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The Birmingham, Ala., bank made more money and spent less on bad loans than expected, but CEO Grayson Hall had to answer questions about why other Southeastern regional banks grew loans and revenue when it did not.
April 24
Regions Financial's second-quarter earnings growth puts the Southeast regional on the
The Birmingham, Ala., company's net income nearly doubled from the first quarter and rose more than 400% from a year earlier, to $284 million. Improved credit quality and an expanding net interest margin played key roles in the quarterly improvement at Regions (RF).
Regions is encouraged by the results, which reflected "prudent and profitable growth," Grayson Hall, the company's chief executive, said during a conference call Tuesday to discuss the results. Hall, however, repeatedly cautioned about economic challenges and lower returns on Regions' investment portfolio.
"The U.S. economy continues to improve, but on an uneven and slow pace," Hall said. "The economy continues to work through structural headwinds, including deleveraging, high unemployment, a weak housing market and fiscal consolidation at the local, state and national levels."
Most of Regions' success came from improved credit. The loan-loss provision fell 78% from the first quarter. Nonperforming assets fell 11% from the first quarter, to $1.9 billion, representing the company's lowest level of problematic loans in three years. Hall said the asset quality improvement exceeded management's expectations and allows them to invest more in growth strategies.
The $122 billion-asset company has been expanding in specialized lending and retail segments such as credit cards. Average loans in the specialized banking group grew 4% from a quarter earlier, but consumer loan balances remained low because of low housing prices and continued efforts by customers to reduce personal debt.
Regions expects higher retail sales once its credit card acquisition is fully converted in the third quarter, said David Turner, the company's chief financial officer.
Loan yields remained flat compared to the first quarter, but Regions managed to lower its cost of funds by 5 basis points and lowered nonperforming loans to help expand the net interest margin for the third straight quarter. The margin expanded by 7 basis points from the first quarter and 9 basis points from a year earlier, to 3.16%.
Hall said there is still room to significantly lower deposit costs to maintain a "stable" margin. Management said they do not expanded much more expansion in the margin because of lower returns in the company's investment portfolio.
"Our repricing in the second half is very strong from a deposit standpoint, but we also are looking at historically low 10-year [yields] and the reinvestment rates will serve to work against us," Turner said.
Management added that reducing operating expenses was a key focus to improving earnings as loan demand remains weak.
Regions has cut 2% of its workforce, or 544 positions, in the past year. The company also closed 46 branches last year and seven so far this year. Regions also sold brokerage unit Morgan Keegan during the second quarter, adding $4 million to net income.
When asked whether Regions would close 5% of its branches like another "peer" had, Hall said that Regions had already completely an aggressive effort to close branches. "We believe in large part our branch franchise today is going to be fairly stable," he said. "We will make some minor changes, but you shouldn't expect anything of a major level in that regard."
Regions' executives said they were closely watching capital levels to make sure they are in line with impending requirements for Basel III. Turner said the risk-weighted capital structure could impact consumer products tied to real estate, pending a finalized rule. But management said they were prepared to make changes to that business for the sake of preserving capital.
"Holding more capital clearly would have an impact in terms of the availability of that credit at the prices that we have today," Turner said. "But we have time to overcome and will modify our business such that we have an appropriate amount of capital at the date that is implemented."
Analysts praised Regions' management for the higher-than-expected earnings and getting a handle on its operations and financial performance during the second quarter. At 20 cents, the company's earnings per share surpasses analysts' expectations by 6 cents, according to Thomson Reuters.
Chris Marinac, an analyst at FIG Partners, wrote in a note to clients that the company is on pace to earn up to 80 cents a share next year, "which should help this stock obtain a modest premium to tangible book value."
