DBRS Comments on Regions’ 4Q12 Results – Sr. Debt at BBB; Trend Stable; Ratings Unaffected

DBRS, Inc. (DBRS) has today commented that its ratings for Regions Financial Corporation (Regions or the Company), including its BBB Issuer & Senior Debt rating, are unchanged following the release of the Company’s 4Q12 results. The trend on all ratings is Stable. For the quarter, Regions reported net income available to common shareholders of $261 million, down from $301 million in 3Q12. Lower QoQ earnings mostly reflected non-core expense items in 4Q12. Overall, the decline in earnings was attributable to a 3.8% increase in non-interest expense and a 12.1% increase in provisions for loan loss reserves, partially offset by a 0.3% increase in total revenues.

In general, Regions balance sheet fundamentals were mixed during 4Q12. Positively, asset quality continued to improve, as levels of net charge-offs (NCOs) and non-performing assets (NPAs) declined. Moreover, the deposit base increased sequentially and the mix improved, as non-time deposits increased, while time deposits declined. Nonetheless, the Company’s loan portfolio continued to contract, reflecting lower levels of commercial investor real estate, owner occupied commercial real estate, and consumer loans. In part, the decrease in loans was due to the continued managed run-off of investor real estate loans, as well as sustained consumer deleveraging.

QoQ earnings results were impacted by several non-core items. During 4Q12, revenues benefited from a $12 million securities gain, while expenses were pressured by a $42 million REIT financing early termination expense, and a $11 million loss on extinguishment of debt. Meanwhile 3Q12 results had included a $12 million securities gain. Finally, DBRS comments that Regions’ 4Q12 and 3Q12 earnings included net losses from discontinued operations of $12 million and $11 million, respectively.

Positively, on an adjusted basis, the Company’s pre-tax pre-provision income increased 5.1% QoQ to $493 million, driven by a moderate 2.3% decline in non-interest expense along with modest increases in non-interest income (up 0.6%) and spread income (up 0.1%).

Lower adjusted expenses, which totaled $849 million in 4Q12, were driven by a $21 million, or 58.3%, decline in professional & legal expenses, a $11 million, or 2.5%, decrease in salaries and employee benefits and a $7 million or, 53.9%, decline in OREO. Going forward, DBRS believes that expense control will remain important as Regions works to maintain, and increase, its earnings capacity in what remains a challenging environment for revenue growth.

The modest increase in adjusted non-interest income to $524 million from $521 million mostly reflected higher service charges on deposits (up 4.1%). Although mortgage banking revenues were down $16 million QoQ, they remained strong, and continue to benefit from the government’s HARP II program. DBRS expects that fee revenues will continue to benefit from solid mortgage banking activity for the next few quarters.

Meanwhile net interest income increased $1 million QoQ to $818 million in the fourth quarter, driven by a 2 bps widening of the Company’s net interest margin (NIM) to 3.10%, partially offset by a 0.6% decline in average earning assets. The wider NIM mostly reflected lower deposit costs, the recent redemption of trust preferred securities, and non-recurrent interest recoveries and the acceleration of deferred fees related to loan payoffs. Management expects that NIM will remain relatively stable in 2013, at approximately 3.08%, and continue to benefit from further reductions in deposit costs, as well as from the retention of 15-year conforming residential mortgages. DBRS notes that Regions has $8.3 billion of CDs that will mature in 2013, of which $5.4 billion mature in the first half of the year with an average rate of 1.51% and $2.9 billion mature in the second half with an average rate of 53 basis points, providing an opportunity to lower funding costs.

Slightly lower earning assets were attributable to a 1.4% decrease in average loans, somewhat offset by a 0.4% increase in average securities. Despite solid growth in the commercial & industrial (up 1.5%) and indirect automobile (up 6.7%) loan portfolios, lower average loans were driven by declines in the investor real estate (down 10.0%), owner-occupied commercial real estate, (down 2.1%) and owner occupied commercial loan (down 1.9%) portfolios.

Despite the difficult business environment, Regions’ asset quality continued to improve. At December 31, 2012, the Company reported NPAs (excluding performing TDRs), of $1.9 billion, down 13.4% QoQ. NPAs as a percent of loans plus OREO, were 2.59% at the end of 4Q12 compared to 2.93% at the end of 3Q12. Meanwhile, NCOs declined significantly in the quarter, down $82 million to $180 million, representing a manageable 0.96% of average loans. Positively, and perhaps indicating future credit quality improvement, new non-performing loan (NPL) formation was down almost $113 million QoQ to $350 million in 4Q12, and criticized commercial loans declined by $639 million, or 12.4% QoQ.

Although NCOs outpaced provisions by $143 million, Regions’ loan loss reserves of $1.9 billion continue to provide ample protection, in DBRS’s view. At the end of 4Q12, the allowance represented 2.59% of total loans and covered 114% of NPLs (excluding loans held for sale). As a state-chartered, non-OCC regulated bank, Regions Bank was not required to implement the new guidance related to consumer loans where the borrower has gone through a Chapter 7 bankruptcy. However, given the Company’s credit monitoring policies, management does not expect the guidance would have a material impact if implemented.

Regions’ capital remains sound in DBRS’s view, and a loan-to-deposit ratio of 78% underpins the Company’s solid liquidity and funding profile. At December 31, 2012, Regions’ Tier 1 Common ratio was an estimated 10.8%, up from 10.5% at the end of 3Q12, and its Tier 1 ratio was 12.0%, up from 11.5% in 3Q12. Regions estimates that at the end of 4Q12 its Basel III Tier 1 Common ratio, reflecting the recent NPR, was 8.9%, up from 8.7% at the end of 3Q12.

Notes:
All figures are in U.S. dollars unless otherwise noted.

[Amended on May the 23rd, 2014 to remove unnecessary disclosures.]