IB Net Payout Yields Model

Regions Financial Builds Provisions Again

Regions Financial (RF) is one of the smaller holdings in our Growth Portfolio, but its worth following considering its proximity to the important housing markets in Florida and Atlanta. RF reported 'disappointing' results this morning causing the stock to plummet over 7% today. Earnings were indeed lower then expected (.46 vs .35), but it was largely driven by a large build in provisions and not chargeoffs. In fact, provisions exceeded chargeoffs by $487M or nearly 40% of the $1.2B provision was to build for future write offs. That seems excessive considering the stage in this credit cycle and considering that gross inflows of non-performing assets declined for the second consecutive quarter.

If we had to guess, this would appear to be the peak loan provision Q. Hence, future quarters will see declining costs. Its possible this was the kitchen sink Q making 2010 much cleaner. Time will tell but the regional banks appear alot more attractive now. They aren't on the target list of the government and they will now benefit from the credit crisis ending but still having high net interest margin. From a technical perspective RF is looking appealing if it can hold these levels around $6.

Key points for the quarter included:

  • Loss of 51 cents per diluted share for the quarter ended December 31, 2009, reflects the company’s continued actions to improve the risk profile of its balance sheet. Full-year results reflect a net loss available to common shareholders of $1.3 billion or $1.27 per diluted share.
  • Sold $1.3 billion of primarily non-agency investment securities for a loss of $96 million, further de-risking the balance sheet. As adjusted for the securities loss impact, the quarterly loss per diluted share would have totaled 46 cents.
  • Continued active lending and efforts to assist consumers and businesses. Made 166,639 new or renewed loan commitments totaling $65.0 billion in 2009; proactive outreach efforts have helped over 23,500 families stay in their homes.
  • Record account and deposit growth continues. Average low cost deposits increased for the fourth consecutive quarter, growing over 3 percent linked quarter and up nearly $8 billion, or 14 percent year-over-year.
  • Exceeded goal of opening one million new retail and business deposit checking accounts in 2009, up 27 percent versus last year, with 246,000 new accounts opened in the fourth quarter
  • Net interest margin remained steady at 2.72 percent
  • Non-performing assets, excluding loans held for sale, increased $376 million, or 10 percent, linked quarter – the lowest quarterly increase in 2009; gross inflows of non-performing loans declined for second consecutive quarter
  • Net loan charge-offs stabilized at $692 million or an annualized 2.99 percent of average loans
  • Allowance for credit losses increased to 3.52 percent of loans with $1.2 billion provision for loan losses exceeding net charge-offs by $487 million
  • Tier 1 Capital ratio an estimated 11.6 percent. Estimated Tier 1 Common ratio at 7.2 percent.

Interesting comments from typically conservative analysts at S&P:

(Standard & Poor's)
Q4 loss per share of $0.51 vs. a loss per share of $9.01 is wider than our per share estimate of $0.40 loss, largely on a $96M loss on securities. The tangible common equity ratio, one measure of capital, fell to 6.03% from 6.56% in Q3, a negative. However, one major positive, in our view, is that Q4 formation of new nonperforming loans, at $964M was sharply lower than in Q3 and Q2, and we expect this downward trend to continue in '10, which should result in lower provisions. We keep our target price of $8, based on a discount to peers $1.15X Q4 tangible book value per share.

Disclosure : Long in Growth Portfolio and personal account.


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