Regions Q2 Earnings in Line with Estimates, Rises Y/Y

Regions Financial Corporation’s (RF) second-quarter 2014 earnings from continuing operations came in at 21 cents per share in line with the Zacks Consensus Estimate. However, results compared favorably with the prior-year quarter earnings of 18 cents per share.

A strong capital position, reduced non-interest expenses and increase in loans and deposits were the positives for the quarter. However, lower top line, aided by absence of credible improvement in the mortgage market along with higher provision for loan losses remains a concern.

Income from continuing operations available to common shareholders was $291 million in the quarter, up from $260 million reported in the prior-year quarter.

Performance in Detail

Total revenue (net of interest expense) came in at $1.28 billion, well below the Zacks Consensus Estimate of $1.31 billion. Moreover, revenues decreased 2.3% on a year-over-year basis.

Regions reported adjusted pre-tax pre-provision income from continuing operations of $446 million in the second quarter, down 4.9% year over year. Excluding certain one-time items, pre-tax pre-provision income increased 9.0% year over year.

Net interest income was $822 million, up 1.7% year over year. Net interest margin on a fully taxable equivalent basis rose 8 basis points year over year to 3.24% in the quarter.

Regions’ non-interest income was $457 million, down 8% year over year. Reduced mortgage revenues along with lower other income mainly led to the fall in non-interest income. Mortgage production came in at $1.27 billion in the quarter, down 33.9% year over year.

Non-interest expense decreased 7.2% year over year to $820 million. Reduced salaries and benefits expenses along with lower other expenses reflected prudent expense management.

Credit Quality

Credit metrics marked a significant improvement during the second quarter at Regions. Non-performing assets as a percentage of loans, foreclosed properties and non-performing loans held for sale reduced to 1.37% from 2.25% in the prior-year quarter.

Further, non-accrual loans, excluding loans held for sale, as a percentage of loans came in at 1.17%, down from 2.01% in the prior-year quarter. Allowance for loan losses as a percentage of loans, net of unearned income was 1.61%, down from 2.18% in the prior-year quarter.

Allowance for credit losses was $1.3 billion, down 23.5% year over year. Net charge-offs came in at $67 million, down 53.5% year over year.

Capital Position

Regions’ capital position was strong at the end of the quarter. As of Jun 30, 2014, Regions’ Tier 1 capital ratio came in at an estimated 12.5% compared with 11.6% in the prior-year quarter. Basel III common equity Tier 1 ratio was 11.0%, up from 10.3% in the prior-year quarter.

Tier 1 common risk-based ratio was estimated at 11.6%, up from 11.1% in the prior-year quarter. Tangible common book value per share came in at $8.12 in the reported quarter compared with $7.11 in the prior-year quarter. Tangible common stockholders’ equity to tangible assets was 9.84%, up from 8.72% in the prior-year quarter.

Total loans increased 2% year over year to $76.5 billion. Total deposits came in at $93.8 billion, up 1.5% year over year. Total funding costs were 33 basis points.

As of Jun 30, 2014, low-cost deposits as a percent of total deposits were 90.5% compared with 88.3% as of Jun 30, 2013. Further, deposit costs came in at 11 basis points in the reported quarter.

Our Viewpoint

We believe the company’s favorable funding mix, improved core business performance, its expansion mode and strategies will continue to yield profitable earnings in the upcoming quarters. Additionally, significant improvement in its credit quality and decreased expenses would act as positive catalysts.

Yet, regulatory issues and pressure on the top line remain major areas of concern. Regions currently carries a Zacks Rank #3 (Hold).

Among other Southeast banks, Popular, Inc. (BPOP) and United Community Banks, Inc. (UCBI) are expected to release June-quarter end results on Jul 24, while HomeTrust Bancshares, Inc. (HTBI) on Jul 28.