TCF forges ahead with auto lending despite analyst worries

Five years ago, TCF Financial didn't make car loans. Now auto finance is 15 percent of the bank's portfolio.

Fueled by a national rise in car buying, the Wayzata company built a $2.6 billion book of auto loans from nothing.

The business has been a symbol of the firm's postrecession reinvention and an engine of growth. Now, amid turmoil in the auto finance market, it's also a source of concern for skittish analysts.

The worry is over the quality of TCF's auto borrowers, especially as other lenders have had to face the fact they have made too many car loans to subprime borrowers. Sales of cars and trucks plunged in March by 2.1 percent, and analysts worry that a peaking auto market could be trouble for lenders who have grown their auto portfolio quickly.

"I'm worried what's going to happen when the downturn comes," said Dan Werner, an analyst at Morningstar who covered TCF Financial until a month ago. "There's going to be some challenges."

Craig Dahl, chief executive of TCF, was confident in the last conference call with analysts, despite fielding five straight questions on the subject.

"This has been an extremely well-managed and a well-performing portfolio," Dahl said. "So we have that discipline, we think, in it today."

With call centers full of lenders in Anaheim, Tampa and Atlanta, talking on the phone with dealerships and borrowers on nights and weekends, the operation quickly ramped up. By the end of 2015, they were making occasional loans at 11,800 dealerships. The biggest market is California, where TCF has $448 million in outstanding auto loans. Texas, Florida, New York and Pennsylvania are the next biggest markets.

TCF depends on the wide footprint for safety. Instead of trying to generate dozens of loans at particular dealerships in a smaller area, the firm wants a couple of loans per dealership per month. "They love that because it gives them no exposure to any one geography," said Jared Shaw, an analyst for Wells Fargo Securities.

TCF also limits risk by mostly lending to people who buy lightly used vehicles, which don't lose value as quickly as a new car.

"We're about 75 percent used, 25 percent new," Dahl told analysts in January. "Our average transaction size is only $20,000."

The bank insists that it has been making smart loans, unlike some other lenders in the market.

A high average FICO score for a bank doesn't mean all its borrowers are creditworthy.

The average yield on a bank's group of loans is probably a better measure of risk. The higher the yield, the higher the risk. TCF's average yield on auto loans is 4.17 percent. That's not the riskiest portfolio in the market by any stretch, but it's riskier than, say, Fifth Third Bank, in Cincinnati, which reports an average yield of 2.67 percent and carries about $11 billion in car loans on its balance sheet. Several regional banks have an average yield on their auto loans of 2.6 percent to 3.3 percent.

TCF says it moves riskier borrowers off the books by securitizing loans and selling them to investors. It was the first smaller bank in the country to sell auto-backed securities after the financial crisis, said Shaw, the analyst. The bank carried out its third securitization in 2015, selling $256.3 million in bundled loans on the secondary market.

Loan defaults likely wouldn't hit en masse unless U.S. unemployment starts to rise again, and with auto accounting for just 15 percent of the bank's loans, Dahl said he saw no reason to shift course.

"We have a tremendous amount of experience in monitoring portfolios," he said. "We would have to start to see those, basically those leading indicators, start to change before that would cause a change in our strategy."