Regions Financial ( RF) shares were falling as much as 17% early Tuesday after the bank holding company beat Wall Street's expectations but may not have cushioned enough for loan losses.

The Birmingham, Ala. holding company reported net income of $77 million, compared to a net loss of $6.2 billion in the fourth quarter and net income of $337 million in the first quarter of 2008.

After factoring in $51 million in dividends on preferred shares paid mostly to the government, which provided with $3.5 billion in capital on Nov. 14 via the Troubled Assets Relief Program (TARP), first- quarter net income available to common shareholders was $26 million, or 4 cents per share, coming in ahead of the Thomsen Reuters consensus analyst estimate of a loss of 39 cents per share.

Shares were recently falling 14.7% to $4.95, after hitting a low of $4.81 earlier in the morning.

This followed a down day in the market Monday, driven by a first-quarter earnings release from Bank of America ( BAC), which also showed an improvement in earnings, combined with declining asset quality.

While Regions' first-quarter profit coming on the heels of such a large fourth quarter loss may seem like great news on the surface, the fourth quarter loss reflected goodwill impairment charges of $6 billion, as the company wrote down the carrying value of past acquisitions, including Amsouth Bancorp., which had $58 million in total assets when acquired by Regions Financial in late 2006.

The market's initial negative reaction might be explained by a quick look at a few asset quality ratios for Regions:

Regions Financial Corp.'s Asset
Quality ($millions)
Regions Financial Corp.

Net loans charge-offs (actual loan losses) for the first quarter were $390 million, compared to $796 million in the fourth quarter and $126 million in the first quarter of 2008. With the reduced charge-offs, the company also reduced its quarterly provision for loan losses to $425 million from $1.15 billion in the fourth quarter. While the loan-loss provision continued to exceed net charge-offs, Regions Financial's overall exposure continued to increase, as the ratio of nonperforming loans to total loans rose sharply to 2.53% as of March 31, from 1.65% in December and 1.55% in March 2008.

From the analyst consensus, it is clear that many expected a larger provision for loan losses in the first quarter.

With the TARP money, Regions Financial's capital ratios remained strong, with an estimated Tier 1 capital ratio of 10.37% and a total risk-based capital ratio of 14.53% as of March 31. For banks, these ratios generally need to be at least 6% and 10% for an institution to be considered well-capitalized.

With such a large increase in nonperforming loans, mainly in the company's commercial real estate loan portfolio, it's quite possible Regions will need be more aggressive in its loan loss provisioning over coming quarters. This -- along with the drag on earnings from the preferred stock dividends paid to the government -- will be a drag on earnings.
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.