DBRS Comments on Q4 2008 Earnings of Regions Financial Corporation – Senior at A (high)

DBRS commented today on the Q4 2008 earnings of Regions Financial Corporation (Regions or the Company). Regions reported a net loss of $6.2 billion, largely due to a $6 billion non-cash charge for impairment of goodwill. Excluding goodwill impairment, the Company’s loss totaled $245 million, which reflects a large provision for credit losses and a narrowing net interest margin (NIM). On November 13, 2008, DBRS placed the long- and short-term ratings of Regions and its operating bank subsidiaries Under Review with Negative Implications. The ongoing review that is focusing on financial performance, asset quality, reserve adequacy and medium-term financial projections will be concluded by February 2009.

Credit costs, which continue to weigh on the Company’s operating performance, increased to $1.15 billion in the quarter, $354 million more than net charge-offs and $733 million more than the Q3 2008 results. Continued declines in housing and residential related construction projects, particularly in Florida, necessitated the reserve increase.

Non-performing assets (NPAs), excluding those classified as held for sale, dropped to $1.3 billion, or 1.33% of outstanding loans, at year-end 2008 versus 1.66% at Q3 2008 as loans were sold, moved to held for sale or charged off. DBRS notes, however, that the pace of incoming NPAs continues to increase. Total NPAs declined $53 million on a linked-quarter basis to $1.7 billion, or 1.76% of loans and other real estate. Given the pressure from a slowing economy on businesses and consumers, DBRS expects credit quality to further deteriorate for the Company.

Regions continued disposing of its problem assets (residential construction, homebuilder, condominium and home equity loans) in Q4 2008, either selling or transferring to held for sale about $1 billion of non-performing loans and foreclosed properties. Losses on these transactions, which totaled $479 million, drove the linked-quarter increase in total net loan charge-offs to $796 million, or 3.19% of average loans, from Q3 2008’s $416 million, or 1.68%. Commercial real estate construction writeoffs, primarily related to homebuilder and condominium loans, drove the losses.

As mentioned above, the results of goodwill impairment testing at the end of the fourth quarter indicate that the estimated fair value of the Company’s banking reporting unit was less than its book value, necessitating a $6 billion non-cash charge (no impact on operating earnings). Regulatory and tangible capital ratios were unaffected by this adjustment.

Net interest income remained relatively flat on a linked-quarter basis, down 11% from Q4 2007. However, adjusting for the third quarter’s one-time SILO (sale in, lease out) leverage lease charge, taxable equivalent net interest income declined $41 million from the prior quarter. NIM narrowed 14 basis points (bps) in Q4 2008 from the prior quarter, 28 bps when adjusted for the SILO effect. The Company’s margin has been pressured by falling short-term interest rates, the asset-sensitive nature of its balance sheet and elevated deposit costs due to competitive pressures.

Non-interest income was $18 million lower on a linked-quarter basis and $31 million lower on a year-over-year basis, largely due to a drop in service charges and trust income as a result of the weaker economy and lower transaction volumes. Expenses (excluding goodwill impairment, charges related to mortgage servicing rights (MSRs) and merger charges) increased 7%, driven by higher deposit-based and Morgan Keegan incentives, legal and professional fees and valuation-related charges. However, expenses declined on a year-over-year basis as Regions continued to realize merger cost savings and operating efficiencies, primarily from headcount reductions.

The Company experienced modest deposit growth in the quarter. Average customer balances grew 4% in Q4 2008 and period-end customer deposits grew nearly 7%, reflecting strong certificate of deposit (CD) growth in response to competitive offers and a customer desire to lock in rates in a falling rate environment. Average loans increased 1% on a linked-quarter basis and 5% on a year-over-year basis. Higher commercial and industrial (C&I) and commercial real estate balances drove average loan increases, while construction and other consumer balances declined as expected.

Regions strengthened its capital position in the quarter through its participation in the U.S. Treasury’s Capital Purchase Program. The Company issued $3.5 billion of senior perpetual preferred stock and warrants to the government, which raised its Tier 1 ratio to 10.4%, well above minimum “well-capitalized” guidelines. The Company’s tangible common equity ratio was 5.23% at year-end 2008, a 46 bps decline from Q3 2008, which was related to an increase in total assets due to an increase in invested funds from preferred share and debt issuances.

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

The applicable methodology is Rating Banks and Bank Holding Companies Operating in the United States, which can be found on our website under Methodologies.

This is a Corporate (Financial Institutions) rating.