Regions Financial Corporation’s (RF) first-quarter 2014 earnings from continuing operations came in at 21 cents per share, inching past the Zacks Consensus Estimate by a penny. However, results compared unfavorably with the prior-year quarter earnings of 23 cents per share.

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

Income from continuing operations available to common shareholders was $299 million in the quarter, down from $325 million reported in the prior-year quarter.

Performance in Detail

Total revenue (net of interest expense) came in at $1.25 billion, well below the Zacks Consensus Estimate of $1.30 billion. Moreover, revenues decreased 3.8% on a year-over-year basis.

Regions reported adjusted pre-tax pre-provision income from continuing operations of $405 million in the first quarter, down 8.4% year over year. Excluding certain one-time items, pre-tax pre-provision income declined 4.4% year over year.

Net interest income was $816 million, up 2.3% year over year. Net interest margin rose 13 basis points year over year to 3.26% in the quarter.

Regions’ non-interest income was $438 million, down 12.6% year over year. Reduced mortgage revenues, capital markets income, lower net securities gains along with service charges on deposit accounts mainly led to the fall in non-interest income. Mortgage production came in at $966 million in the quarter, down 46.9% year over year.

Non-interest expense decreased 3.0% year over year to $817 million. Better expense management mitigated the increase in salaries and benefits expenses along with higher outside services costs.

Credit Quality

Credit metrics marked a significant improvement during the first quarter at Regions. Non-performing assets as a percentage of loans, foreclosed properties and non-performing loans held for sale reduced to 1.63% from 2.41% in the prior-year quarter.

Further, non-accrual loans, excluding loans held for sale, as a percentage of loans came in at 1.41%, down from 2.15% in the prior-year quarter. Allowance for loan losses as a percentage of loans, net of unearned income was 1.67%, down from 2.37% in the prior-year quarter.

Allowance for credit losses was $1.3 billion, down 27.8% year over year. Provision for loan losses was $2 million, down 80.0% from the prior-year quarter. Net charge-offs came in at $82 million, down 54.4% year over year.

Capital Position

Regions’ capital position was strong at the end of the quarter. Notably, during the first quarter, Regions cleared the stress test under the annual Comprehensive Capital Analysis and Review process and got approval for its 2014 Capital Plan. The plan included increasing the quarterly dividend to 5 cents per share and the common stock repurchase of up to $350 million.

As of Mar 31, 2014, Regions’ Tier 1 capital ratio came in at an estimated 11.9% compared with 12.4% in the prior-year quarter. Basel III common equity Tier 1 ratio was 10.8%, up from 9.1% in the prior-year quarter.

Tier 1 common risk-based ratio was estimated at 11.4%, up from 11.2% in the prior-year quarter. Tangible common book value per share came in at $7.81 in the reported quarter compared with $7.29 in the prior-year quarter. Tangible common stockholders’ equity to tangible assets was 9.53%, up from 8.98% in the prior-year quarter.

Total loans increased 2.4% year over year to $75.7 billion. Total deposits came in at $93.4 billion, down 0.8% year over year. Total funding costs were 33 basis points, down 12 basis points year over year.

As of Mar 31, 2014, low-cost deposits as a percent of total deposits were 90.1% compared with 87.0% as of Mar 31, 2013. Further, deposit costs came in at 12 basis points in the reported quarter, down 6 basis points on a year-over-year basis.

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. Moreover, the stress test clearance and subsequent 2014 capital plan approval raised investors’ confidence.

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, SY Bancorp Inc. (SYBT) is expected to release March-quarter end results on Apr 23, United Community Banks, Inc. (UCBI) on Apr 24 and HomeTrust Bancshares, Inc. (HTBI) on May 5.

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