Regions Beats on Solid Commercial Loan Growth (Update 1)

  • Fourth-quarter adjusted operating EPS of 22 cents, beating the consensus estimate of 21 cents.
  • Average C&I loans grow 1.5% in fourth quarter, 9% year-over-year.
  • Average indirect auto loans grow 7% sequentially as residential loans continue decline.
  • Net interest margin expands slightly.
  • Mortgage revenue declines 15% from the third quarter.

Updated with late morning market action and comments from Jefferies analyst Ken Usdin.

NEW YORK ( TheStreet) -- Regions Financial ( RF) on Monday beat fourth-quarter earnings expectations on an adjusted basis, while reporting significant loan growth in key categories.

The Birmingham, Ala., lender reported fourth-quarter net income available to common shareholders of $261 million, or 18 cents a share, compared to $312 million, or 21 cents a share, in the third quarter, and a net loss to common shareholders of $135 million, or 48 cents a share, in the fourth quarter of 2011.

Excluding "costs resulting from the termination of a third party investment in a subsidiary," Regions reported fourth-quarter adjusted net income available to common shareholders of $311 million, or 22 cents a share, beating the consensus estimate of a 21-cent profit, among analyst polled by Thomson Reuters.

Regions Financial's shares were up 3% in late morning trading, to $7.65, for the strongest morning performance among the 24 components of the KBW Bank Index ( I:BKX) The index was up slightly to 53.58.

Other strong sector performers included State Street ( STT), which was up nearly 3% to $54.90, on the strength of a solid fourth-quarter earnings report on Friday, and Bank of America, which was up 1.5% to $11.29.

Bank of America's shares changed direction, following a 5% decline over the previous two sessions. The company on Thursday reported meager fourth-quarter earnings of three cents a share, springing from its large mortgage putback settlement with Fannie Mae ( FNMA) and its portion of the $8.5 billion foreclosure settlement between federal regulators and the largest mortgage loan servicers.

Regions Financial's fourth-quarter net interest income was $818 million, increasing slightly from $817 million the previous quarter, but declining from $849 million a year earlier. The net interest margin (NIM) -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- was a tax-adjusted 3.10% in the fourth quarter, widening from 3.08%, both in the third quarter and in the fourth-quarter of 2011.

Average total loans were $74.622 billion in the fourth quarter, declining from $75.697 billion the previous quarter and $78.702 billion a year earlier, as planed declines in residential mortgage and commercial real estate loans were only partially offset by increases in commercial and industrial loans and indirect auto loans. Average fourth-quarter C&I loans were $26.414 billion, increasing from $26.024 billion in the third quarter and $24.310 billion in the fourth quarter of 2011. Average indirect auto loans were $2.295 billion in the fourth quarter, growing from $2.150 billion the previous quarter, and $1.825 billion a year earlier.

Fourth-quarter noninterest income totaled $536 million, increasing from $533 million in the third quarter and $507 million in the fourth quarter of 2011. Fourth-quarter mortgage income totaled $90 million, declining from $106 million the previous quarter, but increasing from $57 million a year earlier. The sequential decline in mortgage income was offset by a $10 million increase in service charges on deposit accounts, to $254 million, as well as an increase in other noninterest income.

The fourth-quarter provision for loan losses was $37 million, while the company saw net loan charge-offs of $180 million, for a reserve release of $143 million, boosting operating earnings.

The fourth-quarter ratio of net charge-offs to average loans was an annualized 0.96%, declining from 1.38% the previous quarter and 2.16% a year earlier. Regions reported a Dec. 31 ratio of nonperforming assets (including nonaccrual loans, loans past due 90 days or more and foreclosed assets) to loans, foreclosed properties and nonperforming loans held for sale, of 3.19%, improving from 3.47% in September and 4.40% in December 2011. Loan loss reserves covered 2.59% of total loans as of Dec. 31.

The company reported an adjusted fourth-quarter return on average assets from continuing operations of 1.02% and an adjusted return on average tangible common equity of 11.93%. Regions also estimated a Basel III Tier 1 common equity ratio of 8.9% as of Dec. 31.

Wrapping up a transformational 2012 that include the sale of the company's Morgan Keegan brokerage subsidiary to Raymond James Financial ( RJF) and a $900 million common equity raise in the first quarter, followed by the full redemption in the second quarter of $3.5 billion in preferred shares held by the government for bailout assistance received through the Troubled Assets Relief Program, or TARP, Regions CEO Grayson Hall said "I am pleased with the progress we made in 2012 and am encouraged that our efforts are building a strong foundation for sustainable growth in 2013 and beyond."

Jefferies analyst Ken Usdin said in a note following the earnings release that "pre-provision earnings were stronger-than-expected, mainly on lower expenses," and that a "flat NIM guide could keep forward net interest income estimates fairly stable."

Usdin also said that the banks credit quality was looking "good," and took note of the fourth-quarter reserve release, which declined from $229 million in the third quarter, by saying "we do not think this should be a surprise."

The analyst has a "Hold" rating on Regions, with a price target of $7.50, estimating the company will earn 77 cents a share in 2013.

Regions Financial's shares closed at $7.43 Friday, trading just above their reported Dec. 31 tangible book value of $7.11, and for 9.4 times the consensus 2013 EPS estimate of 79 cents. The consensus 2014 EPS estimate is 81 cents.

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

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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 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.