Regions Financial Corporation — Q3 2013 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2013. Comparisons are generally with the corresponding 2012 period; balance-sheet comparisons are with December 31, 2012. Amounts are in U.S. dollars; financial statement amounts are in millions unless noted.
Business context
Regions is a regional bank holding company headquartered in Birmingham, Alabama, operating across the South, Midwest and Texas. Its three reportable segments are Business Services, Consumer Services and Wealth Management. Morgan Keegan was sold in April 2012 and is presented as discontinued operations.
Key financial results
| Metric | Q3 2013 | Q3 2012 | Nine months 2013 | Nine months 2012 |
|---|---|---|---|---|
| Net interest income, GAAP | $824 | $817 | $2,430 | $2,482 |
| Net interest income, taxable-equivalent | $838 | $830 | $2,470 | $2,519 |
| Net interest margin, taxable-equivalent | 3.24% | 3.08% | 3.18% | 3.11% |
| Provision for loan losses | $18 | $33 | $59 | $176 |
| Non-interest income | $495 | $533 | $1,493 | $1,564 |
| Non-interest expense | $884 | $869 | $2,610 | $2,624 |
| Income from continuing operations | $293 | $312 | $894 | $902 |
| Net income | $293 | $301 | $895 | $855 |
| Net income available to common shareholders | $285 | $301 | $871 | $730 |
| Diluted earnings per common share | $0.20 | $0.21 | $0.62 | $0.53 |
Q3 diluted EPS from continuing operations was $0.20 versus $0.22 a year earlier. The filing reports an adjusted efficiency ratio of 67.29% for Q3 versus 64.32% in Q3 2012, and 65.13% versus 65.01% for the nine-month periods; these are non-GAAP measures.
Balance sheet, liquidity and capital
- At September 30, total assets were $116.9 billion, down from $121.3 billion at year-end 2012. Total loans, net of unearned income, were $75.9 billion, up $1.9 billion; deposits were $92.3 billion, down $3.2 billion.
- Cash and cash equivalents were $3.9 billion. Nine-month cash flows were $3.1 billion from operating activities, $(394) million from investing activities and $(4.4) billion from financing activities.
- Total borrowed funds were $6.6 billion, including $1.8 billion short-term and $4.8 billion long-term, compared with $7.4 billion at year-end 2012. Long-term borrowings declined after maturities, redemptions and tender offers, partly offset by a $750 million issuance.
- Stockholders’ equity was $15.5 billion, essentially unchanged. Tangible common equity to tangible assets was 9.02%, up from 8.63% at year-end; Tier 1 common risk-based capital was 10.99%, and the estimated Basel III Tier 1 common ratio was 10.37%.
- Regions and significant subsidiaries were categorized as well capitalized under then-current regulatory standards. The filing describes Basel III requirements and implementation beginning in 2015, with full phase-in scheduled through 2019.
- Available borrowing capacity at September 30 included $19.6 billion at the Federal Reserve and $5.1 billion at the FHLB, subject to eligible collateral. Management said it did not rely on unsecured wholesale funding in its contingency planning.
Credit quality and material changes
- Net charge-offs were $114 million in Q3 2013, or an annualized 0.60% of average loans, versus $262 million and 1.38% in Q3 2012. For the first nine months, net charge-offs were $438 million, or 0.78%, versus $859 million and 1.50%.
- The allowance for loan losses was $1.54 billion, or 2.03% of loans, compared with $1.92 billion and 2.59% at year-end 2012. Non-performing assets declined to $1.54 billion from $1.92 billion; non-performing loans excluding held-for-sale loans were $1.35 billion versus $1.68 billion.
- Loans grew in commercial and industrial lending and indirect auto lending, while investor real estate, residential mortgage and home equity balances declined. Management cited ongoing de-risking and improving credit performance.
- Securities totaled $24.0 billion, down $3.2 billion from year-end. Regions sold securities and transferred $2.4 billion of available-for-sale securities to held-to-maturity in Q2; the transfer included $111 million of pre-tax unrealized losses to be amortized over the securities’ remaining lives.
- Accumulated other comprehensive loss worsened by $476 million over the nine months, primarily reflecting unrealized securities losses. Management attributed increased securities unrealized losses largely to interest-rate changes and reported no indication of adverse credit changes in the securities reviewed.
Outlook, commentary and risks
- Management expected net charge-offs and non-performing assets to continue improving in 2013 versus 2012, while cautioning that economic conditions, real estate values, interest rates, unemployment and individual large credits could create volatility. No specific earnings or revenue guidance was provided.
- Management described the balance sheet as moderately asset-sensitive. Its models estimated that a sustained parallel increase of 100 basis points would raise 12-month net interest income by $205 million instantaneously or $157 million gradually; a 50-basis-point decline was estimated to reduce it by $116 million or $83 million, respectively. These are modeled estimates, not forecasts.
- Mortgage income fell to $52 million in Q3 from $106 million, with mortgage production down 28% year over year as rising rates slowed demand. For the nine months, mortgage income declined to $193 million from $273 million.
- Q3 non-interest income included a $24 million pre-tax gain from divesting a non-core Wealth Management business. Nine-month expense included $61 million of losses on early debt extinguishments, of which approximately $29 million was non-deductible for tax purposes.
- Legal matters include an indemnity to Raymond James for Morgan Keegan pre-sale legal claims; its carrying value was $244 million. Regions estimated reasonably possible losses in excess of accrued amounts of up to approximately $90 million, while noting that no excess loss was also reasonably possible. Management said pending litigation and inquiries were not expected to have a material overall effect, but adverse outcomes could be material in an individual period.
- Other risks include regulatory and capital-rule changes, interest-rate and prepayment sensitivity, credit and liquidity risks, mortgage repurchase claims, and cyber threats. Denial-of-service attacks affected website performance during 2013 but did not result in a reported client-data breach. The filing also identifies $175–$275 million of potential problem commercial and investor real estate loans that could migrate to non-accrual status.
Most important facts for investors to verify
- Whether credit improvement continues and whether the lower allowance remains adequate as loans grow; monitor charge-offs, non-accruals, criticized loans and the potential-problem-loan estimate.
- Whether deposit runoff and lower mortgage activity affect funding costs, loan growth and recurring revenue; distinguish the $24 million asset-sale gain from ongoing performance.
- How interest-rate changes affect net interest margin, securities values, mortgage servicing rights and accumulated other comprehensive income; compare modeled sensitivity with subsequent results.
- Whether capital returns, including the $0.03 quarterly common dividend and the $350 million repurchase authorization, remain permitted under regulatory review and preferred-stock terms.
- Developments in litigation, the Raymond James indemnification obligation and regulatory inquiries, including potential losses above accruals.
- Implementation effects of Basel III and proposed liquidity requirements; the filing’s Basel III capital estimate is non-GAAP and based on management’s interpretation of rules then in transition.