TCF Bank initiated a shift in its auto finance strategy during the first quarter by decreasing the mix of superprime loans, in favor of holding more profitable nearprime loans in its portfolio — which will result in a 30% to 40% decline in overall auto originations, the company reported in its latest earnings report.
The bank has used a gain on sale strategy and sold $250.6 million in auto loans during the first quarter of 2017, compare to $444.3 million sold during the same period the year prior, according to its first quarter earnings report released this morning.
First quarter originations were down 5.6% — to $863 million in auto loans — compared to the same period last year. Auto outstandings remained relatively flat, year over year, at $2.78 billion.
“Based on a reassessment and changing market conditions, we have decided to make changes to the strategy that will allow us to increase profitability, reduce earnings volatility, and reduce capital liquidity and operational risks related to the gain-on-sale model, moving forward,” said Craig Dahl, president and chief executive of TCF Bank, during the earnings call. “Many of these changes have already been made but it will take some time to see the full impact.”
Nearprime auto loans will come to make up roughly 10% to 15% of the bank’s overall portfolio, but that may change depending on how the loans perform, said Mike Jones, executive vice president of consumer banking, during the call. Ultimately, tightened credit standards and a reduced portfolio size overall will drive less risk, and increase profitability, he added.
“Although we will hold more of that nearprime on the balance sheets, in January and February we enacted quite a few changes in our underwriting, which we believe will drive better results within each of the credit grades, as we react to what’s happening in the marketplace, the used car market, and some of the recovery rates,” Jones said.
Delinquencies 60 days or more past due were up to 0.13% of the portfolio, compared with 0.09% of the portfolio the same quarter a year ago. However, delinquencies were down 10 basis points, compared with the fourth quarter 2016 — a trend the company believes will affect charge-offs moving forward.
“We don’t give the 30-day [delinquency] number, but directionally it came down in the same direction,” Jones said. “So we would anticipate that in the second quarter — as it has in prior years — the charge-off number will come down based on those delinquency numbers.”
On a year-over-year basis, first quarter charge-offs increased by 31 basis points, to 1.12% of average auto loans and leases.
