Regions Financial Corporation today reported earnings for the quarter ending June 30, 2012.

Regions reported second quarter net income available to common shareholders of $284 million or $0.20 per diluted share driven by continued improvement in core business performance. Second quarter income from continuing operations was $280 million or $0.20 per diluted share compared to $185 million or $0.14 per diluted share in the first quarter. Regions reported net income of $4 million from discontinued operations, attributable to the gain on the sale of Morgan Keegan. In connection with the repayment of its Series A preferred stock, the company accelerated the accretion of the discount and coupled with the final preferred stock dividends, reduced net income available to common shareholders by $71 million, or $0.05 per diluted share.¹

Pre-tax pre-provision income¹ totaled $503 million as compared to $438 million in the prior quarter. This improvement of 15 percent linked quarter reflected an increase in net interest income and a decline in non-interest expenses partially offset by a decline in non-interest revenue.

"We continued to make incremental progress on many key fronts and are pleased with the improvement of our financial performance despite considerable economic and political uncertainty, and an uneven economic recovery," said Grayson Hall, president and chief executive officer. "By focusing on initiatives that we can control, we continue to drive sustainable and prudent growth across our business."

Mortgage revenue grows while credit related expenses decline

Non-interest revenues from continuing operations totaled $507 million, down 3 percent linked quarter. Mortgage revenue increased 17 percent linked quarter or $13 million driven by new home purchases and refinance activity, as customers took advantage of low interest rates and the extended Home Affordable Refinance Program, or HARP II. Mortgage production for the quarter was $2.1 billion, a 28 percent increase from the prior quarter. While closed application volumes have increased 50 percent since last year, the company has maintained efficient completion times that have aided productivity.

Account service fees and charges were down $21 million linked quarter due to the establishment of a reserve for certain customer fee refunds resulting from a change in the company's non-sufficient funds policy. Excluding this item, total service charges would have been consistent with the first quarter.

Non-interest expenses from continuing operations declined $71 million linked quarter, an improvement of 8 percent, and are down $114 million or 12 percent from the prior year. This reduction in expenses is primarily driven by lower credit related expenses; in particular, held for sale expenses in the second quarter benefited from $26 million in gains related to sales of properties, reflecting asset value improvements.

Commercial and industrial loan growth led by expertise in specialized lending

Despite continued economic headwinds and uncertainty, Regions was able to grow loans in targeted areas through expertise and service quality. Second quarter results reflect growth in lending to middle market commercial and industrial customers, in particular the specialized banking groups. Average loans in this category were up 4 percent compared to prior quarter and total commercial and industrial commitments grew $441 million, or 1.4 percent linked quarter. Commercial loan production (including renewals) totaled $11.6 billion, of which $4.3 billion were new loan originations.

Consumer loan production totaled $2.8 billion in second quarter, which is an increase of 24% over last year. Indirect auto loans experienced a 6 percent increase in balances but this was offset by declines in the residential mortgage and home equity portfolios. Consumer loan balances continue to be impacted by consumer deleveraging and the overall economic environment including home prices.

Overall, average loans declined 1 percent linked quarter reflecting a further $638 million or 6 percent decline in the investor real estate portfolio. The company's aggregate loan yield was flat linked quarter at 4.29 percent, primarily due to the low rate environment.

Funding mix improvement resulting in a decline in deposit costs

Average low-cost deposits improved 2 percent linked quarter while higher cost time deposits declined 10 percent. This deposit mix shift drove an improvement in the company's funding mix during the quarter, as average low-cost deposits as a percentage of total deposits rose to 82 percent compared to 77 percent last year. This positive mix shift resulted in deposit costs declining to 32 basis points for the quarter, down 5 basis points from first quarter and 21 basis points from last year. Total funding costs declined to 60 basis points, down 20 basis points from one year ago.

Net interest income from continuing operations was $838 million; an $11 million increase linked quarter. The net interest margin rose linked quarter to 3.16 percent due to lower deposit costs, lower non-accrual levels and further deployment of excess cash.

Broad based asset quality improvement continues

Asset quality continued to improve in the second quarter. The provision for loan losses totaled $26 million or $239 million less than net charge-offs and was down from first quarter's provision of $117 million. Total net charge-offs decreased $67 million or 20 percent linked quarter to $265 million. The company's loan loss allowance to non-performing loan coverage ratio increased from 1.12x to 1.20x year-over-year and the allowance for loan losses as a percent of loans was 3.01 percent as of June 30, 2012.

Non-performing loans, excluding loans held for sale, totaled $1.9 billion and were down $236 million or 11 percent linked quarter. This is the first time that non-performing loans have been below $2 billion in three years. Inflows of non-performing loans declined to $315 million or 17 percent from the first quarter. Business Services criticized loans also declined 9 percent in the quarter and are down 31 percent year-over-year.

Strong capital and solid liquidity

Early in the second quarter Regions repaid the U.S. Treasury Department's $3.5 billion preferred stock investment. This transaction followed the completion of a highly successful common equity offering late in the first quarter. In connection with the repayment of the Series A preferred stock the company redeemed the associated warrant for $45 million.

Tier 1 and Tier 1 common¹ capital ratios remained strong, ending the second quarter at an estimated 11.0 percent and 10.0 percent, respectively. The company's liquidity position at both the bank and the holding company remains solid as well. As of June 30, 2012, the company's loan-to-deposit ratio was 80 percent.