Regions Financial Corporation (NYSE:RF) today reported financial results for the quarter ending June 30, 2010.

Key points for the quarter included:

Loss of 28 cents per diluted share for the quarter ended June 30, 2010, reflecting a $200 million charge related to Morgan Keegan regulatory proceedings

Excluding the Morgan Keegan charge, Regions' loss was 11 cents per diluted share which compares to a loss of 21 cents in the prior quarter and reflects core revenue growth and continued improvement in key credit metrics

Pre-tax pre-provision net revenue, as adjusted, increased $89 million or 22% linked quarter

Total adjusted revenues grew 3 percent and adjusted non-interest expenses declined 4 percent versus the previous quarter

Loans outstanding contracted $2.2 billion or 3 percent during the quarter, reflecting challenging loan demand and the company's efforts to reduce investor real estate lending

Average low-cost deposits increased for the sixth consecutive quarter, growing 4 percent linked quarter, up $10.3 billion or 17 percent compared with the prior year

Reduced total deposit costs by 21 basis points to 0.79 percent in the second quarter

Net interest margin improved ten basis points to 2.87 percent

Non-performing assets, excluding loans held for sale, declined $297 million or 7 percent linked quarter driven by a significant drop in inflows of non-performing loans which declined for the fourth consecutive quarter

Net loan charge-offs declined to $651 million or an annualized 2.99 percent of average loans

Allowance for loan losses increased to 3.71 percent of loans; provision for loan losses of $651 million declined $119 million linked quarter

Solid capital with a Tier 1 Capital ratio estimated at 12.0 percent and a Tier 1 Common ratio estimated at 7.7 percent

Earnings Highlights

Morgan Keegan regulatory proceedings

As previously disclosed, on April 7, 2010, the Securities and Exchange Commission, a joint state task force of securities regulators from Alabama, Kentucky, Mississippi and South Carolina and the Financial Industry Regulatory Authority announced that they were commencing administrative proceedings against Morgan Keegan, Morgan Asset Management and certain of their employees for violations of federal and state securities laws and NASD rules relating to certain funds previously administered by Morgan Keegan and Morgan Asset Management. Based on the current status of settlement negotiations, Regions believes that a loss on this matter is probable and reasonably estimable. Accordingly, at June 30, 2010, Morgan Keegan recorded a non-tax deductible $200 million charge representing the estimate of probable loss.

Strong core business performance, improving asset quality metrics

"We remain intensely focused on returning the company to sustainable profitability as our core business performance and risk profile incrementally continue to improve," said Grayson Hall, president and chief executive officer. "The recently approved financial reform legislation includes many aspects that will prove to be beneficial to the industry but will require a substantial number of rules to be written. Our focus is on customers and adjusting our business models to serve them under the eventual new operating rules. We are committed to serving our customers' financial needs with products and services that deliver value. Our challenge is to accomplish this while protecting the future of the company, ensuring balance in our business, closely managing critical risk exposures and maintaining strong capital and liquidity."

Non-performing assets decline; risk profile continues to improve

For the first time in six quarters, the company's non-performing assets, excluding loans held for sale, declined by $297 million or 7 percent linked quarter. Reflecting the continued improvement in non-performing assets and net charge-offs, the company's provision for loan losses decreased to $651 million. At the same time, the allowance for loan losses as a percentage of loans increased 10 basis points linked quarter to 3.71 percent of loans. Net charge-offs declined from $700 million to $651 million or an annualized 2.99 percent of average loans, compared to the first quarter's annualized 3.16 percent. The company's loan loss allowance coverage of non-performing loans improved to 0.92x at June 30, 2010.

Low-cost deposits grow and net interest margin expands

Net interest income increased $25 million on a linked quarter basis and contributed to the increase in the net interest margin, which climbed another 10 basis points this quarter to 2.87 percent. The most significant catalysts to the increase in net interest income were improvements in deposit cost and mix, highlighted by the addition of $2.7 billion of average low-cost deposits, offset by the beneficial reduction of $2.7 billion of higher-cost certificates of deposit. This shift helped drive total deposit costs down 21 basis points to 0.79 percent. The company expects the net interest margin to continue improving gradually throughout the year. The main drivers of the improvement will be beneficial certificate of deposit repricing, a shift in the mix of total deposits to include more low-cost deposits, and continued reduction in deposit costs.

Increasing non-interest income

Second quarter non-interest income increased $22 million or 3 percent versus the first quarter, excluding the prior quarter's gain on sale of securities and a gain related to leveraged lease terminations. Brokerage revenues were the main driver of growth, with an $18 million increase reflecting higher private client revenues and an increase in fixed income capital markets and investment banking activity.

Mortgage income declined $4 million linked quarter, primarily reflecting the impact of a reduced benefit from mortgage servicing rights hedging activities. However, origination volumes of $1.8 billion were strong compared to the prior quarter's $1.4 billion, with a solid 59 percent representing new purchases in the second quarter, compared to 45 percent in the prior quarter and just 24 percent a year ago.

Higher non-interest income also reflects a 5 percent increase in service charges, primarily from higher interchange transaction activity. Policy changes associated with Regulation E began in the second quarter with minimal impact, but will be fully implemented during the third quarter and are expected to place downward pressure on service charge revenues in the future.

Declining non-interest expenses; higher performance and efficiency

Continuing a recent trend, non-interest expenses declined 4 percent linked quarter, after excluding the Morgan Keegan regulatory proceedings charge and first quarter's loss on early extinguishment of debt and branch consolidation charges. A $15 million reduction in salaries and benefits cost, reflecting lower headcount and a seasonal payroll tax decline, drove the improvement.

The company continues to control discretionary expenses and improve its operating efficiency. However, certain headwinds, including higher FDIC premiums and credit-related costs, will continue to impact the bottom-line for the foreseeable future. The company expects certain of the credit-related costs to subside as the economy recovers. Given that much of these are tied to other real estate and loan workout costs, declines in non-performing assets serve as a leading indicator of an eventual decline in credit-related costs.

Low-cost deposits continue to grow

Average low-cost deposits grew for the sixth consecutive quarter, rising $2.7 billion on a linked quarter basis. This growth continues to reflect outstanding customer acquisition and retention, bolstered by service and satisfaction levels that are higher today than at any point in the company's history. The company continues to execute its core business operations in a manner that attracts and retains customers. Year-to-date, the company has opened approximately 488,000 new business and consumer checking accounts and is on track to open approximately 1 million new accounts this year--matching or exceeding 2009's record level.

Assisting customers; continued lending to businesses and consumers

Since inception of the company's Customer Assistance Program, approximately 16,000 consumer real estate loans have been restructured totaling more than $2.3 billion while a total of 30,000 homeowners have received some type of assistance. In addition, Regions has remained an active lender in the current environment, having made new or renewed loan commitments totaling $15.2 billion during the second quarter of 2010, primarily driven by residential first mortgage production and lending to small businesses.

33,039 home loans and other lending to consumers totaling $2.4 billion

11,176 commitments totaling $1.9 billion to small businesses and $10.9 billion to other commercial customers

Despite these lending commitments, loans outstanding declined $2.2 billion or 3 percent versus the previous quarter, reflecting reduced demand from creditworthy borrowers. Also a factor was the company's continued effort to reduce exposure to higher-risk investor real estate, which declined another $1.5 billion in the second quarter or $4.7 billion over the last 12 months.

As customers see more confidence in the sustainability of the economic recovery, Regions expects loan demand to increase at a measured pace. In anticipation of this, small business and middle-market loan officers are actively calling on existing customers, as well as potential new customers. The company remains confident in its ability to attract and retain customers with attractive lending products, particularly in small business. Success in acquiring new business clients is continuing this year as Regions has continued to strengthen its branch focus on small business.

Gulf oil spill

The company continues to closely 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 and to know the options they have for assistance, if needed. The company's Customer Assistance Program, which helps distressed borrowers, was developed from its experience in dealing with Hurricane Katrina and the recession.

In assessing the potential financial impact to the company, Regions has performed a thorough review of the potentially impacted geographic area stretching from Lake Charles, Louisiana to just north of Tampa, Florida. Within that geographic range, Regions analyzed exposure to businesses that rely on tourism, fishing, boating and hospitality, for example. Based on preliminary stress testing, the company estimates potential future losses to be a maximum of $100 million in its adverse case. This loss estimate conservatively assumes no benefit from private insurance payments, government support or stimulus money that BP has committed, any of which would reduce potential losses. Historically, Regions has experienced strong resilience from the Gulf coast markets in responding to environmental and economic challenges.

Regulatory reform

With the Dodd-Frank Wall Street Reform and Consumer Protection Act becoming law, the legislation has provided some level of clarity regarding how the industry and Regions' specific business will move forward. Additional rule writing is required under this legislation and will require substantial time before the business implications are completely defined. The company is diligently assessing the potential effects of the legislation to its specific business units and is attempting to forecast related earnings and capital impact. Regions is also analyzing steps that can be taken to mitigate any potential negative financial impact of the various reform measures. The company expects that while the legislation will require adjustments to its business strategies, these and other associated challenges are manageable over time.

Regions is committed to being part of the solution to restore the vitality of the economy. Operating by the principles of fairness, clarity and transparency, the company will continue focusing on customer needs and preferences.

Strong capital position

As of June 30, 2010, Tier 1 Capital stands at an estimated 12.0 percent, while the estimated Tier 1 Common ratio is 7.7 percent, compared to 11.7 percent and 7.1 percent, respectively, for the previous quarter (see non-GAAP discussion).

As to the capital implications 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 change does not significantly impact Regions since trust preferred securities totaled $846 million or approximately 86 basis points of its Tier 1 capital at June 30, 2010.