Regions Financial Beats as Credit Costs Plunge

  • Regions Financial reports first-quarter earnings from continued operations of 14 cents a share.
  • The consensus EPS estimate was eight cents.
  • Transitional quarter with sale of Morgan Keegan and common equity raise, preparing for April TARP repayment.
  • Reserve release of $215 million fuels beat.

NEW YORK ( TheStreet) - Regions Financial ( RF) on Tuesday reported that its first-quarter provision for loan losses declined 60% sequentially and 76% year-over-year, fueling operating results that far exceeded analysts' expectations.

The Birmingham, Ala., lender reported first-quarter earnings from continuing operations available to common shareholders of $185 million, or 14 cents a share, improving from losses of $135 million, or 11 cents a share, in the fourth quarter, and a loss of $2 million, or less than a penny a share, in the first quarter of 2011.

The consensus among analysts polled by Thomson Reuters was for Regions to post first-quarter operating EPS of 8 cents.

On a GAAP basis, Regions reported first-quarter net income available to common shareholders of $145 million, or 11 cents a share, compared to a fourth-quarter loss of $602 million, or 11 cents a share, mainly from write-downs associated with the then-pending sale of the company's Morgan Keegan subsidiary, which was completed during the first quarter. During the first quarter of 2011, GAAP net income to common shareholders was $17 million, or a penny a share.

The first quarter represented quite a transition for Regions, with not only the Morgan Keegan sale, but also a $900 million common equity raise, in preparation for the company's the full repayment in early April of $3.5 billion in federal bailout funds received through the Troubled Assets Relief Program, or TARP, in November 2008.

The main factor in the first-quarter earnings beat was a sharp decline in credit costs, with a first-quarter provision for loan losses of $117 million, declining from $295 million the previous quarter, and $482 million a year earlier. Loan loss reserves declined by $215 million, directly boosting operating earnings.

Average loan balances declined 2% sequentially and 6% year-over-year, to $77.2 billion during the first quarter, with all real estate loan categories seeing declines.

A highlight for Regions was that average non-real estate commercial and industrial loan balances increased 2% sequentially and 8% year-over-year, to $24.7 billion during the first quarter.

Regions said it was in a "strong capital position," with an estimated Tier 1 common equity ratio of 9.6% as of March 31 -- increasing to an estimated 10.6% following the TARP repayment -- which CEO Grayson Hall said had the company well positioned "to continue growing profitable customer relationships, expanding our market share and helping our customers become more successful financially,"

With noninterest bearing deposits increasing 5% sequentially and 8% from a year earlier to $29.7 billion as of March 31, Regions managed to preserve its net interest margin, which was 3.09% during the first quarter, increasing from 3.08% the previous quarter, and matching the margin a year earlier.

Jefferies analyst Ken Usdin rates Regions a "Hold," with a $7.00 price target, and said that "better credit (both charge-offs and reserve release) drove the beat," while "pre-provision earnings looked a little light (high expenses), but some of this may be seasonal. "

Usdin also noted that "unlike others, RF is not juicing the balance sheet with residential mortgage growth."

With the company selling most of the mortgages it originates, Regions booked $77 million in mortgage income during the first quarter, increasing from $57 million the previous quarter, and $45 million a year earlier.

Regions Financial's shares closed at $6.07 Monday, returning 42% year-to-date, following a 38% decline during 2011.

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The shares trade for just below their reported March 31 tangible book value of $6.42, and for eight times the consensus 2013 EPS estimate of 74 cents. The consensus 2012 EPS estimate is 48 cents.

Interested in more on Regions Financial? See TheStreet Ratings' report card for this stock.

-- Written by Philip van Doorn in Jupiter, Fla.

To contact the writer, click here: Philip van Doorn.

To follow the writer on Twitter, go to http://twitter.com/PhilipvanDoorn.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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