Regions Financial Corporation — Q1 2013 Form 10-Q
Business context and period. Unaudited results cover the three months ended March 31, 2013, compared with Q1 2012; balance-sheet comparisons are with December 31, 2012. Regions is a Birmingham-based bank holding company operating across the South, Midwest and Texas, with Business Services, Consumer Services and Wealth Management segments. The Morgan Keegan sale closed April 2, 2012; its results are presented as discontinued operations.
Key financial results
| Metric | Q1 2013 / March 31, 2013 | Comparable / prior period |
|---|---|---|
| Net income | $335 million; $327 million available to common shareholders; diluted EPS $0.23 | Q1 2012: $199 million net income; $145 million available to common; diluted EPS $0.11 |
| Continuing operations | $333 million net income; $325 million available to common | Q1 2012: $239 million and $185 million, respectively |
| Net interest income | $798 million GAAP; $811 million taxable-equivalent; net interest margin 3.13% | Q1 2012: $827 million GAAP; $839 million taxable-equivalent; margin 3.09% |
| Non-interest income / expense | $501 million / $842 million | Q1 2012: $524 million / $913 million |
| Provision and credit losses | $10 million provision; $180 million net charge-offs, or 0.99% annualized | Q1 2012: $117 million provision; $332 million charge-offs, or 1.73% annualized |
| Cash flow | $1.130 billion operating cash flow; cash and cash equivalents ended at $4.933 billion, down $556 million during the quarter | Q1 2012: $755 million operating cash flow; ending cash $7.473 billion |
| Balance sheet | Assets $119.718 billion; loans $73.936 billion; deposits $94.133 billion | December 31, 2012: assets $121.347 billion; loans $73.995 billion; deposits $95.474 billion |
| Borrowings and equity | Total borrowed funds $7.677 billion; stockholders’ equity $15.740 billion | December 31, 2012: borrowings $7.435 billion; equity $15.499 billion |
Material changes and management commentary
- Common-shareholder earnings more than doubled year over year, primarily reflecting sharply lower loan-loss provision, lower non-interest expense and lower preferred-stock expense. Q1 2012 included $54 million of preferred dividends and accretion, versus $8 million in Q1 2013.
- Net interest income declined despite a slightly higher margin: lower average earning assets and loan and securities yields more than offset lower funding costs. Deposit costs fell to 18 basis points from 37 basis points.
- Adjusted efficiency ratio was 64.92%, versus 67.93% in Q1 2012; adjusted total revenue was $1.297 billion versus $1.344 billion. These are non-GAAP measures and exclude specified items, including securities gains.
- Loans were broadly flat: commercial and industrial balances grew $928 million from year-end, while investor real estate declined $400 million. Deposits declined $1.341 billion, mainly from time-deposit maturities with little customer reinvestment.
- Credit indicators improved: allowance for loan losses was $1.749 billion, or 2.37% of loans, versus $1.919 billion, or 2.59%, at year-end. Non-performing assets were $1.788 billion versus $1.919 billion. Management attributed improvement to resolutions, lower problem-asset inflows and portfolio mix changes.
Outlook, risks and unusual items
- Management expected 2013 net charge-offs and non-performing assets to continue improving versus 2012, but noted that real estate values, interest rates, unemployment, large individual credits and other economic developments could cause quarterly volatility.
- At March 31, management estimated $250–$350 million of potential problem commercial and investor-real-estate loans that could migrate to non-accrual in the next quarter.
- Capital ratios exceeded stated regulatory thresholds. Regions reported a 11.23% Tier 1 common ratio and estimated a 9.12% Basel III Tier 1 common ratio under proposed rules; Basel III calculations remained estimates subject to regulatory clarification. The company stated it was above the then-applicable 100% liquidity coverage minimum based on its interpretation of the rules.
- Liquidity included $3.1 billion of excess cash on deposit with the Federal Reserve, $19.9 billion of Federal Reserve borrowing availability and $6.7 billion of FHLB borrowing availability, subject to collateral. Regions said its contingency funding plan did not rely on unsecured sources.
- Interest-rate sensitivity was moderately asset-sensitive: estimated annual net interest income increased $312 million under a gradual +200-basis-point scenario and decreased $98 million under a gradual −50-basis-point scenario. These are modeled estimates, not forecasts.
- Regions conducted an interim goodwill impairment test because market capitalization was below book value. The Business Services reporting unit’s estimated fair value was below carrying amount, requiring a second-step test; the test indicated no impairment. The $4.816 billion goodwill balance therefore remained unchanged, but valuation assumptions and market conditions create impairment risk.
- Legal matters include Morgan Keegan-related claims indemnified to Raymond James. The indemnification liability was $268 million carrying value ($248 million estimated fair value). For matters where it could estimate possible losses, Regions disclosed reasonably possible losses above accruals of up to approximately $60 million, while noting estimates may not cover every matter. Management did not expect pending litigation to materially affect the company overall, but acknowledged an adverse outcome could be material in a particular period.
- Subsequent events: Regions launched a tender offer for up to $350 million of senior notes, with expected pre-tax extinguishment losses of $25–$30 million; issued $750 million of 2.00% senior notes due 2018; and announced redemption of approximately $498 million of junior subordinated notes and related trust preferred securities. A new $350 million share-repurchase plan began in Q2; by May 6, about 10 million shares had been repurchased for $82 million. The Q2 common dividend was raised to $0.03 per share from $0.01.
- Denial-of-service attacks in October and December 2012 and March and April 2013 temporarily affected website availability or performance. Regions reported no client-data breach and said the incidents were resolved.
Important facts for investors to verify
- Whether credit-quality improvements persist and whether the allowance remains adequate, especially given potential problem loans and stressed home-equity exposures.
- Whether lower net interest income, deposit attrition and loan-mix changes affect future margins and revenue.
- Goodwill valuation headroom for Business Services and the sensitivity of the no-impairment conclusion to market and loan fair-value assumptions.
- Actual costs and funding effects of the debt tender, note maturities, planned redemptions, share repurchases and higher dividend.
- Developments in Morgan Keegan-related litigation and the adequacy of indemnification and other legal reserves.
- Regulatory capital and liquidity outcomes as Basel III rules are finalized; reported Basel III and liquidity estimates were based on management’s interpretation at filing.