REGIONS FINANCIAL CORP quarterly report, Q1 FY2011

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Regions Financial Corporation — Q1 2011 Form 10-Q

Business context and reporting period. Unaudited results for the three months ended March 31, 2011, compared with Q1 2010; balance-sheet comparisons are primarily against December 31, 2010. Regions is a Birmingham-based bank holding company operating across the South, Midwest and Texas, with banking, brokerage/investment banking/trust and insurance businesses.

Financial performance and condition

  • Earnings: Net income was $69 million, versus a net loss of $196 million. Net income available to common shareholders was $17 million, or $0.01 per diluted share, compared with a $255 million loss, or $0.21 loss per share.
  • Revenue and margin: GAAP net interest income was $863 million, up from $831 million; taxable-equivalent net interest income was $872 million versus $839 million. Net interest margin rose to 3.07% from 2.77%, supported by lower deposit costs (0.59% versus 1.00%). Non-interest income increased to $843 million from $812 million. Adjusted efficiency ratio, a non-GAAP measure, improved to 71.33% from 74.25%.
  • Credit costs: Provision for loan losses was $482 million, down from $770 million; net charge-offs were $481 million, or an annualized 2.37% of average loans, versus $700 million and 3.16%. The allowance for loan losses was $3.186 billion, or 3.92% of loans, versus 3.84% at year-end 2010 and 3.61% a year earlier.
  • Credit quality: Non-performing assets totaled $3.933 billion, roughly flat from year-end and down from $4.572 billion a year earlier. Non-performing loans, including loans held for sale, were $3.468 billion. Impaired loans were about $4.5 billion; troubled debt restructurings were $2.153 billion.
  • Expenses and unusual items: Non-interest expense fell to $1.167 billion from $1.230 billion. The prior-year quarter included a $53 million loss on early repayment of FHLB advances; Q1 2011 had no such charge. Q1 2011 also included $82 million of net securities gains, compared with $59 million.
  • Balance sheet: Total assets were $131.756 billion, down from $132.351 billion at year-end. Loans were $81.371 billion, down $1.493 billion; total deposits were $96.369 billion, up $1.755 billion. Stockholders’ equity was $16.619 billion.
  • Debt and liquidity: Borrowed funds totaled $15.379 billion, down from $17.127 billion at year-end, including $12.197 billion of long-term borrowings. Cash and cash equivalents were $7.320 billion. Management reported $17.1 billion of Federal Reserve borrowing availability and $1.2 billion from FHLB Atlanta, subject to collateral availability.
  • Cash flow: Net cash from operating activities was $1.332 billion, compared with $1.727 billion in Q1 2010. Investing activities used $925 million, versus providing $1.397 billion; financing activities used $6 million, versus using $4.264 billion.
  • Capital: Regulatory Tier 1 and total capital ratios were 12.53% and 16.48% at the holding company; Regions Bank ratios were 11.89% and 15.13%. Tangible common equity to tangible assets, a non-GAAP measure, was 5.98%, versus 6.04% at year-end. The quarterly common dividend remained $0.01 per share.

Material changes versus comparable periods

  • The return to modest common-shareholder profitability primarily reflected lower loan-loss provision, with higher net interest and non-interest income and lower expenses also contributing.
  • Loans declined year over year by $6.803 billion, with the largest reduction in investor real estate; commercial and industrial loans increased. Management attributed the sequential loan decline principally to strategic reductions in investor real estate and some residential mortgage loan sales.
  • Deposits increased from year-end, led by non-interest-bearing demand accounts. Borrowings declined, including approximately $1.0 billion of long-term debt that matured during the quarter.
  • Credit metrics improved year over year, but non-performing assets were essentially unchanged from year-end and new non-performing loan inflows remained elevated.

Outlook, risks and contingencies

  • Management expected net charge-offs to remain elevated during 2011 and the provision for loan losses to remain elevated, although likely to trend downward through the year. Real estate values, interest rates and unemployment were identified as key determinants.
  • Management reported the allowance as adequate, while noting that estimates may change and regulators may require adjustments. Investor real estate and Florida home-equity second liens remain particular credit risks.
  • Goodwill was $5.561 billion. Q1 impairment testing found the Banking/Treasury reporting unit’s carrying value exceeded estimated fair value, but the Step Two analysis concluded goodwill was not impaired. Management warned that adverse assumptions or trends could result in future impairment.
  • Regions reported a three-year cumulative loss position for deferred-tax-asset assessment purposes, but concluded most of its $1.5 billion net deferred tax asset was more likely than not to be realized; a $30 million valuation allowance was maintained for certain state tax attributes.
  • Management’s pro forma Basel III estimates were approximately 7.5% Tier 1 common and 11.1% Tier 1 capital, above the cited proposed minimums, but noted that rules and implementation remained uncertain. The filing identifies possible regulatory changes, including Dodd-Frank and Basel III, as risks.
  • Moody’s and S&P ratings for the parent were below investment grade; Moody’s rating for the bank was also below investment grade. Certain derivatives have credit-related termination or collateral provisions; Regions had posted $654 million against applicable liability-position contracts.
  • Litigation includes Morgan Keegan Select Funds proceedings and auction-rate securities matters, among other claims. Regions said it could not estimate potential exposure in certain class actions; it had recorded a $200 million charge in Q2 2010 for the Select Funds regulatory matter. The filing states an adverse outcome in some matters could be material in a particular period.
  • Regions stated it did not expect to raise the $0.01 quarterly common dividend for the foreseeable future. TARP preferred stock carries a 5% dividend for its first five years and 9% thereafter unless redeemed; related restrictions limit certain common-stock dividends and repurchases.

Most important facts for investors to verify

  1. Whether lower provision and net charge-offs continue, and whether non-performing loan inflows and impaired-credit trends improve.
  2. Loss performance in investor real estate and Florida second-lien home equity, including collateral values and unemployment exposure.
  3. Capital and liquidity headroom after regulatory changes, credit losses, collateral requirements and any rating actions.
  4. The sustainability of net interest margin gains, securities-sale income, and brokerage and mortgage revenues.
  5. Realization assumptions for deferred tax assets, sensitivity of goodwill valuations, and developments in material litigation and regulatory proceedings.
  6. Terms and implications of outstanding TARP preferred stock for dividends, capital actions and common shareholders.