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Forget EPS Miss: Regions Shows Strong C&I Loan Growth, Expanded Margin (Update 1)

  • Third-quarter net income of $285 million, or 20 cents a share
  • EPS a penny shy of consensus estimate
  • Adjusted noninterest expenses up 6% sequentially to $879 million.
  • Average commercial and industrial loans grow 4% from Q2, 13% from year-earlier
  • Mortgage revenue down 14% sequentially, down 51% from year earlier

Updated from 8:38 a.m. ET with increase in adjusted noninterest expenses, market reaction and comment from Jefferies analyst Ken Usdin.

NEW YORK ( TheStreet) -- Investors will see headlines saying Regions Financial (RF - Get Report) missed the consensus third-quarter earnings estimate, but there was plenty of good news in the company's earnings announcement on Tuesday.

Regions of Birmingham, Ala., reported third-quarter net income available to common shareholders of $285 million, or 20 cents a share, increasing from $259 million, or 18 cents a share, in the second quarter, but declining from $301 million, or 22 cents a share, during the third quarter of 2013.

The third-quarter results came in a penny shy of the consensus estimate of 21 cents a share, among analysts polled by Thomson Reuters.

The main factor in the year-over-year earnings decline was a 51% decline in mortgage income to $52 million in the third quarter, following the industry trend as a rise in long-term interest rates has slowed the wave of mortgage refinancing in the U.S. Mortgage income was also down from $69 million in the second quarter.

Third-quarter highlights for Regions included an expansion of the net interest margin to 3.24% from 3.16% the previous quarter and 3.08% a year earlier. Net interest income increased to $824 million in the third quarter from $808 million in the second quarter and $817 million in the third quarter of 2012. Those are significant achievements in the current environment, with some regional lenders seeing net interest margins continuing to contract.

Feeding the expanded margin was an improved funding mix, with interest-bearing deposits down 4% year-over-year, while non-interest-bearing deposits declined only slightly. The company said in its earnings release that "average low-cost deposits increased from the previous year by $2.6 billion, while higher cost time deposits declined $5.1 billion. As a result, low-cost deposits as a percent of total deposits improved to 89 percent, compared to 84 percent last year."

Meanwhile, average loans were down slightly year-over-year, as the bank's commercial real estate (CRE) and home equity loans continued to run off. But coveted commercial and industrial (C&I) loans were up considerably, with average balances rising 4% sequentially and 13% year-over-year, to $29.3 billion in the third quarter.
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