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Regions Misses Estimates on One-Time Items (Update 1)

Updated from 7:59 a.m. ET with market reaction and comments from Jefferies analyst Ken Usdin.

NEW YORK ( TheStreet) -- Regions Financial (RF - Get Report) on Tuesday missed analysts' earnings expectations again, however the results would have beaten the consensus fourth-quarter estimate if several one-time items were excluded.

Regions -- headquartered in Birmingham, Ala. -- reported fourth-quarter net income available to common shareholders of $219, or 16 cents a share, declining from $285 million, or 20 cents a share, in the third quarter, and $261 million, or 18 cents a share, during the fourth quarter of 2012.

The fourth-quarter results were lowered by $124 million, or five cents a share, from the following:

  • The transfer of $686 million in loans categorized as troubled debt restructurings, or TDRs, to held-for-sale, resulting in a pre-tax loss of $75 million, or $46 million after tax.
  • Terminations of leveraged leases, for a gain of $39 million before tax and $6 million after tax.
  • Pretax charges of $5 million for branch consolidations, amounting to $3 million after tax.
  • After-tax regulatory charges of $58 million, "to previously disclosed inquiries from government authorities concerning matters from 2009," according to the company.
  • A $25 million pre-tax increase in the firm's indemnification reserve related to the sale of is brokerage subsidiary Morgan Keegan to Raymond James during 2012, coming to $14 million after tax.
Partially offsetting these items was a tax benefit of $40 million, from the recapture of part of the firm's valuation allowance for deferred tax assets, or DTA.

The consensus among analysts polled by Thomson Reuters was for regions to post net income of $282 million, or 20 cents a share, on revenue of $1.313 billion. Regions reported fourth-quarter revenue of $1.358 billion.

For all of 2013, Regions reported net income available to common shareholders of $1.090 billion, or 77 cents a share, increasing from $991 million, or 71 cents a share, during 2012.

Fourth-quarter net interest income was $832 million, increasing from $824 million the previous quarter and $818 million a year earlier.  The net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- expanded to a tax-adjusted 3.26% in the fourth quarter 3.24% in the third quarter and 3.10% in the fourth quarter of 2012.

The provision for loan losses increased to $79 million during the fourth quarter from $18 million the previous quarter and $37 million a year earlier, with $75 million of the most recent quarter's provision tied to the transfer of TDR loans to held-for-sale.

Noninterest income totaled $526 million in the fourth quarter from $495 million in the third quarter and $536 million in the fourth quarter of 2013.  Mortgage revenue continued to decline -- in line with the industry as rising long-term interest rates curtailed mortgage refinancing activity -- to $43 million during the fourth quarter from $52 million the previous quarter and $90 million a year earlier.  The previous quarter included a $24 million gain related to the divestiture of a non-core portion of the Wealth Management business, and the fourth quarter included a net gain of $17 million related to the sale of certain low-income housing investments. Additionally, during the fourth quarter the company terminated two leveraged leases that resulted in a gain of $39 million with an offsetting $33 million tax expense," the company said.

Regions Financial's noninterest expense totaled $946 million during the fourth quarter, increasing from $884 million the previous quarter and $902 million a year earlier.   The fourth-quarter  total included the regulatory charge and the elevated costs from branch closings.  Expenses would have been "relatively stable" without these charges, according to the company.

The transfers of TDRs to held-for-sale lowered the bank's period-end loans by 2% from the previous quarter.  Commercial and industrial loans totaled $29.413 billion as of Dec. 31, down from 2% from the previous quarter, but up 10% from a year earlier.  Adjusting for the transfers of loans to held-for-sale, total portfolio loans rose 2% year-over-year to $75.295 billion as of Dec. 31.

"2013 was a foundational year for Regions as we took decisive action to position the company for long-term, sustainable growth while also achieving positive loan growth," said CEO Grayson Hall in the company's earnings press release. 

"By focusing on meeting the financial needs of our customers and maintaining our efforts to operate more efficiently, we concluded the year with more customers and successfully lowered adjusted [operating] expenses compared to the prior year. We are optimistic about growth prospects for 2014 as consumers and businesses begin the year with healthy balance sheets and the economy continues to improve," he added.

Shares of Regions Financial were up 2.4% in early trading to $10.81.

Jefferies analyst Ken Usdin rates Regions a "buy," with a price target of $11.50, and in a quick note to clients following the earnings release that featured "lots of clean-up," wrote, "We peg operating EPS at $0.20, inline with consensus... Our initial take is that mgmt.'s outlook for stable [net interest margin], loan growth of 3%-5% in '14, and lower Y-Y expenses should be supportive of EPS estimates."

The company's estimated Basel III Tier 1 common equity ratio was 10.5% as of Dec. 31, increasing from 10.4% the previous quarter.  "We continue to believe RF is well-positioned for this year's stress test, and we expect the bank will return more capital (both dividends and buybacks) to shareholders in '14," Usdin wrote.

The Federal Reserve will conclude its next round of annual stress tests for major U.S. financial firms in mid-March, with the results of its capital plan reviews being announced the following week. 

This chart shows the performance of Regions Financial's stock against the KBW Bank Index (I:BKX) and the S&P 500 (^GSPC) since the end of 2011:

RF Chart data by YCharts


-- Written by Philip van Doorn in Jupiter, Fla.

Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a bachelor of science in business administration from Long Island University.

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