WRAPUP 3-U.S. regional banks post gains; loan losses ease

* Net interest income up, loan losses down

* U.S. Bancorp Q1 EPS of $0.52 vs. $0.34 a year ago

* Regions Q1 EPS of $0.01 vs. loss of $0.21 year ago

* Regions shares up 2.7 pct; U.S. Bancorp down 1.2 pct (Adds deposit cost details, analyst comment; updates share prices)

By Joe Rauch and Clare Baldwin

CHARLOTTE, N.C./NEW YORK, April 19 (Reuters) - U.S. regional banks Regions Financial Corp (RF.N) and U.S. Bancorp (USB.N) reported better-than-expected first-quarter earnings on Tuesday as they paid less for deposits and had fewer delinquent borrowers.

The results highlight how smaller, regional U.S. banks are moving closer to conquering the real estate-related credit problems that have dogged them since the housing crisis began in 2007.

"The regional banks are all about their book of loans -- credit quality is improving," said David Dietze, president of Point View Financial Services in Summit, New Jersey, with $115 million under management.

Regional banks relied more heavily on home construction and mortgages before the crisis compared with their larger competitors, which had other businesses like investment banking and wealth management to boost profits.

That meant they relied almost exclusively on net interest income -- or the difference between what they earned in interest from borrowers and what they paid for deposits.

Now, many banks are seeing the margin on that income widen, as the rates banks have to pay depositors fall.

At Regions Financial Corp, the Southeastern bank posted a surprise profit as its first quarter net interest margin rose to 3.07 percent, up from 2.77 percent a year ago.

During the company's analyst call, senior management said the rise was due primarily to pay lower interest on customer deposits.

The Birmingham, Alabama-based Regions' widening margin led to higher net interest income, which rose 3.9 percent to $863 million.

Regions' interest income increase and surprise second quarter profit occurred despite a 7.7 percent decline in total loans to $81.3 billion. [ID:nN18221286]

Minneapolis-based U.S. Bancorp -- considered one of the strongest U.S. lenders -- bucked the trend in margin expansion. It grew net interest income through loan growth.

The large Midwestern bank's net interest income increased 4.3 percent to $2.5 billion.

US Bancorp reported total loans increased 3.6 percent to $198 billion, even as its net interest margin declined to 3.69 percent versus 3.90 percent a year prior.

The company said the margin contracted due to higher securities balances and a higher-than-expected cash position with the Federal Reserve, due to unexpected deposit growth.

"It's just the outcome of us addressing the liquidity coverage ratio, which is part of Basel III," U.S. Bancorp Chief Financial Officer Andrew Cecere said in an interview. The bank is adding about $5 billion to its securities portfolio each quarter. It impacts the margin 5 to 10 basis points per quarter but has no impact on net interest income or capital.

U.S. Bancorp reported net income just above $1 billion, or 52 cents per share. [ID:nN19272362]

LOAN LOSSES

Banks' profits were also boosted because the loans now left on their books are not entering default.

Dallas-based Comerica Inc (CMA.N) reported net income of $102 million, or 57 cents per share, in the quarter, reversing a loss last year because of a dramatically lower loan loss provision. [ID:nL3E7FJ1YH]

Comerica reduced its reserve for bad loans by 72 percent to $49 million. The bank recently agreed to buy smaller rival Sterling Bancshares Inc SBIB.O.

U.S. Bancorp reduced the amount of money it set aside for bad loans to $755 million during the quarter from $1.31 billion a year earlier.

"If we continue to see the improvement that we are seeing, we will continue to release reserves at levels probably equal to, if not slightly higher, than what you just saw," U.S. Bancorp CEO Richard Davis said on a conference call with analysts.

Regions said net charge-offs -- or loans the bank writes off after default -- fell 29 percent from the prior quarter.

The regional banks' improving health has led to a wave of repayments of the U.S. government's bailout aid invested at the height of the 2008 financial crisis.

During the quarter, regional banks including Atlanta-based SunTrust Banks Inc (STI.N) and Cincinnati-based Fifth Third Bancorp (FITB.O) repaid their Troubled Asset Relief Program aid.

The repayments came after a second round of stress tests conducted by the Federal Reserve and completed in March.

Regions is the last of the 19 largest U.S. banks that has been through the stress tests which has yet to repay the $3.5 billion invested under the TARP program.

Both SunTrust and Fifth Third have yet to report first-quarter earnings.

Regions shares closed up 2.7 percent at $7.17, while U.S. Bancorp fell 1.2 percent to $25.25. Comerica shares fell 2.2 percent to $36.64. (Reporting by Joe Rauch and Clare Baldwin. Additional reporting by Jochelle Mendonca in Bangalore; Editing by Lisa Von Ahn, Robert MacMillan and Bernard Orr)