Regions Financial (RF) felt the sting of devalued Florida real estate in its second-quarter earnings.

The Birmingham, Ala.-based bank on Tuesday delivered net income of $206.4 million or 30 cents per diluted share; analysts had forecast 42 cents.

The earnings still missed expectations when merger-related expenses are excluded, at 39 cents per diluted share. Earnings fell year over year, as well as sequentially. The bank earned $453.3 million in the second quarter of 2007 and $336.7 million in the first quarter of 2008.

"Credit-quality deterioration is today's overriding issue for financial services companies, and Regions is not immune," said CEO Dowd Ritter in a statement. "While we are prudently managing our credit risk and taking steps to strengthen our capital position, we are also focusing on growing revenue and managing costs to maintain a strong foundation for long-term growth and profitability."

One of the steps that the bank is taking includes slashing its dividend from 38 cents to 10 cents. Analysts had predicted that would be necessary in order to preserve capital.

The Florida housing market, struggling homebuilders and problematic home-equity loans were to blame for increases in loan charge-offs. The net loan charge-offs for the second quarter were $209 million, a big jump up from the first quarter's level of $125.8 million. The acute stress in the Florida real estate market was blamed, as property values have seen rapid and deep declines.

The loan-loss provision came in at $309 million, and total nonperforming assets were $1.6 billion vs. $1.2 billion in the first quarter. The increase was attributed to homebuilder and condominium loans. The Florida market now has a glut of condos. Plus, the homebuilders can't complete their projects or start new ones.

One of the positive points of the quarter for Regions was its securities arm of Morgan Keegan, which contributed $38 million in the quarter. The strong fixed-income side offset the weaker equity market, but a writedown on a mutual fund investment cost the bank $13.4 million. But revenue was unchanged sequentially, even with a reduction in expenses.

Average loans grew at an annualized 6% pace from the first to second quarter, driving solid gains in earning assets and benefiting revenue. Additional margin contraction, however, offset that effect.

Standard & Poor's analyst Stuart Plesser expected that total charge-offs for loans would come in at 70 basis points; they came in at 86 basis points. With a "hold" rating and a 47-cent estimate for the quarter, presumably he and other analysts will be adjusting their numbers downward. Plesser has a target price of $14.

The stock was recently down 12.3% at $9.01.

Fellow bank Key Corp. ( KEY) also reported disappointing earnings on Tuesday, but not as bad as the market had expected.

Another bank that is heavily exposed to Florida is Synovus Financial ( SYN), which reports earnings on Thursday. Regional banks with business in Florida have seen their stock values plummet as much as 65% or more over the past year.

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