RF Regions Financial Corporation

Regions Financial Corporation’s (RF) fourth-quarter 2011 earnings from continuing operations came in at 9 cents per share, outshining the Zacks Consensus Estimate by 2 cents. Moreover, results compared favorably with 7 cents per share reported in the prior quarter and 1 cent reported in prior-year quarter.

Quarterly results benefited from improved net interest margin and better credit quality backed by lower loan loss provisions and reduced non-performing assets. Reported quarter represented the company’s fifth consecutive quarterly profit after incurring losses since the second quarter of 2009.

Net loss available to common shareholders, including goodwill impairment charges of $731 million, was $602 million or 48 cents per share. Results compared unfavorably with net income of $101.0 million or 8 cents per share reported in the prior quarter and $36.0 million or 3 cents per share reported in the prior-year quarter.

For the full year, income from continuing operations available to common shareholders was $211 million or 17 cents per share. Earnings per share for full year missed the Zacks Consensus Estimate by 2 cents. Including goodwill impairment and a tax benefit from the second quarter 2011 regulatory charge, net loss available to common shareholders was $429 million or 34 cents per share.

Performance in Detail

Total revenue came in at $1.4 billion, below the Zacks Consensus Estimate of $1.6 billion. Moreover, revenue fell 0.5% sequentially and 23.9% year over year.

For the full year, revenue was $5.6 billion, down 5.5% from $5.9 billion in 2010. Moreover, results significantly missed the Zacks Consensus Estimate of $6.5 billion.

Regions reported pre-tax pre-provision net revenue of $485 million, down 5% sequentially, mainly attributed to expected reduction in service charges. Moreover, revenue was down 39% year over year. Including goodwill impairment, revenue came in at $232 million in the quarter.

Net interest income was $849 million, modestly in line with the prior quarter and declined 1.6% year over year. Funding mix showed an improvement as average low-cost deposits inched up as a percentage of total deposits from 77.8% in the prior quarter to 79.2%.

Net interest margin of 3.08% was up 4 basis points (bps) sequentially, gaining from lower deposit costs and decline in lower average excess cash reserves at the Federal Reserve. However, these benefits were partly offset by higher prepayments in the securities portfolio coupled with the impact of maturing interest rate swaps.  Moreover, margin improved by 7 bps on a year over year basis.

Regions’ non-interest income was $507 million, down 1.2% sequentially and 44.9% year over year. Non-interest income included $7 million in securities gains. Excluding securities gains, non-interest income fell 2.7% sequentially, as service charges declined $47 million sequentially as the Durbin Amendment rules was implemented since October 2011.

Non-interest expense increased 32% sequentially to $1.1 billion, due to goodwill impairment charges. Moreover, excluding goodwill impairment, non-interest expenses increased 2% sequentially, reflecting $16 million of expense related to Visa class B shares litigation.

Credit Quality

Credit quality improved during the quarter at Regions. Inflows of non-performing loans decreased 26% sequentially to $561 million. Non-performing loans, excluding loans held for sale, declined 12%.

Net charge-offs decreased 36 bps sequentially and 106 bps year over year to 2.16% of average loans. Moreover, non-performing assets decreased 40 bps sequentially and 86 bps year over year to 3.83% of loans, foreclosed properties and non-performing loans held for sale.

Provision for loan losses fell 16.9% sequentially and 56.7% year over year to $295 million.

Capital Ratios

As of December 31, 2011, Regions’ Tier 1 capital ratio came in at 13.2% compared with 12.8% in the prior quarter. Tier 1 common risk-based ratio was 8.5%, up from 8.2% 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 81.0% as of the same date.

Recent Developments

In January 2012, Regions finally succeeded in selling its securities brokerage arm, Morgan Keegan & Company Inc. The company entered a stock purchase agreement with Raymond James Financial Inc. (RJF) to sell Morgan Keegan for $930 million.

Under the terms of the deal, Regions would also receive a dividend of $250 million from Morgan Keegan before closing, thereby projecting $1.18 billion as the net amount of proceeds. The deal awaits regulatory approvals and other customary closing conditions and therefore, is expected to close during first quarter of 2012. However, Morgan Asset Management and Regions Morgan Keegan Trust are retained as part of Regions Wealth Management organization.

Following the divestiture, Regions aims to concentrate on its core banking business while providing products and services to its clients in a better way. Moreover, the company will have strong revenue opportunities through a business relationship with Raymond James, which would benefit the shareholders in the long run.

Our Take

We believe the company’s favorable funding mix, improved core business performance, its expansion mode and strategies will continue to yield profitable earnings in the upcoming quarters. Moreover, improved credit quality also act as a positive catalyst for the company.

While the de-risking measures at Regions are encouraging, the upfront costs of such initiatives cannot be avoided. Additionally, regulatory issues also remain a major area of concern.

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.

 
REGIONS FINL CP (RF): Free Stock Analysis Report
 
RAYMOND JAS FIN (RJF): Free Stock Analysis Report
 
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