Impacted by lower revenues, Regions Financial Corporation’s (RF - Analyst Report) fourth-quarter 2014 earnings from continuing operations came in at 14 cents per share, missing the Zacks Consensus Estimate by 7 cents. Moreover, results compared unfavorably with the prior-year quarter earnings of 17 cents per share.

Lower-than-expected results were driven by higher non-interest expenses and lower top-line. Moreover, absence of credible improvement in the mortgage market remains a concern. However, increase in loans and deposits were the positives for the quarter.

Income from continuing operations available to common shareholders was $198 million in the quarter, down from $233 million reported in the prior-year quarter.

For full-year 2014, Regions reported income available to common shareholders of $1.09 billion or 79 cents per share compared with $1.10 billion or 78 cents in the prior year. Results lagged the Zacks Consensus Estimate of 85 cents.

Performance in Detail

For full-year 2014, Regions reported total revenue of $5.1 billion, missing the Zacks Consensus Estimate of $5.2 billion. Moreover, revenues decreased 3.4% on a year-over-year basis.

Total revenue (net of interest expense) came in at $1.27 billion in the quarter, lagging the Zacks Consensus Estimate of $1.30 billion. Moreover, revenues decreased 6.6% on a year-over-year basis.

Regions reported adjusted pre-tax pre-provision income from continuing operations of $397 million in the fourth quarter, down 8.9% year over year. Excluding certain one-time items, pre-tax pre-provision income decreased 27.4% year over year to $299 million.

Net interest income was $820 million, down 1.4% on a year-over-year basis. Net interest margin on a fully taxable equivalent basis declined 9 basis points year over year to 3.17% in the quarter.

Regions’ non-interest income was $448 million, down 14.8% 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 $1.17 billion in the quarter, down 5.7% year over year.
 

Non-interest expense increased 2.4% year over year to $969 million. Elevated other expenses mainly led to the rise. Notably, Regions plans to consolidate about 50 offices during 2015 related to which the company recorded $10 million during the reported quarter. Further, an accrual of $100 million for contingent legal and regulatory items has also been recorded.

Credit Quality

Credit metrics marked a significant improvement during the fourth quarter at Regions. Non-performing assets as a percentage of loans, foreclosed properties and non-performing loans held for sale reduced to 1.28% from 1.74% in the prior-year quarter.

Further, non-accrual loans, excluding loans held for sale, as a percentage of loans came in at 1.07%, down from 1.45% in the prior-year quarter. Allowance for loan losses as a percentage of loans, net of unearned income was 1.43%, down from 1.80% in the prior-year quarter.

Provision for loan losses was $8 million, down 89.9% year over year. Allowance for credit losses was $1.1 billion, down 17.9% year over year. Net charge-offs came in at $83 million, down 70.1% year over year.

Capital Position

Regions’ capital position was strong at the end of the quarter. As of Dec 31, 2014, Regions’ Tier 1 capital ratio came in at an estimated 12.5% compared with 11.7% in the prior-year quarter. Basel III common equity Tier 1 ratio was 11.1%, up from 10.6% in the prior-year quarter.

Tier 1 common risk-based ratio was estimated at 11.6%, up from 11.2% in the prior-year quarter. Tangible common book value per share came in at $8.26 in the reported quarter compared with $7.54 in the prior-year quarter. Tangible common stockholders’ equity to tangible assets was 9.75%, up from 9.24% in the prior-year quarter.

Total loans increased around 3.6% year over year to $77.3 billion. Total deposits came in at $94.2 billion, up 1.8% year over year. Total funding costs were 29 basis points.

As of Dec 31, 2014, low-cost deposits as a percent of total deposits were 90.9% compared with 89.5% as of Dec 31, 2013. Further, deposit costs came in at 11 basis points in the reported quarter.

During the year 2014, Regions returned about $500 million as capital to shareholders through dividends and repurchase of 26 million shares of common stock for $256 million. Notably, during the quarter, the company repurchased common stock worth $248 million.

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 along with loans and deposit balances would act as the positive catalysts.

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

Performance of some Major Banks

The fourth-quarter earnings season kick started with Wall Street biggies – Wells Fargo & Company (WFC - Analyst Report) and JPMorgan Chase & Co. (JPM - Analyst Report). Amid a challenging industry backdrop, Wells Fargo’s fourth-quarter 2014 earnings met expectations. The financial bigwig came out with earnings per share of $1.02, meeting the Zacks Consensus Estimate. Also the reported figure came above the year-ago figure of $1.00.

JPMorgan came out with adjusted earnings of $1.45 per share, ahead of the Zacks Consensus Estimate as well as the prior-year quarter earnings of $1.30 per share. Earnings exclude an impact of $990 million related to after-tax legal expenses. Considering this significant one-time item, the company has earned $1.19 per share.   

Another banking major – Citigroup Inc. (C - Analyst Report) reported adjusted earnings per share for fourth-quarter 2014 of 6 cents, missing the Zacks Consensus Estimate of 9 cents. Further, earnings came significantly below the year-ago figure of 82 cents per share. Including the impact of credit valuation adjustment (CVA) and debt valuation adjustment (DVA), Citigroup reported net income of $350 million, which was significantly down from $2.5 billion reported in the prior-year quarter.