Regions Financial Corporation (NYSE:RF) reported financial results for the quarter ending March 31, 2011, including another profitable quarter.
Regions' first quarter 2011 earnings available to common shareholders of $17 million, or 1 cent per diluted share, marks the company's second consecutive quarterly profit and included solid core business performance and improving credit trends. As pre-tax pre-provision net revenue on an adjusted basis rose by 16 percent over the first quarter of 2010, the company continued its progress toward sustainable profitability. Additionally this quarter, the net interest margin continued to expand, low-cost deposits increased, middle market commercial and industrial lending continued to grow and regulatory capital increased.
"We're making solid headway towards sustainable profitability and key credit metrics continue to improve," said Grayson Hall, president and chief executive officer. "The economic recovery is slow - especially in our southeastern markets - but our focus on customers is paying off. We're taking market share, gaining new customers and expanding existing relationships. At the same time, we are improving productivity and efficiency and taking steps to expediently and prudently deal with credit problems and more stressed credit portfolios."
The company's inflows of non-performing loans declined 23 percent versus the previous quarter, as the main driver was a $168 million or 64 percent decline in inflows of land, condo, and single family loans. As of March 31, 2011, consistent with the previous quarter, 38 percent of Business Services' non-performing loans were current and paying as agreed compared to 28 percent a year ago. Loans paying current have cash flow and therefore the company expects these will result in less costly resolution versus non-income producing properties.
During the first quarter, net charge-offs declined $201 million, or 29 percent linked quarter, to $481 million or an annualized 2.37 percent of average loans and the provision for loan losses essentially matched net charge-offs. The current allowance for loan losses to loans ratio increased 8 basis points to 3.92 percent, while the loan loss allowance coverage of non-performing loans increased to 1.03x at March 31, 2011.
Key points for the quarter included:
Reported earnings of 1 cent per diluted share reflect improved core business performance, compared to a loss of 21 cents per diluted share for the first quarter in 2010
Pre-tax pre-provision net revenue ("PPNR") totaled $539 million, including $82 million in security gains; PPNR on an adjusted basis (see non-GAAP reconciliation in Financial Supplement) totaled $460 million, an increase of 16 percent over the first quarter of 2010.
Inflows of non-performing loans declined 23 percent linked quarter to $730 million; non-performing loans, excluding loans held for sale, declined 2 percent linked quarter
Delinquencies declined for the fourth straight quarter; while Business Services Criticized loans, which include Classified loans, have declined for five consecutive quarters and were down 7% for the quarter.
Net charge-offs decreased $201 million or 29 percent versus prior quarter.
Loan loss provision essentially matched net charge-offs resulting in an increase of 8 basis points to 3.92 percent in the allowance for loan losses to net loans ratio; loan loss allowance coverage of non-performing loans increased to 1.03x at March 31, 2011.
Average commercial and industrial loans grew $933 million, driven by customers' capital expenditures, increasing investments in inventory and M&A.
Net interest margin continued to improve, expanding 7 basis points to 3.07 percent or an increase of 30 basis points from first quarter 2010; quarterly improvement driven by declining deposit costs of 5 basis points and slower prepayments resulting in lower premium amortization in the securities portfolio.
Funding mix improved as average low-cost deposits grew $1 billion or 1 percent during the first quarter in 2011 and increased $3.8 billion or 6 percent from the first quarter 2010
Excluding adjustments for securities gains and mortgage loan sales, non-interest revenues on an adjusted basis (see non-GAAP reconciliation in Financial Supplement) declined 4 percent linked quarter, but were up 4 percent year-over-year on strong debit card volume and fee-based account growth.
Non-interest expenses decreased 8 percent linked quarter, or 4 percent excluding prior quarter's debt extinguishment costs, driven by declines in professional and legal fees, credit-related expenses and salaries and benefits expense
Continued focus on expense control, enhancing productivity and limiting discretionary expenses.
Solid capital position with a Tier 1 Capital ratio estimated at 12.5 percent and a Tier 1 Common ratio estimated at 7.9 percent
Earnings Highlights Three months ended:
(In millions. except per share data) March 31, 2011 December 31, 2010 March 31, 2010
Amount Dil. EPS Amount Dil. EPS Amount Dil. EPS
Earnings
Net interest income $863 $877 $831
Securities gains, net 82 333 59
All other non-interest income 761 880 753
Non-interest expense 1,167 1,266 1,230
Pre-tax pre-provision net revenue 539 824 413
Provision for loan losses 482 682 770
Net income (loss) $69 $0.05 $89 $0.07 ($196 ) ($0.16 )
Preferred dividends and accretion 52 0.04 53 0.04 59 0.05
Net income (loss) available to common shareholders $17 $0.01 $36 $0.03 ($255 ) ($0.21 )
Key ratios *
Net interest margin (FTE) 3.07 % 3.00 % 2.77 %
Tier 1 Capital 12.5 % 12.4 % 11.7 %
Tier 1 Common risk-based Ratio
7.9 % 7.9 % 7.1 %
Tangible common stockholders' equity to tangible assets (non-GAAP) 5.98 % 6.04 % 6.28 %
Tangible common book value per share (non-GAAP)
$6.00 $6.09 $6.93
Asset quality
Allowance for loan losses as % of net loans
3.92 % 3.84 % 3.61 %
Net charge-offs as % of average net loans~ 2.37 % 3.22 % 3.16 %
Non-performing assets as % of loans, foreclosed properties and non-performing loans held for sale 4.78 % 4.69 % 5.13 %
Non-performing assets (including 90+ past due) as % of loans, foreclosed properties and non-performing loans held for sale 5.42 % 5.38 % 5.92 %
* Tier 1 Common and Tier 1 Capital ratios for the current quarter are estimated.
~ Annualized
Retaining and profitably growing customers and core businesses is a key factor in returning the company to sustainable profitability. According to a recent report issued by the Temkin Group, Regions ranked as the top bank for customer experience, and as one of the top companies in America for customer service across all industries. The company has also received national awards from Greenwich & Associates for overall client satisfaction in middle market and for relationship manager performance in the company's small business lending.
Overall, both ending and average loans declined 2 percent. Ending commercial and industrial grew 3 percent, offset by the company's continued de-risking of its Investor Real Estate portfolio. The company is still targeting to reduce this portfolio to no more than 100 percent of the bank's total regulatory capital, which approximates $14 billion today.
In the first quarter growth in lending to the middle market commercial and industrial customer segment continued, as average loans increased 4 percent linked-quarter in this segment and the company experienced increases in 65 percent of its markets. This was driven by customers' increasing their investments in capital expenditures and inventory as well as mergers and acquisitions; both new client acquisition and line utilization are contributing to this growth. Total commercial and industrial outstandings have now grown for nine consecutive months. Line utilization rose to 41.7 percent as of March 31--up from year-end 2010's 40.3 percent, the highest since September 2009; however, utilization still remains well below Regions' historical normal rate.
The company also continues to execute on its plans to grow consumer loans, which includes an increased emphasis on indirect lending, cash banking product solutions, and continuing to leverage our customer loyalty and extensive branch network to retain and attract new customers.
Regions has remained an active lender in the current environment, having made new or renewed loan commitments totaling $13.3 billion during the first quarter, primarily driven by residential first mortgage production and lending to commercial customers, including those operating small businesses.
Net interest margin expansion driven by improving funding mix and slower prepayments resulting in lower investment portfolio premium amortization
Regions' funding mix continued to improve during the quarter, as average low-cost deposits grew $1 billion or 1 percent linked quarter, driving a 7 basis point gain in net interest margin to 3.07 percent. During the first quarter, deposit costs declined 5 basis points to 0.59 percent. Slower prepayment rates and the resulting decrease in premium amortization on mortgage-backed securities and lower average cash balances at the Federal Reserve were also drivers of the increase. Overall, net interest income declined 2 percent linked quarter, but was 4 percent higher on a year-over-year basis at $863 million.
While some deposit re-pricing opportunity is available, the company believes that future margin expansion depends primarily on continued improvement in loan spreads and change in loan mix. The company remains disciplined with pricing on new loans, ensuring the company is being appropriately paid on a risk-adjusted basis. The company's balance sheet is modestly asset sensitive and accordingly net interest income and net interest margin would increase with rising interest rates.
Modest decline in non-interest revenues
Non-interest revenue totaled $843 million and included $82 million in securities gains. On an adjusted basis, non-interest revenues declined 4 percent linked quarter, primarily driven by a 14 percent decline in brokerage and investment banking revenue, which benefited from several sizable investment banking transactions in the prior quarter, as well as other seasonal factors (see non-GAAP reconciliation in Financial Supplement). Income from service charges of $287 million was down slightly on both a linked quarter and a year-over-year basis. However, the company continues to see strong debit card volume and fee-based account growth, which is serving to offset the negative impact of Regulation E. Although mortgage originations were down on a linked quarter basis, resulting in a $6 million decline in mortgage income, they remain strong compared to historical standards, increasing 13 percent compared to the same period a year ago.
Non-interest expenses improve
Non-interest expense totaled $1.2 billion for the quarter. Non-interest expenses decreased 8 percent linked quarter, driven by declines in professional and legal fees, salaries and benefits expense, other real estate owned and loans held for sale expenses and a $55 million debt extinguishment cost in the prior quarter. Credit-related expenses are a significant component of non-interest expenses, ranging between $300 million and $400 million annually, and are expected to subside as the credit cycle eases. The company remains committed to targeting all areas of staffing, occupancy, discretionary spending, incentives, and credit-related expenses. Customers will continue to be at the center of every decision, and any changes will maintain focus on service quality and meeting their needs.
Depending on ultimate regulatory changes related to interchange fees and the timing of their implementation, the company faces additional fee income challenges in 2011. Regions derived $346 million from this revenue stream in 2010 and while it is premature to assess the proposals' impact on these fees, the potential effect could be significant.
The company is encouraged by the Federal Reserve's announcement of a delay in issuing a final rule on interchange fees. The company is also encouraged by the bills introduced in both the House and Senate with bipartisan support that would delay implementation of proposed reductions in interchange fees proposed by the Durbin Amendment, giving the industry more time to analyze pricing and consequences of the proposal. The company is hopeful that the review process and outcome will be more rational than the plan currently proposed. The desired approach is one that takes into account the banking industry's total costs of delivering debit cards, such as losses related to fraud, and also considers the potential negative effect to the consumer on debit card availability.
Regardless of the outcome, the company is working to develop mitigation strategies to rationalize its business under the proposed rule changes. For instance, Regions began migrating accounts from free to fee eligible last May, and now all checking accounts are fee eligible. Also, the company continues to see a record level of penetration with its new checking account customers, who are electing to have a debit card 90 percent of the time.
Tier 1 common and Tier 1 ratios remained solid, ending the quarter at an estimated 7.9 and 12.5 percent, respectively, and on a Basel III pro-forma basis were 7.5 and 11.1 percent, above the respective 7 percent and 8.5 percent minimum requirements. The company's liquidity position at both the bank and the holding company remains strong as well. As of March 31, 2011, the company's loan-to-deposit ratio was 84.4 percent.
Regions Financial Corporation, with $132 billion in assets, is a member of the S&P 500 Index and is one of the nation's largest full-service providers of consumer and commercial banking, trust, securities brokerage, mortgage and insurance products and services. Regions serves customers in 16 states across the South, Midwest and Texas, and through its subsidiary, Regions Bank, operates approximately 1,800 banking offices and 2,200 ATMs. Its investment and securities brokerage trust and asset management division, Morgan Keegan & Company Inc., provides services from over 300 offices.