Regions Financial Corporation (RF) has narrowed its loss in the third quarter but missed the Zacks Consensus Estimate. The company reported a net loss of 17 cents per share, compared with a loss of 37 cents in the year-ago period. The Zacks Consensus Estimate was a loss of 10 cents per share.
Results were significantly impacted by the continued de-risking of the balance sheet and the high disposition of problem assets. Also, recent legislative actions have impacted the company’s non-interest income though favorable funding mix and deposit pricing have led to better net interest income figures.
Credit Quality Evaluation
Regions’ asset disposition included about $1.0 billion being transferred to the held-for-sale category in the reported quarter. This included a bulk sale of distressed assets of $350 million. The assets disposition resulted in $233 million of related charge-offs in the quarter. Net charge-offs increased to 3.52% of average loans, up from 2.99% in the prior quarter and 2.86% in the year-ago quarter.
Provision for loan losses equaled net charge-offs at $760 million, increasing from $651 million. Allowance for loan losses to net loan ratio increased to 3.77% from 3.71% in the prior quarter and 2.83% in the year-ago quarter. Excluding loans held for sale, nonperforming loans were down $101 million or 3%, resulting in a 5% drop in nonperforming assets.
Quarter Performance in Detail
Total revenue at Regions came in at $1,618.0 million, almost unchanged both sequentially and year over year. Total revenue surpassed the Zacks Consensus Estimate of $1,606.0 million.
Regions reported pre-tax pre-provision net revenue (PPNR) of $454 million, a drop of $32 million from $486 million in the prior quarter, excluding regulatory charges. Higher credit-related costs and the Regulation E impacts attributed to this decline. Compared with the prior year quarter, adjusted PPNR was up 11%.
Net interest income at Regions increased to $868 million, up 1% sequentially and 3% year over year as Regions’ funding mix and costs continued to improve.Net interest margin continued to advance, increasing 9 basis points sequentially and 23 bps year over year to 2.96%. However, average loans were down 2% during the quarter as a result of Regions’ portfolio de-risking efforts, specifically relating to investor real estate.
Regions’ non-interest income was $750 million, down 1% sequentially and 3% year over year. The decrease stemmed from the Regulation E (overdraft legislation) implementation. Nevertheless, the company has decreased its potential impact from the Reg E changes. Regions now projects a $50 million to $60 million impact, with approximately $16 million being reflected in the reported quarter. This compares with a previous estimate of $72 million in the second half of 2010.
Regions’ total non-interest expense increased $37 million or 3% sequentially to $1,163 million after excluding regulatory charges in the prior quarter. The increase was due to a rise in other real estate owned (OREO) expense and held-for-sale costs. The company expects the bottom line to be negatively impacted from such credit-related challenges in the upcoming quarters.
Capital Ratios
As of September 30, 2010, Tier 1 capital ratio came in at an estimated 12.1%, while the estimated Tier 1 common ratio was 7.6%, compared to 12.0% and 7.7%, respectively, in the prior quarter.
Gulf Oil Spill Impact
Regions continued to monitor the situation in the Gulf Coast area. In assessing the financial impact of the company, based on updated stress testing performed in the reported quarter and following discussions with its borrowers, the company has substantially reduced the potential future loss estimate to a maximum of $20 million from $100 million that was initially estimated.
Competitor Performance
Similar to Regions, BB&T Corp. (BBT) results were impacted by higher provision for credit losses, lower service charges on deposits and increased non-interest expense were the downsides. However, the company’s third quarter adjusted earnings (excluding merger related charges) of 31 cents were a nickel ahead of the Zacks Consensus Estimate based on mortgage banking income, checkcard fees, non-deposit fees and commissions and improved net interest income.
However, Bank of America Corporation’s (BAC) third quarter 2010 earnings came in at 27 cents per share, substantially ahead of the Zacks Consensus Estimate of 16 cents. Lower credit costs and higher net interest income and increased mortgage banking and card income were primarily responsible for the better-than-expected results. Yet, higher non-interest expense, pressure on trading income, lower service charges and reduced insurance income were the primary offsetting factors.
Our Take
While the de-risking measures at Regions are encouraging, the upfront costs of such initiatives cannot be avoided. Additionally, in the post regulatory environment and with several recent legislative actions, both top and bottom line results at Regions are impacted, which is expected to continue in the upcoming quarters. Nevertheless, the favorable funding mix and an expected improvement in the economy in the coming quarters would support the company’s earnings.
Regions currently maintains its Zacks #3 Rank, which translates to a short-term Hold rating. The stock also has a Neutral recommendation from us.
However, reflecting the earnings miss, the stock is trading at significant discount in today’s regular session on the New York Stock Exchange.
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