Huntington, TCF Chiefs Defend Their Fast-Growing Auto Books

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Regional banks on Thursday defended their aggressive push into auto finance as regulators continue to raise red flags about the market's rapid growth.

Auto loans at two Midwestern banks –TCF Financial and Huntington Bancshares—jumped sharply in the third quarter, providing a much-needed boost to interest income as rates remain low.

But executives were peppered with questions about credit quality in their auto books, and about regulators' recent comparisons of the sector to mortgages before the meltdown.

“Our model in the auto financing industry has not changed a twit,” Bill Cooper, chairman and chief executive of the $20 billion-asset TCF, told analysts on a conference call.

Auto loans jumped nearly 40%, to $2.4 billion, at the Wayzata, Minn., bank. TCF’s loan book overall grew 5%, to $17.2 billion.

The $69 billion-asset Huntington has steadily expanded its auto lending business since the crisis. Its auto portfolio expanded 11%, to $9.2 billion, last quarter.

“Our numbers are rock solid in terms of what we are originating … so we feel extremely confident in the performance of our book today,” said Dan Neumeyer, chief credit officer at Columbus, Ohio-based Huntington.

The comments occurred a day after Comptroller of the Currency Thomas Curry urged auto lenders to be more cautious and more selective in granting credit and structuring loans.

Car loans accounted for more than 10% of retail credit at national banks in the second quarter, compared with 7% for the same period in 2011.

“Although delinquency and losses are currently low, it doesn’t require great foresight to see that this may not last," Curry said in a speech Wednesday. "How these auto loans, and especially the nonprime segment, will perform over their life is a matter of real concern to regulators. It should be a real concern to the industry.”

A range of factors such as low gas prices and declining unemployment have provided a boost to the auto loan market in recent years, according to a June report from the OCC.

But declines in credit quality can creep up slowly—and rapid loan growth is often an early warning sign, the report said.

“Extended rapid growth is difficult to maintain and can sometimes mask early signs of weakening credit quality,” the report said.

During their analyst calls, bankers acknowledged that there are signs of trouble ahead in the auto financing market. Lenders across the country have begun to lengthen loan terms and lend to borrowers with blemished credit histories, they said.

But their message to investors was clear: it is not an issue in our books.

“I think there have been changes in the industry as a whole, and that may be of concern to regulators or others, but that has not occurred at TCF much,” said President Craig Dahl, who will succeed Cooper as CEO when he retires from the job at yearend.

Secondary Market

One of the ways that TCF controls for credit risks is by selling loans with lower FICO scores to the secondary market, Cooper said. TCF completed its third securitization of auto loans during the third quarter, executives said.

Such sales also bolster fee income, though they slacked off a bit at TCF and Huntington last quarter.

Nearly 10% of TCF's noninterest income came from gains from sales of auto loans in the third quarter. Those gains, about $10.4 million, were 30% lower than a year earlier.

“We continue to build up that channel and delivery” for loan sales, said Mike Jones, TCF’s chief financial officer.

Huntington's total gains on the sale of loans were $5.9 million in the third quarter. However, that figure was 28% lower than a year earlier.

In his speech Wednesday, Curry warned that securitization does not eliminate risk.

Packaging auto loans into asset-backed securities allows lenders to pass along some risk to investors, he said. But weak underwriting -- including loans that drag on for years -- can undermine the whole market.

“With these longer terms, borrowers remain in a negative equity position much longer, exposing lenders and investors to higher potential losses,” Curry said.

Future Risks

The bankers acknowledged that there were some downsides to expanding so quickly.

As Huntington expands it auto financing book, problem loans will increase as well, Neumeyer said, but he added any increases would occur against a very low base of auto loan delinquencies.

“Obviously over time we could see an uptick in chargeoffs as we move to the cycle, although….I think it would be in line with historical performance,” he said.

Net chargeoffs of auto loans at Huntington -- up 22%, to $4.9 million -- outpaced the growth rate of the overall portfolio.

At TCF, larger auto financing units also led to higher salary expenses. It attributed its 3% growth in compensation costs to its larger auto lending staff.

At the end of TCF’s call, Cooper struck a more measured tone about future risks in the business. In response to a question about the company’s reserves, he said that the company can’t sustain such strong growth over the long term.

“Things aren’t going to be as good as they are forever, so we are going to be prudent,” he said.

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