Add
RF to Portfolio
Set Alert
Email to a
Friend
| |||
|
|
Quotes & Info
|
| RF > SEC Filings for RF > Form 10-Q on 5-Aug-2009 | All Recent SEC Filings |
5-Aug-2009
Quarterly Report
INTRODUCTION
The following discussion and analysis is part of Regions Financial Corporation's ("Regions" or the "Company") Quarterly Report on Form 10-Q to the Securities and Exchange Commission ("SEC") and updates Regions' Form 10-K for the year ended December 31, 2008, which was previously filed with the SEC. This financial information is presented to aid in understanding Regions' financial position and results of operations and should be read together with the financial information contained in the Form 10-K. Certain prior period amounts presented in this discussion and analysis have been reclassified to conform to current period classifications, except as otherwise noted. The emphasis of this discussion will be on the three and six months ended June 30, 2009 compared to the three and six months ended June 30, 2008 for the statement of operations. For the balance sheet, the emphasis of this discussion will be the balances as of June 30, 2009 compared to December 31, 2008.
This discussion and analysis contains statements that may be considered "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. See pages 3 and 4 for additional information regarding forward-looking statements.
CORPORATE PROFILE
Regions is a financial holding company headquartered in Birmingham, Alabama, which operates in the South, Midwest and Texas. Regions provides traditional commercial, retail and mortgage banking services, as well as other financial services in the fields of investment banking, asset management, trust, securities brokerage, insurance and other specialty financing.
Regions conducts its banking operations through Regions Bank, an Alabama chartered commercial bank that is a member of the Federal Reserve System. At June 30, 2009, Regions operated approximately 1,900 full-service banking offices in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia. Regions provides brokerage services and investment banking from approximately 320 offices of Morgan Keegan & Company, Inc. ("Morgan Keegan"), a full-service regional brokerage and investment banking firm. Regions provides full-line insurance brokerage services primarily through Regions Insurance, Inc., one of the 25 largest insurance brokers in the country.
Regions' profitability, like that of many other financial institutions, is dependent on its ability to generate revenue from net interest income and non-interest income sources. Net interest income is the difference between the interest income Regions receives on interest-earning assets, such as loans and securities, and the interest expense Regions pays on interest-bearing liabilities, principally deposits and borrowings. Regions' net interest income is impacted by the size and mix of its balance sheet components and the interest rate spread between interest earned on its assets and interest paid on its liabilities. Non-interest income includes fees from service charges on deposit accounts, securities brokerage, investment banking and trust activities, mortgage servicing and secondary marketing, insurance activities, and other customer services which Regions provides. Results of operations are also affected by the provision for loan losses and non-interest expenses, such as salaries and employee benefits, occupancy and other operating expenses, as well as income taxes.
Economic conditions, competition, and the monetary and fiscal policies of the Federal government significantly affect most financial institutions, including Regions. Lending and deposit activities and fee income generation are influenced by levels of business spending and investment, consumer income, consumer spending and savings, capital market activities, and competition among financial institutions, as well as customer preferences, interest rate conditions and prevailing market rates on competing products in Regions' market areas.
Regions' business strategy has been and continues to be focused on providing a competitive mix of products and services, delivering quality customer service and maintaining a branch distribution network with offices in convenient locations. Regions delivers this business strategy with the personal attention and feel of a community bank and with the service and product offerings of a large regional bank.
SECOND QUARTER HIGHLIGHTS
Regions reported a net loss available to common shareholders of $244 million, or $0.28 loss per diluted share in the second quarter of 2009, compared to second quarter 2008 per diluted share income of $0.30. High credit costs, primarily the result of focused efforts to identify and address loan portfolio stress, as well as increasing unemployment and ongoing deterioration in real estate values, continued to negatively impact pre-tax earnings. During the second quarter, Regions recorded a $912 million provision for loan losses, $603 million higher than the second quarter of 2008. Additionally, several other significant items, which are discussed later in this section, affected net income for the second quarter of 2009.
Net interest income on a fully taxable-equivalent basis for the second quarter of 2009 was $840 million compared to $1.0 billion in the second quarter of 2008. The net interest margin (taxable-equivalent basis) was 2.62% in the second quarter of 2009, compared to 3.36% during the second quarter of 2008. The decline in the net interest margin was impacted primarily by factors directly and indirectly associated with the erosion of economic and industry conditions since late 2007. These factors include an unfavorable variation in the general level and shape of the yield curve, Regions' asset sensitive balance sheet, rate increases for new debt issuances, and rising non-performing asset levels. Additionally, declining loan yields have not been offset by similar declines in deposit rates due to the competitive demand for deposits within the industry. Recent increases in non-interest bearing deposit balances as well as the benefits of improving spreads on newly originated and renewed loans should help promote a stable net interest margin going forward.
Net charge-offs totaled $491 million, or an annualized 2.06% of average loans, in the second quarter of 2009, compared to 0.86% for the second quarter of 2008. The increase was primarily driven by deterioration in the residential homebuilder portfolio and losses within the home equity and condominium portfolios, all of which are closely tied to the housing market slowdown. The provision for loan losses totaled $912 million in the second quarter of 2009 compared to $309 million during the second quarter of 2008. The allowance for credit losses at June 30, 2009 was 2.43% of total loans, net of unearned income, compared to 1.95% at December 31, 2008 and 1.56% at June 30, 2008. Total non-performing assets, including loans held for sale, at June 30, 2009 were $3.4 billion, compared to $1.7 billion at December 31, 2008 and $1.6 billion at June 30, 2008. Residential homebuilder and condominium loans, as well as foreclosed properties, continue to be the primary drivers of the increase since December 31, 2008. Further, the increase is being partially driven by recent increases in non-performing loans secured by income producing properties. Also included in non-performing assets were $371 million of loans held for sale at June 30, 2009 compared to $423 million at December 31, 2008 and $8 million at June 30, 2008.
Non-interest income for the second quarter of 2009 increased by $455 million compared to the second quarter of 2008. The increase was due primarily to several items impacting the 2009 periods with no corresponding impact on the 2008 periods. These items include gains from terminations of leveraged leases of $189 million, gain on sale of Visa shares of $80 million, and a gain on the extinguishment of debt of $61 million realized in connection with the Company's issuance of common stock in exchange for trust preferred securities. Higher gains from sales of portfolio securities also contributed to the increase. Additionally, mortgage income was greater in the second quarter and first six months of 2009 by $39 million and $66 million, respectively, compared to the same periods of 2008 due to elevated refinancing activity driven by lower interest rates.
Total non-interest expense, excluding merger-related charges, was $1.231 billion and $1.041 billion in the second quarter of 2009 and 2008, respectively. Pre-tax merger charges of $100 million were incurred in the second quarter of 2008 (see Table 13 "GAAP to Non-GAAP Reconciliation"). The increase in non-interest expense was primarily attributable to increased FDIC insurance premiums, including a $64 million special assessment, and $69 million in other-than-temporary impairment charges on investment securities. Additionally, salaries and employee benefits and net occupancy expense, excluding merger charges, and other real estate owned ("OREO") expense were higher in the second quarter of 2009 as compared to the corresponding 2008 period. The increase in non-interest expense was also driven by a 2008 recapture of mortgage servicing rights, which did not occur in the corresponding 2009 period. Partially offsetting these increases were decreases in furniture and equipment expense, adjusted for merger charges, and amortization of mortgage servicing rights and core deposit intangibles.
During the second quarter of 2009, the Company significantly strengthened its balance sheet, fulfilling the $2.5 billion regulatory Supervisory Capital Assessment Program ("SCAP") requirement primarily through the issuances of common and preferred securities. Tier 1 Capital at the end of the second quarter of 2009 was 12.16 percent, and the Tier 1 common ratio was 8.05 percent (see Table 13 "GAAP to Non-GAAP" Reconciliation").
TOTAL ASSETS
Regions' total assets at June 30, 2009 were $143 billion, compared to $146 billion at December 31, 2008. The decrease in total assets from year-end 2008 resulted primarily from a decrease in interest-bearing deposits in other banks as the Company's excess liquidity position was higher at year-end.
LOANS
At June 30, 2009 and December 31, 2008, loans represented 76% of Regions'
interest-earning assets. The following table presents the distribution by loan
type of Regions' loan portfolio, net of unearned income:
June 30 December 31 June 30
(In millions, net of unearned income) 2009 2008 2008
Commercial and industrial $ 23,619 $ 23,596 $ 23,242
Commercial real estate-non owner-occupied 16,419 14,486 13,643
Commercial real estate-owner-occupied 12,282 11,722 11,277
Construction-non owner-occupied 7,163 9,029 9,478
Construction-owner-occupied 1,060 1,605 2,523
Residential first mortgage 15,564 15,839 16,464
Home equity 15,796 16,130 15,447
Indirect 3,099 3,854 4,145
Other consumer 1,147 1,158 2,048
$ 96,149 $ 97,419 $ 98,267
|
Loans, net of unearned income, totaled $96.1 billion at June 30, 2009, a decrease of $1.3 billion from year-end 2008 levels, primarily due to a decline in construction loans, reflecting developers' reluctance to begin new projects or purchase existing projects under current economic conditions. These decreases were partially offset by increases in commercial and industrial as well as the commercial real estate portfolios. The primary driver of the increases in these categories was the funding of Variable Rate Demand Notes ("VRDNs"). At June 30, 2009, Regions had funded $2.4 billion in letters of credit backing VRDNs. The remaining unfunded VRDN letters of credit portfolio was approximately $2.6 billion at June 30, 2009 (net of participations). The dealer indirect portfolio is an exit portfolio and continues to be in a runoff mode.
Regions has approximately $66 million in book value of "sub-prime" loans retained from the disposition of EquiFirst, down slightly from the year-end 2008 balance of $77 million. The credit loss exposure related to these loans is addressed in management's periodic determination of the allowance for credit losses.
RESIDENTIAL HOMEBUILDER PORTFOLIO
During late 2007, the residential homebuilder portfolio came under significant stress. In Table 1 "Loan Portfolio", the majority of these loans are reported in the construction-non owner-occupied loan category, while a smaller portion is reported as commercial real estate-non owner-occupied. The residential homebuilder portfolio is geographically concentrated in Florida and North Georgia; the balances in these areas total approximately $1.4 billion of the $3.8 billion total at June 30, 2009. Regions continues its proactive efforts in contacting and helping customers, along with fortifying collection efforts, in order to mitigate losses. This portfolio has decreased by approximately $616 million from December 31, 2008 to June 30, 2009, and approximately $3.4 billion since the beginning of 2008.
The following table details the portfolio breakout of the residential homebuilder portfolio:
Table 2-Residential Homebuilder Portfolio
June 30 December 31 June 30
(In millions, net of unearned income) 2009 2008 2008
Land $ 1,273 $ 1,553 $ 2,066
Residential-spec 1,098 1,297 1,752
Residential-presold 252 300 546
Lots 908 967 1,179
National homebuilders and other 255 285 215
$ 3,786 $ 4,402 $ 5,758
|
ALLOWANCE FOR CREDIT LOSSES
The allowance for credit losses ("allowance") represents management's estimate of credit losses inherent in the portfolio. The allowance consists of two components: the allowance for loan losses and the reserve for unfunded credit commitments. Management's assessment of the adequacy of the allowance is based on the combination of both of these components. Regions determines its allowance in accordance with regulatory guidance, Statement of Financial Accounting Standards No. 114, "Accounting by Creditors for Impairment of a Loan" ("FAS 114") and Statement of Financial Accounting Standards No. 5, "Accounting for Contingencies" ("FAS 5"). Binding unfunded credit commitments include items such as letters of credit, financial guarantees and binding unfunded loan commitments.
Factors considered by management in determining the adequacy of the allowance
include, but are not limited to: (1) detailed reviews of individual loans;
(2) historical and current trends in gross and net loan charge-offs for the
various portfolio segments evaluated; (3) the Company's policies relating to
delinquent loans and charge-offs; (4) the level of the allowance in relation to
total loans and to historical loss levels; (5) levels and trends in
non-performing and past due loans; (6) collateral values of properties securing
loans; (7) the composition of the loan portfolio, including unfunded credit
commitments; and (8) management's analysis of current economic conditions.
Various departments, including Credit Review, Commercial and Consumer Credit Risk Management and Special Assets are involved in the credit risk management process to assess the accuracy of risk ratings, the quality of the portfolio and the estimation of inherent credit losses in the loan portfolio. This comprehensive process also assists in the prompt identification of problem credits. The Company has taken a number of measures to aggressively manage the portfolios and mitigate losses, particularly in the more problematic portfolios. Significant action in the management of the home equity portfolio has also been taken. Also, a strong Customer Assistance Program is in place which educates customers about options and initiates early contact with customers to discuss solutions when a loan first becomes delinquent.
For the majority of the loan portfolio, management uses information from its ongoing review processes to stratify the loan portfolio into pools sharing common risk characteristics. Loans that share common risk characteristics are assigned a portion of the allowance based on the assessment process described above. Credit exposures are categorized by type and assigned estimated amounts of inherent loss based on the processes described above.
The allowance for credit losses totaled $2.34 billion at June 30, 2009 and $1.90 billion at December 31, 2008. The allowance for credit losses as a percentage of net loans was 2.43% at June 30, 2009 compared to 1.95% at December 31, 2008 and 1.56% at June 30, 2008. The increase in the allowance was primarily driven by the result of focused efforts to identify and address loan portfolio stress, as well as deterioration in the residential
homebuilder, condominium and home equity portfolios. These developments resulted in a significant migration of loans into non-performing status. The majority of the increase in non-performing loans was driven by continued deterioration in the residential homebuilder and condominium loans. Further, the increase during the second quarter of 2009 in non-performing loans was partially driven by recent increases in non-performing loans secured by income producing properties. The Company considers increases in non-performing loans to be one of the indicators of increased risks inherent in the portfolio. The increase in the allowance for credit losses reflects these increased risks. Given continuing pressure on residential property values-especially in Florida and North Georgia-rising unemployment and a generally uncertain economic backdrop, the Company expects credit costs to remain elevated. The reserve for unfunded credit commitments was $53 million at June 30, 2009 and $74 million at December 31, 2008. Details regarding the allowance and net charge-offs, including an analysis of activity from the previous year's totals, are included in Table 4 "Allowance for Credit Losses".
Net charge-offs as a percentage of average loans (annualized) were 1.85% and 0.70% in the first six months of 2009 and 2008, respectively. For the first six months of 2009, net charge-offs on commercial real estate-non-owner-occupied and owner-occupied were an annualized 2.27% and 0.46%, respectively, compared to an annualized 0.43% and 0.26%, respectively, for the first six months of 2008. For the first six months of 2009, net charge-offs on construction-non-owner-occupied and owner-occupied were an annualized 4.48% and 1.10%, respectively, compared to an annualized 0.97% and 0%, respectively, for the first six months of 2008. The increase in commercial real estate-non owner-occupied and construction-non owner-occupied net charge-offs are primarily driven by continued deterioration in Regions' homebuilder portfolio.
Net charge-offs were an annualized 2.62% of home equity loans compared to an annualized 1.25% through the first six months of 2009 and 2008, respectively. Losses in Florida-based credits remained at elevated levels, as unemployment levels remain high and property valuations in certain markets have continued to experience ongoing deterioration. These loans and lines represent approximately $5.8 billion of Regions' total home equity portfolio at June 30, 2009. Of that balance, approximately $2.2 billion represent first liens, while second liens, which total $3.6 billion, are the main source of losses. Florida second lien losses were 7.01% annualized through the first six months of 2009 as compared to 2.89% for the same period of 2008. Through the first six months of 2009, home equity losses in Florida amounted to an annualized 5.44% of loans and lines versus 1.02% across the remainder of Regions' footprint. This compares to the first six months of 2008 losses of 2.24% and 0.73%, respectively.
The following tables provide details related to the home equity portfolio as follows:
Table 3-Selected Home Equity Portfolio Information
Six Months Ended June 30, 2009
Florida All Other States Total
(In millions) 1st Lien 2nd Lien Total 1st Lien 2nd Lien Total 1st Lien 2nd Lien Total
Balance $ 2,171 $ 3,625 $ 5,796 $ 4,509 $ 5,491 $ 10,000 $ 6,680 $ 9,116 $ 15,796
Net Charge-offs 30 127 157 13 38 51 43 165 208
Net Charge-off %(1) 2.78 % 7.01 % 5.44 % 0.58 % 1.38 % 1.02 % 1.28 % 3.60 % 2.62 %
Six Months Ended June 30, 2008
Florida All Other States Total
(In millions) 1st Lien 2nd Lien Total 1st Lien 2nd Lien Total 1st Lien 2nd Lien Total
Balance $ 1,922 $ 3,448 $ 5,370 $ 4,525 $ 5,552 $ 10,077 $ 6,447 $ 9,000 $ 15,447
Net Charge-offs 9 49 58 9 27 36 18 76 94
Net Charge-off %(1) 1.01 % 2.89 % 2.24 % 0.43 % 0.97 % 0.73 % 0.60 % 1.70 % 1.25 %
|
(1) Net charge-off percentages are calculated on an annualized basis as a percent of average balances.
Activity in the allowance for credit losses is summarized as follows:
Table 4-Allowance for Credit Losses
Six Months Ended
June 30
(In millions) 2009 2008
Allowance for loan losses at beginning of year $ 1,826 $ 1,321
Loans charged-off:
Commercial 153 88
Commercial real estate-non owner-occupied 179 30
Commercial real estate-owner-occupied 31 17
Construction-non owner-occupied 179 60
Construction-owner-occupied 7 -
Residential first mortgage 91 23
Home equity 220 102
Indirect 37 24
Other consumer 37 36
934 380
Recoveries of loans previously charged-off:
Commercial 11 12
Commercial real estate-non owner-occupied 2 1
Commercial real estate-owner-occupied 4 3
Construction-non owner-occupied 2 1
Construction-owner-occupied - -
Residential first mortgage 1 1
Home equity 12 8
Indirect 10 8
Other consumer 11 12
53 46
Net charge-offs:
Commercial 142 76
Commercial real estate-non owner-occupied 177 29
Commercial real estate-owner-occupied 27 14
Construction-non owner-occupied 177 59
Construction-owner-occupied 7 -
Residential first mortgage 90 22
Home equity 208 94
Indirect 27 16
Other consumer 26 24
881 334
Allowance allocated to sold loans and loans transferred to
loans held for sale - (5 )
Provision for loan losses 1,337 490
Allowance for loan losses at June 30 $ 2,282 $ 1,472
Reserve for unfunded credit commitments at January 1 $ 74 $ 58
Provision for unfunded credit commitments (21 ) 6
Reserve for unfunded credit commitments at June 30 $ 53 $ 64
Allowance for credit losses at end of period $ 2,335 $ 1,536
Loans, net of unearned income, outstanding at end of period $ 96,149 $ 98,267
Average loans, net of unearned income, outstanding for the
period $ 96,012 $ 96,456
Ratios:
Allowance for loan losses at end of period to loans, net of
unearned income 2.37 % 1.50 %
Allowance for credit losses at end of period to loans, net
of unearned income 2.43 1.56
Net charge-offs as percentage of:
Average loans, net of unearned income 1.85 0.70
Provision for loan losses 65.88 68.31
Allowance for credit losses 37.73 21.79
|
|
|