Regions Latest Regional With Earnings Beat (Update 2)

Updated with market close information, along with comments from KBW analyst Melissa Roberts, Stifel Nicolaus analyst Christopher Mutascio, and Jefferies analyst Ken Usdin.

NEW YORK ( TheStreet) -- Regions Financial ( RF) on Tuesday reported a sharp decline in its credit expenses, along with an improved funding mix and solid commercial loan growth.

The Birmingham, Ala., lender's shares rose over 4% to close at $6.65.

The company followed the trend for large regional bank holding companies beating analysts' consensus second-quarter estimates, as credit costs continued to decline. According to KBW analyst Melissa Roberts, a sample of 64 large banks that had already reported second-quarter earnings showed that "on an operating-per-share basis, 46 banks (72%) beat consensus estimates, 4 (6%) met estimates, and 14 (22%) missed estimates. This compares to 2Q11 and 1Q12 when 67% and 69% of the banks beat estimates, respectively."

Regions reported second-quarter net income available to common shareholders of $284 million, or 20 cents a share, beating the consensus estimate of a 16-cent profit, among analysts polled by Thomson Reuters.

Earnings grew from $145 million, or 11 cents a share during the first quarter, and $55 million, or four cents a share, during the second quarter of 2011.

The second-quarter earnings were reduced by $71 million, or five cents a share, from the accelerated discount accretion related to the company's redemption in April of $3.5 billion in preferred shares held by the government, for bailout assistance received in October 2008, through the Troubled Assets Relief Program, or TARP.

The second-quarter results were boosted by a decline in the provision for loan losses to $26 million, from $117 million the previous quarter, and $398 million a year earlier, as asset quality continued to improve. Regions Financial's annualized ratio of net charge-offs to average loans was 1.39% during the second quarter, improving from 1.73% in the first quarter, and 2.71% during the second quarter of 2011.

Even after releasing $239 million in loan loss reserves during the second quarter, loan loss reserves covered 3.01% of net loans as of June 30, indicating that the company will continue to release reserves over coming quarters, boosting earnings.

Regions had $122.3 billion in total assets as of June 30, declining 5% from the previous quarter, and 7% from a year earlier. Nonperforming assets totaled $2.3 billion as of June 30 and made up 1.91% of total assets, improving from 2.06% in March and 2.75% in June 2011.

During the second quarter, the bank's net interest margin - the spread between the average yield on loans and investments and the average cost for deposits and borrowings - expanded to a tax-adjusted 3.16%, from 3.09% in the first quarter, and 3.07% in the second quarter of 2011, with the sequential improvement reflecting "lower deposit costs, lower non-accrual levels and further deployment of excess cash." The company said that during the second quarter, "average low-cost deposits improved 2 percent linked quarter while higher cost time deposits declined 10 percent."

Second-quarter net interest income was $838 million, increasing from $827 million the previous quarter, but declining from $856 million a year earlier.

Total noninterest income declined to $507 million during the second quarter, from $524 million in the first quarter, and $543 million a year earlier. The year-over-year decline in noninterest income mainly reflected the reduced service charges on deposit accounts from the implementation of the Durbin Amendment during the fourth quarter of 2011.

The company also said that "account service fees and charges were down $21 million linked quarter due to the establishment of a reserve for certain customer fee refunds resulting from a change in the company's non-sufficient funds policy."

Second-quarter mortgage revenue increased to $90 million, from $77 million the previous quarter, and $50 million a year earlier, "driven by new home purchases and refinance activity, as customers took advantage of low interest rates and the extended Home Affordable Refinance Program, or HARP II."

During the second quarter, Regions also reported $26 million in gains related to the sale of properties.

Noninterest expense totaled $842 million during the second quarter, declining from $913 million in the first quarter and $956 million during the second quarter of 2011, with the linked-quarter improvement "primarily related to lower credit related costs."

Following a $900 million common equity raise and the sale of the company's Raymond James subsidiary during the first quarter and the TARP repayment during the second quarter, Regions estimated that its ratio of Tier 1 common equity to risk-weighted assets was 10.0% as of June 30. The company said that its tangible common equity ratio was 8.04% as of June 30.

Total loans declined 1% from the previous quarter and 6% from a year earlier, to $76.2 billion as of June 30. Commercial and industrial loan balances grew 4% sequentially and 10% year-over-year, to $26.0 billion, as of June 30. Regions said that "commercial loan production (including renewals) totaled $11.6 billion," during the second quarter, "of which $4.3 billion were new loan originations."

Regions Financial's shares have now returned 55% year-to-date, following a 39% decline during 2011.

RF Chart RF data by YCharts

The shares trade just below their reported June 30 tangible book value of $6.69, and for nine times the consensus 2013 EPS estimate of 76 cents. The consensus 2012 EPS estimate is 62 cents.

Stifel Nicolaus analyst Christopher Mutascio rates Regions Financial a hold, and said on Tuesday that "while the company continues to dispose of repossessed real estate and non-performing loans, we note that sequential declines of 11.2% and 18.8% in these balances were largely attributable to lower inflows (as opposed to higher sales levels), which we view as yet another positive indicator.

Mutascio estimates that Regions will earn 65 cents a share for all of 2012, followed by 2013 EPS of 80 cents.

Jefferies analyst also Ken Usdin rates Regions a "Hold," with a $7.50 price target, saying on Tuesday that the bank's net interest margin expansion "came sooner than expected," and that it was "a great quarter for credit," with the decline in the provision for loan loss reserves.

Usdin added that "Forward-looking metrics looked solid as criticized loans were down 9% and nonperforming inflows were down $66mm to $315mm."

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

-- Written by Philip van Doorn in Jupiter, Fla.

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Philip W. van Doorn is a member of TheStreet's banking and finance team, commenting on industry and regulatory trends. He previously served as the senior analyst for TheStreet.com Ratings, responsible for assigning financial strength ratings to banks and savings and loan institutions. Mr. van Doorn previously served as a loan operations officer at Riverside National Bank in Fort Pierce, Fla., 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.