Regions Enters Profit Region - Analyst Blog

Regions Financial Corporation (RF) has finally entered the profit region in the fourth quarter of 2010, significantly surpassing the Zacks Consensus Estimate loss of 13 cents. The company reported a net income of 3 cents per share, compared favorably with a loss of 17 cents in the prior quarter and 51 cents in the year-ago period.

For fiscal year 2010, Regions narrowed loss on a year-over-year basis. The company reported net loss of 62 cents per share, outpacing the Zacks Consensus Estimate loss of 76 cents. Moreover, this compares favorably with $1.27 loss per share reported in the prior year.

Results were significantly impacted by the continued de-risking of the balance sheet, improved core business performance and the high disposition of non-performing assets. Also, the company's improved non-interest income, high pre-tax pre-provision net revenue and net margin expansion attributed to favorable funding mix and deposit pricing, have led to impressive results. However, these increases were partly offset by augmented non-interest expenses.

Net income came in at $36.0 million in the quarter, significantly up from a loss of $209.0 million in the prior quarter and loss of $606 million in the year-ago quarter.

Credit Quality Evaluation

During the fourth quarter of 2010, the company's inflows of non-performing loans edged down 29% sequentially, which resulted in $308 million decline in non-performing assets. Further, Regions sold $405 million of non-performing assets in the quarter.

Net charge-offs decreased to 3.22% of average loans from 3.52% in the prior quarter and 2.99% in the year-ago quarter.

Provision for loan losses equaled net charge-offs of $682 million in the quarter, decreasing from $760 million in the prior quarter. Allowance for loan losses to net loan ratio increased to 3.84% from 3.77% in the prior quarter and 3.43% in the year-ago quarter.

Performance in Detail

Regions reported pre-tax pre-provision net revenue (PPNR) of $824 million, edging up 81% sequentially and almost doubled on a year-over-year basis. Including $363 million of net adjusted items, PPNR was $461 million, up 2% sequentially and 19% year over year. Higher revenue reflects elevated brokerage activity and fee-based account growth.

Net interest income at Regions increased to $877 million in the quarter, up 1% sequentially and 3% year over year as Regions' funding mix and costs continued to improve. Net interest margin continued to increase,surging by 4 basis points sequentially and 28 bps year over year to 3.00%. For fiscal 2010, net interest income was $3.4 billion, up 3% year over year.

Regions' non-interest income was $1.2 billion, whopping up 62% sequentially and 69% year over year. Non-interest income included $333 million of securities gains, a profit of $26 million related to a sale of residential mortgage loans, and $59 million of leveraged lease termination gains, partially offset by tax expenses.

Excluding these non-core revenue items, non-interest income edged up 6% sequentially, reflecting strong interchange income from improved debit card volume and fee-based account growth and an increase in brokerage income. For fiscal 2010, non-interest income was $3.5 billion, down 6% year over year.

Total revenue at Regions came in at $2.1 billion, surpassing the Zacks Consensus Estimate of $1.6 billion. This compared favorably with revenue of $1.6 billion in the prior quarter and $1.6 million in the prior-year quarter. For full year 2010, total revenue was $6.9 billion, down 2.8% year over year. However, revenue outpaced the Zacks Consensus Estimate of $6.5 billion.

Regions' total non-interest expense increased $49 million or 4% sequentially to $1.3 billion after excluding $55 million loss on early extinguishment of debt in the fourth quarter. The increase was due to a rise in professional and legal fees and incentive-based compensation attributed to Morgan Keegan.

Capital Ratios

As of December 31, 2010, Tier 1 capital ratio came in at an estimated 12.4%, while the estimated Tier 1 common ratio was 7.9% compared with 12.1% and 7.6%, respectively, in the prior quarter. On a Basel III pro-forma basis, the ratios were 11.4% and 7.6%, respectively, well above the respective minimum ratios of 8.5% and 7.0%, required under Basel III.  As of December 31, 2010, the company's loan-to-deposit ratio was 88%.

Competitor Performance

In Regions' peer group, BB&T Corp.'s (BBT) fourth quarter 2010 earnings came in at 30 cents per share, ahead of the Zacks Consensus Estimate of 26 cents. BB&T's results reflected better-than expected revenue, which was in turn, were supported by higher net interest income.

Interest margin expanded while non-interest income remained nearly flat with the comparable prior-year quarter. The company also achieved an improvement in the credit quality while provision expenses were down in the quarter. However, a rise in expenses slightly dampened the quarter's results.

However, Bank of America Corporation's (BAC) fourth quarter earnings came in at 4 cents per share, substantially lower than the Zacks Consensus Estimate of 19 cents. Earnings for the reported quarter excluded a previously announced goodwill impairment charge of $2 billion related to its Home Loans and Insurance business.

Results were also marred by a $3.0 billion increase in provision expense related to the Government Sponsored Enterprises (GSEs) and $1.5 billion in litigation expenses. Lower credit costs, higher net interest income and increased card income were among the positives. However, reduced mortgage banking income, lower non-interest income and higher non-interest expense were the downside.

Our Take

While the de-risking measures at Regions are encouraging, the upfront costs of such initiatives cannot be avoided. Moreover, with downgrades by rating agencies following changes in management and asset quality issues, the risk mitigation initiatives and pace of recovery remain uncertain. Nevertheless, the favorable funding mix, improved core business performance and an expected improvement in the economy in the coming quarters would, however, support the company's earnings. 

The shares of Regions retain a Zacks #3 Rank, which translates into a short-term ‘Hold' recommendation. Also, considering the company's business model and fundamentals, we hold a long-term “Neutral” recommendation on the shares.

 
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