Regions Financial Corporation — Q3 2009 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2009. Financial statements are unaudited and consolidated; amounts below are in U.S. dollars unless stated otherwise.
Business context and financial results
Regions is a regional financial holding company headquartered in Birmingham, Alabama, providing consumer and commercial banking, mortgage, brokerage, investment banking, trust and insurance services. At quarter-end it operated approximately 1,900 banking offices across 16 states.
- Third quarter: Net loss was $377 million; loss available to common shareholders was $437 million, or $0.37 per diluted share. In Q3 2008, net income was $79 million and diluted EPS was $0.11.
- Nine months: Net loss was $488 million; loss available to common shareholders was $655 million, or $0.71 per diluted share. In the first nine months of 2008, net income was $622 million and diluted EPS was $0.89.
- Net interest income and margin: Q3 taxable-equivalent net interest income was $853 million versus $931 million a year earlier; margin was 2.73% versus 3.10%. Nine-month taxable-equivalent net interest income was $2.5 billion versus $2.9 billion; margin was 2.66% versus 3.33%.
- Non-interest income: $772 million in Q3, up from $719 million; $3.037 billion for nine months, up from $2.371 billion. Year-to-date results included $517 million of leveraged-lease termination gains, $165 million of securities gains, an $80 million Visa-related gain and a $61 million debt-extinguishment gain.
- Expenses and credit provision: Q3 non-interest expense was $1.243 billion versus $1.128 billion. Provision for loan losses was $1.025 billion versus $417 million. For nine months, provision was $2.362 billion versus $907 million.
- Cash flow: For the first nine months, operating cash flow was $2.083 billion, investing cash flow was $1.203 billion and financing cash flow was negative $5.890 billion. Cash and cash equivalents ended the period at $8.369 billion, down $2.604 billion from the start of the year.
Balance sheet, credit, debt and liquidity
- Total assets were $139.986 billion at September 30, down from $146.248 billion at December 31, 2008. Loans, net of unearned income, were $92.754 billion, down from $97.419 billion.
- Total deposits were $94.880 billion, up from $90.904 billion at year-end. Non-interest-bearing deposits increased to $21.226 billion from $18.457 billion.
- Total borrowed funds were $23.379 billion, down from $35.053 billion at year-end: short-term borrowings fell to $5.286 billion from $15.822 billion, and long-term borrowings to $18.093 billion from $19.231 billion. Regions repaid all Term Auction Facility borrowings during Q3.
- Non-performing assets, including loans held for sale, rose to $4.099 billion from $1.718 billion at year-end; non-performing loans were $3.216 billion. The allowance for loan losses was $2.627 billion, or 2.83% of loans, versus 1.87% at year-end. Allowance coverage of non-performing loans was 0.82x.
- Q3 net charge-offs were $680 million, or 2.86% annualized of average loans, versus 1.68% a year earlier. Residential homebuilder, condominium, home-equity and income-producing commercial real estate exposures were cited as sources of pressure.
- Stockholders’ equity was $18.492 billion. Regulatory capital ratios exceeded stated minimums: holding-company Tier 1 capital was 12.15%, total capital 16.28% and leverage 9.68%; Tier 1 common was 7.88% (a non-GAAP measure). Tangible common equity to tangible assets was 6.56%, versus 5.23% at year-end.
- Regions reported $9.1 billion of FHLB Atlanta borrowings and approximately $1.7 billion of additional capacity under its current agreement, subject to collateral. Discount-window borrowing availability was revised lower after Federal Reserve collateral-margin changes announced October 19.
Material changes and notable items
- Common and preferred equity offerings in May generated approximately $1.8 billion and $278 million, respectively. Together with other capital actions, Regions stated it met the Federal Reserve’s SCAP Tier 1 common equity requirements.
- Regions declared a Q3 common dividend of $0.01 per share, down from $0.10 a year earlier, citing the need to strengthen capital. Management did not expect to raise it above $0.01 for the foreseeable future.
- Regions announced consolidation of 121 branches; Q3 charges associated with branch consolidations were $41 million.
- Mortgage income rose with increased refinancing activity at historically low rates. Regions originated $1.8 billion of mortgages in Q3 and $7.7 billion year to date. Mortgage servicing rights moved to fair-value accounting in 2009.
- Goodwill impairment testing found General Banking/Treasury’s estimated fair value below its carrying value at the first step, but the second-step analysis concluded goodwill was not impaired. Investment Banking/Brokerage/Trust also passed the first step.
Outlook, risks and contingencies
- Management expected credit costs to remain elevated, citing pressure on property values, especially in Florida and North Georgia, rising unemployment and an uncertain economy. It anticipated that improving deposit spreads and spreads on new and renewed loans could help stabilize net interest margin.
- Regions’ disclosed rate scenarios showed modest near-term asset sensitivity: a gradual +100 basis-point move was estimated to increase annual net interest income by 1.3%; a gradual -100 basis-point move by 0.5%. These are model estimates, not guidance.
- Risks include further loan losses, real-estate deterioration, funding and interest-rate pressures, potential goodwill or deferred-tax-asset impairment, regulatory changes, and TARP-related restrictions. The company remained subject to TARP preferred-stock dividend and other program terms.
- Regions disclosed SEC and FINRA Wells notices and related proceedings concerning Morgan Keegan Select Funds, an SEC lawsuit and Alabama proceedings concerning auction-rate securities, and a purported class action concerning trust preferred securities. Management stated some adverse outcomes could be material; potential exposure was not estimable for certain cases. Morgan Keegan customers held approximately $288 million of auction-rate securities and Morgan Keegan held approximately $137 million at quarter-end.
- Credit ratings had been downgraded by agencies; the filing discusses further downgrades by DBRS on October 22 and S&P on November 4, which could affect market access, funding costs and liquidity. The filing text’s November 4 reference is later than its November 3 signature date and should be verified.
- The $517 million year-to-date leveraged-lease termination gain was largely offset by $515 million of related income tax expense, with minimal net-income effect. Nine-month net loss also included $75 million of net other-than-temporary impairment expense.
Most important facts for investors to verify
- Whether further credit deterioration, charge-offs or non-performing assets will require additional provisions beyond the already elevated 2009 levels.
- The composition, collateral values and geographic concentration of troubled homebuilder, commercial real estate and Florida home-equity exposures.
- Regulatory capital calculations, SCAP compliance, TARP terms and the sustainability of the $0.01 quarterly common dividend.
- Whether deposit growth and available secured funding capacity can offset constrained unsecured market access and the effects of rating downgrades.
- The ultimate financial and regulatory consequences of the Morgan Keegan fund and auction-rate-securities matters and the trust preferred securities lawsuit.
- The quality and repeatability of reported non-interest income, including leveraged-lease, securities-sale, Visa and debt-extinguishment gains.