Regions Beats Zacks Estimates

Regions Financial Corporation’s (RF - Analyst Report) first-quarter 2012 earnings from continuing operations came in at 14 cents per share, outshining the Zacks Consensus Estimate of 8 cents. Results also compared favorably with 9 cents per share reported in the prior quarter.

Quarterly results benefited from improved net interest margin and better credit quality, backed by lower loan loss provisions and reduced non-performing assets.

Net income available to common shareholders was $145 million in the reported quarter as against a net loss of $602 million in the prior-quarter. This also compared favorably to the prior-year quarter’s net income of $17.0 million.

Performance in Detail

Total revenue at Regions came in at $1.3 billion, in line with Zacks Consensus Estimate. Moreover, revenue fell 0.7% sequentially and 25.1% year over year.

Regions reported pre-tax pre-provision net revenue of $419.0 million, down 11.0% sequentially, mainly due to seasonal increase in expenses from payroll taxes and subsidiary’s annual dividend payment.

Net interest income was $827 million, down 2.6% from the prior quarter and 3.3% from the prior-year quarter. Funding mix showed an improvement as average low-cost deposits as a percentage of total deposits inched up from 79.2% in the prior quarter to 80.0%.

Net interest margin of 3.09% was up 1 basis point (bps) sequentially and in line with prior-year quarter. The sequential gain driven mainly from lower deposit costs and decline in lower average excess cash reserves at the Federal Reserve as well as lower non-accrual levels. However, these benefits were partly offset by the impact of previously terminated balance-sheet hedges.

Regions’ non-interest income from continuing operations was $524 million, up 3% sequentially. Excluding securities gains, non-interest income was $512 million up 2.4% from the previous quarter and 2.8% from the year-ago quarter. The sequential gain was a result of higher mortgage income, partially mitigated by lower service charges.

Regions’ non-interest expenses, excluding goodwill impairment, were $913 million, growing 5.0% sequentially but dipping 2.0% year over year. The sequential rise was due to higher salaries and benefits partially offset by lower other real estate expense.

Credit Quality

Credit quality improved during the quarter at Regions. Inflows from non-performing loans decreased 32% sequentially to $381 million. Non-performing loans, excluding loans held for sale, declined 9% in the reported quarter.

Net charge-offs dropped 43 bps sequentially and 64 bps on a year over year basis to 1.73% of average loans. Moreover, non-performing assets decreased 41 bps sequentially and 136 bps year over year to 3.42% of loans, foreclosed properties and non-performing loans held for sale.

Provision for loan losses fell 60.3% sequentially and 75.7% year over year to $117 million in the quarter under review.

Capital Ratios

As of March 31, 2012, Regions’ Tier 1 capital ratio came in at 14.3% compared with 13.3% in the prior-quarter. Tier 1 common risk-based ratio was 9.6%, up from 8.5% in the prior-quarter. Tangible common equity ratio was 7.35% as against 6.57% in the previous quarter.

Recent Developments

In January 2012, Regions submitted a capital plan to the Federal Reserve for complete capital analysis. After a thorough examination, Regions received permission from the Fed to execute its plan to strengthen its capital position. Since then, the company has taken varied steps to solidify its financial position.

In March 2012, Regions successfully raised $900.0 million from its common equity, yielding $875.0 million in net proceeds.

In April 2012, the company completed the sale of Morgan Keegan to Raymond James Financial Inc. (RJF - Analyst Report) resulting in proceeds of $1.2 billion. Along with the divestiture, it repaid $3.5 billion to the U.S. Treasury department.

Our Take

We believe that the company’s favorable funding mix, enhanced core business performance, its expansion mode and strategies will continue to yield profitable earnings in the long run. Moreover, improved credit quality will 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, persistent regulatory issues remain a cause of major concern.

Currently, Regions retains 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. Community Trust Bancorp Inc. (CTBI - Snapshot Report), one of its close peers retains a Zacks#1 Rank, which translates into ‘Strong Buy’ Rating.