[00:00:00] Pete: You go into the pandemic with all the free money out there, kind of the Mr. Nice Guy approach that everybody was doing in the industry, because we’re humans, we care about people, and you knew that lives had been disrupted at the highest level. Pulling that trigger and not utilizing other tools. In other words, loan extension, things like that was not the favorite choice.

[00:00:25] Voiceover: You’re listening to 22 Minutes in Lending, your go to podcast for insights on all things lending, from lending practices, regulatory updates, how to enhance lending efforts, and more. In each episode, host Vince Passione connects with industry leaders to discuss the latest trends and happenings around the lending industry.

[00:00:44] Voiceover: Let’s dive into the latest in lending.

[00:00:48] Vince: Welcome everyone to 22 Minutes in Lending. I’m your host, Vince Paciello, and I’m excited to introduce our guest today. Pete Hill is your President and CEO of Allied Solutions. Pete

[00:00:56] Vince: Pete is a giant in the industry and has more than 30 years of experience as he leads Allied Solutions through all aspects of the company’s operations.

[00:01:03] Vince: He is a great leader, great speaker. He has a know how to get things done, as you’ll hear from his comments. I’m excited to hear what he has to say. And so without further delay, let’s get started with these 22 minutes in lending. Pete, welcome. And thank you for joining the podcast.

[00:01:18] Pete: Well, thanks for having me Vince. I always look forward to talking to you and being part of how we can help improve the industry and create success for everyone. Perfect.

[00:01:26] Vince: Perfect. So Pete, just for our listeners, quick overview. Tell us a little bit about Allied Solutions and

[00:01:31] Pete: all the businesses that you’re in. Oh, it’s interesting. Allied Solutions was an independently held company for quite some time, but in 2004, security and casualty, a Fortune 500 company purchased us with the premise to leave us completely independent.

[00:01:45] Pete: And since that date, 19 years later, we’ve been extremely successful in our M& A and our acquisition, broadening the scope of the geographics that we operate in, as well as the industries we operate in. So we’re up in Canada. We’re in the U. S. We have about 45 to 50 strong partners that either represent an insurance product or another tool out there, represents about 150 different products out there.

[00:02:11] Pete: Companies really growing up, about 1800 employees, corporate offices are in Carmel, Indiana. The credit union marketplace is true to our hearts. It’s kind of where we were founded back in 1977 when my mother started the company. Many of the, you know, Melissa Eldridge, she’s still alive and well, but we had to convince her retirement was good about four or five years ago.

[00:02:31] Pete: So she’s enjoying life now. And Ally just continues to build and be committed on the services and the experiences our credit unions and clients have, and really brand protection, culturally being aligned and doing the right thing is what we focus on every day.

[00:02:47] Vince: No, it’s amazing. I had a chance to meet your mom, amazing lady and amazing heritage in the company, Pete, really.

[00:02:51] Vince: So Pete, look, we were talking before we started, and I said, I had a chance to see it speak in June at the NAFCA Engage Conference, and as always, you took the stage for 30 minutes, you were very provocative, challenged people to really think, and you cover everything from your views on work from home, to the liquidity crisis, to partnerships, to fintech, so what I want to do is maybe spend the 20 minutes really unpacking some of that for the folks listening.

[00:03:14] Vince: So let’s talk liquidity, right? So everybody’s mine. We’re now on our 11th rate hike in 17 months. highest lead spawn rate that we’ve seen in a very long time. Deposit movement by consumers just continues and many of our prospective clients are all struggling to retain deposits and having liquidity to conduct their business.

[00:03:34] Vince: So, you spoke at the conference and you talked about, hey, look, there are some opportunities here. So, can you talk a little bit about what you think your clients, our clients can do to go out and either retain deposits, retain their customer base, or grow those deposit bases as they look to the future?

[00:03:52] Pete: Sure. And I think it’s important to first to find out what the definition of liquidity is. Many people think that, well, I don’t have enough deposits, so I can’t lend my lending to deposit ratios are too tight. And that’s just a small part of it. You can go look at 5, 300 reports every day and on paper, it looks like some client has a lot of liquidity there, but you need to go look at the investment portfolio side of things.

[00:04:15] Pete: And so liquidity to me is. The definition between what deposits you have, what you’ve lended, but how long you’ve ran your investments out that are tying up a lot of your capital. And because we are in such a low interest rate environment for so many years, some credit unions really took the extension of investment.

[00:04:33] Pete: In other words, not your typical two or three year investment, but sometimes four, five, six, even seven years. And you think about the returns they were getting, we were in historical low interest rates for historical timeframes. And now within a very short period of time, the opposite happens. Never in the history of our country has the Feds raised rates so quickly.

[00:04:54] Pete: You would thought maybe they, in the savings and loan crisis, maybe they would learn that patience is of essence at some times and it cures itself because inflation is a fact. You raise interest rates. Inflation is not going to fix itself for 12 months. You’re not going to see the full impact. And so what it’s done for our clients, it’s put them in a really bad spot.

[00:05:15] Pete: They can’t liquidate their investments because it’s an immediate hit on their financials. So they really have no choice but to focus on how do we gain deposits. And I can tell you, yes, raising interest rates is one powerful tool. So raising what your depositors can get in return of their money is one tool.

[00:05:33] Pete: But it’s that value proposition and leveraging that crediting brand, and you heard me talk about it, it’s that trust factor. And I can assure you that through my experience, a half a percentage point does not offset the value that trust can be. And that’s why I really believe the industry has a unbelievable opportunity today.

[00:05:55] Pete: To leverage that trust, to leverage the confidence and to leverage the partners they have out in the industry, to create tools that are more than just interest rate driven tools to generate deposits. And it’ll work. There’s a lot of companies out there, a lot of great relationships that companies like yours and mine have leveraged and we’ve leveraged that buying power of this powerful industry so that you can compete with those large super banks and super regional banks.

[00:06:22] Vince: No, look, I think it makes a lot of sense. And as you said, I think some of the stats that were shared about. When you think about where people want to bank, right, and they’re banking at larger institutions, especially the younger demographic. And you and I both know the average age of a Craigie member hasn’t changed all that much.

[00:06:36] Vince: It’s still somewhere in that 49 to 50 years old. So we’ve got to focus on this next generation and to make certain that we have the right tools and trust. It’s exactly right. In the SVB crisis. What did people do, right? Those run on banks or run on trust. So, you’re also big on partnerships. We’re a partner of yours.

[00:06:54] Vince: We’ve talked about partnerships and how this cooperative spirit allows folks to aggregate up their ability to compete with larger institutions. So, talk a little bit about your experience with partnerships and why you think it’s so important, especially now.

[00:07:07] Pete: Partners are key, and it’s key because the industry we’re trying to help support, and I believe in passionately, as you do, is small in comparison to who they compete against.

[00:07:21] Pete: And, the first thing I think that the creative industry needs to do is quit thinking they’re the competitor of each other. They’re not. Quit thinking that you have the ability to go direct regardless of your size. Because the aggregation that companies like you… Me, True Stage, all the competitors out in the industry, Southwest Business do, is they take and they aggregate us into as though we have one large, large entity.

[00:07:49] Pete: That can purchase and have the buying power. So then you have to build the due diligence and the trust that your members have in the institution the credit union And how do you bring that trust of those institutions into those partners? And again, it’s good leads Like blend key allied solutions true state southwest.

[00:08:09] Pete: I make a point of commenting On everyone in the industry because I don’t believe podcasts like this when I get up and speak It’s not the opportunity in the time to sell It’s the opportunity and time to educate and support the community. And if you don’t do that, I think you become so singular focused and biased that your credibility goes right out the window.

[00:08:30] Pete: And so when you look at companies out there like Finifer, Mantle, Clutch, those are companies, Kasasa is another example, that are powerful tools in driving deposits. They really are. And there are many, many different tools out there. Those are just a sampling, but embracing them and understanding that developing a higher deposit base and a growing deposit base is a combination of two things.

[00:08:55] Pete: One, getting more members, and I am overly critical, I think, in the crediting industry, but justifiably so, that they missed an opportunity in 2007, 8, 9. And they’re gonna miss an opportunity today. If they don’t leverage their marketing capabilities and really invest in it, credit unions have a very, very poor budget for marketing.

[00:09:19] Pete: And I think that they really need to align with partners and with each other, because who’s to say marketing the credit union brand versus the individual credit union name isn’t just as, if not more powerful than taking your dollars and singularly focusing on your credit union in the market you represent.

[00:09:37] Pete: So that’s the first thing I think that needs to happen. And then really. Looking under the hood to these depository partners that are out there, they can make a significant impact with a small investment by each individual credit union to really pick up the deposit sides because we’ve offered credit unions, for example, with your product.

[00:09:57] Pete: We said, listen, I know you have liquidity issues, but why don’t you cash in three and a quarter percent returns on those long term investments? Yeah, you’ll take a hit short term, but take those dollars and redeploy them in a much higher yield and a much higher returning product like the one LendKey has, and there’s several other companies out there that are having those same products, but they get so short term focused in that very few of them will do that.

[00:10:22] Pete: And if they won’t do that, they really need to focus on the latter part that I just previously mentioned on powerful depository tools, marketing the industry versus the individual name and brand. You can underline that in a lower budget in your own brand. I think that’s something that’s absolutely critical and the window is very short to get it done.

[00:10:40] Vince: Well, interesting. Right. We talked to Steve Williams about this, of course, on advisors and we were talking about Rayrock. And why that methodology is now so important. And I think you touched on with investments as well. It’s this hell to maturity mentality. That if I sell something at a loss, it’s a tragedy when you think about it and say, but given where the rate environment has moved and you’ve got stuff on your books at three and a half percent that you can originate almost twice the yield, why not sell it and now take that loss and figure out what the net’s going to be to you.

[00:11:12] Vince: So agreed. It’s a tough one. It’s certainly not ingrained in the industry. No, I didn’t need to be. Given the environment we’ve experienced in the last decade or so. I agree with you. It’s a big point. So moving from partnerships Talk about fintechs. We hear this concept first. They were disruptors Then they were partners and now we see lots of different ways that You yourself and credit unions have started to invest, right?

[00:11:37] Vince: The Circle Fund, I think they’re getting ready to launch their second fund. I think it’s going to exceed almost 500 million of credit unions investing in fintechs. First question is, do you think credit unions should be investing in fintechs? Do they understand the risk associated with it? And the second is, so what’s your attitude, right?

[00:11:54] Vince: You’ve done lots of acquisitions. You’ve been very acquisitive. So, start with the credit union side of it. Do you think that’s within the credit union purview to start investing in fintechs?

[00:12:01] Pete: Sensitive subject, but I’ll be candid and disruptive at times, so I’ll continue that brand of mine. Would a credit union invest in a fintech that’s not necessarily core to what they do today, and then what is owning a half a percent or one percent really mean to you?

[00:12:20] Pete: You don’t have any control. You don’t have any decision making as to where dollars are going to be invested within that investment to grow. And here’s the weird thing. There’s so many crittings that invest in those tools that don’t even use them. They don’t even deploy them. So I would put up the caution flag on FinTech investment.

[00:12:37] Pete: Unless it’s core to what you do. And you’re willing to use it. Michigan State Credit Union’s Interest in Credit Union, they have a big role in fintech investments, but they have a policy, and this is my understanding, that says if we’re going to invest in fintech, we’re going to use it. Now all of a sudden you have purpose and direction in where that investment is, because it’s a usage experience that you’re dealing with.

[00:12:59] Pete: The return dollars on some of these fintechs, I would argue that any of these fintech tools, how much bottom line has that investment brought to an institution? Uh huh. Very little. Now, this is the controversial part. What you do want to do is be a part of the game when they sell. And I would really pick and choose how much of one investment I’m going to make.

[00:13:20] Pete: So if I have 10 percent of an investment, Finifer, Allied Invested in Finifer. And we wanted to invest in it because ultimately we want to get a return on it, okay? And my return isn’t just necessarily the dollars that churn every single month when you get a profit margin. The return is that most fintechs have an endgame of selling.

[00:13:40] Pete: And I want a part of that. We have helped at Allied’s World, and this is the same with the credit unions. They have helped so many fintechs make hundreds of millions of dollars and they’ve never been a part of that. And I think that’s where you and companies like mine come in, that we want the credit unions to be aggregated in to that overall golden egg.

[00:14:00] Pete: That is getting the check or the return on the investment when private equities come out and buy these fintechs or others come out and buy these fintechs. I would say selective, not spread. In other words, I don’t need to have 15 fintechs that I own 1 percent in and only 3 of them that I do something with.

[00:14:17] Pete: It has to have a thoughtful strategy behind it.

[00:14:20] Vince: It’s interesting, Pete, so I’ve got 30 years in the industry. I’ve probably got 38 years in the industry. So in my days at Citigroup, And back in the late nineties, people think this is all a new phenomenon, but when I was a CTO at Citigroup, Citi was investing in a whole bunch of different quote unquote FinTechs.

[00:14:34] Vince: And I still remember Citi Ventures at the time, they had a philosophy, we invested for the three R’s. It was integration, first of all, Michigan, we got to use it. It was insight because we always sort of invested in bleeding edge technologies to understand where the industry was going. The third and last was investment because guess what?

[00:14:55] Vince: It was a one time hit to the balance sheet if we turned around and sold something. So the street wasn’t going to give us all that much credit. I think with the credit unions, I’d add a fourth I. It’s influence. And it’s the ability to influence the direction of the company so that they get what they need.

[00:15:10] Vince: Because I hear you, I think they create value and they should participate in that value. But I think very similar to Citigroup, it’s a one time hit, right? The real value is having influence over where the product goes and how they get to use it over time. And it’s interesting because you do that. I’d love you to talk a little bit about that, right?

[00:15:30] Vince: When I look at your acquisitions. You have a plan. You’re threading a whole bunch of companies together that create this product strategy. Can you talk a little bit about that? And I know the latest one you did, we were chatting with Vero, but you’ve done a few of these now and they fit into the strategy for Allied.

[00:15:47] Pete: Yes, we’ve had about 25 acquisitions since 2004 and they really go in two buckets. What can we invest in or buy knowing that we’re going to turn it and flip it in a short period of time to increase our capital pool? To make meaningful investments that are part of our overall enterprise long term strategy.

[00:16:07] Pete: And so we look at Vero, they’re in the auto dealership business, but they’re more of a product manufacturer and administrator in that. So it’s not somebody that’s knocking on a dealer door and selling something. It’s critical to where we want to go. We think that controlling the experience of that member.

[00:16:24] Pete: From beginning to end, especially when you look at direct lending, I think indirect lending is going to take a hit for a little while because the losses are going to build up, you’ve got these higher interest rates out there, maybe when things settle down, creditors can actually make decent margin on indirect lending, but Vero is a supporter for that movement And getting more revenue pieces back into our credit unions.

[00:16:45] Pete: We bought a roadside company. Why do we buy a roadside company? Well, so many products that credit members are buying has a roadside component to it. So that group of investments are long term. They’re part of our overall long term corporate strategy. We call it one allied as the corporate strategy. The other thing Vince I want to go back to really quick when we were talking about the different FinTechs and how people build solutions that are long term.

[00:17:10] Pete: And you’re a perfect example of it at LendKey. Open lending would be another one, and there’s a few other companies out there. And you look at the insurance that you’re putting on there to protect from a risk management standpoint. It’s part of that creative product development that companies like ours bring to the table.

[00:17:26] Pete: Nobody realizes that there’s a good argument that you could get some relief on the CECL calculation of reserves when you add that. And now you take that and you go back to dissolving some of your long term investments that don’t have a good return. You take and combine that with putting more profitable investments on the books through lending volume, through buying portfolios, the relief in the calculation that they get from CSO on the reserves.

[00:17:53] Pete: I’d argue very quickly, short term, they come out ahead and I think having that vision and tapping into the expertise that companies like yours, mine, again, I’m going to mention TrueState, Southwest Business, they are companies that are investing millions and millions and millions of dollars, whether it be data wise, digital.

[00:18:11] Pete: FinTechs, et cetera. I think it’s invaluable to partner with them.

[00:18:15] Vince: No, spot on the insurance piece, especially where Cecil’s going, right? Cause that FASB rule says that, yeah, for insurance, they can turn around and still take it over the life of the loan versus taking on the front. So absolutely right. And I think the industry, thanks to products like yours have gotten very accustomed to taking credit risk default insurance out.

[00:18:32] Vince: And I think it’s going to be a product that you’re going to see even more demand as. Our lenders start to recognize CECL’s rollout because it was delayed for so long, right? Now, here we are, we’re in the early stages of the rollout. They’ll see it and the full impact. Hey, you touched on auto and you said something and engage and we talked about it in the prep and I didn’t realize it, but you told me, and this goes to the health of the consumer and the recession, but you said that Alliance is going to repossess over 90, 000 vehicles.

[00:19:00] Vince: You said in a month. Which is amazing to me, how do you see the consumer right now? I mean, this recession, is it ever going to happen? It sounds like in the world of allied and what you’re seeing from your clients, that it’s here. So can you comment a little bit on it? And what you’re seeing in auto, right?

[00:19:16] Vince: We see these auto payments, they’re over 700. I mean, when I first started the industry, the sweet spot was about 250. It goes to show how old I am. So how do you feel about the consumer and what’s happening?

[00:19:26] Pete: Well, it’s happening. That’s how I feel. It’s happening pre pandemic. 2019 we were at about 70, 000 repos a month.

[00:19:35] Pete: You go into the pandemic with all the free money out there, kind of the Mr. Nice Guy approach that everybody was doing in the industry. Because we’re humans, we care about people and you knew that lives had been disrupted at the highest level. Pulling that trigger and not utilizing other tools, in other words, loan extension, things like that, was not the favorite choice.

[00:19:56] Pete: Fast forward today, the reality is hitting. So you have a little bit of that backlog. But you also now have a more aggressive RMO, Risk Management Office, within the institutional level. And we’re seeing, on average, already over 80. So in July, we did over 80, 000 repossessions. And that means we touched a repossession at some point.

[00:20:18] Pete: Either triggered the picking up of it. The recovery of it or the disposition of it, but 80, 000 individual, unique pieces of collateral that we did that for. And what’s happening in the industry, and this was a lot due to the pandemic, I know we don’t have a lot of time left, but the small mom and pop repo agencies are gone.

[00:20:36] Pete: So you have the regional or the nationals and they have become more selective who they do business with. And again, you’re talking about leveraging partners, talked about it earlier. You get a company like ours that’s doing 80, 90, 000 a month. We’ve got a pretty good hammer in getting preferential treatment, preferential pricing, and quite frankly higher results than the average institution.

[00:20:57] Pete: And it’s going to continue. This is not going away. We’ve invested millions and millions of dollars to help our institutions, to be great partners with them, and ultimately to reduce charge off, improve bottom line.

[00:21:11] Vince: Well, listen, Pete, this is as always provocative and really insightful. We sort of pretty much hit out time on it.

[00:21:16] Vince: So thank you so much for your comments. Thanks for those listening, please make sure to subscribe so you can enjoy more episodes and I will see you all in our next 22 Minutes in Lending. Thanks so much.

[00:21:27] Voiceover: Thank you for listening to the 22 Minutes in Lending podcast. We hope you enjoyed today’s episode.

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