Regions Financial Corporation’s (RF) first quarter 2011 earnings came in at 1 cent per share, way ahead the Zacks Consensus Estimate of a loss of 9 cents. This also compares favorably with a loss of 21 cents in the year-ago quarter. Quarterly results also represent back-to-back profits after incurring losses since the second quarter of 2009.
Strong core business performance, better credit trends, growing customers, improved top line and continued expansion in net interest margin primarily led to the impressive results. A decrease in non-interest expenses also supported the better-than-expected results. However, a modest decline in non-interest revenues was the downside.
Net income came in at $17.0 million, down from $36 million in the prior quarter but substantially better than a loss of $255 million in the year-ago quarter.
Performance in Detail
Regions reported pre-tax pre-provision net revenue of $539 million, down 35% sequentially but up 31% year over year.
Total revenue came in at $1.7 billion, surpassing the Zacks Consensus Estimate of $1.6 billion. This compares unfavorably with revenue of $2.1 billion in the prior quarter but favorably with $1.6 billion in the prior-year quarter.
Net interest income was $863 million, down 2% sequentially but up 4% year over year. Funding mix showed an improvement as average low-cost deposits increased 1% sequentially and 6% on a year-over-year basis. Net interest margin improved 7 basis points (bps) sequentially and 30 bps year over year to 3.07%.
Net interest margin increased sequentially as slower prepayments resulted in lower investment portfolio premium amortization in mortgage-backed securities, lower deposit costs and lower average cash balances at the Federal Reserve.
Regions’ non-interest income was $843 million, down 31% sequentially but up 4% year over year. Non-interest income included $82 million in securities gains.
Non-interest expense decreased 8% sequentially and 5% year over year to $1.2 billion. The sequential decrease was driven by lower 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 Quality
Credit quality was mixed during the quarter. Inflows of non-performing loans declined 23% sequentially to $730 million. Non-performing loans, excluding loans held for sale, fell 2% sequentially.
Net charge-offs decreased 85 bps sequentially and 79 bps year over year to 2.37% of average loans.
However, non-performing assets increased 9 bps sequentially but decreased 35 bps year over year to 4.78% of loans, foreclosed properties and non-performing loans held for sale.
Capital Ratios
As of March 31, 2011, Tier 1 capital ratio came in at 12.5% compared with 12.4% 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 ratios were 7.5% and 11.1%, above the respective 7% and 8.5% minimum requirements. The company’s loan-to-deposit ratio was 84.4% as of the same date.
Our Take
While de-risking measures are encouraging at Regions, the upfront costs of such initiatives cannot be ignored. However, a favorable funding mix, improved core business performance and economic recovery in the upcoming quarters would support the bottom line.
The shares of Regions retain a Zacks #3 Rank, which translates into a short-term Hold rating. Also, considering the company’s business model and fundamentals, we maintain a long-term Neutral recommendation on the shares. Regions’ competitor ––Capital City Bank Group Inc. (CCBG), however, retains a Zacks #1 Rank (a short-term ‘Strong Buy’ rating).
CAPITAL CITY BK (CCBG): Free Stock Analysis Report
REGIONS FINL CP (RF): Free Stock Analysis Report
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