A Play on the Growing Southeast

By Maxwell Fisher - August 7, 2012 | Tickers: BAC, BBT, RF, WFC | 0 Comments

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Regions Financial (NYSE: RF) quite possibly suffered more than any other regional bank in the past several years, largely from its own weak underwriting during the housing boom in the middle of last decade. After working to fix its balance sheet woes in the past year, it has only recently been in a position to focus on running its bank properly again. Regions is still among the twenty largest commercial banks in the country.

In its second quarter, Regions posted earnings of $284 million, or $0.20 per share. Those numbers gave Regions an annualized return on assets of 0.92%, and an efficiency ratio of 62.8. All told, it was the most successful quarter for the beleaguered bank since early 2008.

The second quarter results also compared most favorably with Region’s recent past. In the corresponding quarter of 2011, it earned $25 million from continuing operations, and in the first quarter of this year, it earned $185 million. The big reason to refer to “continuing operations” is due to Regions' sale of its Morgan, Keegan brokerage unit to Raymond James Financial (RJF) in the first quarter of this year. That sale, along with a $900 million stock offering, gave Regions the ammunition to repay its TARP debt, being the last $100 billion asset bank to do so.

It is almost as if Regions is a year or two behind in its recovery than other banks. In 2011 into this year, many banks have seen a boost, and some have even created their earnings by reducing their provisions for loan losses. Regions set aside just $26 million for loan losses in the second quarter of this year. In the first quarter of this year it set aside $117 million, and in the second quarter of 2011 it set aside $398 million. With the provision a full $372 million less than a year ago, one might think that Regions could have and should have earned more than it did. Obviously, in next year's second quarter there will be virtually no room for improvement in the loan loss provision, so management has until then to figure how it can make sufficient income from its net interest margin and supporting fees.

Aside from the lower loss provision, nothing else went particularly well in the quarter. The loan portfolio shrunk to $76 billion, almost seven percent less than where it stood a year earlier. Deposits, the best and lowest cost funding source for any bank, actually fell a little over one percent to $95.1 billion. Net interest income fell by about $30 million, to $838 million. Non-interest income also fell from the year earlier by $36 million, to $507 million. But at least non-interest expense fell rather dramatically to $842 million, from $956 million a year ago.

To me, the one thing that overrides all the negative momentum of Regions' operating earnings is its branch network and geographic footprint. The company has over 2000 ATM's and over 1700 retail branches. It has branches in 16 states, from Florida to Texas, and as far north as the Ohio River Valley. It is either number one or number two in market share in over half the markets that it serves. And what it serves is the quarter of the country which I believe has the brightest economic future over the next five to ten years. Regions overall book value at the close of the second quarter was $10.23 per share, with $6.69 of it being tangible book value. Regions has challenges ahead of it in continuing to clean up its loan portfolio and prudently issuing new loans. 

Regions has small competitors, regional competitors, and national competitors all vying for the same deposit dollars and the same loan customers. Perhaps its most aggressive customer is Wells Fargo (NYSE: WFC), who entered the southeast in a big way when it purchased Wachovia at the beginning of 2009.  Since then, Wells Fargo has widely been regarded as among this country's best run and most profitable banks. But what makes Wells Fargo such a threat from Regions' perspective is Wells Fargo's expertise in cross selling. Wells Fargo has a dominant leadership position in mortgage loans. And its well trained staff is turning those customers into about five other accounts with the bank, such as checking, credit card, retail brokerage, etc. In terms of predicted revenue growth, Wells Fargo is in a class by itself among the nation's trillion dollar banks. With its solid 3% dividend yield, Wells Fargo is as close to a buy and hold forever bank as exists now in this country.

One might think that North Carolina based Bank of America (NYSE: BAC) would also be a formidable competitor in Region's efforts to profitably grow its balance sheet. Yet, Bank of America is generally in retreat mode as it continues its recovery quarter after quarter. Its balance sheet has been shrinking, as thankfully have its expenses. I expect Bank of America to continue to post modest earnings improvements going forward on these cost reduction plans. But until Bank of America shows a real commitment to growing its loan portfolio, it will never come close to posting the profitability ratios it did prior to 2007. Bank of America continues to be too speculative for my taste.

BB&T (NYSE: BBT) is another successful Southern regional bank whose footprint more or less overlaps Regions' footprint. It never came close to posting an annual loss last decade, and has started posting quarters of earnings representing over a 1% return on assets. I believe the bank is on its way toward returning to its pre-recessionary days when it routinely earned 1.50% or more on assets. The only downside to me here is the outspoken political leanings of the bank's leadership. But if you are interested in a well-run, efficient southern regional, put BB&T on your short list. 

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