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Shares of Regions Financial ( RF) of Birmingham, Ala., closed at $5.53 Wednesday, rising 29% year-to-date.

Regions owes $3.5 billion in federal bailout money received in 2008 through the Troubled Assets Relief Program, or TARP.

The company agreed in January to sell its Morgan Keegan brokerage subsidiary to Raymond James Financial ( RJF) for "total consideration of $1.18 billion."

O'Connor's price target for Regions is $6.00, and he estimates the company will earn 48 cents a share in 2012, followed by EPS of 75 cents in 2013.

The analyst says that an "outsized capital raise for TARP repayment is unlikely given fundamental improvement," including the Morgan Keegan sale, "improvement in credit quality in 4Q and an increase in capital ratios." O'Connor expects the company's Basel I Tier 1 capital "to exceed 9% by the end of 2012."

O'Connor also points out that "unlike some regionals, RF hasn't meaningfully released Reserves," which covered 3.5% of total loans at the end of 2011.

"Tarp uncertainty" remains an obvious risk for Regions, with O'Connor estimating that the company will eventually raise $1 billion in common equity to repay the government.

Interested in more on Regions Financial? See TheStreet Ratings' report card for this stock.

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