Regions Financial: Earnings Winner

NEW YORK ( TheStreet) -- Regions Financial ( RF) was the winner on Tuesday among major U.S. financial names, with shares rising 4% to close at $8.01.

The broad indices all ended with 1% gains, as the narrative of the U.S. housing rebound continued. The Federal Housing Finance Agency reported that its House Price Index was up 0.7% in February from January, and that house prices in the U.S. were up 7.1% from a year earlier. The U.S. House Price index was still 13.6% below its peak in April 2007, right before the housing bubble burst.

The KBW Bank Index ( I:BKX) rose 2% to close at 55.80, with all 24 index components ending with gains. The index is, of course, heavily weighted to Bank of America ( BAC), which was up 3% to close at $12.07, after Morgan Stanley analyst Betsy Graseck upgraded the company to an "overweight" rating from an "equal-weight" weighting.

Graseck raised her price target for Bank of America to $16 from $13, and said in a note to clients that "you don't get a lot of second chances in life, and so we are taking advantage of this one....BAC is about to deliver on a significant expense reduction over the next several quarters, which should fall to the bottom line and boost EPS. Also, we expect BAC will be largely through significant litigation risk by YE2013."

Based on her expectations for the bank's expense reduction, credit quality improvement and a gain in market share at the expense of Wells Fargo ( WFC), Graseck raised her 2013 earnings estimate for Bank of America to $1.07 a share from $1.01, while raising her 2014 EPS estimate to $1.43 from $1.30. Her 2015 EPS estimate for Bank of America is $1.98.

Regions

Regions Financial of Birmingham, Ala., on Tuesday reported first-quarter net income available to common shareholders of $327 million, or 23 cents a share, increasing from $261 million, or 18 cents a share, in the fourth quarter, and $145 million, or 11 cents a share, in the first quarter of 2012. The first-quarter results came in ahead of the consensus estimate of 20 cents, among analysts polled by Thomson Reuters.

The biggest factor in the year-over-year earnings improvement was a decline in the provision for loan losses to $10 million in the first quarter from $37 million the previous quarter and $117 million a year earlier. The provision is the amount added to loan loss reserves, directly lowering pre-tax earnings.

Noninterest expense totaled $842 million in the first quarter, declining from $902 million in the fourth quarter and $913 million in the first quarter of 2012. According to the company, professional and legal expenses returned to "a more normalized level" of $31 million in the first quarter from $15 million in the fourth quarter, when Regions "benefitted from $20 million in lower legal reserves." The biggest factor in the sequential lowering of expenses was $42 million in costs in the fourth quarter to terminate a Real Estate Investment Trust investment.

The bank's expenses to maintain repossessed real estate totaled just $2 million in the first quarter, declining from $6 million the previous quarter and $23 million a year earlier.

Another highlight for Regions was that its net interest margin -- the spread between the average yield on loans and investments and the average cost for deposits and borrowings -- widened to 3.13% in the first quarter from 3.10% in the fourth quarter and 3.09% in the first quarter of 2012.

Despite the margin expansion, net interest income was down to $798 million in the first quarter from $818 million the previous quarter and $827 million a year earlier. The sequential decline reflected a lower number of days in the quarter, but also a decline in average loans to $73.9 million in the first quarter from $74.6 million in the fourth quarter. Continued declines in commercial real estate (CRE) and residential mortgage loans, home equity loans and other consumer loans, were only partially offset by increases in commercial and industrial loans and indirect auto loans.

Average commercial and industrial (C&I) loans were up 2% sequentially to $27.1 billion in the first quarter.

Credit Suisse analyst Craig Siegenthaler rates Regions "outperform," and in a note to clients on Tuesday raised his price target for the shares to $9.50 from $9.00, estimating that the bank would be able to see net loan growth beginning in the second or third quarters of this year, "driven by continued strong C&I and indirect consumer growth, retention of 15Y fixed conforming resi mortgage, and slower income CRE runoff."

Siegenthaler raised his 2013 EPS estimate for Regions by a penny to 82 cents, and raised his 2014 EPS estimate by a penny to 91 cents. The analyst also raised his 2015 earnings estimate by two cents, to 98 cents a share.

Shares of Regions have returned 13% this year, following a 67% return in 2012. The shares trade for 9.5 times the consensus 2014 EPS estimate of 84 cents. The consensus 2013 EPS estimate is 82 cents.

RF Chart RF data by YCharts

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.

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