DBRS Comments on Regions Financial’s 1Q13 Results – Sr. Debt at BBB, Stable Trend

DBRS, Inc. (DBRS) has today commented on Regions Financial Corporation’s (Regions or the Company), 1Q13 financial results. The Company has an Issuer & Senior Debt rating of BBB. All ratings of the Company have a Stable trend. For the quarter, Regions reported net income available to common shareholders of $327 million, up from $261 million for 4Q12. Higher quarter-over-quarter (QoQ) earnings mostly reflected the non-recurrence of 4Q12 noncore expense items. Overall, the increase in earnings was attributable to a 6.7%, decrease in non-interest expense and a 73.0% decrease in provisions for loan loss reserves, partially offset by a 4.1% decrease in total revenues.

DBRS notes that Regions’ balance sheet fundamentals for 1Q13 were mixed. Positively, the Company’s asset quality continued to improve and its liquidity and capital profile remained solid. Nonetheless, average loans contracted sequentially.

Higher QoQ earnings were impacted by the non-recurrence of several 4Q12 non-core items, which included a $42 million REIT financing early termination expense, and an $11 million loss on extinguishment of debt. On an adjusted basis, the Company’s QoQ income before provisions and taxes decreased $51 million, or 10.3%, to $442 million, driven by a 4.3% decline in adjusted revenues that was only partially offset by a 0.8% decrease in adjusted non-interest expense.

Lower adjusted revenues were attributable to a $38 million, or a 7.3%, decrease in non-interest income and a $20 million, or 2.4%, decline in net interest income. The contraction in linked-quarter non-interest income mostly reflected an $18 million, or 20.0%, decrease in mortgage income and a $12 million, or 4.7%, decrease in service charges on deposit accounts. Lower mortgage banking income was driven by a decrease in volume along with the continued retention of originated 15-year fixed rate mortgages. The decline in deposit servicing fees was due to seasonality. Meanwhile, lower net interest income reflected a 1.6% decrease in average interest earning assets, partially offset by a 3 basis point widening of net interest margin to 3.13%.

The slight linked-quarter decrease in adjusted expenses mostly reflected a $13.0 million, or 65.0%, decrease in amortization of core deposit intangibles and a $7.0 million, or 7.2%, decrease in occupancy expense. Going forward, DBRS believes that expense control will remain an important driver of performance (adjusted expense/efficiency ratio was 64.9% in 1Q13) as Regions works to maintain, and increase, its earnings capacity in what remains a challenging environment for revenue growth.

Overall, lower average loans, on a linked-quarter basis, reflected declines across many loan segments, which more than offset average growth in C&I loans (up 2.4%) and indirect loans (up 5.6%). DBRS notes that the contraction in loans, in part, reflected the continued managing down of investor real estate loans and the de-leveraging of consumer loans. Going forward, the Company expects loan growth to outpace attrition in 2H13.

Despite the difficult operating environment, Regions’ asset quality continued to improve. At March 31, 2013, the Company reported non-performing assets (NPAs; excluding performing TDRs) of $1.8 billion, down 6.8% sequentially. NPAs as a percent of loans plus OREO were still a relatively high 2.41% of loans at the end of 1Q13, but down from 2.59% at the end of 4Q12. Meanwhile, net charge-offs (NCO) on an absolute basis were stable at $180 million. Given the decrease in average loans, Regions’ NCO to average loan ratio edged up to 0.99% for 1Q13, from 0.96% for 4Q12. Positively and perhaps signaling continued future credit quality improvement, new non-performing loan (NPL) formation was down $73 million, QoQ, to $277 million in 1Q13, and criticized commercial loans continued to decline.

Although NCOs outpaced provisions by $170 million, Regions’ loan loss reserve of $1.75 billion continues to provide ample protection, in DBRS’s view. At the end of 1Q13, the allowance represented 2.37% of total loans and covered 110% of NPLs (excluding loans held for sale).

Regions’ capital position remains sound in DBRS’s view, and a loan-to-deposit ratio of 79% underpins the Company’s solid liquidity and funding profile. At March 31, 2013, Regions’ Tier 1 Common ratio was an estimated 11.2%, up from 10.8% at the end of 4Q12, and its Tier 1 ratio was 12.3%, up from 12.0% in 4Q12. Regions estimates that at the end of 1Q13 its Basel III Tier 1 Common ratio, reflecting the most recent NPR, was 9.1%.

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

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