Regions Financial Corporation - Zacks Investment Research

March 16, 2015

Regions Financial Corporation (RF-NYSE)

Current Recommendation Prior Recommendation Date of Last Change

Current Price (03/13/15) Target Price

NEUTRAL

Outperform 09/25/2013

$9.91 $10.50

SUMMARY DATA

52-Week High 52-Week Low One-Year Return (%) Beta Average Daily Volume (sh)

Shares Outstanding (mil) Market Capitalization ($mil) Short Interest Ratio (days) Institutional Ownership (%) Insider Ownership (%)

Annual Cash Dividend Dividend Yield (%)

5-Yr. Historical Growth Rates Sales (%) Earnings Per Share (%) Dividend (%)

P/E using TTM EPS

P/E using 2015 Estimate P/E using 2016 Estimate

Zacks Rank *: Short Term 1 3 months outlook

* Definition / Disclosure on last page

$11.30 $8.70 -4.76 2.13

12,204,564

1,343 $13,309

0.70 73 1

$0.20 2.02

-10.4 52.6 46.1

12.5 12.4 11.1

4 - Sell

SUMMARY

Regions Financial s fourth-quarter 2014 earnings missed the Zacks Consensus Estimate and came below the prior-year quarter figure as well. Results were affected by reduced revenues and elevated expenses. However, improved loans and deposits and better asset quality were the tailwinds. The recent approval of the 2015 capital plan by the Federal Reserve boosts investors confidence in the stock. We believe that the company s favorable funding mix, improved core business performance, expansion spree and other strategic initiatives will yield profitable earnings in the coming quarters. However, regulatory issues and a declining fee income remain matters of concern.

Risk Level *

Type of Stock Industry Zacks Industry Rank *

Below Avg.,

Large-Value Banks-Southeast

104 out of 267

ZACKS CONSENSUS ESTIMATES

Revenue Estimates

(In millions of $)

Q1

Q2

(Mar)

(Jun)

2013 2014 2015 2016

1,299 A 1,254 A 1,270 E

1,305 A 1,279 A 1,293 E

Q3 (Sep)

1,319 A 1,299 A 1,309 E

Q4 (Dec)

1,358 A 1,268 A 1,329 E

Year (Dec)

5,281 A 5,100 A 5,201 E 5,519 E

Earnings Per Share Estimates

(EPS is operating earnings before non-recurring items, but including employee stock options expenses)

Q1

Q2

Q3

Q4

Year

(Mar)

(Jun)

(Sep)

(Dec)

(Dec)

2013 $0.23 A

$0.18 A

$0.20 A

$0.21 A

$0.82 A

2014 $0.22 A

$0.21 A

$0.22 A

$0.14 A

$0.79 A

2015 $0.18 E

$0.20 E

$0.21 E

$0.21 E

$0.80 E

2016

$0.89 E

Projected EPS Growth - Next 5 Years %

8

? 2015 Zacks Investment Research, All Rights reserved.



10 S. Riverside Plaza, Chicago IL 60606

OVERVIEW

Regions Financial Corporation is a Birmingham, AL-based financial holding company. The company provides retail and commercial banking, trust, securities brokerage, mortgage and insurance products and services. As of Dec 31, 2014, Regions operated around 1,650 branch offices and 2,000 ATMs across a 16-state network over the South, Midwest and Texas. In addition to banking and securities brokerage, Regions Financial has significant insurance brokerage operations.

The company operates through the following segments as detailed below:

The Corporate Bank segment includes the company s commercial banking functions including commercial and industrial, commercial real estate, investor real estate lending and equipment lease financing. The company provides services to corporate, middle market, small business and commercial real estate developers and investors.

The Consumer Bank segment comprises the company s branch network, including consumer banking products and services as well as the corresponding deposit relationships.

The Wealth Management segment consists of wealth management products and services. This

segment provides services such as investment advice, assistance in managing assets and estate planning to individuals and institutional clients.

Other includes the company s treasury function, the securities portfolio, wholesale funding activities, interest rate risk management activities and other corporate functions that are not related to a strategic business unit.

Notably, another segment Discontinued Operations constitutes all brokerage and investment activities associated with Morgan Keegan, which was sold in Apr 2012.

As of Dec 31, 2014, the company had total assets of $120.0 billion, loans (net of unearned income) of $77.3 billion, deposits of $94.2 billion and stockholders' equity of $17.0 billion.

REASONS TO BUY

Improved funding mix augurs well and the company continues to benefit from lower deposit costs, reduced non-accrual levels and a decline in low-yielding interest earning assets. Notably, net interest margin (NIM) improved to 3.21% in 2014 from 3.20% in 2013, 3.11% in 2012 and 3.07% in 2011. Also, improvements in deposit and borrowing costs have contributed to higher NIM in the past few quarters. Though management expects margin compression in the near term on account of low interest rate scenario, loan growth is expected to aid net interest income (NII).

Regions Financial has been prudent in controlling costs. Notably, non-interest expenses exhibited a negative CAGR of nearly 3% over the last 5 years (2010-2014). Management intends to continue with prudent cost management while making planned strategic investments that will result in gradually improving efficiencies. Though higher compensation expenses of around $25 million in 2015 or $6 million per quarter are expected due to fresh recruitments made in the fourth quarter of 2014, management anticipates generating positive operating leverage in 2015.

Regions strong capital position was reflected by the consecutive successful clearance of the stress tests in 2014 and 2015. Further, with the Federal Reserve s approval of the 2015 capital plan, the company intends to hike its dividend by 20% and repurchase share of up to $875 million

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in common stock. Further the capital plan provides the possibility of a subsequent dividend increase beginning in the second-quarter of 2016. Such moves undoubtedly enhance shareholders value.

Despite the macro pressure, Regions Financial s credit quality continues to normalize. In spite of the slow and uneven pace of the economic recovery, the company experienced significant improvement in credit quality metrics since 2011. Further, we are impressed with the overall improving trend in delinquencies rates and net charge-offs. Credit quality is anticipated to undergo continuous enhancement in the upcoming quarters, based on the current scenario, though in some credit metrics volatility on a near-term basis is expected.

In Oct 2014, Fitch Ratings provided upgraded ratings to Regions as well as its lead bank on longterm and short-term debt. The improved ratings were driven by Regions better asset quality, strong capital position, solid liquidity and an overall recovering risk profile. Also, in Sep 2014 Moody s upgraded its rating outlook for Regions and its subsidiaries, reflecting the company s continuous improvement in credit quality and capital levels as well as better risk management pertaining to asset concentration limits. We believe such favorable ratings not only reflect the financial strength of the company, but boost investors confidence in the stock as well.

REASONS TO SELL

Though Regions Financial is taking initiatives to increase revenues, the persistent decline in noninterest income has weighed on the top line over the last few years. Notably, non-interest income exhibited a negative CAGR of 7.5% for the last 5 years (2010-2014). Given the company s previously announced posting order process for customer deposit accounts, decline in fee income between $10 million to $15 million each quarter is anticipated. We believe this will further weigh on total non-interest income, thereby restricting top-line growth.

The prospects for home equity, mortgage and credit card portfolios remain a significant concern as a result of the high unemployment rate and pressure on the housing situation. A continued weakness in credit trends for the home equity, mortgage and credit card portfolios will require additions to the consumer allowance for credit losses. Though the housing market has improved and unemployment levels have normalized to some extent in the recent quarters, there will still be some sluggishness in the near term.

We are also concerned about the stringent regulations, which will likely limit the company s profitability going forward. Such regulations are likely to reduce fee income growth, increase compliance costs and subject Regions Financial to a number of restrictions. Notably, owing to Consumer Financial Protection Bureau (CFPB) concerns, beginning Jan 2014 Regions discontinued deposit advance loan product, which significantly contributed to service charges revenues. We expect this to pose a threat to the company s profitability.

Regions Financial continues to encounter many investigations and lawsuits from the investors and regulators for violation of rules and forgery. Though the company resolved certain litigations, many of the cases are yet to be resolved. All these are expected to lead to increased expenses and litigation provisions in the near term.

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RECENT NEWS

Regions Q4 Earnings Lag Estimates, Revenues Slump Jan 20, 2015

Impacted by lower revenues, Regions Financial s fourth-quarter 2014 earnings from continuing operations came in at $0.14 per share, missing the Zacks Consensus Estimate by $0.07. Moreover, results were down 33.3% year over year.

Lower-than-expected results were driven by higher non-interest expenses and lower top-line. Moreover, absence of credible improvement in the mortgage market remains a concern. However, increase in loans and deposits were the positives for the quarter.

Income from continuing operations available to common shareholders was $198 million in the quarter, down from $233 million reported in the prior-year quarter.

For full-year 2014, Regions reported income available to common shareholders of $1.09 billion compared with $1.10 billion in the prior year.

Performance in Detail

For full-year 2014, Regions reported total revenue of $5.1 billion, missing the Zacks Consensus Estimate of $5.2 billion. Moreover, revenues decreased 3.4% on a year-over-year basis.

Total revenue (net of interest expense) came in at $1.27 billion in the quarter, lagging the Zacks Consensus Estimate of $1.30 billion. Moreover, revenues decreased 6.6% on a year-over-year basis.

Regions reported adjusted pre-tax pre-provision income from continuing operations of $397 million in the fourth quarter, down 8.9% year over year. Excluding certain one-time items, pre-tax pre-provision income decreased 27.4% year over year to $299 million.

Net interest income was $820 million, down 1.4% on a year-over-year basis. Net interest margin on a fully taxable equivalent basis declined 9 basis points year over year to 3.17% in the quarter.

Regions non-interest income was $448 million, down 14.8% year over year. Reduced mortgage revenues along with lower service charges on deposit accounts and other income mainly led to the fall in non-interest income. Mortgage production came in at $1.17 billion in the quarter, down 5.7% year over year.

Non-interest expense increased 2.4% year over year to $969 million. Elevated other expenses mainly led to the rise. Notably, Regions plans to consolidate about 50 offices during 2015 related to which the company recorded $10 million during the reported quarter. Further, an accrual of $100 million for contingent legal and regulatory items has also been recorded.

Total loans increased around 3.6% year over year to $77.3 billion. Total deposits came in at $94.2 billion, up 1.8% year over year. Total funding costs were 29 basis points.

As of Dec 31, 2014, low-cost deposits as a percent of total deposits were 90.9% compared with 89.5% as of Dec 31, 2013. Further, deposit costs came in at 11 basis points in the reported quarter.

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Credit Quality

Credit metrics marked a significant improvement during the fourth quarter at Regions. Non-performing assets as a percentage of loans, foreclosed properties and non-performing loans held for sale reduced to 1.28% from 1.74% in the prior-year quarter.

Further, non-accrual loans, excluding loans held for sale, as a percentage of loans came in at 1.07%, down from 1.45% in the prior-year quarter. Allowance for loan losses as a percentage of loans, net of unearned income was 1.43%, down from 1.80% in the prior-year quarter.

Provision for loan losses was $8 million, down 89.9% year over year. Allowance for credit losses was $1.1 billion, down 17.9% year over year. Net charge-offs came in at $83 million, down 70.1% year over year.

Capital Position

Regions capital position was strong at the end of the quarter. As of Dec 31, 2014, Regions Tier 1 capital ratio came in at an estimated 12.5% compared with 11.7% in the prior-year quarter. Basel III common equity Tier 1 ratio was 11.1%, up from 10.6% in the prior-year quarter.

Tier 1 common risk-based ratio was estimated at 11.6%, up from 11.2% in the prior-year quarter. Tangible common book value per share came in at $8.26 in the reported quarter compared with $7.54 in the prior-year quarter. Tangible common stockholders equity to tangible assets was 9.75%, up from 9.24% in the prior-year quarter.

Share Repurchase & Dividend Update

During 2014, Regions returned about $500 million as capital to shareholders through dividends and repurchase of 26 million shares of common stock for $256 million. Notably, during the quarter, the company repurchased common stock worth $248 million.

On Feb 12, 2015, Regions declared a quarterly cash dividend of $0.05 per share. The dividend will be paid on Apr 1, 2015 to stockholders of record on Mar 13, 2015.

Regions Receives Federal Reserve Approval on 2015 Capital Plan Mar 11, 2015

Regions announced that the Federal Reserve did not object to the company s capital plan, which as was submitted to the Fed as part of the Comprehensive Capital Analysis and Review (CCAR). The capital plan and proposed capital actions cover for the second quarter of 2015 through the second quarter of 2016.

Regions proposed capital plan includes a 20% increase of quarterly common dividend to $0.06 per share and share repurchase of up to $875 million in common stock. Further the capital plan provides the possibility of subsequent dividend increase beginning in the second-quarter 2016. Regions board of directors is expected to consider this subsequent dividend increase in early 2016.

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