Since Ohio Central Savings in Dublin launched its Auto Arm in April, the outsourcing unit has made $9 million of direct auto loans for 10 small banks but has yet to produce a profit for the $60 million-asset thrift.
That may be about to change.
Auto Arm has just signed the $26.3 billion-asset New York Community Bancorp Inc. of Westbury as a client.
“This is the deal that is going to push us over the top, we believe,” Robert W. Hughes, Ohio Central’s president and chief executive, said Monday.
Auto Arm’s largest client after New York Community has about $500 million of assets, he said.
“We didn’t expect a bank that large to need outsourced help,” Diane M. Gregg, Ohio Central’s vice president and chief operating officer, said Monday. “Obviously, they could do this themselves.”
New York Community could, but Andrew L. Kaplan, the first senior vice president of its biggest bank unit, New York Community Bank, said Tuesday that it does not want to, because car loans do not fit its conservative credit profile.
The deal with Ohio Central “is consistent with New York Community’s history of identifying quality partners to assist us in providing full banking services to our customers,” he said.
New York Community gets a large number of car-loan inquiries from customers who visit its 152 branches, and now it can offer them a loan through Auto Arm and cross-sell them other products, Mr. Kaplan said.
Though banks have the option of buying any loan that Auto Arm originates, most don’t, and New York Community said it won’t, either.
To accommodate its new client, Ms. Gregg said, Ohio Central has added a person to its marketing staff and made plans to bring on more loan processors as volume increases.
Auto Arm funds the loans and pays participating banks a fee for every deal it closes with one of their customers. It puts some of the loans on Ohio Central’s books and sells the majority to investors. Thus, most of the revenue Auto Arm generates for Ohio Central is booked as noninterest income, attributable to the loans sold and to fees for servicing them.
For Auto Arm’s first nine months of operation, Ohio Central reported $568,000 of noninterest income.
Founded as a credit union, Ohio Central Savings became a bank in 1998 but never gave up its attachment to direct auto lending, which remains a staple for credit unions. (Banks abandoned the business as competition from credit unions and automakers intensified.)
The American Bankers Association, for example, has no committee on direct auto lending, and Jerry Baugh, a vice president of the Consumer Bankers Association, said only a few dozen of the hundreds of lenders that attend its annual automobile finance conference make car loans directly.
The vast majority of banks involved in auto lending do it indirectly, by purchasing loans from car dealers, Mr. Baugh said Monday.
However, Ohio Central considers auto lending a winning proposition for banks, because it gives them another point of contact with customers. Under its model, customers apply for loans online. The links between participating banks’ Web sites and Auto Arm’s are customized, so it appears to customers as if they never leave their bank’s Web site.
Ohio Central also provides participating banks with statement stuffers, in-branch advertising, and other marketing materials.
Auto Arm underwrites the loans and makes all credit decisions, but participating banks get to close the deals in their offices.
“That gives them the chance to cross-sell mortgages, deposit products, and other things,” Ms. Gregg said.
Ohio Central says it can compete with credit unions and automotive finance companies by keeping its credit losses low. As of Sept. 30 it had $42,000 of delinquent car loans, or 0.22% of its portfolio. According to the ABA, the industrywide delinquency rate for direct auto loans is 1.81%.
Mr. Hughes said the market for car sales is huge — Americans bought 37 million new and used cars last year.
In addition to New York Community, Ohio Central is close to signing two more banks, he said.
Mr. Baugh said banks are beginning to show a renewed interest in direct auto lending.
“They see it as a way to provide a more complete service to their customers,” he said.
