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Engine of growth

By Ed Avis, June 29, 2017

Two years ago, the leaders of Farmers State Bank in Waterloo, Iowa, decided that auto lending should become a larger part of the bank’s portfolio. Their timing was good: Because of the strengthening economy, demographic changes and other factors, car sales jumped 4.8 percent in 2016 to a record 88 million vehicles worldwide. And when more cars are sold, more cars are financed.

“We made a conscious effort to increase that part of our bank’s lending, and all the stars lined up,” says Todd Rohlfsen, president of the $850 million-asset community bank, which has 10 branches in northeast Iowa. Farmers State Bank carried about $34 million in auto loans in 2016, up from about $20 million in 2015. “We’ve been very happy,” Rohlfsen says.

Farmers State Bank is not alone among community banks. According to data from Sageworks, banks with less than $1 billion in assets carried $13 billion in auto loans in 2016, up .07 percent from 2015. That doesn’t mean there aren’t some challenges, but overall, auto lending is a bright spot for many community banks.

“There is a lot of consumer confidence right now, and people are looking to make larger purchases, such as cars,” says Rob Ashbaugh, senior risk management consultant at Sageworks. “There are a lot of banks that have had significant growth in that sector.”

Naturally, the economy is a key driver of auto lending, and the economic recovery over the past five years—albeit slow—has moved a steadily increasing number of cars off the lot.

Used-car strongholds

New cars, because of their high price points, generate a lot of financing need. But that’s also where the automakers’ own finance arms are strongest. Financing used cars, on the other hand, is something community banks dominate in
many markets.

“I like the used-car market,” says John Buhrmaster, president of 1st National Bank of Scotia in New York and a past chairman of ICBA. “Families need second cars, and some are buying a third car for their young-adult children. That’s become an excellent market for us. If you’re buying a car for your kid, you’re looking for a small amount, which big banks don’t like. But you have a good payment record, and you want to put the kid on the loan so he can establish credit. That’s a community bank loan all the way.” Buhrmaster says auto loans make up about 35 percent of his bank’s portfolio, and that’s split about 50/50 between new and used cars.

Like the new-car market, used-car sales have been strong in this economy. According to Mannheim’s Used Car Market Report, 2017 was the seventh consecutive year that used-car sales increased in the United States.

For the full story featuring Sageworks, visit Independent Banker – Engine of growth.