Regions' Auto Lending Push, Settlement Talks Show New CEO's Hand

With a full quarter under their belts, the new managers at Regions Financial Corp. are making some changes.

O.B. Grayson Hall — who took over as chief executive April 1 — said during a second-quarter conference call Tuesday that the company will reenter the indirect auto lending business this quarter after quitting it two years ago. Regions is also close to settling a probe into business practices at its Morgan Keegan & Co. Inc. unit.

The $135.3 billion-asset Birmingham, Ala., banking company continued an aggressive effort to purge bad assets, selling $620 million of problem loans in the quarter at an average discount of 24%. Hall made it clear that more must be done to return the company to profitability.

"Although we are making progress and we are even slightly ahead of our own internal forecasts, we are clearly not satisfied," he told analysts after reporting a fifth straight quarter in the red.

Christopher Marinac, an analyst at FIG Partners LLC, said the shifts by the new CEO are subtle but encouraging. Regions' investor day scheduled for Aug. 5 will offer an opportunity to see whether other changes are in the works, Marinac added. On a possible Morgan Keegan settlement, he said the market "appreciates them addressing issues quickly and swiftly to put the matter behind them."

The return to indirect auto finance, which involves originating loans through dealerships, is part of a broader effort to increase lending. It can be a fickle business for banks and specialty lenders, which frequently enter and exit depending on economic conditions. Regions left the business in October 2008, when it had $4.13 billion in such loans. It continued to service those loans and believes it can again be a respectable player in the business.

"If we didn't think we could generate some decent volume, we wouldn't be getting back in it," Hall said, though he was reluctant to forecast how big the loan book could get. "What drove this decision more than anything else was consumers' returning to our branches asking for auto loans," he said. "We had not seen that for years."

Overall lending declined during the second quarter, falling 2.5% from the first quarter and 8.3% from a year earlier, to $85.9 billion. Deposits fell 2.1% from the first quarter but rose 3.8% from a year earlier, to $96.3 billion.

Hall also said during the call that Regions may be close to resolving an issue with regulators over charges filed in April that Morgan Keegan had fraudulently overstated the value of securities backed by subprime mortgages. Regions took a $200 million charge in the second quarter related to the matter. Hall said the amount is "based on the current status of negotiations" with the Securities and Exchange Commission, the Financial Industry Regulatory Authority and a task force of securities regulators from four states.

The charge greatly overshadowed improvement during the quarter. Regions reported a loss to shareholders of $335 million, compared with a loss of $255 million in the first quarter and $244 million a year earlier. Excluding the Morgan Keegan-related charge, a loss per share of 11 cents was better than the 20-cent loss forecast by analysts, according to Thomson Reuters.

Nonperforming assets fell 6.5% from the first quarter but rose 33.4% from a year earlier, to $4.28 billion. "While we are encouraged by this improvement, we remain cautious concerning the outlook for NPAs," said David Turner, who last month completed his first quarter as Regions' CFO.

Other credit metrics improved. The loan-loss provision fell 15.5% from the first quarter and 28.6% from a year earlier, to $651 million. Net chargeoffs fell 7% from the first quarter but rose 42.6% from a year earlier, to $651 million.

Hall said difficulties include an economy that remains "challenging and fragile" and uncertain fallout from the Gulf of Mexico oil spill. Regions estimated that it faces up to $100 million in losses from the disaster in a worst-case scenario.