Regions focused on returning to profitability, Reports Q1 Financials
Press release from the issuing company
Wednesday, April 21st, 2010
Key points for the quarter included:
- Loss of 21 cents per diluted share for the quarter ended March 31, 2010, reflects stabilizing net charge-offs and minimal reserve build. Inflows of non-performing loans declined for third consecutive quarter.
- Core pre-tax pre-provision net revenue increased $11 million or 2.9% linked quarter
- Net interest margin improved to 2.77 percent driven by 15 basis point improvement in average deposit cost to 1 percent; net interest margin expected to rise to 3.00 percent by year-end 2010
- Morgan Keegan net income rises 39 percent linked quarter; solid private client, equity capital markets and trust revenues; reduced operating costs
- Non-interest expense declined 3 percent, after excluding branch consolidation charges and loss on the early extinguishment of debt
- Record account and deposit growth continues. Average low-cost deposits increased for the fifth consecutive quarter, growing 6.5 percent linked quarter, up nearly $9.6 billion or 16 percent year-over-year.
- Loan growth remains challenged but commercial line utilization beginning to stabilize. New and renewed loan commitments remained solid, totaling $11.6 billion for the quarter, but total loans outstanding contracted 2.8 percent.
- Continued efforts to proactively reach out to customers needing assistance have helped 28,000 families to stay in their homes
- Non-performing assets, excluding loans held for sale, increased $221 million, or 5.4 percent, linked quarter, marking the third consecutive quarter of moderation in the overall growth rate
- Net loan charge-offs remain relatively stable at $700 million or an annualized 3.16 percent of average loans
- Allowance for credit losses increased to 3.69 percent of loans with $770 million provision for loan losses exceeding net charge-offs by $70 million
- Tier 1 Capital ratio was an estimated 11.7 percent, while the Tier 1 Common ratio stood at an estimated 7.1 percent. Both ratios were essentially unchanged versus the previous quarter.
Momentum in core business; pre-provision net revenue improving
Regions' 2010 first quarter loss available to common shareholders of $255 million, or 21 cents per diluted share, reflects credit-related costs associated with the company's continuing efforts to further improve the risk profile of its balance sheet. Despite these costs, first quarter results show momentum in the company's core business performance, as pre-tax pre-provision net revenue ("PPNR") rose by 2.9 percent on an adjusted basis. Additionally, the net interest margin improved, customers opened new accounts on pace to eclipse the record account openings of the prior year and low-cost deposit growth remained strong.
"During the first quarter, asset quality continued to stabilize and deposit growth remained strong; however, substantial credit costs continued to more than offset the underlying strength of our core business. Despite the strong fundamentals of our business, we are not satisfied with our financial performance and we remain intensely focused on returning the company to profitability," said Grayson Hall, president and chief executive officer. "In addition to restoring financial performance, we will continue to focus on serving our customers, continue to de-risk our balance sheet and implement best-in-class risk management practices."
Net interest margin continues to grow driven by positive shift in funding mix and cost and improving loan spreads
Continued low-cost deposit growth resulting in improved funding mix, as well as better loan pricing, lifted the net interest margin by 5 basis points to 2.77 percent. The company expects the net interest margin to continue improving gradually throughout the year, reaching 3.00 percent by year-end. The main drivers of the improvement will be certificate of deposit repricing, a shift in the mix of total deposits to include more low-cost deposits, and loan spread improvement.
Net interest income of $831 million was stable linked quarter, excluding $20 million of trading income in the previous quarter, and increased $22 million or 2.8% over the comparable period in the previous year. Earning assets declined 2 percent versus the prior quarter, driven primarily by an expected drop in investor real estate lending as the company continues to execute on its strategy to reduce this exposure.
Steady non-interest income
Reported non-interest income was 13 percent higher than in the previous quarter. On an adjusted basis, excluding leveraged lease termination gains and securities gains and losses in each quarter, non-interest income was 1 percent lower.
Results at Morgan Keegan reflected lower, yet still historically strong, fixed income activity on a linked quarter basis. Despite this pressure on fixed income revenues, net income at Morgan Keegan rose $7 million or 39 percent in the first quarter of 2010 as compared to the prior quarter. Results were largely driven by solid private client, equity capital markets and trust revenues, as well as reduced operating costs. Net new brokerage account openings increased 5 percent linked quarter.
Regions' non-interest income was also impacted by a 4 percent decline in service charges reflecting lower customer transaction activity as is typical during the first quarter of the year. Mortgage income was essentially unchanged linked quarter, excluding the effects of MSR hedging activity. Origination volume of $1.4 billion was still historically strong but down versus the prior quarter's $2.0 billion, with a favorable trend of 45 percent representing new purchases in the first quarter, up from 17 percent a year ago.
The company recorded a $59 million gain on the sale of $1.4 billion of short duration collateralized mortgage obligations. Proceeds were reinvested into collateralized mortgage obligations, with slightly longer durations.
Disciplined expense management; higher performance and efficiency
Driven primarily by $42 million in lower professional and legal fees, non-interest expenses were a favorable 3 percent lower linked quarter, after adjusting for $53 million related to a loss on the early extinguishment of FHLB advances, as well as $8 million of branch consolidation related costs recorded in the first quarter and $12 million in the fourth quarter.
The Company successfully completed the consolidation of 120 branches during the first quarter with minimal customer impact, which should provide an annual $21 million net cost savings starting in the second quarter. The company continues to aggressively control day-to-day operating costs and seek opportunities to further improve our operating efficiency. Benefits of cost control efforts should become increasingly evident as, over time, recession-related and credit costs return to more normalized levels.
Excellent customer service; deposits and households continue to grow
Strong service quality results continue to drive customer deposit growth, which was up 2 percent on average fourth-to-first quarter. Most notably, average low-cost deposits grew for the fifth consecutive quarter, rising $4.2 billion or 6.5 percent on a linked quarter basis, and helping drive average deposit costs down 15 basis points to 1 percent overall. The company's success in providing superior customer service, focusing on deepening customer loyalty, attracting new customers and improving cross-sell continues to be reflected in strong account growth. Record customer retention and satisfaction levels have also been a catalyst for growth. During the quarter, the company opened 248,000 new business and consumer checking accounts and is on track to meet or exceed 2009's record-breaking level of 1 million new accounts. Customer retention is well above the industry norm, increasing to 89 percent during the first quarter of 2010. The Company continues to execute its core business operations in a manner that attracts and retains customers.
Actively lending to businesses and consumers despite weakened demand
Throughout the challenging business and economic climate, Regions has remained an active lender to businesses and consumers. Regions made new or renewed loan commitments totaling $11.6 billion during the first quarter of 2010, primarily driven by residential first mortgage production and lending to small businesses.
- 23,920 home loans and other lending to consumers totaling $2.2 billion
- 9,302 commitments to businesses totaling $1.5 billion to small businesses and $7.9 billion to other commercial customers
While loan demand remains sluggish, commitment levels remain strong and for the first time in several quarters, declines in commercial line utilization rates have begun to level off. Regions remains a leader in small business lending, ranking third nationally by the Small Business Administration, and will continue to focus on this important line of business. In spite of the Company's efforts, loans outstanding declined 2.8 percent as compared to last quarter. Regions continues to seek opportunities to lend to its customers in need of credit and anticipates loan growth as the general economy improves.
Moderating trend of non-performing asset formation continues; risk profile further improves
For the first quarter, net charge-offs were an annualized 3.16 percent of average loans compared to fourth quarter's 2.99 percent. A $770 million loan loss provision exceeded net charge-offs by $70 million, and led to an 18 basis point increase in the ratio of period-end allowance for loan losses to loans.
The overall growth rate in non-performing assets, excluding loans held for sale, moderated to $221 million linked quarter, compared to the fourth quarter's $376 million increase and the third quarter's $662 million, marking three consecutive quarterly declines in the level of inflow to non-performing status. Given a substantial recent decline in internally risk rated problem assets, the company expects that the absolute level of non-performing assets will peak in the second quarter.
Robust capital planning process and strong capital position
Regions has developed a robust capital planning process which includes various scenario analyses, including stress testing under adverse conditions. This capital planning process includes the development of macroeconomic forecast scenarios, significantly improved credit modeling, and financial and capital forecasting under several sets of circumstances. These scenarios consider all types of risks that could affect the Company over a given period of time.
As of March 31, 2010, Tier 1 Capital stands at an estimated 11.7 percent, while the estimated Tier 1 Common ratio is 7.1 percent, compared to 11.5 percent and 7.1 percent, respectively, for the previous quarter (see non-GAAP discussion).