DBRS Comments on Regions Financial’s 2Q13 Results – Sr. Debt at BBB, Stable Trend

DBRS, Inc. (DBRS) has today commented on Regions Financial Corporation’s (Regions or the Company), 2Q13 financial results. The Company has an Issuer & Senior Debt rating of BBB. All ratings have a Stable trend. For the quarter, Regions reported net income available to common shareholders of $259 million, down from $327 million for 1Q13, and $284 million for 2Q12. Lower QoQ earnings reflected significant restructuring costs associated with the prepayment of certain debt and preferred securities. Specifically, lower sequential earnings were attributable to a 5.0% increase in non-interest expense and a 210%, or $21 million, increase in provisions for loan loss reserves, partially offset by a 0.5% increase in total revenues.

Regions’ balance sheet fundamentals remained sound during 2Q13 and included improved asset quality, a modest increase in average loans, and sound liquidity and capital positions. During the quarter, the Company improved its capital efficiency and reduced its cost of funds through several capital and financing actions, including the redemption of $350 million of higher cost senior debt, the issuance of $750 million of lower cost senior debt, the redemption of $498 million of trust preferred securities and the redemption of $100 million of REIT preferred stock.

Positively, on a core basis, the Company’s 2Q13 DBRS calculated adjusted income before provisions and taxes (IBPT) increased by a solid 6.1% sequentially to $469 million. The improved adjusted IBPT reflected a 1.7% decrease in adjusted expenses to $828 million and a 1.0% increase in adjusted revenues to $1.3 billion.

Lower adjusted expenses mostly reflected a $20 million positive swing in provision for unfunded credit commitments and a $10 million, or 32.3%, decrease in professional and legal expense. Partially offsetting these improvements, salaries and employee benefits increased $5 million, or 1.1% and deposit and administrative fees increased $4 million, or 12.1%. Higher salaries and employee benefits, in part, reflected the recent hiring of approximately 100 financial consultants who were placed in Regions’ branches. Overall, the Company anticipates that expenses in 2013 will be lower than in 2012.

Higher QoQ adjusted revenues were driven by a 1.3% increase in net interest income to $808 million and a 0.6% increase in adjusted non-interest income to $489 million. Improved sequential net interest income reflected a 3 basis point widening of net interest margin (NIM) to 3.16%, partially offset by a 0.8% decrease in average earning assets. The wider NIM was driven by a decrease in excess average cash balances and lower borrowing costs. During 2Q13, Regions’ average loans increased by 0.9%, led by a 4.6% increase in average commercial & industrial loans and a 7.6% increase in average indirect auto loans. As with most banks, the steeper yield curve will benefit the Company’s NIM over time. Meanwhile, moderately improved sequential non-interest income was driven by a $6 million, or 22.2%, increase in other income and a $2 million, or 7.4%, increase in investment fee income.

In 2Q13, the Company reported non-core items including $56 million of early debt extinguishment expense along with $8 million of securities gains. In 1Q13, Regions reported $15 million of securities gains.

During 2Q13, Regions’ asset quality continued to improve. At June 30, 2013, the Company reported non-performing assets (NPAs) of $1.7 billion, down 5.2% sequentially. NPAs as a percent of loans plus OREO were still a relatively high 2.25% of loans at the end of 2Q13, but down from 2.41% at the end of 1Q13. Meanwhile, net charge-offs (NCO) declined 20% to $144 million and represented 0.77% of average loans, from 0.99% for 1Q13. Positively and perhaps signaling continued future credit quality improvement, criticized and classified loans continued to decline.

Although NCOs outpaced provisions by $113 million, Regions’ loan loss reserve of $1.64 billion continues to provide ample protection, in DBRS’s view. At the end of 2Q13, the allowance represented 2.18% of total loans and covered 109% of NPLs (excluding loans held for sale).

Regions’ capital position remains sound, and its loan-to-deposit ratio of 81% underpins its solid liquidity and funding profile. During 2Q13, the Company completed the before-mentioned capital efficiency actions and repurchased approximately half of its $350 million of common stock buyback authorization. At June 30, 2013, Regions’ estimated risk weighted capital ratios included a Tier 1 Common ratio of 11.2%, Tier 1 ratio of 11.7% and Total ratio of 14.8%. In regards to Basel III, Regions estimates its Tier 1 Common ratio to be 10.4%.

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

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