Two straight quarters in the black is not good enough for Grayson Hall, the chief executive of Regions Financial Corp., to proclaim "mission accomplished."
"We're not where we want to be, not where we need to be," Hall said during an interview Tuesday after the Birmingham, Ala., bank surprised Wall Street with a $17 million profit.
For Hall, sustainable profitability is more about quality than quantity. "We would love to see a more material level of profitability by our company," he said. That would mean reversing the situation that persisted in the first quarter, in which bad loans written off by Regions exceeded core revenues (the kind that come from loan interest and fees, not paper gains).
Two crucial elements of the comeback strategy, Regions officials said, are an emphasis on loan restructurings instead of asset sales and the extension of new credit to certain commercial clients.
Hall stood by his commitment to return the $132 billion-asset bank to sustainable profitability and show a substantial improvement in credit before repaying the $3.5 billion it still owes the government.
Still, he said he was proud that the bank — whose losses during the crisis total $2.09 billion — has come as far as it has.
"We know it takes time to recover and rebuild," he said. "It's our goal to make incremental progress every quarter and we think we did that this quarter."
Regions, which is concentrated in the Southeast, one of the regions hardest hit by the housing market bust, is the largest bank to have yet to repay the Troubled Asset Relief Program.
Net chargeoffs dropped significantly at Regions, by 31% year over year, to $481 million, or 2.37% of average loans on an annualized basis. Delinquencies fell for the fourth quarter in a row. And inflows of nonperforming loans also declined sharply.
Because of the better credit picture, the bank set aside less for future losses. The provision for credit losses totaled $482 million, down 37% from the year-earlier quarter and 29% from the previous quarter.
But other issues worry some analysts.
John Pancari, a managing director and senior regional bank analyst at Evercore Partners, was quick to note that the profits in both the fourth and first quarters partly relied on securities gains, which are not reflective of a bank's core franchise. But the first-quarter profit was less dependent on such a boost, which Pancari took as a good sign.
"This quarter it was encouraging that profitability was more so driven by credit improvement," he said.
Regions has also been aggressive in working through the remainder of its credit problems. It said it has been working to restructure more loans, versus loan sales, as a way to lessen potential losses.
"We expect that restructurings generally will result in better economics for us, because you're not having to pay for the liquidity that you've provided when you sell a loan," David Turner, Regions' chief financial officer, said during a conference call with analysts Tuesday. "You should see increases in TDRs as a result. But the chargeoffs we would expect to be mitigated to some degree versus a straight-up sale. … That provides better opportunity for us to have a recovery."
Pancari acknowledged that this strategy could be viewed as simply "kicking the can down the road," but if done responsibly, "they could very well limit their loss content longer-term."
"We're clearly on a path to recovery," Hall said. "Our profitability has lagged some of our peers because of the markets we operate in and because of our concentrations in commercial real estate. But we remain confident in the value of our core franchise which continues to perform well. The credit metrics, they are improving at a slower pace than we would have preferred to see but we're working hard to accelerate that pace of improvement."
Investors seemed generally pleased with the earnings, and sent the stock up 2.7% to end regular trading at $7.17 on a day of modest gains for the overall market.
After paying preferred dividends, the bank reported first-quarter net income of $17 million, or a penny per share. That was down slightly from the $36 million, or 3 cents a share, profit reported in the fourth quarter, but far exceeded analysts' expectations. Analysts polled by Bloomberg, on average, expected a loss of 10 cents a share. The results were also a huge improvement over the $255 million, or 21 cents a share, loss a year earlier.
Like other banks, Regions' balance sheet continued to constrict during the quarter.
Despite making new or renewed loan commitments of $13.3 billion during the first quarter (consisting primarily of residential first mortgages and commercial loans), Regions' total average loan balances at the end of the period were $82.41 billion, down 8.1% from a year earlier and 2% from the fourth quarter.
But management was upbeat on its commercial and industrial clients, which have been increasing the utilization of their credit lines as they ramp up acquisitions and investments in capital improvements.
Total revenue was up 3.8% from a year earlier to $1.71 billion, helped by an increase in net interest income as funding costs declined. However, that was down 18% from the fourth quarter because of a decline in brokerage and investment banking revenue, as well as mortgage originations.