Regions Financial Corporation today reported earnings for the quarter ended March 31, 2013.

Key points:

• Reported net income available to common shareholders of $327 million or $0.23 per diluted share; as compared to $261 million or $0.18 per diluted share in the fourth quarter of 2012 and $145 million or $0.11 per diluted share in the first quarter of the prior year
  • Pre-tax pre-provision income¹ from continuing operations totaled $457 million, up 4 percent from the prior year
  • Net interest income totaled $798 million, down 4 percent from the prior year
  • Net interest margin was 3.13 percent, an improvement of 4 basis points from the prior year
  • Non-interest revenue totaled $501 million, down 4 percent from the prior year
  • Non-interest expenses were $842 million, an improvement of 8 percent from the prior year

• Balance sheet remains steady
  • Total ending loans were steady linked quarter, as growth in commercial and industrial loans as well as indirect loans offset continued de-risking in the investor real estate portfolio and deleveraging in consumer lending portfolios
  • Middle market commercial and industrial loans grew 3.5 percent linked quarter and 10 percent over the prior year on an ending basis
  • Indirect auto loans continued to grow, up 6 percent from the prior quarter and 28 percent from the prior year on an ending basis
  • Loan yields were down 7 basis points linked quarter to 4.14 percent
  • Funding mix continued to improve as average low-cost deposits grew $375 million linked quarter and higher cost time deposits declined$1.3 billion
  • Deposit costs declined to 18 basis points, down 4 basis points from the fourth quarter and 19 basis points from the prior year

• Asset quality continues to improve
  • Net charge-offs of $180 million were steady linked quarter; the loan loss provision of $10 million was $170 million less than net charge-offs
  • Linked quarter non-performing assets decreased 7 percent, non-performing loans decreased 6 percent and inflows of non-performing loans decreased 21 percent
  • Allowance for loan losses as a percentage of loans declined 22 basis points linked quarter to 2.37 percent, while the ratio of allowance for loan losses to non-performing loans decreased 4 basis points to 1.10x

• Capital and liquidity positions remain strong
  • Successfully completed the annual Comprehensive Capital Analysis and Review process (CCAR) with no objections
  • Solid capital position with an estimated Tier 1 ratio of 12.3 percent and Tier 1 Common ratio¹ of 11.2 percent at March 31, 2013
  • Tangible common book value per share¹ was $7.29, an increase of $0.18 from the prior quarter

Moving Forward

Liquidity position remains solid with a low loan-to-deposit ratio of 79 percen

Regions reported first quarter net income available to common shareholders of $327 million or $0.23 per diluted share and net income available to common shareholders from continuing operations of $325 million or $0.23 per diluted share.

Compared to the previous quarter, net income available to common shareholders from continuing operations was up $52 million, or $0.04 per diluted share, and improved $140 million or $0.09 cents per diluted share from the prior year.

"This quarter's results demonstrate that our disciplined approach to meeting more customer needs is continuing to drive solid performance across our franchise," said Grayson Hall, president and CEO. "Building on this foundation while prudently managing expenses, Regions is moving forward to take advantage of growth opportunities in all of our businesses as the economy improves."

Regions' performance for the quarter demonstrates that the company's strategy to deliver consistent long-term performance for shareholders is working. As an example, growth in commercial and industrial and indirect auto lending portfolios continued, while the rate of de-risking in the investor real estate portfolio slowed. Additionally, in conjunction with the annual CCAR process, the company announced plans to repurchase up to $350 million in common shares and will seek Board approval to increase its quarterly dividend to $0.03 per common share.

Loan balances steady and pace of deleveraging eases

Total ending loan balances were steady linked quarter; total commercial and investor real estate loans were up slightly to $45.1 billion. Middle market commercial and industrial loans continued to grow in the first quarter, with ending loans in this category up 3.5 percent compared to the prior quarter, and 10 percent over the same period last year. New loan production increased 8 percent year over year to $6.6 billion, helping to offset ongoing deleveraging among businesses and consumers. Total commercial and industrial line commitments grew $950 million, or 3 percent linked quarter, while new commercial and industrial loan production totaled $3.3 billion.

At quarter end the investor real estate portfolio totaled $7.3 billion and comprised 10 percent of the total loan portfolio, compared to 13 percent one year ago. However, new production in the investor real estate portfolio increased 62 percent from this time last year.

Consumer loan production totaled $2.7 billion in the first quarter, an increase of 17 percent over the prior year. Indirect auto loans experienced an increase in average balances of 6 percent linked quarter. Production for indirect auto totaled $419 million during the quarter, an increase of 16 percent linked quarter and 33 percent over the prior year. Declines in the residential mortgage and home equity portfolios served to offset the indirect balance growth as consumers continue to pay down real estate debt. However, the pace of decline in the consumer lending residential portfolio has slowed due to a change in company strategy to retain 15 year conforming mortgages, along with the addition of a new home equity loan product. These home equity loans help current homeowners take advantage of low interest rates to refinance higher cost debt.

Improved funding mix continues to drive decline in deposit costs

Average low-cost deposits grew $375 million linked quarter, while higher cost time deposits declined 9 percent. This mix shift drove continued improvement in the company's funding mix, as average low-cost deposits as a percentage of total deposits rose to 86 percent, compared to 80 percent last year. This positive mix shift resulted in deposit costs declining to 18 basis points for the quarter, down 4 basis points from fourth quarter and 19 basis points from last year. Total funding costs declined to 45 basis points, down 20 basis points from one year ago.

Taxable equivalent net interest income was $811 million, a 2 percent decline linked quarter. This was driven by a fewer number of days in the quarter, lower earning assets and higher mortgage prepayments, partially offset by lower deposit costs. The resulting net interest margin expanded 3 basis points linked quarter to 3.13 percent, primarily attributable to lower day count, debt management activities in the prior quarter and declines in deposit costs. This was partially offset by a reduction in earning assets yields due to a persistent low rate environment.

The company's aggregate loan yield was down 7 basis points linked quarter to 4.14 percent, driven primarily by the impact of maturing fixed-rate loans that were reinvested at lower interest rates, as well as fewer interest recoveries related to non-performing loans that were paid in full.

Non-interest revenue impacted by seasonal trends

Non-interest revenue totaled $501 million, down 7 percent linked quarter. Service charges income was down 5 percent linked quarter, driven by seasonality related to non-sufficient fund (NSF) fees. Mortgage income for the quarter totaled $72 million, a decline of 20 percent linked quarter. Mortgage production for the quarter was approximately $1.8 billion, a 13 percent increase from the prior year. Overall, the company continues to benefit from HARP II loan production, as only 20 percent of all eligible HARP II loans have been refinanced to date. Approximately 40 percent of all HARP mortgage applications submitted are from outside our existing customer base. In addition, loan applications for new home purchases were up for the quarter, accounting for almost 50 percent of all mortgage applications, compared to 35 percent last quarter.

Expense control is part of our culture, not a campaign

Non-interest expenses of $842 million decreased 8 percent from the prior year and declined 1 percent compared to the prior quarter's adjusted non-interest expense¹. Ongoing efforts to manage expenses offset a $9 million linked quarter increase in salaries and benefits, primarily related to seasonal increases in payroll taxes. Professional and legal expenses returned to a more normalized level, compared to the prior quarter that benefitted from $20 million in lower legal reserves. The company continues to focus on generating positive operating leverage through prudent expense management.

Asset quality improvement continues

Asset quality continued to improve in the first quarter. The provision for loan losses totaled $10 million, or $170 million less than net charge-offs. Total net charge-offs were steady linked quarter at $180 million and net charge-offs as a percentage of total average loans was 0.99 percent. The company's loan loss allowance to non-performing loan coverage ratio was 1.10x and the allowance for loan losses as a percentage of loans was 2.37 percent as of March 31, 2013.

Non-performing assets totaled $1.8 billion and were down $131 million, or 7 percent linked quarter. Non-performing loans, excluding loans held for sale, improved $95 million, or 6 percent linked quarter. Inflows of non-performing loans were $277 million, down 21 percent linked quarter and total delinquencies were down 10 percent. Commercial and investor real estate criticized loans declined 9 percent in the quarter and were down 31 percent year-over-year.

Strong capital and solid liquidity

Tier 1 and Tier 1 common¹ capital ratios remained strong, ending the first quarter at an estimated 12.3 percent and 11.2 percent, respectively. Tangible common book value per share¹ reached $7.29 for the first quarter, up from $7.11 in the prior quarter.

The company's liquidity position at both the bank and the holding company remains solid. As of March 31, 2013, the company's loan-to-deposit ratio was 79 percent.

¹ Non-GAAP, refer to pages 8 and 16-19 of the financial supplement to this earnings release.

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