2009 National Marine Bankers Association Conference Summary

prepared by Greg Proteau

Lenders Fear Gone, but Credit Thaw Elusive

Marine lending and related service business executives gathering for the National Marine Bankers Association Annual Conference were feeling much better than a year before at the peak of the global credit crisis. About 90 people attended the 30th annual event, on par with 2008 despite the economic challenges. Most of those gathering November 9 to 11 on Hilton Head Island, SC acknowledged the flow of credit to marine retail and wholesale uses needs to improve. In fact, programs and policies advanced or supported by the organization since the beginning of the year were helping the credit thaw.

NMBA President Jim Coburn of Flagstar Bank pointed to several efforts of the organization to support the flow of funds to buy and help with stocking of boats or to encourage lenders to look at the boating industry and consider the opportunities in serving it and its customers. Coburn suggested that many sources of lending remained in place, but the rules for borrowing had become more demanding, perhaps reverting to practices of 20 years ago. He pointed out that marine lending was quite profitable then, and that starting at that level again could produce similar or better results.

Of several new initiatives or improvements NMBA has worked on, Coburn is most enthusiastic of the Small Business Administration's Dealer Floor Plan (SBA DFP) pilot program launched earlier this year and where the first marine loan has been issued in Tennessee with pending loans in two additional states. Calling it a vital program for the industry, the next steps will be to encourage SBA to make it a permanent lending program before the pilot ends.

What’s ahead for NMBA and the industry? A measure of patience in the face of unemployment challenges and the continuing workout of new and distressed boating inventory. With boat builder production at very low or non-existent levels, the industry will stabilize. In the interim, Coburn feels lenders will implement back-to-basics lending routines and raise their level of involvement as competition returns to the field.

Brunswick Chief Sees More Pain, then Gain

For Dustan McCoy, who’s been guiding Brunswick Corp., the world’s biggest boatbuilder since late 2005, efforts have focused on retaining cash, improving liquidity, protecting dealers during the industry’s worst downturn and positioning to be stronger as the economy improves. The chairman and CEO directed cuts across the board which reduced overall production by 80 percent, shrunk the company's marine workforce by 60 percent, shuttered half of its manufacturing facilities and eliminated one-third of the brands. When the market bottoms, which he feels won’t come until late next year or later, McCoy sees the company positioned to leverage its cost-cutting moves and rock-bottom inventory status back to profit gains on slow growing sales.
McCoy delivered a pointed message to the NMBA Conference participants telling them the number one question he hears from the field is how the industry can improve financing for inventory and consumers? He notes that only one-in-four boat sales are now able to be financed and reminds that only a single major floorplan lender – with whom Brunwick has a joint venture – continues service. He is most concerned about the 24- to 40-foot offshore fishing and cruiser market where plummeting sales were exacerbated by lack of loans. McCoy suggested lenders should be targeting marine businesses that have survived the remarkable 45 percent decline in industry sales, but also be cautious in choosing healthy dealers who are connected to healthy builders and related suppliers.

Brunswick management is looking at a number of issues which will support boating in the future. These include simplifying the challenge of consumers to find time to access a boating lifestyle, clarifying benefits, redefining and highlighting brand value, continuing a focus on product innovation and improving the process of getting people into boating and retaining them. Pricing will become more transparent because of information available on the Internet; dealer order and stocking (and perhaps sharing) need to be streamlined; boat refurbishing and refitting are being studied to support the ever-expanding pre-owned market.

McCoy’s outlook, with the past two years turmoil to save the corporation and position it to lead in the expected upturn, is based on gains in boating participation from 26 to 30 percent of the U.S. population over the past four years, and the potential he sees in extending the lifestyle to younger and growing ethnic groups and the general populace. His personal experience in gaining family benefits while boating is the story he knows will resonate with prospects. And he intends to help Brunswick capitalize on that knowledge, its size and reputation.

Boating Participation Gains To Drive Rebound

NMMA president Thom Dammrich told lenders it’s important to keep things in perspective when considering the industry’s state of affairs. Declines in new boat sales are sobering, from an annual average 311,000 units for the decade before the current recession to an anticipated 135,000 units this year. Yet he points to moderate boating participation growth in the past three troubled years as the sign that purchases will turn up again as they historically have in the past. The foundation on which the domestic industry can return to better times includes 17 million boats in use and is reflected in many of boating’s service, storage and support sectors having steady or plus business during this down cycle.

The Discover Boating campaign continues to keep the boating lifestyle in the minds of prospects and reflects the passion that many have for being on the water with family and friends. This past summer, a contest asked boat owners to send in home-made commercials on how they discovered boating and attracted 400 compelling entries. Dammrich aired several for the lenders noting they will be used for Internet, social and viral marketing over the next year. (To view the entries, visit http://www.discoverboating.com/adcontest/videoandphotocontestwinner....)

Projections for overall U.S. population growth from 300- to 350-million in the next 40 years also points to organic growth for boating. Converting boating participation to sales gains will take effort, planning and sector partnerships, Dammrich feels. Credit flow for both consumer and inventory loans will determine the ability and speed of the industry to right itself and recover – and the lending, retailing and manufacturing sectors have more work to do on this. Among other factors beyond industry influence which will pace market gains are recovery of personal wealth and discretionary funds, improving consumer confidence, and stabilization in housing values and market activity.

Longer term, Dammrich is concerned about addressing the costs of boating. Emission regulations are driving up acquisition costs even when environmental benefit is questionable. New models should be investigated in providing product to consumers, including build-to-order and manufacturer-direct. Floorplan availability and costs must be addressed. And boat shows as marketing tools need to be studied to reduce numbers and cut costs with Dammrich suggesting 30 shows should be enough for the nation.

Economy Stabilizing With Slow Recovery Seen

Equity strategist Gina Martin Adams sees the U.S. economy stabilizing and turning up with a slow recovery in the next year, but has concerns about the longer-term health and vitality of the consumer and the country. Returning for a fourth appearance at the NMBA conference, the Wells Fargo Securities director painted a challenging picture for consumers who saw their net worth contract by double what it did in 2001-02 and face a decline in housing values that had never before spread nationwide. The chief negative culprit is the unemployment rate at 10.2 percent, with an underlying rate of 17.5 percent including those who have looked for more than six months (it’s never been longer) or stopped searching. As a result, today’s consumer will be value-driven, cost-conscious and savings-minded, similar to his or her counterpart of the early 1940s.

Adams sees stability in energy prices at the same level as a year ago (though she thinks they will rise moderately in the short term), similar food prices and a very slight 1 percent growth in discretionary spending in 2010. The stock market is likely at a top, following its 60 percent gain and needing a breather. Savings rates will be in the 4- to 7-percent range due to less spending and this continues driving consumer credit borrowing down. Consumer confidence is still not consistently rising reflecting fear and focus on living costs. Spending categories that have seen some recent life include sporting goods and personal health and care, which Adams suggests may be a positive sign for fishing and boating.

The main question marks facing the overall economy in the longer term include the level of governmental intervention in credit markets and certain industries such as home mortgages, health care and autos. Injections of federal cash to stabilize these markets and others will likely push inflation up at some point, Adams warns, with a corresponding negative effect on the value of the dollar and equities. For now, however, she views the overall picture as fairly steady, but says until consumer spending comes back at higher levels, this economy will be stuck on slow.

Update on Red Flag Rules for Lenders, Others

Panelists discussing the “Red Flags Rule” included moderator Karen Trostle of Sterling Acceptance, Leslie Spencer of Sun Trust, Jaymie Yeats of Caterpillar Finance and Tom Smith of Sterling Associates/Dimen. They advised the rule will be enforced beginning June 1, 2010, and pointed to growing Internet use as the chief source of fraudulent loan applications. The rule requires many businesses and organizations to implement a written Identity Theft Prevention Program to detect the warning signs – or “red flags” – of identity theft in their day-to-day operations. It applies to “financial institutions” and “creditors.” The definition of “creditor” is broad, and includes businesses or organizations that regularly provide goods or services first and allow customers to pay later.

All loan material needs to be carefully scrutinized starting with the application and all supporting paperwork. Try to find alternate sources of verification for income and taxes, mortgage details, brokerage claims, etc. Use parties involved in the transaction including the dealer or broker, surveyor, documentation house and insurance agent to monitor the process and double check collateral evaluation. Try to close all deals in person and obtain signed documents indicating funds have been disbursed, and trade-ins (or floorplans) paid off. For a guide to the rule, visit http://www.ftc.gov/bcp/edu/pubs/business/idtheft/bus23.pdf.

Collateral Valuation During Boating’s Downturn

Agreeing that valuation of boats has always been more art than science, panelists said this has been especially so during the boating market downturn. They also agreed that great caution should be used when comparing public listing values on the Internet, as many prices simply reflect the loan balances borrowers have on their boats. Moderator Peggy Bodenreider of Maritime Capital was joined by Matt Amata of National Liquidators, Don Parkhurst of Sun Trust, Lenny Sims of NADA Guides, Tom Fournier of Abos Blue Books, and Mike Ryan of M&T Bank to consider the subject.

Activity in repossessions has an obvious significant influence on market pricing, but remarketers say they are getting 92 percent of book prices. Repo business is expected to continue steady or growing because it mirrors the direction of unemployment data, currently pointing up; more larger yachts are expected to enter the market the longer the economy is poor. For the overall used boat market, pressure on pricing is pointing down because there is more supply than demand. However, the panel warned that used prices could move dramatically higher when the market bottom is reached or perceived.

Other numbers mentioned during the discussion imply average advance rates are running 80 to 90 percent of loan to value of selling prices and 85 percent of wholesale price; pricing of product made by bankrupt or failed builders reflects another 8 percent reduction. Care needs to be taken in assessing other aspects of used boats, such as saltwater basing, outfitting (especially electronics), age and selling season.