Regions Financial Corp.’s (RF) first quarter loss came in at 21 cents per share, better than the Zacks Consensus Estimate of a loss of 27 cents. Results for the quarter improved due primarily to lower-than-expected provisions for loan losses. Last year, the company reported a profit of 4 cents. 

First quarter marked the third consecutive period of stabilized net interest margin, which came in at 2.77%. The actions that Regions has been taking on loan and deposit pricing should produce an improving margin throughout 2010. Improving deposit mix fueled by a strong low-cost deposit growth continues to be a significant contributor to the margin stabilization. 

Non-interest income declined about 24% year-over-year to $831 million. In 2009, Regions made a considerable headway in lowering its core expense base and anticipate additional efforts in improvements in 2010. An unusually high recession and credit related costs such as higher OREO, professional fees and FDIC premiums are more than offsetting the company’s expense reduction efforts. 

Non-interest expense was up 16.3% year-over-year and is likely to continue into 2010. But ultimately, many of these expenses will revert to a more normalized level. 

Regions increased its provision for loan losses (money set aside to cover souring loans) to $770 million from $425 million in the prior-year quarter. The increase in the loan loss provision was primarily driven by focused efforts to identify and address loan portfolio stress as well as continued deterioration in the residential homebuilder, condominium and home equity portfolios. However, it improved compared with the prior quarter. 

Non-performing assets expressed as a fraction of loans and other real assets ticked up to 5.15% from 2.43% in the year-ago period and 4.83% in the previous quarter. Net charge-offs also increased to 3.16% of average net loans from 1.64% in the year-ago period and 2.99% in the previous quarter. Credit related costs, while remaining elevated, should begin to decline in 2010, given management’s proactive stance towards credit loss recognition and prudent reserve bill in 2009. 

With Tier 1 Capital ratio at an estimated 11.7% and Tier 1 Common ratio at 7.1%, Regions stays above the “Well Capitalized” threshold. 

In terms of balance sheet changes, loan demand reflected the broader economy, which was generally soft. Return on tangible equity came in at negative 12.7% versus positive 1.43% in the previous year quarter. 

Along with the financial services industry, Regions still faces some near-term credit and economic challenges. Though we are encouraged by some of the recent trends, we remain cautious about the pace and substance of improvement. 

We see an improvement in Regions’ credit quality metrics but remain measured in our forecast regarding the pace of improvement. Looking forward into 2010, we expect the margin to gradually improve throughout the year. Organic momentum in the form of deposit repricing and continuous loan spread improvement will be the main drivers.
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