Regions Financial Corporation — Q2 2011 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2011; financial statements are unaudited. Regions is a bank holding company providing banking and related financial services across the South, Midwest, and Texas.
Financial performance and position
- Q2 earnings: Net income was $109 million and net income available to common shareholders was $55 million, or $0.04 per diluted share. In Q2 2010, Regions reported a $277 million net loss and a $335 million loss available to common shareholders, or $0.28 per share.
- First-half earnings: Net income was $178 million and common earnings were $72 million, or $0.06 per diluted share, versus net losses of $473 million and $590 million, respectively, in first-half 2010.
- Revenue and expenses: Q2 net interest income was $864 million ($872 million on a taxable-equivalent basis), versus $856 million and $863 million, respectively, a year earlier. Non-interest income was $781 million, up from $756 million. Non-interest expense was $1.198 billion, down from $1.326 billion. The filing reports a taxable-equivalent net interest margin of 3.05%, versus 2.87% in Q2 2010.
- Cash flow: For the six months, operating activities provided $2.842 billion, investing activities used $676 million, and financing activities used $1.111 billion. Cash and cash equivalents ended the period at $7.974 billion.
- Balance sheet and funding: Total assets were $130.9 billion, down from $132.4 billion at year-end 2010. Loans were $81.2 billion, down from $82.9 billion; deposits were $96.3 billion, up from $94.6 billion. Total borrowed funds were $14.4 billion, including $2.7 billion short-term and $11.6 billion long-term, compared with $17.1 billion at year-end.
- Credit: The allowance for loan losses was $3.12 billion, or 3.84% of loans. Q2 net charge-offs were $548 million, an annualized 2.71% of average loans; the first-half rate was 2.54%, versus 3.08% a year earlier. Non-performing assets totaled $3.60 billion, down from $3.92 billion at year-end 2010 and $4.28 billion a year earlier.
- Capital and liquidity: At June 30, the company reported a 7.95% Tier 1 common ratio, 12.57% Tier 1 capital ratio, 16.22% total capital ratio, and 9.49% leverage ratio; reported capital ratios exceeded regulatory requirements. Tangible common equity to tangible assets was 6.18%. Regions held more than $5.5 billion of excess cash at the Federal Reserve and reported $19.7 billion of Federal Reserve borrowing availability and $2.2 billion of FHLB availability.
Material changes and notable items
- Lower loan-loss provision was the main driver of the earnings improvement: Q2 provision fell to $398 million from $651 million; first-half provision fell to $880 million from $1.421 billion.
- Credit trends improved overall, but investor real estate remained a key source of losses. Regions transferred $545 million of classified loans to held for sale in Q2; charge-offs exceeded provision in the quarter in part because of these transfers.
- Regions acquired about $1.2 billion of Regions-branded credit card accounts in June, including approximately 500,000 consumer accounts; $84 million of allowance was allocated to purchased loans.
- Q2 2011 included $77 million of branch consolidation and property charges, primarily related to plans to close approximately 40 branches. Q2 2010 included a $200 million Morgan Keegan regulatory charge. The related 2011 settlement generated a $44 million tax benefit; the settlement had previously been fully reserved.
- Regions sold about $4.0 billion of securities in Q2, recognizing $24 million of gains, and reinvested proceeds predominantly in similar, shorter-duration securities.
Outlook, risks, and contingencies
- Management expected net charge-offs to remain elevated during 2011 and non-performing assets to remain high relative to historical levels. It identified property values, interest rates, unemployment, and asset disposition activity as important drivers.
- Management expected the clarified troubled-debt-restructuring definition to increase reported TDRs, but did not expect a material change in the overall allowance as a result. The company was reviewing about $1.0 billion of renewed substandard accrual loans under the clarification.
- Regions estimated the final debit interchange rule could reduce annual debit interchange revenue by approximately $170 million before mitigation, and said it expected to address the impact through revenue enhancements and expense management.
- Management stated it did not expect to raise the quarterly common dividend above $0.01 per share for the foreseeable future. The company planned to explore strategic alternatives for Morgan Keegan, excluding Morgan Asset Management and Regions Morgan Keegan Trust.
- Moody’s and S&P ratings for the parent were below investment grade; Regions Bank’s Moody’s rating was also below investment grade. The companies remained on Moody’s negative credit watch. Management cited funding access, collateral, regulatory changes, credit losses, litigation, and potential goodwill impairment among key risks.
- Regions estimated reasonably possible litigation losses above amounts accrued of up to approximately $300 million, while noting losses could also be zero. The filing states that Morgan Keegan and Morgan Asset Management settled regulatory matters for $210 million, previously reserved.
- Q2 goodwill testing found no impairment, including for Banking/Treasury, but management identified adverse credit, regulatory, economic, and valuation developments that could threaten future goodwill assumptions.
Important facts for investors to verify
- Whether credit improvement continues, particularly in investor real estate, and how much of the reported decline in problem assets reflects loan sales or transfers to held-for-sale.
- The future path of provisions, net charge-offs, non-performing assets, and the adequacy of the $3.12 billion loan-loss allowance.
- Whether deposit-cost reductions and net interest margin can offset loan contraction and potential rate or prepayment changes.
- The actual impact of debit interchange regulation, branch closures, and the Morgan Keegan strategic review on recurring earnings and capital.
- Progress on litigation and regulatory matters, credit ratings, liquidity access, and the company’s ability to maintain capital and avoid goodwill impairment.