Regions 2Q 2011 Financial Results
Core pre-tax pre-provision net revenue rises 9 percent to $500 million -- highest level since third quarter 2008; New products and services further diversify revenue streams
BIRMINGHAM, Ala. – (BUSINESS WIRE) – July 26, 2011 –Regions Financial Corporation (NYSE:RF) today reported financial results for the quarter ending June 30, 2011.
Focusing on customers; enhancing enterprise-wide risk management; building sustainable performance
Regions’ second quarter 2011 earnings available to common shareholders of $55 million, or 4 cents per diluted share, marks the company’s third consecutive quarterly profit highlighted by solid core business performance and improving credit costs. Pre-tax pre-provision net revenue on an adjusted basis (see supplement page 8) rose to $500 million, its highest level since third quarter 2008, reflecting the company’s continued growth in commercial and industrial, indirect and direct consumer loans, as well as low-cost deposits, while also taking steps to further diversify revenue streams and build for future growth. Additionally, the company’s brokerage and investment banking subsidiary, Morgan Keegan, reached a settlement with the SEC, FINRA and state regulators. The financial impact on second quarter earnings related to the $210 million regulatory settlement was a $44 million tax benefit on a portion of the settlement which had been previously accrued as non-deductible.
“Our results this quarter further demonstrate that our strategy for sustainable profitability is working,” said Grayson Hall, president and chief executive officer. “Focusing on the customer, enhancing enterprise-wide risk management and building sustainable performance are the key priorities of our business plans, and this quarter’s performance shows we are making solid progress.”
Credit metrics continue to improve
The company’s credit costs, while still elevated, declined to the lowest level in two years. Total net charge-offs in the second quarter were $548 million. Of this amount, $207 million of net loan losses resulted from $620 million of criticized loans that were transferred to held for sale or sold during the quarter. The provision for loan losses totaled $398 million or $150 million less than net charge-offs primarily reflecting the loan loss allowance related to the loans sold or transferred to held for sale. The provision was $84 million less or 17 percent lower than the previous quarter. The company’s loan loss allowance to non-performing loan coverage ratio increased from 1.03x to 1.12x at June 30, 2011.
Inflows of non-performing loans declined $175 million, or 24 percent to $555 million, the lowest level in over three years. Business Services criticized loans declined 14 percent linked-quarter and non-performing loans, excluding loans held for sale, declined $303 million or 10 percent. As of June 30, 2011, 42 percent of Business Services’ non-performing loans were current and paying as agreed, up from 38 percent in the prior quarter.
Profitably gaining market share, growing customers and improving balance between consumer and commercial loan portfolios
Retaining and profitably growing customers and core businesses is a key factor in sustainable profitability, and the company is executing on its plans in this area by leveraging customer loyalty and its extensive branch network. In the quarter, the company took several actions to expand its products and services to consumers, including re-entry into the credit card business with the acquisition of an approximate $1.2 billion portfolio of existing Regions’ deposits customers. The portfolio consists of customers in the company’s markets, of which two-thirds have two to five other banking services with the company. Indirect auto lending also gained momentum, up 14 percent on a linked quarter basis. Furthermore, the company expects to have 1,200 dealerships signed by year end. These businesses will help accelerate the company’s efforts to improve the balance between the consumer and commercial loan portfolios, further diversify revenue streams and better serve customers.
In the second quarter, growth in lending to the middle market commercial and industrial customer segment continued, with ending loans up 12.1 percent from one year ago. Growth was driven by specialized industry lending businesses, which include energy, healthcare, franchise restaurant, transportation, technology and defense, and asset-based lending. Total commercial and industrial commitments have now grown for five consecutive quarters and risen 7 percent year-to-date.
Overall, ending loans were relatively stable, declining 0.2 percent linked quarter. This primarily reflects the $1.4 billion decline in the Investor Real Estate portfolio, partially offset by the company’s credit card purchase and middle market commercial and industrial growth. The company’s ending investor real estate portfolio has now been reduced to $13.4 billion.
Improving funding mix
The company’s funding mix continued to improve during the quarter, as average low-cost deposits grew 1.8 percent linked quarter, while higher cost time deposits declined 2.0 percent. The company’s net interest margin was 3.05 percent, down 2 basis points compared with the prior quarter but 18 basis points higher than a year ago. During the second quarter, deposit costs declined 6 basis points to 0.53 percent. Overall, net interest income was steady linked quarter at $864 million.
Growing fee income; expanding fee-based services
Non-interest revenue totaled $781 million and included $24 million in securities gains. Non-interest revenues, excluding securities gains, declined 1 percent linked quarter, and reflected a decline in private client and capital markets revenue. However, income from service charges of $308 million remained strong and increased $21 million linked quarter. This strength reflects the ongoing restructuring of checking accounts to fee-eligible status, as well as the launch of new products.
During the quarter the company introduced new or expanded consumer fee-based services to meet customers’ needs. This included new services such as on-line person-to-person payments, small cash advances for relationship customers, and identity theft protection. The company also announced an agreement with Western Union to provide money transfer and expedited bill pay services as part of a new suite of consumer financial services, branded as Now Banking, which also includes check cashing and reloadable debit cards. Focusing on the affluent segment, the company also announced in late June the formation of a new Wealth Management Group, integrating its Trust, Private Banking and Insurance units within a single business line. Establishing this new group enables the company to focus on a key, profitable customer segment with the goal of increasing non-interest revenue, deepening customer relationships and enhancing value.
Diligently reducing non-interest expenses
Non-interest expense totaled $1.2 billion for the quarter, however, excluding $77 million in charges related to branch consolidation and property and equipment charges, adjusted non-interest expense totaled $1.1 billion, or 4 percent lower than the prior quarter. Key drivers of this quarter’s decline were a 6 percent decline in salaries and benefits expense, as well as a decline in professional and legal fees of $20 million. FDIC premiums increased $20 million linked quarter reflecting new rules which went into effect on April 1, 2011. Credit-related expenses, which include other real estate expense, gains or losses from loans held-for-sale and credit-related personnel costs, declined modestly and represented 8 percent of second quarter’s adjusted non-interest expenses.
The company remains focused on strengthening its core franchise through productivity and efficiency initiatives. In conjunction with these efforts, the company will consolidate approximately 40 branches later this year. The company recorded associated property valuation charges on the branches, plus other property and equipment charges totaling $77 million this quarter, and expects to realize future net cost saves of approximately $19 million annually. The company will continue to take a rigorous review of expenses, without sacrificing investment opportunities or customer service. Customers will continue to be at the center of every decision, and any changes will maintain the company’s high standards of service quality.
The Federal Reserve Board of Governors has announced its final rule on debit card interchange fees mandated by the Durbin Amendment to the Dodd-Frank Act effective October 1, 2011. Based on the final ruling, the company estimates that the impact on annual debit interchange revenue will be approximately $170 million before any mitigation efforts. However, the company believes it will be able to mitigate this impact over time through revenue enhancements and expense management.
Strong capital and liquidity
Tier 1 common and Tier 1 capital ratios remained healthy, ending the quarter at an estimated 7.9 percent and 12.6 percent, respectively, and on a Basel III pro-forma basis were 7.2 percent and 10.8 percent, above the respective 7 percent and 8.5 percent minimum requirements (see non-GAAP calculation). The company’s liquidity position at both the bank and the holding company remains strong as well. As of June 30, 2011, the company’s loan-to-deposit ratio was 84.3 percent.
About Regions Financial Corporation
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. Additional information about Regions and its full line of products and services can be found at www.regions.com.
This press release may include forward-looking statements which reflect Regions’ current views with respect to future events and financial performance. The Private Securities Litigation Reform Act of 1995 (“the Act”) provides a “safe harbor” for forward-looking statements which are identified as such and are accompanied by the identification of important factors that could cause actual results to differ materially from the forward-looking statements. For these statements, we, together with our subsidiaries, claim the protection afforded by the safe harbor in the Act. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results or other developments. Forward-looking statements are based on management’s expectations as well as certain assumptions and estimates made by, and information available to, management at the time the statements are made. Those statements are based on general assumptions and are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. These risks, uncertainties and other factors include, but are not limited to, those described below:
The words "believe," "expect," "anticipate," "project," and similar expressions often signify forward-looking statements. You should not place undue reliance on any forward-looking statements, which speak only as of the date made. We assume no obligation to update or revise any forward-looking statements that are made from time to time.
The foregoing list of factors is not exhaustive. For discussion of these and other factors that may cause actual results to differ from expectations, look under the captions “Forward-Looking Statements” and “Risk Factors” in Regions’ Annual Report on Form 10-K for the year ended December 31, 2010, and Quarterly Report on Form 10-Q for the quarter ended March 31, 2011, as on file with the Securities and Exchange Commission.
Use of non-GAAP financial measures
Page two of this earnings release presents computation of earnings and certain other financial measures excluding regulatory charge and related tax benefit (non-GAAP) and other significant items (non-GAAP), Tier 1 common risk-based ratio and tangible common equity (non-GAAP). Page three of the financial supplement shows additional ratios based on return on average assets, tangible common stockholders’ equity, efficiency ratio, as well as the Tier 1 common risk-based ratio and computations of earnings and certain other financial measures excluding the regulatory charge and the federal income tax benefit related to the regulatory charge (non-GAAP). Tangible common stockholders’ equity ratios have become a focus of some investors, and management believes they may assist investors in analyzing the capital position of the company absent the effects of intangible assets and preferred stock. Traditionally, the Federal Reserve and other banking regulatory bodies have assessed a bank’s capital adequacy based on Tier 1 capital, the calculation of which is codified in federal banking regulations. In connection with the Supervisory Capital Assessment Program, these regulators began supplementing their assessment of the capital adequacy of a bank based on a variation of Tier 1 capital, known as Tier 1 common equity. While not codified, analysts and banking regulators have assessed Regions’ capital adequacy using the tangible common stockholders’ equity and/or the Tier 1 common equity measure. Because tangible common stockholders’ equity and Tier 1 common equity are not formally defined by GAAP or codified in the federal banking regulations, these measures are considered to be non-GAAP financial measures and other entities may calculate them differently than Regions’ disclosed calculations. Since analysts and banking regulators may assess Regions’ capital adequacy using tangible common stockholders’ equity and Tier 1 common equity, we believe that it is useful to provide investors the ability to assess Regions’ capital adequacy on these same bases.
Tier 1 common equity is often expressed as a percentage of risk-weighted assets. Under the risk-based capital framework, a bank’s balance sheet assets and credit equivalent amounts of off-balance sheet items are assigned to one of four broad risk categories. The aggregated dollar amount in each category is then multiplied by the risk weighted category. The resulting weighted values from each of the four categories are added together and this sum is the risk-weighted assets total that, as adjusted, comprises the denominator of certain risk-based capital ratios. Tier 1 capital is then divided by this denominator (risk-weighted assets) to determine the Tier 1 capital ratio. Adjustments are made to Tier 1 capital to arrive at Tier 1 common equity. Tier 1 common equity is also divided by the risk-weighted assets to determine the Tier 1 common equity ratio. The amounts disclosed as risk-weighted assets are calculated consistent with banking regulatory requirements.
Regions currently calculates its risk-based capital ratios under guidelines adopted by the Federal Reserve based on the 1988 Capital Accord (“Basel I”) of the Basel Committee on Banking Supervision (the “Basel Committee”). In December 2010, the Basel Committee released its final framework for Basel III, which will strengthen international capital and liquidity regulation. When implemented by U.S. bank regulatory agencies and fully phased-in, Basel III will change capital requirements and place greater
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. To mitigate these limitations, Regions has policies and procedures in place to identify and address expenses that qualify for non-GAAP presentation, including authorization and system controls to ensure accurate period to period comparisons. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. In particular, a measure of earnings that excludes the regulatory charge and the federal income tax benefit related to the regulatory charge does not represent the amount that effectively accrues directly to stockholders (i.e. the regulatory charge is a reduction in earnings and stockholders’ equity).
See page 8 of the supplement to this earnings release for the computation of pre-tax pre-provision net revenue (GAAP) to adjusted pre-tax pre-provision net revenue (non-GAAP). See pages18, 19, 20 and 21 of the supplement to this earnings release for 1) computation of GAAP net income (loss) available to common shareholders, earnings (loss) per common share and return on average assets to non-GAAP financial measures, 2) a reconciliation of average and ending stockholders’ equity (GAAP) to average and ending tangible common stockholders’ equity (non-GAAP), 3) a reconciliation of stockholders’ equity (GAAP) to Tier 1 capital (regulatory) and to Tier 1 common equity (non-GAAP regulatory), 4) a reconciliation of non-interest expense (GAAP) to adjusted non-interest expense (non-GAAP), 5) a reconciliation of non-interest income (GAAP) to adjusted non-interest income (non-GAAP), 6) a computation of the efficiency ratio (non-GAAP), and 7) a reconciliation of stockholders’ equity (GAAP) to Basel III Tier 1 capital (non-GAAP) and Basel III Tier 1 common (non-GAAP).
SOURCE: Regions Financial Corporation
Media Contact: Tim Deighton , 205-264-4551
Investor Relations Contact: List Underwood, 205-801-0265