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Regions Financial Corporation's (RF - Analyst Report) fourth-quarter 2013 adjusted earnings came in at 21 cents per share, inching past the Zacks Consensus Estimate by a penny. Moreover, results compared favorably with the prior-year quarter earnings of 19 cents per share.

Despite positive market sentiment, shares of Regions declined around 2% in the pre-market session, indicating that investors have been bearish on the results. The price reaction during the trading session will give a better idea about whether Regions has been able to meet expectations.

Strong capital position and increased net interest income were the positives for the quarter. However, reduced non-interest income and elevated non-interest expenses partially offset the positives.

Adjusted net income was $294 million in the final quarter, up from $261 million reported in the prior-year quarter. For full-year 2013, Regions reported income available to common shareholders of $1.1 billion or 77 cents per share as compared with $991 million or 71 cents in the prior year. However, results lagged the Zacks Consensus Estimate of 82 cents.

Performance in Detail

Total revenue (net of interest expense) came in at $1.36 billion, well above the Zacks Consensus Estimate of $1.32 billion. Moreover, revenues increased slightly on a year-over-year basis.

For full-year 2013, Regions reported total revenue of $5.28 billion, well above the Zacks Consensus Estimate of $5.24 billion. However, revenues decreased 2.2% on a year-over-year basis.

Regions reported adjusted pre-tax pre-provision income from continuing operations of $436 million in the fourth quarter, down 11.6% year over year. Excluding net leveraged lease termination gains, regulatory charges and branch consolidation and property and equipment charges, pre-tax pre-provision income declined 8.8% year over year.

Net interest income was $832 million, up 1.7% year over year. Net interest margin rose 16 basis points year over year to 3.26% in the quarter.

Regions’ non-interest income was $526 million, down 1.9% year over year. Reduced mortgage revenues and lower service charges on deposit accounts led to the fall in non-interest income. Mortgage production came in at $1.2 billion in the quarter, down 41.7% year over year.

Non-interest expense increased 4.9% year over year to $946 million. Better expense management partially mitigated the increase in salaries and benefits expenses.

Credit Quality

Credit metrics was a mixed bag during the final quarter at Regions. Non-performing assets as a percentage of loans, foreclosed properties and non-performing loans held for sale reduced to 1.74% from 2.59% in the prior-year quarter.

Further, non-accrual loans, excluding loans held for sale, as a percentage of loans came in at 1.45%, down from 2.27% in the prior-year quarter. Allowance for loan losses as a percentage of loans, net of unearned income was 1.80%, down from 2.59% in the prior-year quarter.

Allowance for credit losses was $1.4 billion, down 30% year over year. However, provision for loan losses more than doubled to $79 million as compared with the prior-year quarter figure of $37 million. Moreover, net charge-offs came in at $278 million, up 54.4% year over year.

Capital Position

Regions’ capital position was strong at the end of the quarter. As of Dec 31, 2013, Regions’ Tier 1 capital ratio came in at estimated 11.6% compared with 12.0% in the prior-year quarter.

Tier 1 common risk-based ratio was estimated at 11.2%, up from 10.8% in the prior-year quarter. Tangible common book value per share came in at $7.54 in the reported quarter compared with $7.11 in the prior-year quarter.

Total loans increased 1% year over year to $75 billion. Excluding the transfer of residential mortgage loans to held-for-sale, loan growth was 2% year over year, reflecting loan production even in the challenging economic environment.

Average deposits came in at $92 billion in the final quarter, down 3.2% year over year. Total funding costs were 34 basis points, down 16 basis points year over year, as the mix of deposits continued to improve in 2013.

As of Dec 31, 2013, low-cost deposits as a percent of total deposits were 90% as compared with 86% as of Dec 31, 2012. Further, deposit costs came in at 12 basis points in the reported quarter, down 10 basis points year over year, reflecting a positive change in deposit mix.

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 top-line growth would act as positive catalysts. Yet, regulatory issues, increasing expenses and reducing fee income remain major areas of concern.

Regions currently carries a Zacks Rank #3 (Hold). Some better-ranked Southeast banks that are currently performing well include Pinnacle Financial Partners Inc. (PNFP - Snapshot Report), United Community Banks, Inc. (UCBI - Snapshot Report) and HomeTrust Bancshares, Inc. (HTBI). All these banks carry a Zacks Rank #1 (Strong Buy).

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