DBRS Downgrades Regions Financial Corporation Senior Debt to A (low); Trend Negative

DBRS has today downgraded the long-term ratings of Regions Financial Corporation (Regions or the Company) to A (low) from “A” while confirming its short-term rating at R-1 (low). At the same time, DBRS downgraded the long-term ratings of Regions Bank to “A” from A (high) and its short-term rating to R-1 (low) from R-1 (middle). The trend for all long-term ratings and the Short-Term Instruments rating for Regions Financial Corporation are Negative. All FDIC guaranteed debt remains at AAA with a Stable trend and Region Bank’s R-1 (low) Short-Term Instruments rating is stable.

Today’s rating actions conclude a Review with Negative Implications initiated by DBRS in July 2009. The downgrade reflects Regions continuing struggle with steep asset quality deterioration and elevated credit costs that continue to weigh on its performance and have produced net losses in three of the past four quarters, a trend that DBRS believes is likely to continue. Credit losses on the Company’s non-owner occupied commercial real estate construction and mortgage loan portfolios have produced the highest losses and non-accrual inflows in the third quarter. While Regions has already charged-off a substantial amount of loans in this credit cycle, DBRS believes that significant amounts of potential losses likely remain embedded in the Company’s loan portfolios, as signaled by the 22.8% quarterly increase in non-accrual loans and 4.9% increase in loans 90 days or more past due.

DBRS also considers that reserve coverage at 82% of non-performing loans may be insufficient to address potential losses given the deterioration and also taking into consideration its $1.4 billion in restructured loans. Given the credit overhang which is expected to require elevated loan-loss provisioning, DBRS believes that financial performance will likely continue to suffer in the near to medium-term.

Positively, Regions moved aggressively in 2008 and 2009 disposing of some of its most troubled residential construction and condominium loans and has significantly reduced risk exposures through additional write-downs. DBRS expects that owner and non-owner occupied commercial real estate including construction (4 times tangible common equity), commercial & industrial (2.5 times TCE), residential home mortgage (1.8 times TCE), and home equity portfolios (1.8 times TCE) will have elevated credit costs for the remainder of 2009 and into 2010.

Regions ratings are underpinned by its large, mostly core-funded community banking franchise in attractive markets of the South, Midwest and Texas. The ratings also reflect the strength of the Company’s top-tier deposit shares in many markets and earnings diversity from its brokerage, investment banking, trust and insurance agency businesses.

The negative trend considers the struggling economy, market disruptions and weak loan demand that have also constrained Company’s earning power. Q3 2009 Pre-tax Pre-provision Net Revenue (PPNR, adjusted for one-time events) declined 26.5% compared to Q3 2008 and 17.0% to the linked quarter. Regions is carefully controlling its non-credit related expenses and is working on a branch consolidation plan that is expected to deliver $21 million in annual cost saves beginning in 2010. This will help rationalize the expense base in a normalized environment. Currently, however, the $1,025 million third quarter provision (including a $345 million reserve build) is 2.5 times the adjusted PPNR of $410 million, highlighting the significant gap that needs to be bridged. Continued credit deterioration and losses beyond IBPT and/or significant revenue declines could result in additional negative rating actions.

Regions has good liquidity and a disciplined approach to funding. Core deposits continue to fund most of the loan book but the cost of the deposit funding is high relative to its large bank peers. Average total deposits have grown 7% in the past year with non-interest bearing rising 19.4% over the year and 3.4% over the quarter. The Company’s capital levels are relatively strong with a 6.56% tangible common equity to tangible assets ratio and Tier 1, Tier 1 Common, and Total Capital Ratios of 12.1%, 7.8% and 16.2%, respectively. Regulatory ratios include $3.5 billion in TARP preferred shares.

Regions Financial Corporation, a diversified financial services corporation headquartered in Birmingham, Alabama, reported $140 billion in consolidated assets as of September 30, 2009.

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.