain America UT $2,102.8 $1,271.2 $831.6
7 Teachers IN $1,342.2 $1,261.0 $81.1
8 Tinker OK $1,635 $1,159 $476.8
9 Texas Dow Employees TX $1,268.3 $1,129.3 $139.0
10 First Tech CA $1,418.3 $1,099.5 $318.8

Source: Callahan & Associates.

*Excludes credit unions that make other indirect loans, such as lifestyle loans, outside of the auto portfolio

LEADERS IN DIRECT-ONLY LENDING

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.16
© Callahan & Associates | www.creditunions.com

​ ​
Rank Credit Union State Assets (In Millions) Total Auto Loans (In Millions) Indirect Loans Direct Loans (In Millions)
1 Navy VA $75,166.3 $11,112.0 $0 $11,112.0
2 Pentagon VA $19,920.3 $2,536.8 $0 $2,536.8
3 State Employees' NC $33,322.5 $2,536.8 $0 $2,536.8
4 Delta Community GA $5,157.3 $1,540.3 $0 ​ $1,540.3
5 American Airlines TX $6,067.3 $1,226.6 $0 $1,226.6
6 Atlanta Postal GA $2,051.7 $713.6 $0 $713.6
7 University TX $2,047.3 $590.4 ​$0 $590.4
8 State Farm IL $3,996.1 $541.4 $0 $541.4
9 Educational Employees CA $2,640.2 $461.2 $0 $461.2
10 Local Government NC $1,691.6 $422.0 $0 $422.0

Source: Callahan & Associates. 

Callahan & Associates frequently fields calls from credit union executives considering making the move into indirect lending. So, what does the data say?

Firstly, the larger the credit union, generally the more likely it is to engage in indirect lending. That’s despite the fact that the nation’s three largest credit unions — Navy Federal, Pentagon, and State Employees’ Credit Union of North Carolina — don’t do it. (A chart on the opposite page shows how uncommon indirect lending is among smaller credit unions, and that more than 234 of the 266 credit unions of $1 billion or more in assets offer it.)

INDIRECT LENDERS VS. DIRECT-ONLY LENDERS

FOR MICHIGAN CREDIT UNIONS | DATA AS OF 03.31.16

Source: Callahan & Associates.

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

LEADERS IN TOTAL AUTO LENDING

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.16
© Callahan & Associates | www.creditunions.com

<​/tr>
Rank Credit Union State Total Auto Loans (In Millions) Indirect Loans (In Millions) Direct Loans (In Millions) New Auto Loans (In Millions) Used Auto Loans (In Millions)
1 Navy VA $11,112.0 $0 $11,112.0 $5,264.4 $5,847.7
2 Security Service TX $5,423.5 $5,028.0 $5,028.0 $2,694.1 $2,729.4
3 Alaska USA AK $3,655.3 $3,649.2 $6.1 $1,779.8 ​ $1,875
4 The Golden 1 CA $2,920.1 $2,365.0 $55.1 $1,635 $1,284.2
5 America First UT $2,728.0 $1,879.4 $848.6 $562.0 $2,166.1
6 Pentagon VA $2,536.8 $0 $2,536.8 $1,295.4 $1,241.4
7 State Employees' OH $2,161.4 $0 $2,161.4 $494.2 $1,667.2
8 Mountain America UT $2,102.8 $271.2 $831.1 $848.1 $1,254.7
9 Randolph-Brooks TX $2,054.7 $537.0 $1,517​.8 $844.3 $1,210.4
10 Digital MA $2,048.0 $383.2 $1,664.8 $688.9 ​ $1,359.1

Source: Callahan & Associates. 

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

Direct Impact Of Indirect

Only 31.9% of the industry participates in indirect lending; however, those credit unions are significantly impacting the auto portfolio.

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

Meanwhile, total auto lending expanded 14.1% year-over-year to reach $272.4 billion at the end of March 2016. Although growth is down from last year’s 16.1% rate, that marked the 11th-straight quarter of double-digit national auto loan growth. National market share expanded to 17.1%, up from 16.3% in the first quarter of last year.

Meanwhile, new car loans are rising as a proportion of the industry’s auto portfolio, up from 35.0% in the first quarter of 2012 to 38.1% as of this year’s first quarter. And the average member relationship (total loan and share balances less member business loans, per member)at credit unions where there is some indirect lending is $17,491 and $16,618 for those credit unions with only direct loans, as of March 31, 2016.

AVERAGE MEMBER RELATIONSHIP

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.16

Source: Callahan & Associates.

Of course, larger credit unions — which tend to be those who participate in indirect lending — also tend to be those that can devote more resources towards segmenting and marketing broader relationships to those indirect loan holders. The average member relationship, while considered a key metric for measuring overall engagement, could be influenced here by the sheer size of the indirect loan itself. That said, however, we’re also seeing a slight raise in the average share balances at credit unions that do indirect lending.

Delinquencies Don’t Dramatically Differ

It’s also widely assumed that higher delinquency rates are a byproduct of indirect lending. Maybe. Maybe not. While delinquency rates are considerably lower for new auto loans vs. used auto loans, they are not significantly different for direct vs. indirect loans.

Nationally, the new auto loan delinquency rate, at 0.35%, sits 31 basis points lower than the 0.66% used auto delinquency rate, according to our analysis of first quarter call report data. For indirect vs. direct, the overall delinquency rates as of March 31 were 0.57% vs. 0.51%, respectively.

Auto delinquency and net charge-off ratios did rise slightly over the past 12 months. Auto delinquency increased three basis points to 0.54%, and auto net-charge offs rose nine basis points to 0.62%. The auto net charge-offs rate has been creeping up steadily and is at its highest point in the three-year history of required reporting.

The national credit union auto portfolio has grown 32.4% since March 2014, yet the net-charge off auto amount has grown nearly twice as fast, at 59.1%, over the same period. The total net-charge off ratio is considerably down, at 0.52%, since its high of 1.20% in December of 2010 following the recession.

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

AUTO LOAN COMPOSITION

FOR U.S. CREDIT UNIONS | DATA AS OF 03.31.16

Source: Callahan & Associates.

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

— Senior writer Marc Rapport contributed to this article.

This article appeared originally on Credit Union Times on July 10, 2016.

 
 

Aug. 22, 2016


Comments

 
 
 
  • Good analysis on a timely topic.
    Anonymous
     
     
     
  • Overall relationship balances look to be actually the car loan itself. Does not make sense that overall relationship would be higher with indirect.
    Anonymous
     
     
     
  • Hello and thank you for your comment! The metric measured in the fifth graph is average member relationship, which is calculated by taking shares and loans less member business loans all over members. Auto loans are a major part of credit unions' loan portfolio; therefore, a higher auto loan portfolio may drive up average member relationship. However, credit unions that have an indirect program also have a higher average share balance at $10,144 compared to $9,859 for credit unions that do not have indirect. As I mentioned in the article, these numbers could be tied to the fact that larger credit unions tend to participate in indirect lending and smaller ones do not. Hope that helps and please let me know if you have any questions!
    Liz Furman