By John Hintze
What type of consumer lending may offer banks collateral that increases in value, high credit-score borrowers, geographic variance and attractive returns?
Answer: Loans to finance purchases of collectible cars, a market that has survived recent economic downturns with nary a scratch and provides banks with a relatively low-risk way to diversify their portfolios.
Banks’ interest in those loans appears to have picked up dramatically in the wake of the COVID pandemic. Woodside Credit, which has specialized in the market since 2003, originated $500 million in loans over the past year out of $3 billion in total since its start, according to President Mitch Shatzen.
That’s due partly to Woodside building up its sales and market efforts over the years, so that it now supports representatives in states from east to west. The dramatic increase in deposits banks experienced during the pandemic coupled with the limited lending opportunities some banks face has also been a big factor.
Ireland Bank, headquartered in Malad City, Idaho, noticed Woodside in 2012. Ten years later, when it found itself facing abundant deposits and a shrunken consumer loan portfolio, the bank discussed the volume of funded and documented loans it was interested in purchasing from Woodside, which underwrites the loans to meet regulated bank requirements.
“Every week they send us a package of loans — the applications, their underwriting, everything you need to write a consumer loan — and then we’ll do our own underwriting,” explains Bruce Lowry, president and CEO of Ireland Bank, adding that Woodside’s turndown rate is actually higher than his bank’s.
Lowry says the average loan size his bank buys from Woodside is $89,000, with most of those loans in the $50,000 to $70,000 range that relatively affluent borrowers are using, along with significant down payments, to buy Fords, Chevys and other classics from the 1960s and 70s. Some much larger loans are used to buy high-end collectibles such as Ferraris and Porsches. Lowry added that the collectible-carborrower’s average credit score is 775, compared to an average of 700 in southern Idaho.
“It’s a different kind of borrower that’s not naturally in our market,” he says.
In the business since 1993, J.J. Best Banc takes a different strategy in lending to seven categories of collectible cars, including antique, classic, exotic and muscle cars. Founder and owner John Meldon says the bank lends money across the continental U.S., generally originating prime loans that it sells to other banks ranging significantly in size. In some cases, J.J. Best will retain loans on its books, Meldon says, if, for example, a borrower with a low credit score the bank normally would not lend to provides a large down payment and the bank determines the risk is acceptable.
J.J. Best also offers auto insurance to borrowers to facilitate the transaction, Meldon adds, noting that while his bank ultimately competes against virtually every other bank offering car loans, most banks focus on loans for new cars.
“If you ask Chase for a loan to buy a 1966 Chevrolet or Corvette, they generally will not do that loan unless you’ve been doing business with the bank for 20 or 30 years,” he says.
Denali Bank, based in Fairbanks, Alaska, services around 100,000 customers, according to Steve Lungren, president and CEO of the $500 million-asset bank. Denali Bank has increased its loan-to-deposit ratio to 85 percent today, from 60 percent 15 years ago, and its return on assets to 160 percent from 80 percent, in part by buying loans in niche lending areas. About $40 million of Denali Bank’s portfolio is currently in collectible-car loans, also originated by Woodside, and half the bank’s overall portfolio is devoted to similar programs, including insurance-agency financing and construction financing to support Small Business Administration 504 loans. Denali Bank is also a member of the BancAlliance program, enabling it to invest in senior credit facilities to mostly middle-market companies.
Lungren called the profile of Woodside borrowers attractive, given their typically steady employment and higher net worth and income compared to the average borrower in Fairbanks. The Woodside loans tend to be longer term, out as far as 15 years, but the average loan life is typically less than four years, since borrowers will pay off the loan or sell the collectible car in order to by a different one.
“As bankers, we usually like to see shorter amortizations, because car values depreciate quickly,” Lungren says, adding, “What we like about this [collectible] portfolio is the value of the car really doesn’t depreciate and in some cases even increases.”
First Financial Northwest Bank, located just south of Seattle in Renton, Washington, started lending through Woodside in 2019, also to diversify its portfolio geographically. President and CEO Joseph Kiley says the loans held up well during the Covid pandemic and, in fact, charge-offs for its collectible-car loans have totaled just 18 basis points.
“They do a very good job of bank-like underwriting, because that’s who their partners are,” Kiley says, adding that if the loan is paid off within 90 days for whatever reason, Woodside will reimburse its upfront fee or replace the loan. “And if the loan runs into trouble — and that’s rare — Woodside is a great partner in helping us collect on that loan, or locate the vehicle and borrower and take possession of the vehicle.”
Shatzen says loans range in size from as little as $10,000 to more than $1 million. He added that the average rate Woodside offers today is 9.5 percent, relatively low given that the prime rate today is approximately 8.5 percent, and the payment is driven by a term of 180 months for a loan above $200,000, 144 months for above $100,000 and shorter terms for smaller balances.
“Many customers are able to pay cash for their cars, but they come to us because they like the cash flow benefits, since they don’t have to tie up their own capital,” Shatzen says.
In fact, Kiley says, he’s considering restricting the loans his banks purchases to those over $100,000, given the larger down payments, the typically more established borrowers, and the greater likelihood that they will take great care of the vehicle. “The larger the loan, the better I feel about it.”
John Hintze is a frequent contributor to the ABA Banking Journal.
