Regions Financial Corporation — Q3 2011 Form 10-Q
Business context and reporting period. Regions is a regional bank holding company headquartered in Birmingham, Alabama, with banking, brokerage and investment banking, trust, and insurance businesses. This unaudited filing covers the quarter and nine months ended September 30, 2011; comparisons are primarily with the corresponding 2010 periods and December 31, 2010 balance-sheet amounts. All dollar amounts below are in millions unless stated otherwise.
Key financial metrics
| Metric | Q3 / September 30, 2011 | Comparison |
|---|---|---|
| Net income | $155; $101 available to common shareholders; diluted EPS $0.08 | Q3 2010 net loss of $155; $209 loss available to common; diluted EPS $(0.17) |
| Nine-month net income | $333; $173 available to common; diluted EPS $0.14 | Nine-month 2010 net loss of $628; $799 loss available to common; diluted EPS $(0.66) |
| Net interest income | $858 GAAP; $866 on a taxable-equivalent basis. Taxable-equivalent net interest margin: 3.02% | Q3 2010: $868 GAAP; $876 taxable-equivalent; margin 2.96% |
| Non-interest income / expense | $745 / $1,066 | Q3 2010: $750 / $1,163 |
| Provision for loan losses | $355 | Q3 2010: $760 |
| Credit costs | Net charge-offs $511; annualized 2.52% of average loans | Q3 2010: $759; 3.52% |
| Total assets / loans | Assets $129,762; loans, net of unearned income, $79,447 | December 31, 2010: assets $132,351; loans $82,864 |
| Deposits / borrowed funds | Deposits $95,938; total borrowed funds $13,083, including $10,140 long-term | December 31, 2010: deposits $94,614; borrowed funds $17,127, including $13,190 long-term |
| Liquidity and cash flow | Cash and cash equivalents $8,263 at period-end; operating cash flow $4,616 for nine months | Cash and cash equivalents were $6,919 at December 31, 2010 |
| Capital | Tier 1 capital ratio 12.84% at Regions Financial; total capital 16.53%; leverage 9.67%. Tangible common equity to tangible assets 6.48% | All reported regulatory ratios exceeded stated well-capitalized thresholds |
Material changes versus comparable periods
- Q3 returned to profitability, with the lower loan-loss provision the principal driver; net income improved by $310 versus Q3 2010. Nine-month earnings also improved substantially from the prior-year loss.
- Q3 taxable-equivalent net interest income declined $10 year over year, while margin rose 6 basis points. Lower earning-asset balances were offset by lower deposit costs; total deposit cost fell to 0.46% from 0.70% in Q3 2010.
- Q3 non-interest expense declined $97 year over year, reflecting lower compensation, including offsetting deferred-compensation effects, lower headcount, and lower other-real-estate expense. Non-interest income was broadly flat.
- Loans fell $3,417 from year-end, primarily due to intentional reductions in investor real estate, residential mortgage sales and home-equity runoff. Commercial and industrial balances rose, and Regions added credit-card balances following its June 2011 purchase of approximately $1.2 billion in branded accounts.
- Deposits grew $1,324 from year-end, with growth in non-interest-bearing and transaction accounts partly offset by lower money-market and time deposits. Borrowed funds fell $4,044, including debt maturities and repayments.
- Non-performing assets decreased to $3,391 from $3,918 at year-end; non-performing loans, including loans held for sale, were $3,054 versus $3,464. Investor real-estate criticized and classified balances also declined.
Outlook, management commentary, risks and unusual items
- Management expected net loan charge-offs to remain elevated for the rest of 2011, citing economic pressures; property values, unemployment, interest rates and dispositions were identified as key drivers. Management considered the allowance appropriate, but noted estimates could change.
- Regions identified approximately $600–$700 of potential problem commercial and investor real-estate loans that could migrate to non-accrual status in the following quarter. This is an estimate, not a reported subsequent outcome.
- Durbin Amendment interchange rules were expected to reduce annual debit interchange revenue by approximately $170 before mitigation. Regions said it intended to offset the impact over time through revenue enhancements and expense management.
- Regions does not expect to raise its quarterly common dividend above $0.01 per share for the foreseeable future. The 5% annual dividend on the $3.5 billion Treasury Series A preferred investment and related restrictions remain relevant; the preferred dividend rate rises to 9% after the first five years unless redeemed.
- Management was exploring strategic alternatives for Morgan Keegan, excluding Morgan Asset Management and Regions Morgan Keegan Trust, as part of capital planning. No outcome or timetable is provided in the supplied filing text.
- Goodwill was $5.6 billion. Interim testing found no impairment, but the Banking/Treasury reporting unit’s estimated fair value remained below carrying value at Step One; Step Two indicated implied goodwill exceeded carrying goodwill by approximately 24%. Management warned that further declines in market capitalization, higher loan losses, regulatory changes or prolonged low rates could increase impairment risk.
- Legal matters included securities, auction-rate securities, overdraft-fee and other litigation and regulatory inquiries. Regions estimated reasonably possible losses in excess of accrued amounts could reach approximately $300, while also stating that no loss was possible; ultimate outcomes could differ materially. The SEC’s Morgan Keegan auction-rate-securities case had been decided in Morgan Keegan’s favor at summary judgment, but the SEC appealed.
- Credit ratings remained a funding and collateral risk: Regions Financial’s S&P and Moody’s ratings were below investment grade, as was Regions Bank’s Moody’s rating. Ratings-related derivative terms required additional collateral; Regions reported $206 posted cumulatively under amended contracts.
- Regions reported no goodwill impairment charge, but recorded $77 of branch-consolidation and property/equipment charges in the first nine months, following a decision to consolidate approximately 40 branches. A $200 regulatory charge from 2010 had been settled in Q2 2011.
- The filing describes significant regulatory, economic, credit, interest-rate, liquidity, litigation, and valuation risks. Regions reported that it met current regulatory capital requirements and estimated it met Basel III minimums based on its then-current understanding; those estimates were subject to rule clarification and implementation.
Most important facts for investors to verify
- Whether credit improvement persists: charge-offs, non-performing assets, criticized/classified loans, and the $600–$700 potential-problem-loan estimate.
- Whether provision expense remains below charge-offs, and how loan transfers to held for sale affect reported credit costs and asset quality.
- Whether deposit-cost savings and balance-sheet mix sustain net interest margin amid low rates, prepayments, and possible regulatory changes.
- The scale and timing of Durbin-related revenue pressure and the results of planned mitigation measures.
- Developments in Morgan Keegan’s strategic review, litigation and regulatory inquiries, and any impact on capital, liquidity, or earnings.
- Goodwill impairment-test assumptions and headroom, especially given the Banking/Treasury unit’s sensitivity to discount rates, loan fair values, and market multiples.
- Capital and liquidity capacity under finalized Basel III rules, rating changes, collateral demands, and the continued TARP preferred-stock obligations.