Regions Financial Corporation — Q3 2010 Form 10-Q
Business context and period. Regions is a regional financial holding company providing banking, brokerage, investment banking, trust and insurance services. This unaudited filing covers the quarter and nine months ended September 30, 2010; balance-sheet comparisons are primarily against December 31, 2009. Dollar amounts below are in millions unless noted.
Financial results and condition
| Metric | Q3 2010 | Q3 2009 | Nine months 2010 | Nine months 2009 |
|---|---|---|---|---|
| Net interest income | $868 | $845 | $2,555 | $2,485 |
| Provision for loan losses | $760 | $1,025 | $2,181 | $2,362 |
| Non-interest income | $750 | $772 | $2,318 | $3,037 |
| Non-interest expense | $1,163 | $1,243 | $3,719 | $3,532 |
| Net income (loss) | $(155) | $(377) | $(628) | $(488) |
| Loss per common share, diluted | $(0.17) | $(0.37) | $(0.66) | $(0.71) |
- Q3 net interest margin was 2.96%, up 23 basis points year over year; taxable-equivalent net interest income was $876, versus $853. Lower deposit costs and a shift toward lower-cost deposits supported the improvement. Nine-month margin was 2.87%, versus 2.66%.
- Q3 net loss available to common shareholders was $209, compared with a $437 loss a year earlier. For the first nine months, the common-shareholder loss was $799, versus $655. The 2010 nine-month result included a $200 non-tax-deductible regulatory charge recorded in Q2.
- Net charge-offs were $759 in Q3, an annualized 3.52% of average loans, versus $680 and 2.86% in Q3 2009. Nine-month annualized net charge-offs were 3.22%, versus 2.19%. The allowance for loan losses was $3,185, or 3.77% of loans, at September 30, up from 3.43% at year-end 2009.
- At September 30, total assets were $133,498, down from $142,318 at year-end; loans were $84,420, down from $90,674. Management attributed loan contraction primarily to deliberate reductions in investor real estate exposure and weak demand. Deposits were $94,978, down from $98,680, with time deposits declining and low-cost deposits increasing.
- Borrowed funds totaled $17,996, versus $22,132 at year-end, including $14,335 of long-term borrowings. Stockholders’ equity was $17,163, down from $17,881. The reported Tier 1 common ratio was 7.63%; Tier 1 capital ratios were 12.07% for Regions and 11.39% for Regions Bank.
- Nine-month cash flows were $3,334 from operations, $3,675 from investing and $(8,133) from financing. Cash and cash equivalents declined $1,124 to $6,887 from the beginning of the year.
Material changes and notable items
- Q3 net loss improved year over year chiefly because provision for loan losses was lower by $265 and non-interest expense fell by $80. Credit costs nevertheless remained high, and charge-offs increased year over year.
- Nine-month non-interest income declined $719 year over year, largely reflecting 2009 items that did not recur or were much smaller in 2010: $517 of leveraged lease termination gains, $80 from Visa shares, $61 from early debt extinguishment and higher securities gains. The 2010 period included $61 of securities gains and $19 of leveraged lease termination gains.
- Non-performing assets, excluding loans held for sale, were $3,833, down from $4,095 at year-end but above $3,719 a year earlier. Investor real estate remained a major credit concern. Regions completed a $350 bulk sale of nonperforming assets in Q3.
- Regions converted its remaining Series B mandatorily convertible preferred stock in June, issuing approximately 63 million common shares. The quarterly common dividend remained $0.01 per share; management said it did not expect to raise it above that level for the foreseeable future.
- Regions prepaid approximately $1.5 billion of FHLB advances during the first nine months and recorded a $53 loss on extinguishment. It reported a further $55 pre-tax loss on a $500 FHLB advance prepayment in October, after quarter-end.
Outlook, risks and contingencies
- Management expected net interest margin to improve gradually and reach 3.00% by year-end 2010. It expected net loan charge-offs to remain elevated during 2010; no earnings guidance was provided.
- Management cited ongoing economic weakness, unemployment, falling property values, investor real estate exposure and Florida second-lien home equity losses as credit risks. Q3 non-performing loan inflows increased, including loans still current but classified as non-performing due to concerns about borrower capacity or willingness to repay.
- Management said it believed the allowance was adequate, but its estimate depends on economic assumptions and could change; regulatory examinations could also require adjustments. Goodwill of $5.6 billion was not impaired in the Q3 interim test, although Banking/Treasury’s estimated fair value was below carrying value in Step One. The annual fourth-quarter test had not been completed.
- Regions estimated maximum potential customer loss related to the Gulf oil spill at approximately $20. It identified uncertainty around implementation of Dodd-Frank and Basel III, including potential capital, liquidity, FDIC-cost and interchange-fee effects. Regions said its then-current capital ratios exceeded the Basel III minimum guidelines cited in the filing, but final effects were uncertain.
- Liquidity sources included $15.8 billion of Federal Reserve borrowing availability and $3.8 billion of FHLB Atlanta availability, subject to eligible collateral. The company said its contingency funding plan did not rely on unsecured funding sources.
- Moody’s downgraded Regions and Regions Bank on November 1, 2010, after quarter-end; Regions Financial Corporation’s long-term debt rating fell below investment grade. Further downgrades could raise funding costs, restrict market access or affect counterparty and customer arrangements.
- Material legal matters include regulatory proceedings involving Morgan Keegan and certain funds, for which Regions recorded a $200 charge in Q2 based on its then-current estimate. Other investor-fund and overdraft-fee class actions remained unresolved; the filing said potential exposure could be material in some cases and could not be reasonably estimated.
Key facts for investors to verify
- Whether subsequent loan-loss provisions, charge-offs, nonperforming assets and real estate values confirm stabilization or further deterioration.
- Whether deposit mix, funding costs and the projected 3.00% year-end net interest margin materialized.
- The final settlement amount and outcome of the Morgan Keegan regulatory matter, and developments in related litigation.
- The effects of the Moody’s downgrade, regulatory implementation and credit-rating changes on borrowing capacity, funding costs and capital requirements.
- The results of Regions’ fourth-quarter 2010 goodwill impairment test and the assumptions underlying the large deferred tax asset.
- Whether dividend, liquidity and capital positions remain sustainable, particularly given TARP-related restrictions and planned FHLB debt repayments.