Making It Work

After 50 years in auto finance, Fireside Bank is shutting its doors. Parent company Unitrin Inc., a Chicago-based property and casualty insurer, announced yesterday that its subprime auto lending subsidiary had stopped originating loans.

Fireside, which employed 730 people at yearend 2008, has a loan portfolio in excess of $1 billion, making it one of the top financiers in the nation. It will continue to service its portfolio, winding down operations in the next few years. During that time, Unitrin hopes to recoup its $240 million investment in Fireside.

So what happened to Fireside? It lost $22.3 million last year and $38.8 million in 2007.
Though the Pleasanton, Calif.-based lender did business in 19 states, 65% of originations were concentrated in California, one of the states hardest hit by housing declines and rising unemployment.

Also, Fireside is an industrial bank, regulated by the California Department of Financial Institutions and subject to FDIC regulation. To that end, Fireside is required to maintain a certain level of reserves in cases of losses.

Last year, Fireside’s provision for loan losses included $77.7 million for loans originated in 2008 and a $32.3 million increase to estimated loss expectations for loans originated in 2007 and 2006. The reason for the higher losses, as set forth in Unitrin’s annual report: They were caused “primarily by a higher level of gross chargeoff and lower recovery rates due to higher levels of unemployment, lower auction prices on repossessed vehicles, and negative general economic conditions.”

The losses occurred despite efforts to mitigate risk with an improved risk-based-pricing and credit-scoring model implemented in early 2008, which “resulted in the prospective elimination of certain unprofitable segments of business written in prior years,” according to the 10K.

So what is it that makes a successful auto finance company? Fireside had been offering auto loans for half a century, yet was forced to retreat because of unprecedented turmoil in the auto sector and general economy. What might it have done differently to remain in the game, or what can other lenders learn from its demise?

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