IB Net Payout Yields Model

Regions Financial Builds Provisions

Today, Regions Financial (RF) reported Q3 results. The results were to some degree worse then expected, but in the crazy world of banking stocks RF rallied today after an initial selloff.

Looking at the numbers and reading the transcript of the CC, it appears that RF largely reported a bigger then expected loss due to dramatically increasing the provision for losses. In fact the loan provisions were some $300M greater then charge offs and up over $100M from the linked quarter.

  • Net loan charge-offs increased to $680 million or an annualized 2.86 percent of average loans, driven by value-related write-downs and problem asset dispositions
  • Allowance for credit losses increased to 2.90 percent of loans with $1.025 billion provision for loan losses, exceeding net charge-offs by $345 million

It appears that alot of investors see Q3 as the peak in provisions especially considering the comments about the inflows of non-performing loans stabilizing. Moreover the talk about the homebuilder, condo, and Florida home equity portfolio peaking and trending down in 2010 gives more credence to the thought that loan loss provisions have peaked at RF.

Meanwhile, we continue to reduce our homebuilder and condominium portfolios which declined another $498 million in the aggregate during the quarter. Given the lower levels of these portfolios and the significant charge-offs that we've already booked, this source of losses will decline as we move through 2010.
Encouragingly RF saw a record increase in new checking accounts leading to higher low cost deposits and market share gains. All the while they cut 1,700 employees over the last year. Both good signs that RF has been able to cut costs while maintaining service and gaining market share as weaker competitors retrench from their markets.

The main remaining issue appears to be the CRE portion where a large percentage of the problem loans are income producing. Considering that the properties generate a certain level of income, RF sees a lot of opportunity to restructure these loans.

All in all, RF continues to be a small investment in our Growth Portfolio. If loan loss provisions have indeed peaked, RF will likely rally until year end. Considering they've seen the light at the end of the tunnel for most of their loan markets, investors will have less and less to fret about.


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