Regions Financial Corporation’s (RF) second quarter 2011 earnings came in at 4 cents per share, topping the Zacks Consensus Estimate of a break-even. Quarterly results benefited from lower loan loss provisions and represented the company’s third consecutive quarterly profit after incurring losses since the second quarter of 2009.
Adjusted earnings per share, excluding regulatory adjustments and significant items, came in at 4 cents per share for the reported quarter, compared with a loss of 3 cents in the prior quarter and 11 cents in the year-ago quarter.
Net income available to common shareholders came in at $55.0 million, up from $17 million in the prior quarter and substantially better than a loss of $335 million in the year-ago quarter.
Regions’ brokerageand investment banking subsidiary, Morgan Keegan, reached a settlement with the SEC, FINRA and state regulators. Financial impact of the $210 million regulatory settlement on the second quarter earnings was a $44 million tax benefit on a part of the settlement that had been previously accrued as non-deductible.
Performance in Detail
Regions reported pre-tax pre-provision net revenue of $447 million, down 17% sequentially but up 56% year over year. On an adjusted basis, pre-tax pre-provision net revenue came in at $500 million, up 9% sequentially and 3% year over year. This also represented the highest level on an adjusted basis in the last eleven quarters.
Total revenue came in at $1.6 billion, in line with the Zacks Consensus Estimate. While revenue fell 4% sequentially, it rose 2% year over year.
Net interest income was $864 million, flat sequentially and up 1% year over year. Funding mix showed an improvement as average low-cost deposits inched up 2% sequentially, while higher cost time deposits dipped 2%. Net interest margin of 3.05% was down 2 basis points (bps) sequentially but up 18 bps from the prior-year quarter.
Regions’ non-interest income was $781 million, down 7% sequentially but up 3% year over year. Non-interest income included $24 million in securities gains. Excluding securities gains, non-interest income fell 1% sequentially, primarily due to lower brokerage revenues, offset by an increase in service charges and mortgage revenue.
Non-interest expense increased 3% sequentially but decreased 10% year over year to $1.2 billion. However, excluding charges related to branch consolidation and property and equipment charges, adjusted non-interest expense came in at $1.1 billion, down 4% sequentially.
The improvement in costs came from a decline in salaries and benefits expense, coupled with a fall in professional and legal fees. The company also reported a modest decline in credit-related expenses. However, these were partially offset by an increase in FDIC premiums reflecting new rules effective April 1, 2011.
Credit Quality
Credit quality was mixed during the quarter at Regions. Inflows of non-performing loans declined 24% year over year to $555 million, the lowest level in three years. Non-performing loans, excluding loans held for sale, declined 10%.
Net charge-offs increased 34 bps sequentially but decreased 28 bps year over year to 2.71% of average loans. However, non-performing assets decreased 39 bps sequentially and 54 bps year over year to 4.39% of loans, foreclosed properties and non-performing loans held for sale.
Provision for loan losses fell 17% sequentially and 39% year over year to $398 million.
Capital Ratios
As of June, 2011, Regions’ Tier 1 capital ratio came in at 12.6% compared with 12.5% in the prior quarter. Tier 1 common risk-based ratio remained flat sequentially at 7.9%. On a Basel III pro-forma basis, Tier 1 common and Tier 1 capital ratioswere 7.2% and 10.8%, above the respective 7% and 8.5% minimum requirements.The company’s loan-to-deposit ratio was 84.3% as of the same date.
Outlook
In an effort to boost its core franchise through productivity and efficiency initiatives, the company will consolidate approximately 40 branches later this year. While it recorded associated property valuation charges on the branches, plus other property and equipment charges of $77 million in the reported quarter, it anticipates realizing net cost savings of approximately $19 million annually.
Additionally, based on the Federal Reserve Board of Governors’ final rule on debit card interchange fees mandated by the Durbin Amendment to the Dodd-Frank Act to be effective October 1, 2011, Regions projects that the impact on annual debit interchange revenue will be around $170 million before any mitigation efforts.
Recent Developments
Recently, Regions entered into an agreement with Western Union Co. (WU) to enhance services offered to its customers. Under the terms of the deal, Regions will provide Western Union global money transfer services and faster bill payment services across its 1,700 locations in the U.S. The transaction with Western Union will aid Regions in offering a broader suite of products and services to its customers and communities as per their needs.
Regions also completed the purchase of the credit card portfolio of $1 billion from FIA Card Services, a subsidiary of Bank of America Corporation (BAC), effective June 30, 2011. Through the acquisition, Regions re-entered the credit card business, which it exited a decade ago. Prior to the agreement, Regions used to sell customers credit cards held and serviced by BofA's card business.
With a focus on the affluent segment, in late June, Regions announced the formation of a new Wealth Management Group, integrating its Trust, Private Banking and Insurance units within a single business line.
Our Take
Regions’ favorable funding mix, improved core business performance, its expansion mode and strategies will continue to yield profitable earnings in the upcoming quarters. Improvement in credit quality is also encouraging.
While de-risking measures are encouraging at Regions, the upfront costs of such initiatives cannot be ignored. Additionally, regulatory issues also remain.
Shares of Regions retain a Zacks #3 Rank, which translates into a short-term Hold rating.
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