Regions Financial's (RF) Q1 Earnings Beat, Costs Escalate

Riding on high revenues, Regions Financial Corporation (NYSE:RF) recorded an impressive earnings surprise of 12.9% in first-quarter 2018. Reported earnings of 35 cents per share outpaced the Zacks Consensus Estimate of 31 cents. Moreover, results compared favorably with the prior-year quarter’s earnings of 23 cents.

Income from continuing operations available to common shareholders was $398 million compared with $277 million reported in the year-ago period.

Easing margin pressure and higher revenues were the positive factors. Moreover, credit quality recorded significant improvement. However, lower loans and deposits balance were the undermining factors. In addition, expenses escalated.

Revenues Improve, Costs Flare Up

Adjusted total revenues (net of interest expense) came in at $1.41 billion in the reported quarter, missing the Zacks Consensus Estimate of $1.44 billion. However, revenues climbed 5.9% from the year-ago quarter figure.

Regions Financial reported adjusted pre-tax pre-provision income from continuing operations of $550 million, up 11.1% year over year.

On a fully-taxable equivalent (FTE) basis, net interest income was $922 million, up 4.7% year over year. Net interest margin (on an FTE basis) expanded 21 basis points (bps) year over year to 3.46% in the quarter. Elevated market interest rates and deposit cost management drove the stellar results. These increases were partially offset by reduced average loan balances and elevated funding costs.

Non-interest income jumped 7% to come in at $507 million. Higher capital markets, investment management and trust fee income and service charges on deposit account primarily led to the rise, partly offset by lower mortgage income and bank-owned life insurance.

Non-interest expense escalated 4.9% year over year to $884 million. On an adjusted basis, non-interest expenses flared up 2.9% year over year to $865 million, mainly due to rise in almost all components of expenses.

Balance Sheet Strength

As of Mar 31, 2018, total loans were slightly down year over year to $79.8 billion. Also, total deposits came in at $97 billion, down 2.4% year over year. Total funding costs came in at 46 bps.

As of Mar 31, 2018, low-cost deposits, as a percentage of average deposits, were 92.9% compared with 92.7% as of Mar 31, 2017. In addition, deposit costs came in at 21 bps in the reported quarter.

Credit Quality Improves

Non-performing assets, as a percentage of loans, foreclosed properties and non-performing loans held for sale, contracted 52 bps from the prior-year quarter to 0.85%. Also, non-accrual loans, excluding loans held for sale, as a percentage of loans, came in at 0.75%, shrinking 51 bps from the year-ago quarter.

Allowance for loan losses as a percentage of loans, net of unearned income was 1.05%, down 28 bps from the year-earlier quarter. The company’s total business services criticized loans plunged 37.3% year over year.

Additionally, provision for loan losses recorded credit of $10 million compared with the provision of $70 million reported in the prior-year quarter. In addition to this, net charge-offs as a percentage of average loans came in at 0.42%, contracting 9 bps.

Strong Capital Position

Regions Financial’s estimated ratios remained well above the regulatory requirements under the Basel III capital rules. As of Mar 31, 2018, Basel III Common Equity Tier 1 ratio (fully phased-in) and Tier 1 capital ratio were estimated at 11% and 11.9%, respectively, compared to 11.2% and 12.1% recorded in the year-earlier quarter.

During the first quarter, this bank repurchased 12.5 million shares of common stock for a total cost of $235 million and announced $101 million in dividends to common shareholders.

Other Development

Recently, Regions entered into a definitive agreement to vend its Regions Insurance subsidiary and affiliates. On completion, the deal is likely to record an after-tax gain of about $200 million and Common Equity Tier 1 of around $300 million.

The agreement is expected to close in third-quarter 2018, subject to certain regulatory approvals. Moreover, the capital generated from this transaction is anticipated to repurchase shares subject to results of 2018 CCAR.

Our Viewpoint

Regions Financial reported a decent quarter marked by top-line strength and improved credit quality. The company’s favorable funding mix, attractive core business and revenue diversification strategies will likely yield profitable earnings in the upcoming quarters.

Though decline in loans and deposits pose concerns, we remain optimistic on the company's branch-consolidation plan and reduction of $400-million expenses by 2019.

Currently, Regions Financial carries a Zacks Rank #3 (Hold). You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

Performance of Other banks

Driven by top-line strength, Texas Capital Bancshares Inc. (NASDAQ:TCBI) reported a positive earnings surprise of around 0.7% in the first quarter. Earnings per share of $1.38 outpaced the Zacks Consensus Estimate by a penny. Additionally, results compared favorably with 80 cents recorded in the prior-year quarter. Results were driven by rise in revenues. Organic growth was reflected, with significant rise in loans and deposit balances. However, elevated expenses and provisions remained the undermining factors.

M&T Bank (NYSE:MTB) reported net operating earnings of $2.26 per share in first-quarter 2018. The bottom line improved 5.1% year over year. In addition, top-line growth was recorded. Moreover, improved credit quality was a positive factor. Further, pressure on margin eased. However, decrease in loan and deposit balances was a headwind. Also, results were affected by higher expenses.

Comerica (NYSE:CMA) reported adjusted earnings per share of $1.54 in first-quarter 2018, up from the prior-year quarter adjusted figure of $1.02 on high interest income. Including certain non-recurring items, earnings came in at $1.59. The Zacks Consensus Estimate was $1.49. Higher revenues and improved credit metrics were recorded. Moreover, rise in loans was another tailwind. However, lower deposits and rise in expenses were undermining factors.

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