Regions Financial Loan Growth Accelerates as Deposit Costs Keep Falling
Regions Financial (RF) grew net interest income 2.3% to $1,277 million in the second quarter as average loans posted their fastest sequential growth in five quarters, even as net interest margin slipped 1 basis point to 3.66%.
Regions Financial (RF), the Birmingham, Alabama-based regional lender, grew net interest income 2.3% quarter-over-quarter to $1,277 million in the second quarter, up 1.4% from $1,259 million a year earlier, as average loan growth, fixed-rate asset turnover and an extra day in the quarter offset continued deposit-cost management. Net interest margin on a fully taxable-equivalent basis slipped 1 basis point to 3.66% from 3.67%, extending a gradual drift down from the 3.70% peak hit in the fourth quarter, even as the dollar figure for NII kept climbing.
The margin give-back traced directly to the balance-sheet growth behind it. Average loans rose 2.4% quarter-over-quarter to $98,722 million and 2.8% year-over-year, the fastest sequential pace across the five-quarter panel and a marked acceleration from 0.8% growth in the first quarter and an outright 1.0% contraction in the fourth. Growth was broad-based across commercial and industrial lending, spanning power and utilities, manufacturing, and government and public-sector borrowers, while investor real estate loans accelerated to 5.0% quarterly growth to $9,789 million as elevated long-term rates pushed multifamily sponsors toward bridge financing rather than permanent loans.
Deposits told a different story. Average deposits grew just 0.4% quarter-over-quarter to $130,691 million, a further deceleration from an already-soft first quarter, while ending deposits fell 0.9% to $130,710 million, the second straight quarterly decline, driven by outflows in the Corporate Bank and Wealth Management segments. Regions nonetheless kept pushing funding costs lower: interest-bearing deposit costs fell to 1.69% from 1.72% in the first quarter and 1.85% in the fourth, a fourth consecutive quarterly decline that management framed as peer-leading.
Fee income carried its own momentum. Wealth management income set a new record at $150 million, up 6% quarter-over-quarter and the fifth record or near-record result in six quarters, up from $133 million a year earlier. Card and ATM fees rebounded 8% to $126 million on seasonal volume after a 5% decline in the first quarter, while capital markets income was flat at $84 million, cooling after a record $104 million in the third quarter of last year.
Expense growth outpaced the revenue gains. The efficiency ratio worsened to 58.3%, or 56.9% adjusted, from 56.6% in the first quarter, as non-interest expense rose 5% to $1,121 million, driven by an 8% jump in salaries and benefits tied to elevated benefit-liability mark-to-market adjustments, higher revenue-based incentives and merit increases. FDIC insurance assessments provided a partial offset, falling 11% to $17 million on an unsecured-debt adjustment tied to a debt issuance.
Credit quality improved on multiple fronts after several quarters of deterioration. Net charge-offs fell 12 basis points to 0.42% of average loans, reversing three consecutive quarters of increases that had run from 0.47% in the second quarter of last year to 0.59% in the fourth. The allowance-for-credit-losses ratio declined 5 basis points to 1.63%, with coverage of nonperforming loans rising to 241% from 238%, continuing a steady de-risking trend from 1.80% a year earlier. Business-services criticized loans fell 14 basis points to 5.01% of business loans, down sharply from the 7.22%-7.82% range a year ago.
Capital returns shifted in mix even as the ratio held steady. The common equity Tier 1 ratio was unchanged at 10.7%, with the AOCI-inclusive measure improving to 9.5% from 9.4%. Regions raised its quarterly dividend 13% to $0.30 a share, declared after quarter-end, but pulled back sharply on buybacks to $59 million, or 2.1 million shares, from $401 million repurchased in the first quarter. Adjusted diluted EPS grew 10% quarter-over-quarter to $0.68 on adjusted net income of $583 million, outpacing 3% growth in reported EPS, a gap that reflected a $40 million securities-repositioning loss embedded in the reported figures.