Regions Q3 Earnings Beat Estimates on Lower Expenses - Analyst Blog

Driven by prudent expense management, Regions Financial Corporation's (RF) third-quarter 2014 earnings from continuing operations came in at 22 cents per share, beating the Zacks Consensus Estimate by a penny. Moreover, results compared favorably with the prior-year quarter earnings of 20 cents per share.

Better-than-expected results were driven by reduced non-interest expenses and increase in loans and deposits. 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 $302 million in the quarter, up from $285 million reported in the prior-year quarter.
 

Performance in Detail

Total revenue (net of interest expense) came in at $1.3 billion, in line with the Zacks Consensus Estimate. However, revenues decreased 1.5% on a year-over-year basis.

Regions reported adjusted pre-tax pre-provision income from continuing operations of $457 million in the third quarter, down 10.7% year over year. Excluding certain one-time items, pre-tax pre-provision income increased 8.7% year over year to $473 million.

Net interest income was $821 million, slightly down on a year-over-year basis. Net interest margin on a fully taxable equivalent basis declined 6 basis points year over year to 3.18% in the quarter.

Regions' non-interest income was $478 million, down 3.4% year over year. Reduced mortgage revenues along with lower service charges on deposit accounts and other income mainly led to the fall in non-interest income. Mortgage production came in at $1.29 billion in the quarter, down 20% year over year.

Non-interest expense decreased 6.6% year over year to $826 million. Reduced other expenses reflected prudent expense management.

Credit Quality

Credit metrics marked a significant improvement during the third quarter at Regions. Non-performing assets as a percentage of loans, foreclosed properties and non-performing loans held for sale reduced to 1.30% from 2.03% in the prior-year quarter.

Further, non-accrual loans, excluding loans held for sale, as a percentage of loans came in at 1.09%, down from 1.78% in the prior-year quarter. Allowance for loan losses as a percentage of loans, net of unearned income was 1.54%, down from 2.03% in the prior-year quarter.

Allowance for credit losses was $1.18 billion, down 23.4% year over year. Net charge-offs came in at $75 million, down 34.2% year over year.

Capital Position

Regions' capital position was strong at the end of the quarter. As of Sep 30, 2014, Regions' Tier 1 capital ratio came in at an estimated 12.7% compared with 11.5% in the prior-year quarter. Basel III common equity Tier 1 ratio was 11.2%, up from 10.4% in the prior-year quarter.

Tier 1 common risk-based ratio was estimated at 11.8%, up from 11.6% in the prior-year quarter. Tangible common book value per share came in at $8.23 in the reported quarter compared with $7.32 in the prior-year quarter. Tangible common stockholders' equity to tangible assets was 9.92%, up from 9.02% in the prior-year quarter.

Total loans increased around 1% year over year to $76.6 billion. Total deposits came in at $94.1 billion, up 2% year over year. Total funding costs were 30 basis points.

As of Sep 30, 2014, low-cost deposits as a percent of total deposits were 90.7% compared with 89.1% as of Sep 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.

However, regulatory issues and pressure on the top line remain major areas of concern. Regions currently carries a Zacks Rank #4 (Sell).

Among other Southeast banks, Popular, Inc. (BPOP) and United Community Banks, Inc. (UCBI) are expected to release September-quarter end results on Oct 22 and Oct 23, respectively, while United Bankshares Inc. (UBSI) will report on Oct 29.