Regions Financial’s (RF) second quarter loss came in at 11 cents per share, better than the Zacks Consensus Estimate of a loss of 20 cents per share. Last year, the company reported a loss of 28 cents per share.
Including the Morgan Keegan regulatory proceedings of $200.0 million, Regions’ loss was 28 cents per diluted share, which compares with a loss of 21 cents in the prior quarter.
Results for the quarter improved primarily due to core revenue growth, lower adjusted non-interest expenses, and continued improvement in key credit metrics, partially offset by regulatory charge.
Quarter Performance in Detail
Total revenue reported was $1,612.0 million, down 20.6% year over year and 1.9% sequentially. However, total revenue surpassed the Zacks Consensus Estimate of $1,591.0 million.
Pre-tax Pre-provision Net Revenue reported was $286.0 million, down 64.2% year over year and 30.8% sequentially. Excluding regulatory charge, Pre-tax Pre-provision Net Revenue reported was $486.0 million, down 1.6% year over year, but up 22.4% sequentially. Sequential improvement was attributed to improved operating leverage from higher net interest income, higher adjusted non-interest income and lower adjusted non-interest expense.
Net interest income increased to $856.0 million, up 3.0% both year over year and sequentially, irrespective of a decline in average earning assets. Net interest margin continued to advance, increasing 10 basis points sequentially to 2.87%, which was attributed to improved deposit mix and pricing.
Non-interest income was $756.0 million, down 36.9% from $1,199.0 million in the year-ago period and 6.9% from $812.0 million in the prior quarter. However, excluding the prior quarter’s gains on sale of securities and leveraged lease terminations, non-interest income increased 3% or $22.0 million sequentially.
Credit Quality Evaluation
Non-performing assets, excluding loans held for sale, decreased $297.0 million, or 7% sequentially, to $4.0 billion. Gross inflow of non-performing assets declined $419.0 million to $887.0 million during the reported quarter. Net charge-offs declined $49.0 million to $651.0 million, or an annualized 2.99% of loans as compared with 3.16% reported in the first quarter of 2010.
The provision for loan losses declined 15.5% or $119.0 million sequentially to $651.0 million, significantly due to lower net charge-offs and declining non-performing assets. Allowance for loan losses increased 10 basis points sequentially to 3.71%.
At the end of June 30, 2010, Regions opened 488,000 new accounts, as deposits rose to $96.25 billion from $94.73 billion a year earlier.
As of June 30, 2010, Tier 1 Capital came in at an estimated 12%, while the estimated Tier 1 Common ratio was 7.7%, compared with 11.7% and 7.1%, respectively, in the first quarter of 2010.
As per the capital propositions of regulatory reform, trust preferred securities will be phased out as an allowable component of Tier 1 capital over a three-year period beginning in 2012. This does not considerably impact Regions since trust-preferred securities totaled $846 million or approximately 86 basis points of its Tier 1 capital as of June 30, 2010.
Return on tangible equity came in at negative 16.80% versus negative 12.69% in the previous quarter. Book value was $6.45 per share, down from $6.71 in the previous quarter and $7.58 in the year-earlier period.
Gulf Oil Spill
Regions continue to monitor the situation in the Gulf Coast area. From the beginning of the oil spill, the company has proactively reached out to its customers across the affected area to help them deal with the potential financial impact of the oil spill. In assessing the financial impact of the company, based on preliminary stress testing, Regions estimates potential future losses to be a maximum of $100 million in its adverse case, excluding any help from institutions.
Regions closest peers, Bank of America Corporation (BAC) and BB&T Corp. (BBT) reported positive net income. Another peer, SunTrust Banks Inc. (STI) also reported trimmed net losses.
We believe with the return of credit and environmental costs to more normal levels, Regions will be well positioned for a bounce-back in profitability. Given the company’s proactive stance towards core business performance and a well-capitalized balance sheet, consistent profits are expected to begin in the second half of 2010.
Regions currently retained its Zacks #3 Rank, which translates to a short-term Hold rating. However, considering the fundamentals, we are maintaining an Underperform recommendation on the stock.
Since the announcement of results, the share price of Regions has increased 6.6%.