By: Theresa Brophy
A Little History
In 1971, three Alabama-based banks that trace their roots to the mid-1800s combined to form First Alabama Bancshares. The company renamed itself Regions Financial (RF, Financial) in 1994. After the passage of interstate banking legislation in 1986, Regions acquired out-of-state banks in Florida, Georgia, Tennessee, Louisiana, South Carolina, Arkansas, and Texas, as well as in its home state of Alabama. Its largest purchases include Memphis, Tennessee-based Union Planters in 2004 and Alabama-based AmSouth Bancorporation in 2006.
Recession And Recovery
Like most large banks, Regions’ problem real estate loans surged when housing and property prices plunged during the 2007-2009 recession. Some of the states in which the bank operates, like Florida, experienced considerable overbuilding prior to the downturn. Loans to real estate investors generated a lot of Regions' credit woes. The company made large provisions to its loan loss reserve in the 2008-2011 period that contributed to its losses during that span.
And like other big banks, Regions issued $3.5 billion of preferred stock and warrants to the U.S. Treasury in 2008 under the Troubled Assets Relief Program (TARP) and sold common stock to strengthen its capital base. The $175 million of annual dividends on the preferred stock also helped push Regions’ bottom line into the loss column during the recession.
But the company has staged a partial comeback since 2008. It has reduced its problem assets significantly, including loans to commercial real estate investors, which are generally repaid with income generated by the property or from the sale of the property. Loan losses in the commercial investor mortgage portfolio and commercial investor construction portfolio have declined from 5.66% and 14.3% of 2010 outstandings, respectively, to 3.91% and 0.51% as of mid-2014.
In April 2012, Regions used $875 million of proceeds from the sale of additional common stock and $1.2 billion from the sale of its Morgan Keegan brokerage and investment banking subsidiary to repay the $3.5 billion of preferred sold to the government. Repaying the TARP preferred eliminated the onerous preferred dividend, which is subtracted from net income in computing earnings per share. The sale of Morgan Keegan reduced securities markets risk. Regions' results moved back into the profit column in 2012, and the company continues to make slow bottom-line progress, although earnings per share remain below the 2006 peak due to the pressure on revenues and near-doubling in the common share count since then.
Challenges And Opportunities
The operating environment for regional banks like Regions remains difficult. The company’s loan balances rose only 2.6% in the first half of 2014, partly due to Regions’ willingness to say no to risky loans. Other challenges include very low interest rates, the falloff in mortgage refinancing activity, the termination of a deposit advance product that generated about $24 million of annual pretax income, possible increases in loan loss provisions, and rising regulatory expenses.
Amid this tough scenario, however, Regions has a few opportunities. Some of the most attractive markets in the Southeast are found in its area. Regions’ footprint includes pockets of strong population and economic growth, with some cities forecasted to expand at twice the national rate. The favorable backdrop should provide grist for Regions’ lending mill. The company expects net interest income in 2014 to increase in tandem with loan growth. Too, the balance sheet is positioned to respond favorably when short-term interest rates eventually rise, which ought to give net interest income a lift. The company is working on replacing the lost deposit advance revenue. And it continues to look for ways to lower costs.
Moreover, since the recession, Regions has taken pains to strengthen its equity capital levels. It now has extra capital that it might put to work by building up promising businesses, making accretive acquisitions as opportunities arise, repurchasing Regions stock, or increasing dividend payments to Regions shareholders. In sum, the company and the stock still have decent comeback potential to late decade.
At the time of this article’s writing, the author did not have positions in any of the companies mentioned.
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