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Regions Financial Corp’s (RF - Analyst Report) first-quarter 2013 earnings from continuing operations came in at 23 cents per share, marginally beating the Zacks Consensus Estimate by 3 cents. Moreover, results beat the prior-quarter earnings by a penny.

Results benefited from a fall in non-interest expenses, reflecting effective cost control measures. Moreover, fall in provision for loan losses, strong capital position, improved funding mix and HARP II loan production were the tailwinds for the quarter. Expansion in net interest margin depicts interest recovery to some extent. Yet, decreased net interest and non-interest income were the dampeners.

Net income available to common shareholders was $327 million or 23 cents per share, up from $261 million or 18 cents per share reported in the prior 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 7% on a sequential basis.

Regions reported adjusted pre-tax pre-provision income from continuing operations of $457 million, up 1% sequentially.

Net interest margin expanded 3 basis points sequentially to 3.13% in the quarter, attributed to lower day count, debt management activities in the prior quarter and fall in deposit costs. These positives were partially offset by reduced earning assets yields due to continued low interest-rate environment. Funding mix showed an improvement as average low-cost deposits inched up as a percentage of total deposits from 80% in the prior-year quarter to 86%.

On the flip side, taxable equivalent net interest income was $811 million, down 2% sequentially. The dip was mainly attributed to lesser number of days in the quarter under review, reduced earning assets and elevated mortgage prepayments. These decreases were partially mitigated by lower deposit costs.

Regions’ non-interest income was $501 million, down 7% sequentially. Non-interest income included $15 million in securities gains. Reduced service charges income and mortgage revenues led to the fall in non-interest income. In the quarter under review, mortgage production stood at about $1.8 billion, up 13% year over year. Overall, the company benefited from HARP II loan production.

However, non-interest expense decreased 1% sequentially to $842 million. Better expense management mitigated the increase in salaries and benefits expenses.

Credit Quality

Credit quality was a mixed bag during the first quarter at Regions. Non-performing assets reduced 7% sequentially to $1.8 billion. Inflows of non-performing loans dipped 21% sequentially to $277 million. Moreover, provision for loan losses significantly plummeted by 73% sequentially to $10 million.

However, net charge-offs remained stable at $180 million. Additionally, net charge-offs as a percentage of average net loans stood at 0.99%, up 3 basis points sequentially.

Capital Position

Capital position was strong for Regions at the end of the quarter. During the quarter, the company received the Federal Reserve’s approval for its 2013 Capital Plan under the Comprehensive Capital Analysis and Review (CCAR).

The capital plan for the company includes a hike in the dividend rate to 3 cents per share, subject to the board’s approval along with the share repurchase of common shares worth $350 million covering the period from Apr 1, 2013 to Mar 31, 2014.

Following the approval, the company has authorized the equity repurchase of upto $350 million of its shares. However, the timing and the amount of shares to be repurchased will depend on various factors including market conditions, the company’s capital position and internal capital generation.

As of Mar 31, 2013, Regions’ Tier 1 capital ratio came in at 12.3% compared with 12.0% in the prior quarter. Tier 1 common capital ratio was 11.2%, up from 10.8% in the prior quarter. The company’s loan-to-deposit ratio was 79.0% as of the same date, up from 78% in the prior quarter. Tangible common book value per share came in at $7.29 in the reported quarter, up from $7.11 in the prior quarter.

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 top line remain major areas of concern.

Regions currently carries a Zacks Rank #2 (Buy). Besides Regions, other banks in Southeast that are currently performing well include American National Bankshares Inc. (AMNB - Snapshot Report), BNC Bancorp (BNCN - Snapshot Report) and Crescent Financial Bancshares, Inc. . All three carry a Zacks Rank #1 (Strong Buy).

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