Regions Bank has set the wheels in motion to shutter its indirect auto lending business, Auto Finance News has learned. The Birmingham, Ala.-based bank will continue to originate direct auto loans.
“We informed the dealers and sent out a notice to them on Jan. 14,” Tom Lazenby, senior vice president and line of business executive for Regions Bank’s Dealer Financial Services unit, told Auto Finance News. “We will be purchasing paper through March 4, and we will fund loans through April 1.”
Regions Bank had $3.1 billion of loans outstanding at yearend 2018. Its portfolio has declined 24.4% since 2016.
The bank mentioned the auto exit in its most recent 10-K, filed Feb. 22 with the Securities and Exchange Commission.
“In January 2019, Regions decided to discontinue its indirect auto lending business due to competition-based margin compression impacting overall returns on the portfolio,” according to the 10-K. “Regions will cease originating new indirect auto loans in the first quarter of 2019 and intends to complete any in-process indirect auto loan closings by the end of the second quarter of 2019. The company will remain in the direct auto lending business.”
Though the exit was noted in the bank’s annual report, it was not mentioned on a Jan. 18 earnings call. The only reference to auto finance in that call was a question related to charge-off expectations, to which Chief Credit Officer Barb Godin answered: “Indirect auto has been behaving well for us, so we see that holding pretty steady.”
The move was explained in more detail at Regions Bank’s Investor Day 2019, which took place yesterday. A slide presented by Scott Peters, head of Regions Consumer Banking Group, noted that the bank was “optimizing capital by exiting less profitable businesses” and that it “exited dealer indirect” in 2019.
Here’s how Peters explained the auto exit:
“All of our product and business strategies are looked at through a lens of risk-adjusted returns and relationship opportunity, and we constantly look at the balance of our business and manage our concentrations. Some examples of that have been how we’ve treated our indirect auto business. A few years ago, we exited a flow arrangement we had in indirect auto because the risk-adjusted returns were challenged and we put it in a runoff portfolio. And as John mentioned today, risk-adjusted returns on the auto business have been really challenged and are sub-optimal for us, so we are exiting that business, with our last fundings occurring right around the end of the first quarter.”
A question by Steven Scouten, a managing director at Sandler O’Neill, in the Q&A portion of the Investor Day event prompted Peters to elaborate on the move.
“I’d like to start with: we don’t want to grow just to grow. Our indirect auto business, essentially, we weren’t making any money there. We want to deploy our capital into things that are going to give us healthy returns, and this move out of indirect auto is going to allow us to put that capital to work in other products and businesses that make sense. Another element on indirect auto is that it’s not a very strong relationship product. It doesn’t provide a lot of opportunities for expanding those relationships. The mortgage product, on the other hand, is a relationship product where we get a lot of opportunity to grow the overall customer profitability with those assets and it’s a good, strong performing asset on our balance sheet, as well.”
Starting in 2015, Regions deactivated about a third of its dealers in an effort to bolster operational efficiency. “We spent a lot of time in past two to three years managing our dealer base because that’s where a lot of efficiencies start,” Lazenby said at the 2017 Auto Finance Summit. For example, Regions developed additional dealer parameters to lower losses, although Lazenby declined to specify the parameters or the bank’s dealer network size.
At the time, Regions focused on relationships with midsize dealer groups, “because we found that’s where we get best efficiencies and the best performance,” he said. In the wake of those enhanced relationships, the bank expanded its footprint into four additional states.
Regions has exited the indirect auto finance space twice before, most recently in October 2008.