UPDATE 4-Regions profit beats Street; credit rebounds

* Q2 EPS 4 cents vs Street view loss 1 cent

* Loan loss provision down 40 percent

* Shares rise 2.25 percent (Adds share rise, executive comments, details on loan investigation and debit card fees)

By Joe Rauch

CHARLOTTE, N.C., July 26 (Reuters) - Regions Financial Corp's (RF.N) second-quarter profit topped expectations as the bank set aside less money for real estate-related loan problems.

Revenue was flat, and the bank's loan book shrank, mirroring results at other U.S. regional banks, which are struggling to boost revenue amid weak loan demand.

Credit issues have been particularly burdensome for Birmingham, Alabama-based Regions. It has bad mortgages in states where home prices have plunged, including Georgia and Florida, and is the only one of the 19 largest U.S. banks that has not repaid its U.S. government bailout aid, totaling $3.5 billion.

But the bank reported its third straight quarterly profit on Tuesday, with net income available to common shareholders totaling $55 million, or 4 cents per share.

Analysts had expected a net loss of 1 cent per share, according to Thomson Reuters I/B/E/S.

Regions shares rose 2.25 percent to $6.35 in afternoon trade on the New York Stock Exchange.

"The bank is still hovering around break-even, but it's starting to show signs of improvement," said Jefferson Harralson, a bank analyst with Keefe, Bruyette & Woods Inc.

The bank set aside $398 million for loan losses during the quarter, a decline of 40 percent from $651 million a year earlier.

Loans the bank wrote off its books declined 16 percent, to $548 million from $651 million.

The lower provisions boosted profits, while revenue was flat at $1.6 billion.

In the 2010 second quarter, Regions lost $335 million, or 28 cents per share.

Net interest income -- what the bank makes in loan interest after paying deposit interest -- rose slightly, to $864 million from $856 million a year earlier.

Noninterest income was $757 million, little changed from a year prior.

Regions Chief Executive Grayson Hall said the bank expects to lose $170 million annually in noninterest income beginning in October when new limits on debit card fees take effect.

However, the bank expects to recoup those losses through fees elsewhere and by reducing expenses. he said.

The bank is looking to sell some parts of its business.

During the second quarter it announced it would look for "strategic alternatives" for its Morgan Keegan investment banking and brokerage operations.

The news came on the same day it disclosed a $210 million settlement with several state and federal regulators, resolving allegations that Morgan Keegan fraudulently marketed mutual funds filled with subprime mortgages in 2007. [ID:nN1E75L158]

Last week Reuters reported several rival brokerages and private equity firms were expected to submit bids for the unit. [ID:nN1E76L1QL]

During Regions' earnings conference call with analysts, Hall said the bank had received inquires from federal authorities relating to its 2009 loan accruals, and a federal investigation was continuing.

An investor lawsuit against Regions first disclosed the matter in June, noting the board's audit committee had retained a law firm for its own probe into whether the bank properly reported bad loans in 2008 and 2009. [ID:nN13132542] (Reporting by Joe Rauch; editing by Derek Caney and John Wallace)