Some Long Island banks back off or stop financing car loans

Long Island Business News, Jan 28, 2005 by Claude Solnik

Some local financial institutions are putting the brakes on auto loans.

Long a staple of the business, allowing banks and credit unions to rev up their lending power, some bankers are backing off or even stopping their financing of car loans.

There are several reasons for the downshift - among them, heightened competition from the lending arms of auto makers. Then there's the risk and the diminishing return on used cars, which finance companies typically sell after leases, when those vehicles are tougher to sell at a premium.

Take Riverhead-based Suffolk Bancorp, which traditionally focused heavily on auto lending.

Structural changes in this business have moved [auto financing] to the captive finance subsidiaries of the major manufacturers, said Thomas S. Kohlmann, CEO of the 26-branch bank.

He said auto makers' complex incentive programs (zero-financing loans, for example) have contributed to Suffolk Bancorp and other financial institutions slowing down their auto-loan businesses.

There's pressure from the manufacturers, Kohlmann said. They need to sell cars and they're willing to finance at a lower percentage.

Although banks typically don't break out auto loans on their balance sheets, Suffolk Bancorp reported that its consumer loans, dominated by auto loans, declined 29.4 percent to $1.62 million at the end of 2004 from the year prior.

We're not stopping. We're staying in that market, said Douglas Ian Shaw, a spokesman for Suffolk Bancorp. We're just doing less of it [financing auto loans].

Islandia-based Long Island Financial Corp., whose fourth-quarter income in 2004 slipped to $1.8 million from $3.3 million just a year before, is leaving the auto lending arena.

The parent company of Long Island Com-mercial Bank attributed the decline in earnings to increases in its provision for loan losses and operating expenses related to its automobile loan portfolio.

The company's financial woes sprang primarily from auto lender Captus Financial, which originated leases in deals financed by bankers.

In March 2004, LI Financial learned that Captus, due to liquidity issues and financial difficulties, would not have the ability to fulfill its obligations.

In its fourth quarter, the bank took a $750,000 provision for auto loan losses, bringing provisions for the year to $6.3 million. LI Financial also racked up $289,000 in operating expenses for its fourth quarter and $1.4 million for the full year related to its automobile loan portfolio.

At this point, it's very difficult for auto leasing companies to make money, said LI Financial CEO Douglas Manditch. We're exiting the auto finance business.

The bank said it has stabilized the portfolio and is paring it down gradually.

On Sept. 30, 2004, LI Financial's auto-loan portfolio consisted of 1,367 loans worth about $28.1 million. By year's end, the bank had about 1,110 auto loans with a balance of $22.8 million.

Another problem that's plagued companies providing auto loans is liability. Traditionally, a finance company, as the legal owner of a vehicle, is liable for losses incurred in an accident involving that auto. But car makers have worked their way around that issue by way of balloon leases. Under that arrangement, the borrower, not the lender, is a vehicle's nominal owner and thus liable for any damages.

The rise of the balloon lease has fueled the auto-loan business and put pressure on other lenders.

Bankers who are backing off from auto loans said they're finding that commercial loans provide more attractive prospects.

LI Financial, for one, is focusing more now on its core of traditional commercial lending and mortgages, said Manditch.

And, Suffolk Bancorp is boosting its bottom line with commercial and real estate loans, said Smith. Our loan portfolio had a different structure at the end of 2004 than at the end of 2003. It reflects a change in our business.

For Suffolk Bancorp, real estate construction loans shot up by 65.6 percent to $50.46 million. Real estate mortgages rose 13 percent to $2.62 million.