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On 6th anniversary of entering indirect auto lending, TCF shuts the engine down

One year ago, TCF Financial Corp. was preparing to conduct a securitization of $505.2 million of indirect auto loans originated by Gateway One Lending & Finance LLC. Now, upon the sixth anniversary of the bank's entry into the business, it is getting out of indirect auto lending altogether.

Citing long-term profitability expectations and capital optimization, TCF said Nov. 27 that it would discontinue indirect auto originations, effective Dec. 1, months after it scaled back its efforts in the space.

TCF acquired Anaheim, Calif.-based Gateway One on Nov. 30, 2011, as management said at the time that the business would provide an opportunity to grow high-quality secured assets with strong risk-adjusted returns. The company was led by a team that built Onyx Acceptance Corp., another Orange County, Calif., indirect auto lender that sold in 2005 to Capital One Financial Corp.

The $115.2 million deal came as part of TCF's build-out of various specialty lending businesses with national footprints. For Gateway, which focused on borrowers in the prime and near-prime parts of the credit spectrum, the transaction promised stable, low-cost funding to drive its expansion and to help it compete for higher-quality loans.

At the time of TCF's purchase, Gateway One originated loans on new and used vehicles through relationships with approximately 3,100 active relationships with franchised and independent dealerships across 30 states. By year-end 2016, Gateway One had established more than 11,400 dealer relationships in all 50 states. TCF reported approximately $3.6 billion in auto finance originations during 2016; Gateway One's origination volume for the first nine months of 2011 totaled $214 million.

Through most of TCF's ownership of the platform, it originated indirect auto loans for investment and for sale.

The company held more than $3.2 billion in auto finance receivables as of Sept. 30. According to bank regulatory data, TCF ranked as the 21st-largest auto lender on that date among U.S. depositories at the top-tier consolidated level. Among the 31 such institutions with $1 billion or more in consolidated auto loans as of Sept. 30, TCF's relative concentration in the asset class of nearly 17.6% ranked 10th-highest.

Based on disclosures in various 10-Q and 10-K filings, TCF sold more than $5.3 billion in auto loans from the time of Gateway One's acquisition through the third quarter of 2017. That sum included $2.1 billion in full-year 2016. It recorded aggregate net gains on auto loan sales of $165.2 million from 2011 through the third quarter of 2017, of which $34.8 million hit the books in 2016.

TCF initially engaged in whole-loan sales before conducting its first securitization of auto loans July 2, 2014. Its fifth and final auto securitization, the December 2016 TCF Auto Receivables Owner Trust 2016-PT1, included loans with a weighted average borrower FICO score of 685 and a weighted average original term of 66 months. Like the bank's previous deals, the collateral pool largely consisted of loans on used vehicles.

S&P Global Ratings most recently took action on its ratings for certain TCF Auto Receivables Owner Trust tranches in February. The rating agency affirmed its ratings on 10 classes of notes from TCF's two 2015-vintage deals and raised its rating on the class B notes of TCF Auto Receivables Trust 2015-1 by one notch to AA+(sf).

Although S&P Global Ratings increased its lifetime cumulative net loss expectations for both transactions as a result of weaker-than-expected performance as part of the February action, it observed that the total credit support relative to the outstanding pool balances remained adequate.

TCF subsequently shifted away from the originate-to-sell approach in the indirect auto finance business in April, citing changing market conditions. It planned to reduce overall auto finance originations by between 30% and 40% as part of the transition to an originate-to-hold model. Through the first nine months of 2017, the bank's auto finance origination levels fell 30.5% to $1.9 billion. The year-over-year decline in third-quarter production was even more rapid at 44.5%.

TCF executives said the revised strategy had performed as expected, but they saw better opportunities to deploy capital elsewhere in an action that Wall Street applauded. The bank will continue to service existing auto loans, including those serviced for third parties, after shutting down its indirect originations.