DBRS Comments on Q1 Earnings of Regions Fin. Corp. – Senior at A Unaffected; Trend Remains Negative

DBRS commented today on the Q1 2008 earnings of Regions Financial Corporation (Regions or the Company). The company reported a net profit of $77 million (net income of $26 million after paying preferred dividends to the U.S. Treasury related to the TARP program) in the quarter compared to a loss of $6.2 billion in Q4 2008 and net income of $337 million in Q1 2008. DBRS stated that Region’s financial results were within its expectations, acceptable for its rating range and therefore its ratings were unaffected. On April 14, 2009 DBRS downgraded the long-term ratings of Regions to “A” from A (high) and lowered its short-term rating to R-1 (low) from R-1 (middle). Concurrently, DBRS changed the trend for all long term ratings of the Company to Negative from Stable while keeping the Stable trend on Regions’s short term rating.

DBRS noted that continued credit deterioration and losses beyond income before provisions and taxes and/or significant revenue declines could result in negative rating actions while stronger than expected loan quality and revenue generation could return the trend to Stable.

While credit quality continued to deteriorate, credit costs were significantly lower in Q1 2009 compared to the prior quarter when the Company took substantial losses on asset dispositions. The provision for loan losses declined to $425 million ($35 million above net charge-offs) in Q1 2009, $725 million less than the provision taken in the linked-quarter.

Net interest income fell to $817 million in Q1 2009 compared to $933 million in Q4 2008 and $1.03 billion in Q1 2008 as a result of shrinking loan volume and declining net interest margin (NIM). Regions’s NIM was 2.64% in Q1 2009, 32 basis points (bps) lower than in Q4 2008 and 89 bps lower than in Q1 2008. The Company’s margin has been pressured by falling short-term interest rates, the asset sensitive nature of its balance sheet and the inability to offset falling loan yields with lower deposit costs due to competitive deposit pricing pressures.

Non-interest income was $364 million higher than in the previous quarter. However, excluding Q1 2009 sale-in, lease-out (SILO) transaction–related income of $323 million and securities gains totaling $53 million, non-interest revenues were down marginally (2%) compared to the prior quarter. The chief culprit is the slowing economy which is producing lower transactions volume and lower overall activity thus negatively impacting service charges. Brokerage income from the Morgan Keegan division declined 10% linked-quarter as the unit’s equity capital markets, trust and asset management divisions reflected the recessionary economy and lower asset valuations. On a positive note, mortgage income doubled from the prior quarter due to a favorable rate environment.

Non-interest expenses declined 10% in Q1 2009 compared to Q4 2008 (excluding Q4 2008 goodwill and mortgage servicing rights impairment charges). Salary and benefits costs were down 4% as lower commissions and incentives offset the seasonal rise in FICA and benefits expense.

Average customer deposits grew 4% in Q1 2009 reflecting strong checking and money market growth. Average core deposits also increased 4% linked-quarter. Non-interest-bearing deposits also rose, growing 6% from the prior quarter. Average loans declined by 3% in Q1 2009 compared with the prior quarter, reflecting weaker borrower demand in the currently depressed environment.

Non-performing assets as a percentage of loans and other real estate (excluding loans held for sale) increased to 2.02% at March 31, 2009 from 1.33% at year-end 2008 driven by commercial real estate and construction loan deterioration. Net charge-offs as a percentage of average net loans declined to 1.64% in Q1 2009 from 3.19% in Q4 2008 as the pace of loan sales slowed in the current quarter. The prior quarter’s $796 million in charge-offs reflected substantial marks taken on loan sales or transfers to loans held for sale. The Company continues to dispose of its most problematic assets. It has reduced its homebuilder portfolio by more than $3 billion or 42% since the beginning of 2008, its land portfolio by $2.6 billion or 41% since the beginning of 2007, and its condominium exposure by $1.4 billion or 62% since early 2007. Condo exposure now stands at $850 million of which $460 million is in Florida, the geography with the highest level of loss content. Given the pressure from a slowing economy and rising unemployment on businesses and consumers, DBRS expects credit quality to further deteriorate for the Company.

The Company’s regulatory and tangible capital ratios remained strong during the quarter. Tier 1 ratio was 10.37% at March 31, 2009 while tangible common equity (TCE) ratio improved to 5.41%. The 18 bps improvement in TCE compared to the fourth quarter reflected the reduction in excess liquidity on the balance sheet. Regions reduced its dividend to $0.01 per quarter thus preserving an additional $250 million of capital annually.

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

The applicable methodologies are Rating Banks and Bank Holding Companies Operating in the United States, and Enhanced Methodology for Bank Ratings – Intrinsic and Support Assessments which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.