Regions Financial's (NYSE: RF) recently released earnings report easily exceeded analysts' expectations and caused its share prices to appreciate as shareholders rewarded the positive results. Is it time for you to become a shareholder too and add Regions Financial stock to your portfolio?
Regions Financial Earnings Performance
Regions Financial is the 16th-largest bank in the U.S. as of April 2013, according to SNL Financial, with some $125.5 billion in total assets and $97.1 billion in total deposits. It is a regional full-service financial bank that services 16 states across the Midwest and South, and operates a network of 1,700 branches and 2,000 ATMs through its subsidiary Regions Bank. The bank's range of services includes not only commercial and consumer banking, but also mortgage and wealth management as well as insurance products and services. It is also a member of the S&P 500 Index.
For the first quarter of the year, Regions Financial reported that revenues had reached $1.3 billion in the first quarter of the year, down 4 percent from the $1.4 billion in the same period last year. Despite the decline in revenues, however, net income increased by 68%84, from $199 million to $335 million within the same quarter of 2012. This brought diluted earnings per share (GAAP) to $0.23 from $0.11 in the same quarter last year, exceeding the $0.20 EPS estimated by analysts. The bank's profitability was helped by its cost-cutting efforts, as it was able to reduce adjusted non-interest expenses to $842 million during the first quarter from $913 million in the same quarter last year and $849 million in the fourth quarter.
The bank also reported that it has been able to keep its loan balances steady, with production of commercial and industrial loans up by 3% during the period while commitments increased by 12 percent. However, total loan balances declined slightly by 4%, with consumer lending falling by 5% while commercial and investor real estate loans fell by 3 percent.
But one of the most encouraging results reported in the earnings report was an increase in the net interest margin, which is a profitability measure that looks at how much interest income a bank earns less the amount of interest it pays out to depositors and other lenders, relative to the amount of its interest-generating assets. For the quarter, the bank reported that its net interest margin was 3.13%, up from the $3.09% in the same quarter last year and the 3.10% reported in the fourth quarter of 2012. The bank achieved the higher margin despite a 2% decline in its net interest income to $811 million from $839 million in the same quarter last year.
For banks that depend on traditional consumer banking services such as loan deposits, the net interest margin is an important factor in determining revenue growth, since these banks make their money from the difference between the interest they pay out to depositors and the interest they take in from loans. Since the Federal Reserve established a low interest rate regime in December 2008 as part of its Quantitative Easing, however, there has been strong downward pressure on interest rate margins. Hence, any improvement in this metric is worth noting by investors, no matter how slight it is.
Region's Increasing Dividend Payouts
In addition to the positive earnings report, Regions Financial has many other things going for it. For example, it has already successfully repaid the $3.5 billion it received in taxpayer bailout money in November 2008 by selling off its Morgan Keegan brokerage as well as some $900 million worth of stock. In addition, it generated savings on dividend payments by buying back preferred stock shares. The repayment has left the bank free to pursue measures to improve its capital position.
Regions Financial's success in this area was shown by its performance in the Dodd-Frank stress tests, which measure if a bank has sufficient capital to withstand adverse economic conditions by supporting operations and absorbing losses. The metric used to determine this is the Tier I (non-GAAP) common risk-based ratio. The test was conducted using third quarter figures and showed that not only had the Tier I common ratio of 10.5% increased during the period from the 8.2% reported in the same quarter last year, the ratio did not significantly go down, when under stressed conditions. For the first quarter of the year, the Tier I ratio had increased to 11.2% from the 9.6% reported in the same quarter last year and the 10.8% in the fourth quarter of 2012.
As a result of its success on the stress tests, the Fed approved the bank's capital plans for 2013, which include capital distribution to shareholders through increased dividends. Regions Financial was allowed to increase its quarterly dividends per share to $0.032 from the current $0.01. The bank also announced that it was buying back up to $350 million worth of common stock.
The Bottom Line
It is a good time for investors to buy into Regions Financial stock as it is currently trading at a bargain 0.8 times book value. In addition, while the bank's shares have undoubtedly lost a lot of value from the levels they were trading at before the financial crisis, prices have steadily been appreciating, growing by some 39% over the past year.
The bank is also set to benefit from the housing recovery as well as an upturn in manufacturing activity in the Midwest: the Chicago Federal Reserve reported that regional manufacturing activity in the 7th Federal Reserve District, which covers the states of Illinois, Iowa, Indiana, Wisconsin, and Michigan, grew by an annualized rate of 6.4% in March, with automotive output recording the highest increase at 13.3 percent. Aside from the long-term increase in prices, investors can also benefit from the dividend payouts, which would undoubtedly continue to increase in the future as the bank's performance strengthens.