Regions Financial Corporation — Form 10-Q Summary
Reporting period: Quarter and six months ended June 30, 2009. Unaudited consolidated financial statements; amounts below are in U.S. dollars unless stated otherwise.
Business context and reporting period
Regions is a bank holding company headquartered in Birmingham, Alabama, operating across the South, Midwest and Texas. Its businesses include consumer and commercial banking, mortgage banking, brokerage and investment banking, trust and insurance services. The filing was signed August 5, 2009.
Financial performance and condition
| Metric | Q2 2009 | Q2 2008 | Six months 2009 | Six months 2008 |
|---|---|---|---|---|
| Net interest income | $831 million | $979 million | $1.640 billion | $1.997 billion |
| Non-interest income | $1.199 billion | $744 million | $2.265 billion | $1.652 billion |
| Net interest income plus non-interest income | $2.030 billion | $1.723 billion | $3.905 billion | $3.649 billion |
| Provision for loan losses | $912 million | $309 million | $1.337 billion | $490 million |
| Net income (loss) | $(188) million | $206 million | $(111) million | $543 million |
| Net income (loss) available to common shareholders | $(244) million | $206 million | $(218) million | $543 million |
| Diluted EPS | $(0.28) | $0.30 | $(0.28) | $0.78 |
Margins and credit: Taxable-equivalent net interest margin was 2.62% in Q2 2009 versus 3.36% a year earlier, and 2.63% for the first half versus 3.44%. Q2 net charge-offs were $491 million, or 2.06% annualized of average loans; first-half net charge-offs were $881 million, or 1.85%. The allowance for loan losses was $2.282 billion at June 30; total allowance for credit losses, including unfunded commitments, was $2.335 billion, or 2.43% of loans.
Balance sheet and funding at June 30, 2009: Total assets were $142.811 billion; loans were $96.149 billion; deposits were $94.726 billion; and total borrowed funds were $25.430 billion, including $7.192 billion short-term and $18.238 billion long-term. Deposits increased $3.8 billion from year-end 2008, while total borrowed funds fell $9.6 billion. Cash and cash equivalents were $8.430 billion.
Cash flows, six months ended June 30: Operating activities provided $1.726 billion, investing activities used $346 million, and financing activities used $3.923 billion. Cash and cash equivalents decreased $2.543 billion to $8.430 billion.
Capital: Stockholders’ equity was $18.737 billion. The company reported a 12.16% Tier 1 capital ratio, 16.19% total capital ratio, 9.62% leverage ratio and 8.05% Tier 1 common ratio at June 30. Regions stated it had met the Federal Reserve’s $2.5 billion SCAP Tier 1 common equity requirement.
Material changes versus comparable periods
- Regions moved from Q2 2008 net income of $206 million to a Q2 2009 net loss of $188 million; common shareholders’ results fell from $206 million income to a $244 million loss. The first half likewise shifted from $543 million income to a $111 million loss.
- Credit deterioration drove the higher provision, rising non-performing assets and charge-offs. Non-performing assets, including loans held for sale, reached $3.428 billion, compared with $1.718 billion at December 31, 2008 and $1.629 billion a year earlier. Non-performing loans excluding loans held for sale were $2.618 billion.
- Net interest income and margin declined year over year, reflecting lower loan yields, the rate environment, higher costs on new debt and increased non-performing assets.
- Reported non-interest income rose, but included substantial gains from leveraged-lease terminations, securities sales, Visa shares and debt extinguishment. Deposits grew, while short-term borrowings declined, primarily from reduced Federal Reserve Term Auction Facility funding.
- Regions issued 460 million common shares for approximately $1.8 billion net proceeds and mandatory convertible preferred shares for approximately $278 million. The common dividend was reduced to $0.01 per share from $0.38 in Q2 2008.
Outlook, commentary, risks and unusual items
- Management expected credit costs to remain elevated given pressure on residential property values, especially in Florida and North Georgia, rising unemployment and economic uncertainty. No specific earnings or revenue guidance was provided.
- Management said recent growth in non-interest-bearing deposits and improving spreads on newly originated and renewed loans could help stabilize the net interest margin. Regions did not expect to raise its quarterly common dividend above $0.01 for the foreseeable future.
- Q2 non-interest income included $189 million in leveraged-lease termination gains, $80 million from the sale of Visa shares, $61 million from debt extinguishment and $108 million in net securities gains. First-half leveraged-lease termination gains were $512 million. Related tax expense largely offset the leveraged-lease gains; the terminations had minimal net-income impact.
- Q2 securities impairment expense was $69 million, while the filing reports $260 million of gross impairment charges, net of $191 million non-credit portion recognized in other comprehensive income. The filing identifies impaired non-agency residential mortgage-backed securities and a municipal issuer among the items affected.
- Q2 expenses included a $64 million FDIC special assessment. The company noted further assessments could occur during 2009. Goodwill testing found the General Banking/Treasury unit’s carrying value exceeded estimated fair value at the first step, but the subsequent test concluded goodwill was not impaired at June 30.
- Credit risks include deterioration in residential homebuilder, condominium, commercial real estate and home-equity portfolios. The $3.786 billion residential homebuilder portfolio was concentrated in Florida and North Georgia; about $771 million was non-accrual. Regions also disclosed $1.6 billion of potential problem commercial and commercial real estate loans outside non-accrual and 90-days-past-due categories.
- Ratings agencies downgraded Regions’ ratings during Q2; some ratings remained on negative creditwatch. The company disclosed $2.4 billion of funded VRDN-related credit support and approximately $2.6 billion of remaining unfunded VRDN letters of credit and liquidity facilities, which could require funding if remarketing failed.
- Legal and regulatory matters include Morgan Keegan auction-rate securities litigation and repurchase activity, SEC and FINRA Wells notices concerning Regions Morgan Keegan Select Funds, and a class-action suit involving trust preferred securities. The filing states potential outcomes and exposures could not be reliably estimated for certain matters; management generally did not expect the matters described to have a material effect, while acknowledging adverse outcomes could be material in some cases.
Most important facts for investors to verify
- Whether credit losses, non-performing assets and allowance coverage continue to worsen, particularly in homebuilder, condominium, commercial real estate and Florida home-equity exposures.
- How much of reported non-interest income is recurring after excluding leveraged-lease, securities-sale, Visa and debt-extinguishment gains.
- Whether net interest margin stabilizes and deposit growth continues, and how funding needs evolve as short-term facilities mature.
- Capital ratios, SCAP compliance and any conditions or approvals needed to repay Treasury CPP preferred stock; Regions had not requested approval to repurchase it as of the filing.
- Potential financial and reputational effects of the auction-rate securities and Morgan Keegan fund matters, and any additional regulatory actions or costs.
- Whether the $0.01 common dividend is maintained and whether preferred-stock, TARP or regulatory restrictions constrain future distributions.