Credit, check fraud costs weigh on Regions' earnings

Gary Tramontina

First-quarter earnings fell at Regions Financial, with higher credit costs and operating expenses cutting into the Birmingham, Alabama, company's bottom line.

The $155 billion-asset bank, which reported $135 million in losses due to check fraud during a six-month period last year, reported another $22 million hit to operating expenses on that front in the first quarter. The bank previously said it inadvertently enabled a jump in fraud activity through a change in the period of time it held deposits before making them available to customers.

"Further fraud costs pushed up expenses past what we had hoped," Piper Sandler analyst Scott Siefers said.

Regions said its noninterest expenses adjusted for special items rose 6% from the prior quarter to $1.1 billion.

President and CEO John Turner Jr. said during an earnings call Friday that "the tail" tied to the fraud matter was "a little longer than we anticipated, and as a result, we did incur some additional losses in the quarter."

That noted, he said, the first quarter was expected to mark the "high watermark for the year" on expenses. The bank has implemented fraud "countermeasures" and recruited new talent to drive "fraud prevention activities," and "all of that is working," Turner added.

On the credit quality front, meanwhile, Regions said its adjusted net charge-offs for the quarter totaled $121 million, or 50 basis points of average loans. That was up from 39 basis points the prior quarter. The increase was due primarily to a large restaurant credit and a commercial manufacturing loan, the bank said.

Turner said Regions expects further credit deterioration as "pressure remains within pockets of business lending." He said weakness is largely contained to sectors the bank identified as vulnerable last year, including office, senior housing, health care and technology.

That said, he described credit deterioration as expected and gradually returning to historically average levels of loans. This comes after dropping to almost no loan losses amid the infusion of government money and special-assistance programs to prop up the economy in response to the pandemic.

"We anticipate overall asset quality will perform consistent with historical levels experienced prior to the pandemic," Turner said.

The parent company of Regions Bank said that its first-quarter net interest income declined nearly 4% from the prior quarter to $1.2 billion. Its net interest margin contracted by 5 basis points to 3.55%.

Total deposits increased 1% to $129 billion, though the growth was due to increases in interest-bearing accounts that bumped up funding costs. Those higher costs hurt the margin.

Total first-quarter loans declined 1% from the previous quarter to $97.4 billion.

Adjusted noninterest income increased 6% during the quarter, proving a bright spot, as the bank posted notable gains in its capital markets business.

Regions reported first-quarter net income of $368 million, or 37 cents per share. This compared with $391 million, or 39 cents, in the previous quarter, and $612 million, or 62 cents, a year earlier.

Along with all larger banks, Regions was subject in the first quarter to a special Federal Deposit Insurance Corp. assessment tied to the failures of several regional lenders in 2023. Regions said its first-quarter adjusted items included $18 million for the special assessment.