Q&A with Coburn and Associates managing partner Jim CoburnPosted on Written by Reagan Haynes
Jim Coburn is the managing partner of Coburn and Associates, a Michigan-based financial services consulting firm he founded in 2010.
Coburn has more than 30 years of experience in commercial banking and has managed most consumer finance functions. Before launching his company he was financial vice president and senior consumer lending manager for Flagstar Bank, a regional commercial thrift based in the Midwest.
Earlier in his career he was senior credit risk officer and manager at BB&T in Greensboro, N.C., where he initiated the bank’s consumer specialty finance division. Before that, he was senior vice president of First of America/National City Bank (now PNC), leading regional and national teams in their consumer and floorplan finance divisions.
Coburn is a board member and past chairman of the Michigan Boating Industries Association and a co-founder of the Recreational Boating Industries Educational Foundation, a Michigan scholarship foundation. He was elected president of the foundation in 2015.
He has served on the board of the National Marine Lenders Association since 1995 and is a past president of the organization.
Coburn lives in Macomb, Mich., with his wife, Maureen, and two daughters. He is an active boater and donates time to the United Way, Salvation Army and other community organizations.
We asked Coburn about the state of marine lending and how he expects things might shift under the Trump administration.
Q: What is the state of marine lending today?
A: Overall it’s in good shape, based on the data I have received and the discussions I have with lenders all over the country. The state of marine lending is, of course, centered on the overall performance of the economy and the recreational boating industry. Predictions for the economy in 2017 appear favorable at this time, and the recreational boating industry is making healthy strides away from the Great Recession.
Retail and wholesale lending remains available to consumers and businesses, underwriting guidelines appear to be stable and lenders are reporting overall productive growth in the marine finance space. Boat loan delinquency rates also remain low, consumer rates and terms are favorable and a majority of marine lenders remain optimistic for new business in 2017.
Looking back, retail boat loans have always been available. Recall that it did not feel that way for many during the time of the Great Recession from 2007 to 2010, particularly for finance managers at surviving boat dealerships. During the recession, boat-lender and loan-availability reduction was equal to the reduction of boat units sold. It was more difficult finding boat-buying customers than it was procuring a boat lender.
Floorplan financing is going well after a very rough time during those recession years. Distressed boat channels have cleared, and availability is good today for dealerships. Many more local and community banks have floorplan programs for their footprint clients than seven years ago.
Wells Fargo (formerly GE-CDF), an excellent inventory finance lender, still maintains the lion’s share of the market and necessitates industry watching. The last time I checked, 20 of the top 50 banks in the U.S. indicated they are in the floorplanning business. The downside was that most of those 20 were in automobile floorplanning only. Only a handful possessed marine floorplan programs, with varying degrees of geographical limitations. Again, this area bears watching, as we encourage more banks to enter this business line.
Q: How have service companies shaped the industry?
A: Service companies are one of the four common industry channels for consumer retail boat loans. The other three are direct, indirect or dealer, and portfolio purchase. They have played a great role shaping the boat loan industry and operate, with banks, similarly to the indirect/dealer channel. Service companies are actually marine finance brokers, much like residential mortgage brokers. Service companies began operations in the 1970s and have slowly grown to over 40 legitimate marine finance businesses. Their income and vitality are derived from building relationships with banks. Many of the best-performing finance brokers are owned or managed by former bank employees. There are few barriers of entry in becoming a finance broker.
There are two mainstream types of finance brokers that operate in the U.S. — traditional and outsource. The original type is the traditional finance broker. Traditional business in the early years mostly served large boat markets in the Fort Lauderdale, Annapolis and Newport Beach areas, attaining their most significant growth from the 1990s through 2007. Traditional finance brokers usually solicit boat brokers for their mainstream business. Pre-owned boats historically provide a significant portion of their loan originations, averaging about 65 percent in recent years. Traditionals largely solicit business through the use of internet and print media, such as banner ads and consumer boating publications and by hanging the shingle at selected consumer boat shows. Like banks and credit unions in the boat loan space, traditionals have been slow to adapt to some of today’s digital and content-marketing opportunities.
Traditional finance brokers have historically maintained a good reputation with banks because they do an excellent job of pre-screening their boat loan applicants. As a result, their seasoned portfolios perform better than their indirect/dealer and direct counterparts.
Outsource finance brokers — often referred to as F&I service providers, or circuit riders — mainly target marine dealerships that do not employ finance-and-insurance managers. Outsourcer dealerships tend to be smaller in size of gross revenue and the boats they sell. Outsourcers provide a great service to their dealers, as their financing expertise in processing and funding boat loans saves them time and money. Outsourcers may split their fee income with dealerships. They also may gain additional revenue sources through sales of ancillary products, such as warranty and other insurances.
Finance brokers are very visible to both consumers and marine businesses. They participate in trade shows, consumer shows and many marine industry events. And as I mentioned, most finance brokers do an excellent job in pre-screening loans and protecting their bank or credit union partners. The reported average loan size of both traditional and outsource finance brokers in 2015 was $107,000.
Q: What does subprime marine lending look like today?
A: Non-prime or sub-prime financing appears to be going well in the recreational marine space. The lenders that operate in this specialized space are still reporting brisk business. Their programs generally finance boat loans that are under $100,000 and are geared toward consumers with credit problems, including bankruptcy.
Non-prime lenders typically originate in the under-700 credit score category. The consumer rates are higher, terms may be shorter and other restrictions may apply. It’s a great supplement to those lenders who operate only in the prime paper arenas and a great service to consumers who honestly desire to re-establish their credit standing.
Q: How will the election affect lending and banking?
A: I do not think the election will significantly change lending and banking — at least in the first year of the new administration. Revising or eliminating some of the harsh regulations imposed over the past six years should benefit business and consumers alike. There have been so many consequences of overplayed regulations — unintended or not — that could bring relief if campaign and legislative promises are kept. I’m a believer in the mission of the [Consumer Financial Protection Bureau]: to help consumers. However, most everything they have done to this point has been either punitive or costly to consumers, the very group of Americans it was designed to protect. It will be interesting to see how the CFPB changes. I look forward to it.
Q: Do you think changes will happen slowly or quickly?
A: If 12 to 24 months is your definition of quickly, then I believe changes may happen quickly.
Q: Will things go back to the “good old days?” Do you see any risks associated with that?
A: If you’re talking about the recreational marine industry, then the answer is no. We will not see comparative new-unit sales like we did prior to 2007. Considering the National Marine Manufacturers Association’s revised retail numbers reporting that 881,000 new units were sold in 2001 — the revised high mark — and that 243,600 new units were sold in 2015. That’s about 28 percent of that year’s performance. 2015 is also only about 61 percent of the unit performance in 2006.
On the other hand, total retail expenditures in the marine industry are near an all-time high, according to the NMMA’s revised data. Total retail expenditure dollars of $35.8 billion should easily eclipse the record of $37.8 billion, set in 2006.
So the news is not all good, but not all bad, either. The boat loan and recreational marine industries are thriving and should be able to make hay on the dollars generated in the business. I consider that a good thing and a continued opportunity for all stakeholders.
Q: What challenges lie ahead for marine lending?
A: Interest rates moved up in December, as expected. We wonder how higher rates may affect new-boat buyers, given that boat loan rates are still low, relative to historical standards, and capacity to lend is very good. However, monthly payments will increase — but probably not as much percentage-wise as new-boat prices have recently trended, or are forecasted.
Everyone around the industry is aware that affordability has fallen in recent years, as new-boat prices have risen faster than incomes. A continuous new round of interest-rate hikes during 2017 and 2018 could very likely create a bit of a barricade for our still-recovering recreational boat industry, compared to pre-Great Recession performance.
I’m a bit of an optimist and do not expect new-boat sales to significantly weaken as a result of rising loan rates. However, the new cost burden could affect some potential boat buyers, particularly first-timers, and possibly squeeze them out of our market. This could cause us to reassess the sales growth of new recreational boats, which could slow modestly in 2017.
Profitability issues, such as margin spread management and credit risk, continue to play leading roles for recreational marine lender existence. It is interesting to note that yield performance for boat lenders over the past three years has declined from 6.51 percent in 2013 to 6.28 percent in 2014 and to 4.64 percent in 2015. These numbers, courtesy of the National Marine Lenders Association, include the yield performance of certain non-prime lenders. I estimate that prime lender yield would be approximately 3.50 percent in 2015, net of any non-prime lender data. So boat lenders are always needing to manage through razor-thin margins and the squeeze.
Q: What are some general industry challenges you see?
A: Some of those challenges I think of are interest rates — if they rise significantly and rapidly — consumer affordability of new boats and, of course, the workforce issues that the Michigan Boating Industries Association, the Marine Retailers Association of the Americas and other marine trade associations are hard at work with.
Q: I know NMLA compiles some data. Can you give me the most recent stats?
A: Given the popularity and measured success of digital content and several social media channels over the past seven years, I found this result to be very interesting. Only 28 percent of boat lenders — the banker types, not finance brokers — use social media as a way to attract new business. It is surprising because the traditional types of boat lender avenues, direct and indirect, can benefit from social media and contemporary advertising avenues. The boat-lending bankers and associates appear to be very interested in social media. In November 2010, I and another NMLA director conducted a seminar on the benefits of adding social media to the advertising mix. The San Diego sessions were well attended, with our exit feedback indicating most everyone would implement social media as a tool for attracting new loans and new consumers in the 25-to-45 age demographic. Yet today, 72 percent do not bother with social media.
In the finance broker and service company channel of recreational boat lending, 48 percent use social media to attract new-boat loan business; 52 percent still do not use social media at all.
Another interesting statistic was around loan defaults. In 2015, delinquencies and charge-offs remained at levels well below those highs we experienced from 2009 to 2011. Based on interviews with lenders and bankers during the third quarter of 2016, we expect no surprises with boat loan delinquencies when the data is gathered for the whole year (2016).
However, industry credit underwriting guidelines, while stable, have relaxed slightly in the past two years. For example, all lenders write loans at a 700 credit score and above. But our data tells us more prime lenders are now dabbling back in the 600-699 range. Also, down payment requirements have eased, as most lenders use 10 percent or less as a standard, with fewer using 15 percent. We have also noticed a relaxing of lender-advance, or LTV requirements — the maximum amount a lender will finance, based on the value of a new or pre-owned boat. These events could initiate a minor increase in boat-loan delinquency.
It is important to note that the outstanding loan performance from 2012 to 2015 also contains the data of participating non-prime lenders. The delinquency shown in these years would decrease by about 0.1 to 0.2 percent if the non-prime lender data were omitted from the result. Another good thing about U.S. boat loans — delinquency has continuously performed better than all other consumer installment loans.
Q: How is membership going in the NMLA? What are some of the issues you face?
A: Membership has been a challenge. The association has two types of members — lender and associate. Both segments pay the same dues. Lender membership — banks, credit unions, etc. — has increased 20 percent since early 2012, but has declined 31 percent from its modern-era high in 2003. While increasing about 3 percent in 2016 over 2015, associate memberships have declined about 18 percent since 2009.
Associate membership was introduced in 2007. The association had struggled with plans to reach all U.S. lenders who originate and book boat loans since the onset of the Great Recession. Our current board and leadership is working hard on new dynamics to assist all current and future members with improved benefits, educational opportunities and relevance.
Conversely, MBIA membership has improved steadily every year since 2010, with a 12 percent gain from 2014 to 2016. MBIA has more than four times the membership than NMLA. Outreach marketing and legislative accomplishments have been key for us in that association.
Q: What else is going on with NMLA?
A: I really enjoy being part of the NMLA’s marine lending workshop as an instructor. This year’s workshop begins March 5 at the Hilton Embassy Suites in downtown Tampa, Fla., near the convention center. My instruction modules will be the overview of yesterday and today’s marine finance industry and collateral valuation. The collateral valuation class is so important to the health and profitability of any lender’s portfolio. I’m honored to be a part of it. The NMLA’s 38th annual conference will be at Hyatt Indian Wells Resort and Spa, Indian Wells, Calif. The NMLA has a new president — Dennis Poer of Bank of the Ozarks. He is an industry friend and excellent credit administrator. I am looking forward to his leadership in that association.
The MBIA — Michigan Boating Industries Association — has their conference every December in Lansing, Mich. We have drawn more attendees to this conference than the NMLA for the past three years. I’m really proud of that association’s accomplishment, considering MBIA is up against other national annual meetings and the MRAA’s conference. Both the MBIA and NMLA are producing outstanding conferences, content and educational opportunities for their members and anyone associated with the marine and marine lending industries.
Q: Is there anything you’d like to add?
A: Working with legislators and marine industry-related legislative issues has become an important part of our work life at Coburn and Associates, the MBIA and the NMLA. Each year we make new important contacts in Washington, D.C., and Lansing, Mich., that often help every business [connected with] the marine industry. Politics aside, legislative connections and advocacy usually produce satisfying performances and results. Coburn and Associates LLC’s business has improved modestly for the past five years. We are heading into our seventh year planning for another modest increase. Like most new businesses, our first year was the most challenging.
This article originally appeared in the March 2017 issue.