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Regions Financial Corporation’s (RF - Analyst Report) third-quarter 2013 earnings came in at 20 cents per share, missing the Zacks Consensus Estimate by a penny. Moreover, results compared unfavorably with the prior-year quarter earnings of 21 cents per share.

Improved credit quality and strong capital position were the positives for the quarter. Moreover, increased net interest income was a tailwind. However, reduced non-interest income and elevated non-interest expenses offset the positives.

Net income from continuing operations available to common shareholders was $285 million, down from $312 million reported in the prior-year quarter.

Performance in Detail

Total revenue (net of interest expense) came in at $1.3 billion, in line with the Zacks Consensus Estimate. However, revenues decreased 2.2% on a year-over-year basis.

Regions reported adjusted pre-tax pre-provision income from continuing operations of $413 million, down 11.9% year over year. Excluding costs related to the early termination of certain debt coupled with securities gains, pre-tax pre-provision income declined 9.6% year over year.

Net interest margin rose 16 basis points year over year to 3.24% in the quarter. Funding mix showed an improvement as average low-cost deposits inched up as a percentage of total deposits from 84% in the prior-year quarter to 89%.

Taxable equivalent net interest income was $838 million, up 1.0% year over year. On the flip side, Regions’ non-interest income was $495 million, down 7.1% year over year. Non-interest income included $3 million in securities gains. Reduced mortgage revenues led to the fall in non-interest income. In the quarter under review, mortgage production stood at about $1.6 billion.

Non-interest expense increased 1.7% year over year to $884 million. Better expense management partially mitigated the increase in salaries and benefits expenses.

Credit Quality

Credit quality improved during the third quarter at Regions. Non-performing assets reduced 28.0% year over year to $1.5 billion. Net charge-offs decreased 56.5% year over year to $114 million.

Additionally, net charge-offs as a percentage of average net loans stood at 0.60%, down 78 basis points year over year. Moreover, provision for loan losses decreased 45.5% to $18 million as compared with the prior-year quarter.

Capital Position

Regions’ capital position was strong at the end of the quarter. As of Sep 30, 2013, Regions’ Tier 1 capital ratio came in at estimated 11.6% compared with 11.5% in the prior-year quarter.

Tier 1 common capital ratio was estimated at 11.1%, up from 10.5% in the prior-year quarter. The company’s loan-to-deposit ratio was 82.0% as of the same date, up from 81% in the prior quarter. Tangible common book value per share came in at $7.32 in the reported quarter compared with $7.02 in the prior-year quarter. Total loans stood at $75.9 million, up 0.8% year over year.

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 control in non-interest expenses would act as positive catalysts. Yet, regulatory issues and reducing fee income remain major areas of concern.

Regions currently carries a Zacks Rank #3 (Hold). Besides Regions, other banks in the Southeast that are currently performing well include SY Bancorp Inc. (SYBT - Snapshot Report) and Simmons First National Corp. (SFNC - Snapshot Report) with a Zacks Rank #1 (Strong Buy), while Home Bancshares, Inc. (Conway, AR) (HOMB - Snapshot Report) carries a Zacks Rank #2 (Buy).

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