RF Regions Financial Corporation

 

Regions Financial Corporation’s (RF) third-quarter 2011 earnings came in at 8 cents per share, outshining the Zacks Consensus Estimate by 4 cents. Quarterly results benefited from lower loan loss provisions and represented the company’s fourth consecutive quarterly profit after incurring losses since the second quarter of 2009.

Adjusted earnings per share, excluding regulatory adjustments and significant items, also came in at 8 cents per share for the reported quarter compared with a profit of 4 cents in the prior quarter and loss of 17 cents in the year-ago quarter.

Net income available to common shareholders came in at $101.0 million, up from $55 million in the prior quarter and substantially better than a loss of $209 million in the year-ago quarter.

Performance in Detail

Regions reported pre-tax pre-provision net revenue of $537 million, up 20% sequentially and 18% year over year. On an adjusted basis, pre-tax pre-provision net revenue came in at $540 million, up 8% sequentially and 19% year over year. This also represented the highest level on an adjusted basis in the last twelve quarters.

Total revenue came in at $1.6 billion, in line with the Zacks Consensus Estimate. However, revenue fell 2.6% sequentially and 0.9% year over year.

Net interest income was $858 million, down 0.7% sequentially and 1.2% year over year. Funding mix showed an improvement as average low-cost deposits inched up as a percentage of total deposits from 73.5% in the prior-year quarter to 77.8%. Net interest margin of 3.02% was down 3 basis points (bps) sequentially but up 6 bps from the prior-year quarter.

Regions’ non-interest income was $745 million, down 4.6% sequentially and 0.7% year over year. Non-interest income included $1 million in securities losses. Excluding securities gains, non-interest income fell 1.5% sequentially, primarily due to lower capital market revenues, offset by an increase in mortgage revenue and stable service charges.

Non-interest expense decreased 11% sequentially and 8% year over year to $1.07 billion. Moreover, excluding charges related to branch consolidation and property and equipment charges, adjusted non-interest expense came in at $1.06 billion, down 5% sequentially.

The improvement in costs resulted from a decline in salaries and benefits expense, coupled with a fall in net occupancy expense and lower FDIC premiums. However, the company reported a modest increase in credit-related expenses.

Credit Quality

Credit quality was mixed during the quarter at Regions. Inflows of non-performing loans increased 36% sequentially to $755 million. Non-performing loans, excluding loans held for sale, declined 3%.

Net charge-offs decreased 19 bps sequentially and 100 bps year over year to 2.52% of average loans. However, non-performing assets decreased 16 bps sequentially and 73 bps year over year to 4.23% of loans, foreclosed properties and non-performing loans held for sale.

Provision for loan losses fell 10.8% sequentially and 53.3% year over year to $355 million.

Capital Ratios

As of September 30, 2011, Regions’ Tier 1 capital ratio came in at 12.8% compared with 12.6% in the prior quarter. Tier 1 common risk-based ratio was 8.2%, up from 7.9% in the prior quarter. On a Basel III pro-forma basis, Tier 1 common and Tier 1 capital ratios were 7.7% and 11.3%, above the respective 7% and 8.5% minimum requirements. The company’s loan-to-deposit ratio was 83.0% as of the same date.

Outlook

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, effective from October 1, 2011, Regions projects that the impact on annual debit interchange revenue will be around $170 million before any mitigation efforts.

Recent Developments

During the quarter, Regions 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.

Though de-risking measures are encouraging at Regions, the upfront costs of such initiatives cannot be ignored. Additionally, regulatory issues also remain.

Regions retain a Zacks #3 Rank, which translates into a short-term Hold rating. Moreover, considering the fundamentals, we maintain our long-term ‘Neutral’ recommendation on the stock.

 
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