Regions Financial Corporation’s (RF - Free Report) second-quarter 2016 earnings from continuing operations came in at 20 cents per share, in line with the Zacks Consensus Estimate and stable year over year. On an adjusted basis, earnings per share would have been 21 cents.
Results reflected continued execution of the Birmingham, AL-based bank’s branch network optimization and cost reduction initiatives as the quarter included branch consolidation, property and equipment charges of $22 million and certain other significant items. Income from continuing operations available to common shareholders was $256 million, down 6.2% year over year.
Higher net interest income and lower expenses were offset by reduced non interest income and increased provisions. The quarter witnessed continued growth in loans and deposits while maintaining a strong capital position. However, credit quality reflected weakness.
Net Interest Income Improves; Costs Down
Total revenue (net of interest expense) came in at $1.37 billion in the quarter, down 2.5% on a year-over-year basis. However, the figure came in line with the Zacks Consensus Estimate.
Regions reported adjusted pre-tax pre-provision income from continuing operations of $479 million, up 5.3% year over year.
On a fully taxable equivalent (FTE) basis, net interest income was $869 million, up 3.6% from the prior-year quarter. Net interest margin (on FTE basis) inched down 1 basis point year over year to 3.15% in the quarter.
Regions reported a 10.8% year-over-year decline in non-interest income to $526 million, mainly due to $90 million of insurance proceeds tied with the settlement of a case that was recognized in the prior year quarter. Also the company recorded reduced service charges on deposit accounts, lower commercial credit fee income as well as lower net revenue from affordable housing.
However, revenues from wealth management, card and ATM fees as well as capital market fees improved while mortgage income remained stable. On an adjusted basis, non-interest income increased 5% year over year.
Non-interest expense decreased 2% year over year to $915 million. The decline mainly reflected lower professional, legal and regulatory expenses as well as branch consolidation, property and equipment charges. These were, however, offset by a rise in outside services, FDIC insurance assessments and other expense.
On an adjusted basis, non-interest expenses increased 3.5% a year-over-year basis at $889 million.
Total loans increased 1.9% year over year to $81.70 billion. Total deposits amounted to $97.50 billion, up slightly year over year. Total funding costs were 29 basis points.
As of Jun 30, 2016, low-cost deposits as a percent of total deposits were 92.3% compared with 91.7% as of Jun 30, 2015. Further, deposit costs came in at 12 basis points in the reported quarter.
Weak Credit Quality, Energy Headwinds Linger
Credit metrics deteriorated during the quarter at Regions. Non-performing assets as a percentage of loans, foreclosed properties and non-performing loans held for sale increased to 1.40% from 1.13% in the prior-year quarter.
Also, non-accrual loans, excluding loans held for sale, as a percentage of loans came in at 1.25%, up from 0.94% in the prior-year quarter. Allowance for loan losses as a percentage of loans, net of unearned income was 1.41%, up from 1.36% in the prior-year quarter.
Net charge-offs came in at $72 million, up 56.5% year over year.
Moreover, provision for loan losses was $72 million, increasing 14.3% from the prior year quarter. Notably, the company’s total business services criticized loans increased 24% year over year, mainly related to risk rating migration in the energy portfolio.
Strong Capital Position
Regions’ estimated ratios remained well above the regulatory requirements under the Basel III capital rules. As of Jun 30, 2016, Basel III Common Equity Tier 1 ratio (fully phased-in) and Tier 1 capital ratio were estimated at 10.9% and 11.6%, respectively, versus 11.3% and 12.1% in the prior-year quarter. At the end of the quarter, leverage ratio was 10.2% versus 10.6% in the prior-year quarter.
During the quarter, Regions returned about $258 million as capital to shareholders through $79 million dividend payment and repurchase of common stock for $179 million.
While results does not reflect a strong quarter for Regions, we believe the company’s favorable funding mix, attractive core business, revenue diversification strategies will yield profitable earnings in the upcoming quarters. We also remain optimistic as the company remains focused on its plan to consolidate 100 to 150 branches and reduce $300 million in expenses by 2018 to achieve an efficiency ratio below 60%. Additionally, steady capital-deployment measures will continue to boost investors’ confidence in the stock.
However, regulatory issues and margin pressure amid the still low environment remain concerns.
Regions currently carries a Zacks Rank #3 (Hold).
Performance of Some Major Banks
Among major banks, JPMorgan Chase & Co. (JPM - Free Report) kick-started the second-quarter earnings season on a positive note. Driven by improved trading revenues, the company reported earnings of $1.55 per share that handily outpaced the Zacks Consensus Estimate of $1.43. Also, the figure reflects a 1% rise from the year-ago period. Notably, the results included a legal benefit of $430 million.
The PNC Financial Services Group, Inc.’s (PNC - Free Report) second-quarter 2016 earnings per share of $1.82 handily beat the Zacks Consensus Estimate of $1.75. However, the bottom line declined 3% year over year. Better-than-expected results were aided by increased net interest income and relatively stable expenses, partially offset by lower non-interest income.
Wells Fargo & Company (WFC - Free Report) came out with earnings per share of $1.01, missing the Zacks Consensus Estimate of $1.02. Higher expenses were primarily responsible for this earnings miss.
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