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Regions Tops EPS Estimate

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Regions Financial Corporation’s (RF - Free Report) fourth quarter 2012 earnings from continuing operations came in at 22 cents per share, marginally beating the Zacks Consensus Estimate by a penny. Results were in line with the prior quarter.

Quarterly results benefited from a rise in non-interest income backed by improved funding mix and HARP II loan production. Moreover, expansion in net interest margin depicts interest recovery to some extent. Yet, increased non-interest expenses and higher provision for loan losses were the dampeners.

Net income available to common shareholders was $261 million or 18 cents per share, down from $301 million or 21 cents per share reported in the prior quarter.

For full year 2012, Regions reported income from continuing operations available to common shareholders of $1.1 billion or 76 cents per share. Moreover, this outpaced the Zacks Consensus Estimate by a penny.

Performance in Detail

Total revenues (net of interest expense) came in at $1.4 billion, in line with the Zacks Consensus Estimate. However, revenue increased slightly on a sequential basis.

Regions reported adjusted pre-tax pre-provision income from continuing operations of $493 million in the reported quarter, up 5% sequentially.

Net interest income was $818 million, up 0.1% sequentially. Moreover, net interest margin expanded 2 basis points sequentially to 3.10% in the quarter, attributed to interest recoveries and lower deposit costs. Funding mix showed an improvement as average low-cost deposits inched up as a percentage of total deposits from 84% in the prior quarter to 86%.

Regions’ non-interest income was $536 million, up 1% sequentially. Non-interest income included $12 million in securities gains. Excluding securities gains, non-interest income surged 0.6% sequentially, as service charges income and mortgage revenue improved. Year-to-date, HARP II loan production was $1.6 billion, surpassing the full-year target of $1 billion. Moreover, Now Banking suite of products benefited the non-interest income.

However, non-interest expense increased 3.8% sequentially to $902 million. Excluding one-time items, adjusted non-interest expenses were $849 million, down 2.3% sequentially.

Credit Quality

Credit quality was a mixed bag during the fourth quarter at Regions. Net charge-offs decreased 31% sequentially to $180 million. Additionally, net charge-offs as a percentage of average net loans stood at 0.96%, down 42 basis points sequentially.

Further, non-performing assets reduced 13% sequentially to $1.9 billion. Inflows of non-performing loans dipped 24% sequentially to $350 million. Yet, provision for loan losses was up by 12.1% sequentially to $37 million.

Capital Ratios

Capital ratios remained strong for Regions. As of Dec 31, 2012, Regions’ Tier 1 capital ratio came in at 12.0% compared with 11.5% in the prior quarter. Tier 1 common capital ratio was 10.8%, up from 10.5% in the prior quarter.

The company’s loan-to-deposit ratio was 78.0% as of the same date, down from 79% in the prior quarter. Tangible common book value per share came in at $7.11 in the reported quarter, up from $7.02 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 would act as a positive catalyst. Yet, regulatory issues and elevated non-interest expenses remain major areas of concern.

Regions currently carries a Zacks Rank #3 (Hold).

Among Regions’ peers -- Virginia Commerce Bancorp, Inc. reported fourth quarter 2012 adjusted operating earnings of 16 cents per share, marginally beating the Zacks Consensus Estimate by 2 cents. However, results compare unfavorably with 17 cents per share reported in the prior quarter. Elevated net interest margin, loan and deposit growth and credit quality improvement were the positives for the quarter.

Among other peers - BancorpSouth Inc. (BXS - Free Report) with Zacks Rank #2 (Buy) is expected to release its fourth-quarter 2012 earnings on Jan 23, while IberiaBank Corp. (IBKC - Free Report) with Zacks Rank #1 (Strong Buy) will report on Jan 24.

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