Regions Financial

(RF) - Get Report

shares jumped more than 5% Tuesday after the southern bank said the federal government had accepted its application for a government equity investment.

Regions, in a conference call to discuss third-quarter financial results, said that it "has been notified that it is eligible and does intend to participate in the capital purchase program announced by the Treasury Department on Oct. 13, 2008." The government last week said it would make $250 billion in

preferred equity

investments to shore up confidence in the banking system.

The equity investments are the most significant of several

government initiatives

intended to improve liquidity and confidence in the banking industry.

The government investments will be made out of the $700 billion financial sector rescue plan -- troubled asset relief program, or TARP -- approved by Congress earlier this month. The government has said nine major banks have already agreed to be a part of the equity program, which reportedly include

Bank of America

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JPMorgan Chase

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Wells Fargo

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Morgan Stanley

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Bank of New York Mellon

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State Street

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Bank executives said they also expected to unload assets through the TARP, but had not yet received clarification on what type of assets the government would buy.

Regions' stock reacted positively to the news, despite a steep decline in third-quarter profits, which fell below Wall Street's expectations. The Birmingham, Ala., holding company reported third quarter net income of $80 million, or 11 cents a share, vs. the consensus analyst estimate of 27 cents a share, according to Thomson Reuters. The bank earned $206 million last quarter and $394 million in the third quarter of 2007.

Shares were gaining 5.8% to $11.26 in recent trading.

While Regions expects to raise between $1.17 billion and $3.51 capital by issuing preferred shares to the Treasury, the company emphasized that it remained well capitalized as of Sept. 30, with core capital at $1.7 billion above the regulatory minimum for a well-capitalized institution.

The company's tier-1 and risk-based capital ratios of 7.47% and 11.70% as of Sept. 30, compared to 7.48% and 1.77% last quarter and 7.73% and 11.30% in September 2007.

Earnings and Asset Quality

The main factor in the earnings decline from last quarter was a $108 million increase in the holding company's provision for loan losses, to $417 million. Regions took aggressive steps to reduce its exposure to problem assets during the third quarter, by either selling or transferring to held-for-sale $430 million in nonperforming assets. Net charge-offs and writedowns on these moves totaled $186 million for the quarter, with construction loans comprising nearly half of the charge-offs.

Most holding companies don't include loans past due 90 days or more, but still accruing interest, as part of their nonperforming assets. Most also report nonperforming loans held for sale separate from portfolio loans. All are combined in the table above, showing that even after the aggressive moves to reduce balance sheet risk, Regions saw its nonperforming assets ratio climb to 1.54%, from 1.43% last quarter.

Loan loss reserves covered 1.57% of total loans. While this was slightly "behind" the annualized ratio of net charge-offs to average loans for the third quarter, the company pointed out that its third quarter provision for loan loss reserves "essentially matched net charge-offs," and that its portfolio coverage increased from the previous quarter.

Earnings were also negatively affected by a reduced net interest margin, to 3.10% from 3.36% last quarter, which mainly reflected a "43 million charge related to a leverage lease tax settlement."

Philip W. van Doorn joined Ratings., Inc., in February 2007. He is the senior analyst responsible for assigning financial strength ratings to banks and savings and loan institutions. He also comments on industry and regulatory trends. Mr. van Doorn has fifteen years experience, having served as a loan operations officer at Riverside National Bank in Fort Pierce, Florida, and as a credit analyst at the Federal Home Loan Bank of New York, where he monitored banks in New York, New Jersey and Puerto Rico. Mr. van Doorn has additional experience in the mutual fund and computer software industries. He holds a Bachelor of Science in business administration from Long Island University.