Despite significant recent restructuring involving the sale of its Morgan Keegan retail brokerage, Alabama based Regions Financial (RF) remains among the nation's largest regional banks and the 14th largest commercial bank overall by assets. It has trailed other large banks in recovering from last decade's banking crisis, and its maddeningly slow comeback is continuing by way of Regions' third quarter, 2012 earnings.
Outwardly, Regions' third quarter was terrific, with profit pretty much tripling from the same quarter of 2011. Earnings came to $301 million, or $0.21 per share, compared with the year ago results of $101 million, or $0.08 per share. So, what is the problem? Pretty much everything underlying the profit number was a problem.
Pretax income for Regions in the third quarter before taking into account loan loss provisions actually fell from the year ago quarter from $850 million to $817 million. But in the third quarter of 2011, Regions set aside $355 million for loan losses, while in same quarter of 2012 it set aside $33 million that, along with savings from not having to pay dividends to the U.S. Treasury due to TARP debt, led to the greatly improved bottom line number. Rather than compare Regions to the depressed year ago quarter, let's look at Regions of five and six years ago, when it routinely posted returns on assets of over 1.0%.
Regions' loan portfolio has fallen from about $95 billion in 2007 to about $74 billion today. When combined with the low, relatively flat interest rate environment, there is just not that much money that can be made compared to five or ten years ago. Net interest income in 2007 was $4.4 billion; this year it is likely to end up at about $3.3 billion. Non-interest income, which approached $4 billion in 2008, will be lucky to break the $2 billion level this year. Yet, despite the smaller asset base, Regions non-interest expense will be about the same this year as 2006's $3.3 billion.
The quarter's provision driven earnings improvement is unsustainable. What can be sustainable is loan growth, particularly in higher yielding commercial and industrial portfolios. Regions has a footprint from Texas to Florida, including most of the old Confederacy. I believe the area, particularly Texas and Florida, will have ample economic growth to accommodate loan growth for Regions; it is a question of will. Of course, the bank may be holding back from further leverage in its balance sheet until after this winter's annual stress test." For here and now, Regions has fallen back to about $6.50 per share, a price at which its price to earnings ratio for this year is about 8, and its PEG is a relatively attractive 1.2. This bank has tremendous long-term potential for the patient investor, but it might yet be some time before the company truly returns to its historic profitability.
When it comes to Southern banking, few do it better than BB&T (BBT), the nation's tenth largest commercial bank by assets with about $182 billion. In its third quarter of 2012, earnings grew nearly 30% to $469 million, or $0.66 per share, from $366 million, or $0.52 per share a year ago. Despite the bank's balance sheet growing from $167 billion a year ago to $182 billion at the close of the third quarter, the profits represented a return on assets of 1.1%. The profit level was aided by BB&T's 55% efficiency ratio, to be sure. But what really stands out about this institution is its ability to grow despite occupying virtually the same footprint as Regions. Loans grew from $107 billion in the third quarter of 2011 to $118 billion in the third quarter of 2012.
There was no big lift from a decline in provisions for loan losses, which fell only $6 million on a quarter over quarter basis. On the other hand, more or less steady interest income, plus a steep drop in funding costs, allowed net interest income to climb for its fifth consecutive sequential quarter, and about 5% above the year ago total. Non-interest income rose some $300 million over the year ago quarter on the back of not just strong mortgage banking income, but also strong insurance agency income.
On the whole, while I have much distaste for BB&T's political work, I admire management's adroit ability to run a regional bank. BB&T is not performing yet quite as well as it did before the banking recession, but I perceive that room for improvement as a good thing. If loan growth continues to ramp up, it won't be long before BB&T is earning 1.3% to 1.4% on an expanding asset base. The company now offers an above average 2.9% yield, a PEG of 1.0, and is off about 20% in the last month for no good reason. This is an attractive pick up for the conservative investor.
Synovus Financial (SNV) is the kind of traditional, community lending based model that should have been able to withstand last decade's banking crisis in decent shape. That assumption could not have been more wrong. Synovus had been among the most profitable of all regional banks in the middle of last decade, posting profits approaching a 2% return on assets each year from 2000 through 2006. But its community bank model failed and it lost substantial money each year from 2008 through 2010, before posting a smaller, $61 million loss last year. Largely on the back of lowered loan loss reserves, the bank has returned to modest profitability. In the third quarter, earnings came to $16 million, or two cents per share, nearly identical with the year ago quarter. Much like Regions, Synovus has lost profit capacity as its loan portfolio is down 25% from its 2007 level, and management's job one is to grow the loan portfolio responsibly. If it can do that, investors can expect tremendous long-term returns from this company, who's current stock price is less than a tenth of its 2007 price. Aggressive investors should take note.
By far the largest Southern bank is Bank of America (BAC), this country's second largest bank. The fun trying to interpret its quarterly earnings has gone on for several years, with multibillion dollar one time entries virtually every report. In the third quarter of the year, its one-time items pretty much canceled out, leaving the bank with an essentially break even quarter. An institution of Bank of America's size ought to routinely earn at least $20 billion a year, a level Bank of America has not seen since 2006, when the bank was some $700 billion smaller than it is today. It has been over four years since Bank of America acquired Countrywide Financial, and as time goes on and Bank of America continues to fail to bring reasonable returns to its shareholders, one must look for blame outside of Countrywide. I will never endorse purchase in Bank of America stock until it shows me it is able to be consistently profitable.