UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Form 10-Q
x | Quarterly report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the quarterly period ended March 31, 2011
or
¨ | Transition report pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934 |
For the transition period from to
Commission File Number: 000-50831
Regions Financial Corporation
(Exact name of registrant as specified in its charter)
Delaware | 63-0589368 | |
(State or other jurisdiction of incorporation or organization) |
(IRS Employer Identification No.) | |
1900 Fifth Avenue North Birmingham, Alabama |
35203 | |
(Address of principal executive offices) | (Zip Code) |
(205) 326-5807
(Registrants telephone number, including area code)
NOT APPLICABLE
(Former name, former address and former fiscal year, if changed since last report)
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. x Yes ¨ No
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). x Yes ¨ No
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See the definitions of large accelerated filer, accelerated filer and smaller reporting company in Rule 12b-2 of the Exchange Act. (Check one): Large accelerated filer x Accelerated filer ¨ Non-accelerated filer ¨ (Do not check if a smaller reporting company) Smaller reporting company ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). ¨ Yes x No
The number of shares outstanding of each of the issuers classes of common stock was 1,256,468,000 shares of common stock, par value $.01, outstanding as of April 29, 2011.
REGIONS FINANCIAL CORPORATION
FORM 10-Q
Page | ||||||||
Item 1. | ||||||||
Consolidated Balance SheetsMarch 31, 2011, December 31, 2010 and March 31, 2010 |
5 | |||||||
Consolidated Statements of OperationsThree months ended March 31, 2011 and 2010 |
6 | |||||||
7 | ||||||||
Consolidated Statements of Cash FlowsThree months ended March 31, 2011 and 2010 |
8 | |||||||
9 | ||||||||
Item 2. | Managements Discussion and Analysis of Financial Condition and Results of Operations |
47 | ||||||
Item 3. | 84 | |||||||
Item 4. | 84 | |||||||
Item 1. | 85 | |||||||
Item 2. | 85 | |||||||
Item 6. | 86 | |||||||
87 |
2
Forward-Looking Statements
This Quarterly Report on Form 10-Q, other periodic reports filed by Regions Financial Corporation (Regions) under the Securities Exchange Act of 1934, as amended, and any other written or oral statements made by or on behalf of Regions may include forward-looking statements. The Private Securities Litigation Reform Act of 1995 (the Act) provides a safe harbor for forward-looking statements which are identified as such and are accompanied by the identification of important factors that could cause actual results to differ materially from the forward-looking statements. For these statements, we, together with our subsidiaries, unless the context implies otherwise, claim the protection afforded by the safe harbor in the Act. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results or other developments. Forward-looking statements are based on managements expectations as well as certain assumptions and estimates made by, and information available to, management at the time the statements are made. Those statements are based on general assumptions and are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. These risks, uncertainties and other factors include, but are not limited to, those described below:
| The Dodd-Frank Wall Street Reform and Consumer Protection Act became law on July 21, 2010, and a number of legislative, regulatory and tax proposals remain pending. Additionally, the U.S. Treasury and federal banking regulators continue to implement, but are also beginning to wind down, a number of programs to address capital and liquidity in the banking system. Proposed rules, including those that are part of the Basel III process, could require banking institutions to increase levels of capital. All of the foregoing may have significant effects on Regions and the financial services industry, the exact nature and extent of which cannot be determined at this time. |
| The impact of compensation and other restrictions imposed under the Troubled Asset Relief Program (TARP) until Regions repays the outstanding preferred stock and warrant issued under the TARP, including restrictions on Regions ability to attract and retain talented executives and associates. |
| Possible additional loan losses, impairment of goodwill and other intangibles, and adjustment of valuation allowances on deferred tax assets and the impact on earnings and capital. |
| Possible changes in interest rates may increase funding costs and reduce earning asset yields, thus reducing margins. Increase in benchmark interest rates would also increase debt service requirements for customers whose terms include a variable interest rate, which may negatively impact the ability of borrowers to pay as contractually obligated. |
| Possible changes in general economic and business conditions in the United States in general and in the communities Regions serves in particular, including any prolonging or worsening of the current unfavorable economic conditions, including unemployment levels. |
| Possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans. |
| Possible changes in trade, monetary and fiscal policies, laws and regulations, and other activities of governments, agencies, and similar organizations, may have an adverse effect on business. |
| The current stresses in the financial and real estate markets, including possible continued deterioration in property values. |
| Regions ability to manage fluctuations in the value of assets and liabilities and off-balance sheet exposure so as to maintain sufficient capital and liquidity to support Regions business. |
| Regions ability to expand into new markets and to maintain profit margins in the face of competitive pressures. |
| Regions ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by Regions customers and potential customers. |
3
| Regions ability to keep pace with technological changes. |
| Regions ability to effectively manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity risk, and regulatory and compliance risk. |
| Regions ability to ensure adequate capitalization which is impacted by inherent uncertainties in forecasting credit losses. |
| The cost and other effects of material contingencies, including litigation contingencies, and any adverse judicial, administrative, or arbitral rulings or proceedings. |
| The effects of increased competition from both banks and non-banks. |
| The effects of geopolitical instability and risks such as terrorist attacks. |
| Possible changes in consumer and business spending and saving habits could affect Regions ability to increase assets and to attract deposits. |
| The effects of weather and natural disasters such as floods, droughts, wind, tornadoes and hurricanes, and the effects of man-made disasters. |
| Possible downgrades in ratings issued by rating agencies. |
| Potential dilution of holders of shares of Regions common stock resulting from the U.S. Treasurys investment in TARP. |
| Possible changes in the speed of loan prepayments by Regions customers and loan origination or sales volumes. |
| Possible acceleration of prepayments on mortgage-backed securities due to low interest rates, and the related acceleration of premium amortization on those securities. |
| The effects of problems encountered by larger or similar financial institutions that adversely affect Regions or the banking industry generally. |
| Regions ability to receive dividends from its subsidiaries. |
| The effects of the failure of any component of Regions business infrastructure which is provided by a third party. |
| Changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. |
| The effects of any damage to Regions reputation resulting from developments related to any of the items identified above. |
The words believe, expect, anticipate, project, and similar expressions often signify forward-looking statements. You should not place undue reliance on any forward-looking statements, which speak only as of the date made. We assume no obligation to update or revise any forward-looking statements that are made from time to time.
See also the Forward-Looking Statements and Risk Factors sections of Regions Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the Securities and Exchange Commission.
4
FINANCIAL INFORMATION
Item 1. Financial Statements (Unaudited)
REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
March 31 2011 |
December 31 2010 |
March 31 2010 |
||||||||||
(In millions, except share data) | ||||||||||||
Assets |
||||||||||||
Cash and due from banks |
$ | 2,042 | $ | 1,643 | $ | 2,252 | ||||||
Interest-bearing deposits in other banks |
4,937 | 4,880 | 4,295 | |||||||||
Federal funds sold and securities purchased under agreements to resell |
341 | 396 | 324 | |||||||||
Trading account assets |
1,284 | 1,116 | 1,238 | |||||||||
Securities available for sale |
24,702 | 23,289 | 24,219 | |||||||||
Securities held to maturity |
22 | 24 | 30 | |||||||||
Loans held for sale (includes $1,171, $1,174 and $549 measured at fair value, at March 31, 2011, December 31, 2010 and March 31, 2010, respectively) |
1,552 | 1,485 | 1,048 | |||||||||
Loans, net of unearned income |
81,371 | 82,864 | 88,174 | |||||||||
Allowance for loan losses |
(3,186 | ) | (3,185 | ) | (3,184 | ) | ||||||
Net loans |
78,185 | 79,679 | 84,990 | |||||||||
Other interest-earning assets |
1,214 | 1,219 | 819 | |||||||||
Premises and equipment, net |
2,528 | 2,569 | 2,637 | |||||||||
Interest receivable |
441 | 421 | 503 | |||||||||
Goodwill |
5,561 | 5,561 | 5,559 | |||||||||
Mortgage servicing rights |
282 | 267 | 270 | |||||||||
Other identifiable intangible assets |
358 | 385 | 472 | |||||||||
Other assets |
8,307 | 9,417 | 8,574 | |||||||||
Total assets |
$ | 131,756 | $ | 132,351 | $ | 137,230 | ||||||
Liabilities and Stockholders Equity |
||||||||||||
Deposits: |
||||||||||||
Non-interest-bearing |
$ | 27,480 | $ | 25,733 | $ | 23,391 | ||||||
Interest-bearing |
68,889 | 68,881 | 74,941 | |||||||||
Total deposits |
96,369 | 94,614 | 98,332 | |||||||||
Borrowed funds: |
||||||||||||
Short-term borrowings: |
||||||||||||
Federal funds purchased and securities sold under agreements to repurchase |
2,218 | 2,716 | 1,687 | |||||||||
Other short-term borrowings |
964 | 1,221 | 997 | |||||||||
Total short-term borrowings |
3,182 | 3,937 | 2,684 | |||||||||
Long-term borrowings |
12,197 | 13,190 | 15,683 | |||||||||
Total borrowed funds |
15,379 | 17,127 | 18,367 | |||||||||
Other liabilities |
3,389 | 3,876 | 2,893 | |||||||||
Total liabilities |
115,137 | 115,617 | 119,592 | |||||||||
Stockholders equity: |
||||||||||||
Preferred stock, authorized 10 million shares |
||||||||||||
Series A, cumulative perpetual participating, par value $1.00 (liquidation preference $1,000.00) per share, net of discount; |
||||||||||||
Issued3,500,000 shares |
3,389 | 3,380 | 3,351 | |||||||||
Series B, mandatorily convertible, cumulative perpetual participating, par value $1,000.00 (liquidation preference $1,000.00) per share; |
||||||||||||
Issued0; 0 and 267,665 shares, respectively |
| | 259 | |||||||||
Common stock, par value $.01 per share: |
||||||||||||
Authorized 3 billion shares at March 31, 2011 and December 31, 2010, and 1.5 billion shares at March 31, 2010 |
||||||||||||
Issued including treasury stock1,299,107,517; 1,299,000,755 and 1,235,340,936 shares, respectively |
13 | 13 | 12 | |||||||||
Additional paid-in capital |
19,047 | 19,050 | 18,781 | |||||||||
Retained earnings (deficit) |
(4,043 | ) | (4,047 | ) | (3,502 | ) | ||||||
Treasury stock, at cost42,639,327; 42,764,258 and 43,166,437 shares, respectively |
(1,400 | ) | (1,402 | ) | (1,407 | ) | ||||||
Accumulated other comprehensive income (loss), net |
(387 | ) | (260 | ) | 144 | |||||||
Total stockholders equity |
16,619 | 16,734 | 17,638 | |||||||||
Total liabilities and stockholders equity |
$ | 131,756 | $ | 132,351 | $ | 137,230 | ||||||
See notes to consolidated financial statements.
5
REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
Three Months Ended March 31 |
||||||||
2011 | 2010 | |||||||
(In millions, except per share data) |
||||||||
Interest income on: |
||||||||
Loans, including fees |
$ | 867 | $ | 945 | ||||
Securities: |
||||||||
Taxable |
207 | 242 | ||||||
Tax-exempt |
| 1 | ||||||
Total securities |
207 | 243 | ||||||
Loans held for sale |
13 | 8 | ||||||
Trading account assets |
7 | 12 | ||||||
Other interest-earning assets |
6 | 7 | ||||||
Total interest income |
1,100 | 1,215 | ||||||
Interest expense on: |
||||||||
Deposits |
139 | 242 | ||||||
Short-term borrowings |
3 | 3 | ||||||
Long-term borrowings |
95 | 139 | ||||||
Total interest expense |
237 | 384 | ||||||
Net interest income |
863 | 831 | ||||||
Provision for loan losses |
482 | 770 | ||||||
Net interest income after provision for loan losses |
381 | 61 | ||||||
Non-interest income: |
||||||||
Service charges on deposit accounts |
287 | 288 | ||||||
Brokerage, investment banking and capital markets |
267 | 236 | ||||||
Mortgage income |
45 | 67 | ||||||
Trust department income |
50 | 48 | ||||||
Securities gains, net |
82 | 59 | ||||||
Other |
112 | 114 | ||||||
Total non-interest income |
843 | 812 | ||||||
Non-interest expense: |
||||||||
Salaries and employee benefits |
594 | 575 | ||||||
Net occupancy expense |
109 | 120 | ||||||
Furniture and equipment expense |
77 | 74 | ||||||
Other |
387 | 461 | ||||||
Total non-interest expense |
1,167 | 1,230 | ||||||
Income (loss) before income taxes |
57 | (357 | ) | |||||
Income tax benefit |
(12 | ) | (161 | ) | ||||
Net income (loss) |
$ | 69 | $ | (196 | ) | |||
Net income (loss) available to common shareholders |
$ | 17 | $ | (255 | ) | |||
Weighted-average number of shares outstanding: |
||||||||
Basic |
1,257 | 1,194 | ||||||
Diluted |
1,259 | 1,194 | ||||||
Earnings (loss) per common share: |
||||||||
Basic |
$ | 0.01 | $ | (0.21 | ) | |||
Diluted |
0.01 | (0.21 | ) | |||||
Cash dividends declared per common share |
0.01 | 0.01 |
See notes to consolidated financial statements.
6
REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Preferred Stock | Common Stock | Additional Paid-In Capital |
Retained Earnings (Deficit) |
Treasury Stock, At Cost |
Accumulated Other Comprehensive Income (Loss) |
Total | ||||||||||||||||||||||||||||||
Shares | Amount | Shares | Amount | |||||||||||||||||||||||||||||||||
(In millions, except share and per share data) | ||||||||||||||||||||||||||||||||||||
BALANCE AT JANUARY 1, 2010 |
4 | $ | 3,602 | 1,193 | $ | 12 | $ | 18,781 | $ | (3,235 | ) | $ | (1,409 | ) | $ | 130 | $ | 17,881 | ||||||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||
Net income (loss) |
| | | | | (196 | ) | | | (196 | ) | |||||||||||||||||||||||||
Net change in unrealized gains and losses on securities available for sale, net of tax and reclassification adjustment* |
| | | | | | | 29 | 29 | |||||||||||||||||||||||||||
Net change in unrealized gains and losses on derivative instruments, net of tax and reclassification adjustment* |
| | | | | | | (18 | ) | (18 | ) | |||||||||||||||||||||||||
Net change from defined benefit pension plans, net of tax* |
| | | | | | | 3 | 3 | |||||||||||||||||||||||||||
Comprehensive income (loss) |
(182 | ) | ||||||||||||||||||||||||||||||||||
Cash dividends declared$0.01 per share |
| | | | | (12 | ) | | | (12 | ) | |||||||||||||||||||||||||
Preferred dividends |
| | | | | (51 | ) | | | (51 | ) | |||||||||||||||||||||||||
Preferred stock transactions: |
||||||||||||||||||||||||||||||||||||
Discount accretion |
| 8 | | | | (8 | ) | | | | ||||||||||||||||||||||||||
Common stock transactions: |
||||||||||||||||||||||||||||||||||||
Impact of stock transactions under compensation plans, net |
| | (1 | ) | | | | 2 | | 2 | ||||||||||||||||||||||||||
BALANCE AT MARCH 31, 2010 |
4 | $ | 3,610 | 1,192 | $ | 12 | $ | 18,781 | $ | (3,502 | ) | $ | (1,407 | ) | $ | 144 | $ | 17,638 | ||||||||||||||||||
BALANCE AT JANUARY 1, 2011 |
4 | $ | 3,380 | 1,256 | $ | 13 | $ | 19,050 | $ | (4,047 | ) | $ | (1,402 | ) | $ | (260 | ) | $ | 16,734 | |||||||||||||||||
Comprehensive income (loss): |
||||||||||||||||||||||||||||||||||||
Net income |
| | | | | 69 | | | 69 | |||||||||||||||||||||||||||
Net change in unrealized gains and losses on securities available for sale, net of tax and reclassification adjustment* |
| | | | | | | (101 | ) | (101 | ) | |||||||||||||||||||||||||
Net change in unrealized gains and losses on derivative instruments, net of tax and reclassification adjustment* |
| | | | | | | (30 | ) | (30 | ) | |||||||||||||||||||||||||
Net change from defined benefit pension plans, net of tax* |
| | | | | | | 4 | 4 | |||||||||||||||||||||||||||
Comprehensive income (loss) |
(58 | ) | ||||||||||||||||||||||||||||||||||
Cash dividends declared$0.01 per share |
| | | | | (13 | ) | | | (13 | ) | |||||||||||||||||||||||||
Preferred dividends |
| | | | | (43 | ) | | | (43 | ) | |||||||||||||||||||||||||
Preferred stock transactions: |
||||||||||||||||||||||||||||||||||||
Discount accretion |
| 9 | | | | (9 | ) | | | | ||||||||||||||||||||||||||
Common stock transactions: |
||||||||||||||||||||||||||||||||||||
Impact of stock transactions under compensation plans, net |
| | | | (3 | ) | | 2 | | (1 | ) | |||||||||||||||||||||||||
BALANCE AT MARCH 31, 2011 |
4 | $ | 3,389 | 1,256 | $ | 13 | $ | 19,047 | $ | (4,043 | ) | $ | (1,400 | ) | $ | (387 | ) | $ | 16,619 | |||||||||||||||||
See notes to consolidated financial statements.
* | See disclosure of reclassification adjustment amount and tax effect, as applicable, in Note 6 to the consolidated financial statements. |
7
REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
Three Months Ended March 31 |
||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Operating activities: |
||||||||
Net income (loss) |
$ | 69 | $ | (196 | ) | |||
Adjustments to reconcile net cash provided by operating activities: |
||||||||
Provision for loan losses |
482 | 770 | ||||||
Depreciation and amortization of premises and equipment |
68 | 73 | ||||||
Provision for losses on other real estate, net |
30 | 32 | ||||||
Net amortization of securities |
50 | 40 | ||||||
Net amortization of loans and other assets |
47 | 51 | ||||||
Net securities gains |
(82 | ) | (59 | ) | ||||
Loss on early extinguishment of debt |
| 53 | ||||||
Other-than-temporary impairments, net |
| 1 | ||||||
Deferred income tax benefit |
(14 | ) | (113 | ) | ||||
Excess tax benefits from share-based payments |
| (1 | ) | |||||
Originations and purchases of loans held for sale |
(1,450 | ) | (1,101 | ) | ||||
Proceeds from sales of loans held for sale |
1,591 | 1,656 | ||||||
Gain on sale of loans, net |
(20 | ) | (24 | ) | ||||
Valuation charges on loans held for sale |
2 | 11 | ||||||
(Increase) decrease in trading account assets |
(168 | ) | 1,801 | |||||
Decrease (increase) in other interest-earning assets |
5 | (85 | ) | |||||
Increase in interest receivable |
(20 | ) | (35 | ) | ||||
Decrease (increase) in other assets |
1,272 | (445 | ) | |||||
Decrease in other liabilities |
(483 | ) | (726 | ) | ||||
Other |
(47 | ) | 24 | |||||
Net cash from operating activities |
1,332 | 1,727 | ||||||
Investing activities: |
||||||||
Proceeds from sales of securities available for sale |
2,419 | 1,443 | ||||||
Proceeds from maturities of: |
||||||||
Securities available for sale |
1,363 | 1,853 | ||||||
Securities held to maturity |
2 | 1 | ||||||
Purchases of securities available for sale |
(5,323 | ) | (3,381 | ) | ||||
Proceeds from sales of loans |
602 | 299 | ||||||
Purchases of loans |
(162 | ) | | |||||
Net decrease in loans |
202 | 1,225 | ||||||
Net purchases of premises and equipment |
(28 | ) | (43 | ) | ||||
Net cash from investing activities |
(925 | ) | 1,397 | |||||
Financing activities: |
||||||||
Net increase (decrease) in deposits |
1,755 | (348 | ) | |||||
Net decrease in short-term borrowings |
(755 | ) | (984 | ) | ||||
Proceeds from long-term borrowings |
601 | | ||||||
Payments on long-term borrowings |
(1,551 | ) | (2,870 | ) | ||||
Cash dividends on common stock |
(13 | ) | (12 | ) | ||||
Cash dividends on preferred stock |
(43 | ) | (51 | ) | ||||
Excess tax benefits from share-based payments |
| 1 | ||||||
Net cash from financing activities |
(6 | ) | (4,264 | ) | ||||
Increase (decrease) in cash and cash equivalents |
401 | (1,140 | ) | |||||
Cash and cash equivalents at beginning of year |
6,919 | 8,011 | ||||||
Cash and cash equivalents at end of period |
$ | 7,320 | $ | 6,871 | ||||
See notes to consolidated financial statements.
8
REGIONS FINANCIAL CORPORATION AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)
Three Months Ended March 31, 2011 and 2010
NOTE 1Basis of Presentation
Regions Financial Corporation (Regions or the Company) provides a full range of banking and bank-related services to individual and corporate customers through its subsidiaries and branch offices located primarily in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia. The Company is subject to competition from other financial institutions, is subject to the regulations of certain government agencies and undergoes periodic examinations by those regulatory authorities.
The accounting and reporting policies of Regions and the methods of applying those policies that materially affect the consolidated financial statements conform with accounting principles generally accepted in the United States (GAAP) and with general financial services industry practices. The accompanying interim financial statements have been prepared in accordance with the instructions for Form 10-Q and, therefore, do not include all information and notes to the consolidated financial statements necessary for a complete presentation of financial position, results of operations and cash flows in conformity with GAAP. In the opinion of management, all adjustments, consisting of normal and recurring items, necessary for the fair presentation of the consolidated financial statements have been included. These interim financial statements should be read in conjunction with the consolidated financial statements and notes thereto in Regions Form 10-K for the year ended December 31, 2010.
Regions has evaluated all subsequent events for potential recognition and disclosure through the filing date of this Form 10-Q.
Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation. These reclassifications are immaterial and have no effect on net income, total assets or stockholders equity.
9
NOTE 2Securities
The amortized cost, gross unrealized gains and losses, and estimated fair value of securities available for sale and securities held to maturity are as follows:
March 31, 2011 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
(In millions) | ||||||||||||||||
Securities available for sale: |
||||||||||||||||
U.S. Treasury securities |
$ | 87 | $ | 2 | $ | | $ | 89 | ||||||||
Federal agency securities |
16 | | | 16 | ||||||||||||
Obligations of states and political subdivisions |
24 | 7 | | 31 | ||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Residential agency |
23,170 | 162 | (208 | ) | 23,124 | |||||||||||
Residential non-agency |
18 | 2 | | 20 | ||||||||||||
Commercial agency |
156 | 1 | (3 | ) | 154 | |||||||||||
Commercial non-agency |
205 | | (4 | ) | 201 | |||||||||||
Other debt securities |
25 | | (2 | ) | 23 | |||||||||||
Equity securities |
1,044 | | | 1,044 | ||||||||||||
$ | 24,745 | $ | 174 | $ | (217 | ) | $ | 24,702 | ||||||||
Securities held to maturity: |
||||||||||||||||
U.S. Treasury securities |
$ | 5 | $ | | $ | | $ | 5 | ||||||||
Federal agency securities |
4 | | | 4 | ||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Residential agency |
11 | 1 | | 12 | ||||||||||||
Other debt securities |
2 | | | 2 | ||||||||||||
$ | 22 | $ | 1 | $ | | $ | 23 | |||||||||
December 31, 2010 | ||||||||||||||||
Amortized Cost |
Gross Unrealized Gains |
Gross Unrealized Losses |
Estimated Fair Value |
|||||||||||||
(In millions) | ||||||||||||||||
Securities available for sale: |
||||||||||||||||
U.S. Treasury securities |
$ | 85 | $ | 6 | $ | | $ | 91 | ||||||||
Federal agency securities |
16 | | | 16 | ||||||||||||
Obligations of states and political subdivisions |
23 | 7 | | 30 | ||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Residential agency |
21,735 | 265 | (155 | ) | 21,845 | |||||||||||
Residential non-agency |
20 | 2 | | 22 | ||||||||||||
Commercial agency |
113 | 2 | (3 | ) | 112 | |||||||||||
Commercial non-agency |
103 | | (3 | ) | 100 | |||||||||||
Other debt securities |
27 | | (2 | ) | 25 | |||||||||||
Equity securities |
1,047 | 1 | | 1,048 | ||||||||||||
$ | 23,169 | $ | 283 | $ | (163 | ) | $ | 23,289 | ||||||||
Securities held to maturity: |
||||||||||||||||
U.S. Treasury securities |
$ | 5 | $ | 1 | $ | | $ | 6 | ||||||||
Federal agency securities |
5 | | | 5 | ||||||||||||
Mortgage-backed securities: |
||||||||||||||||
Residential agency |
12 | 1 | | 13 | ||||||||||||
Other debt securities |
2 | | | 2 | ||||||||||||
$ | 24 | $ | 2 | $ | | $ | 26 | |||||||||
10
Equity securities in the tables above included the following amortized cost related to Federal Reserve bank stock and Federal Home Loan Bank (FHLB) stock. Shares in the Federal Reserve Bank and FHLB are accounted for at amortized cost, which approximates fair value.
March 31 2011 |
December 31 2010 |
|||||||
(In millions) | ||||||||
Federal Reserve Bank |
$ | 471 | $ | 471 | ||||
Federal Home Loan Bank |
419 | 419 |
Securities with carrying values of $13.3 billion and $15.4 billion at March 31, 2011 and December 31, 2010, respectively, were pledged to secure public funds, trust deposits and certain borrowing arrangements.
The cost and estimated fair value of securities available for sale and securities held to maturity at March 31, 2011, by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because borrowers may have the right to call or prepay obligations with or without call or prepayment penalties.
Amortized Cost |
Estimated Fair Value |
|||||||
(In millions) | ||||||||
Securities available for sale: |
||||||||
Due in one year or less |
$ | 59 | $ | 59 | ||||
Due after one year through five years |
48 | 49 | ||||||
Due after five years through ten years |
16 | 16 | ||||||
Due after ten years |
29 | 35 | ||||||
Mortgage-backed securities: |
||||||||
Residential agency |
23,170 | 23,124 | ||||||
Residential non-agency |
18 | 20 | ||||||
Commercial agency |
156 | 154 | ||||||
Commercial non-agency |
205 | 201 | ||||||
Equity securities |
1,044 | 1,044 | ||||||
$ | 24,745 | $ | 24,702 | |||||
Securities held to maturity: |
||||||||
Due in one year or less |
$ | 2 | $ | 2 | ||||
Due after one year through five years |
6 | 6 | ||||||
Due after five years through ten years |
3 | 3 | ||||||
Due after ten years |
| | ||||||
Mortgage-backed securities: |
||||||||
Residential agency |
11 | 12 | ||||||
$ | 22 | $ | 23 | |||||
11
The following tables present unrealized loss and estimated fair value of securities available for sale at March 31, 2011 and December 31, 2010. These securities are segregated between investments that have been in a continuous unrealized loss position for less than twelve months and twelve months or more.
Less Than Twelve Months |
Twelve Months or More |
Total | ||||||||||||||||||||||
March 31, 2011 |
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||||||
Residential agency |
$ | 14,561 | $ | (208 | ) | $ | | $ | | $ | 14,561 | $ | (208 | ) | ||||||||||
Commercial agency |
113 | (3 | ) | | | 113 | (3 | ) | ||||||||||||||||
Commercial non-agency |
150 | (4 | ) | | | 150 | (4 | ) | ||||||||||||||||
All other securities |
| | 6 | (2 | ) | 6 | (2 | ) | ||||||||||||||||
$ | 14,824 | $ | (215 | ) | $ | 6 | $ | (2 | ) | $ | 14,830 | $ | (217 | ) | ||||||||||
Less Than Twelve Months |
Twelve Months or More |
Total | ||||||||||||||||||||||
December 31, 2010 |
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
Estimated Fair Value |
Gross Unrealized Losses |
||||||||||||||||||
(In millions) | ||||||||||||||||||||||||
Mortgage-backed securities: |
||||||||||||||||||||||||
Residential agency |
$ | 11,023 | $ | (155 | ) | $ | | $ | | $ | 11,023 | $ | (155 | ) | ||||||||||
Commercial agency |
94 | (3 | ) | | | 94 | (3 | ) | ||||||||||||||||
Commercial non-agency |
100 | (3 | ) | | | 100 | (3 | ) | ||||||||||||||||
All other securities |
| | 5 | (2 | ) | 5 | (2 | ) | ||||||||||||||||
$ | 11,217 | $ | (161 | ) | $ | 5 | $ | (2 | ) | $ | 11,222 | $ | (163 | ) | ||||||||||
There was no gross unrealized loss on debt securities held to maturity at both March 31, 2011 and December 31, 2010.
For the securities included in the tables above, management does not believe any individual unrealized loss, which was comprised of 435 securities and 292 securities at March 31, 2011 and December 31, 2010, respectively, represented an other-than- temporary impairment as of those dates. The unrealized losses are related primarily to the impact of higher interest rates and their impact on mortgage-backed securities. The Company does not intend to sell, and it is not likely, that the Company will be required to sell the securities before the recovery of their amortized cost basis, which may be maturity.
Proceeds from sale, gross gains and gross losses on sales of securities available for sale are shown in the table below. The cost of securities sold is based on the specific identification method.
For the Three Months Ended March 31 |
||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Proceeds |
$ | 2,419 | $ | 1,443 | ||||
Securities gains |
82 | 59 | ||||||
Securities losses |
0 | 0 | ||||||
Net securities gains |
$ | 82 | $ | 59 | ||||
12
The following table details net gains (losses) for trading account securities for the three months ended March 31:
2011 | 2010 | |||||||
(In millions) | ||||||||
Total net gains (losses) |
$ | 21 | $ | 14 | ||||
Unrealized portion |
14 | 16 |
NOTE 3Loans and the Allowance for Credit Losses
As of March 31, 2011 and December 31, 2010, loans represented 70 percent and 72 percent, respectively, of Regions interest-earning assets. The following table presents the distribution by loan type of Regions loan portfolio, net of unearned income:
March 31 2011 |
December 31 2010 |
March 31 2010 |
||||||||||
(In millions, net of unearned income) | ||||||||||||
Commercial and industrial |
$ | 23,149 | $ | 22,540 | $ | 21,220 | ||||||
Commercial real estate mortgageowner occupied |
11,889 | 12,046 | 12,028 | |||||||||
Commercial real estate constructionowner occupied |
430 | 470 | 598 | |||||||||
Total commercial |
35,468 | 35,056 | 33,846 | |||||||||
Commercial investor real estate mortgage |
12,932 | 13,621 | 15,702 | |||||||||
Commercial investor real estate construction |
1,895 | 2,287 | 4,703 | |||||||||
Total investor real estate |
14,827 | 15,908 | 20,405 | |||||||||
Residential first mortgage |
14,404 | 14,898 | 15,592 | |||||||||
Home equity |
13,874 | 14,226 | 15,066 | |||||||||
Indirect and other consumer |
2,798 | 2,776 | 3,265 | |||||||||
Total consumer |
31,076 | 31,900 | 33,923 | |||||||||
$ | 81,371 | $ | 82,864 | $ | 88,174 | |||||||
The allowance for credit losses represents managements estimate of credit losses inherent in the loan and credit commitment portfolios as of period-end. The allowance for credit losses consists of two components: the allowance for loan and lease losses and the reserve for unfunded credit commitments. Managements assessment of the adequacy of the allowance for credit losses is based on a combination of both of these components. Regions determines its allowance for credit losses in accordance with applicable accounting literature as well as regulatory guidance related to receivables and contingencies. Binding unfunded credit commitments include items such as letters of credit, financial guarantees and binding unfunded loan commitments.
Prior to 2011, the allowance for accruing commercial and investor real estate loans, as well as non-accrual loans in those portfolio segments below $2.5 million, was determined using categories of pools of loans with similar risk characteristics (i.e., pass, special mention, substandard accrual, and nonaccrual, as defined below). These categories were utilized to develop the associated allowance for loan losses using historical losses adjusted for current economic conditions. Beginning in 2011, these pools of loans were compiled at a more granular level. A probability of default, a loss given default, and an incurred loss period were statistically calculated. These parameters, in combination with other account data, were used to calculate the estimate of incurred loss. The Company made the change to provide enhanced segmentation, process controls, transparency, governance and information technology controls. The change did not have a material impact on the overall allowance for credit losses. The credit quality indicators for commercial and investor real estate loans disclosed below provide an understanding of the underlying credit quality of Regions portfolio segments and classes, and the corresponding impact on the allowance for credit losses.
13
The components of the calculation of the allowance for credit losses related to nonaccrual commercial and investor real estate loans over $2.5 million, troubled debt restructurings (TDRs), unfunded commitments, and all consumer loans were calculated in 2011 in the same manner as before. Except for the changes to the calculation of the allowance for loan losses for accruing commercial and investor real estate loans and non-accrual loans in these portfolio segments below $2.5 million as described above, there were no changes to Regions allowance process or accounting policies related to the allowance for credit losses from those described in the Annual Report on Form 10-K for December 31, 2010.
Management considers the current level of allowance for credit losses adequate to absorb losses inherent in the loan portfolio and unfunded commitments. Managements determination of the adequacy of the allowance for credit losses, which is based on the factors and risk identification procedures previously discussed, requires the use of judgments and estimations that may change in the future. Changes in the factors used by management to determine the adequacy of the allowance or the availability of new information could cause the allowance for credit losses to be adjusted in future periods.
The following table presents an analysis of the allowance for credit losses by portfolio segment as of March 31, 2011. The total allowance for credit losses is then disaggregated to show the amounts derived through individual evaluation and the amounts calculated through collective evaluation. The allowance for credit losses related to individually evaluated loans includes reserves for non-accrual loans and leases, as well as TDRs, equal to or greater than $2.5 million. The allowance for credit losses related to collectively evaluated loans includes reserves for pools of loans with common risk characteristics.
As of March 31, 2011 | ||||||||||||||||
Commercial | Investor Real Estate |
Consumer | Total | |||||||||||||
(In millions) | ||||||||||||||||
Allowance for loan losses, January 1, 2011 |
$ | 1,055 | $ | 1,370 | $ | 760 | $ | 3,185 | ||||||||
Provision for loan losses |
225 | 89 | 168 | 482 | ||||||||||||
Loan losses: |
||||||||||||||||
Charge-offs |
(151 | ) | (181 | ) | (180 | ) | (512 | ) | ||||||||
Recoveries |
9 | 7 | 15 | 31 | ||||||||||||
Net loan losses |
(142 | ) | (174 | ) | (165 | ) | (481 | ) | ||||||||
Allowance for loan losses, March 31, 2011 |
1,138 | 1,285 | 763 | 3,186 | ||||||||||||
Reserve for unfunded credit commitments, January 1, 2011 |
32 | 16 | 23 | 71 | ||||||||||||
Provision for unfunded credit commitments |
5 | 1 | 1 | 7 | ||||||||||||
Reserve for unfunded credit commitments, March 31, 2011 |
37 | 17 | 24 | 78 | ||||||||||||
Allowance for credit losses, March 31, 2011 |
$ | 1,175 | $ | 1,302 | $ | 787 | $ | 3,264 | ||||||||
Portion of allowance ending balance: |
||||||||||||||||
Individually evaluated for impairment |
$ | 113 | $ | 340 | $ | 3 | $ | 456 | ||||||||
Collectively evaluated for impairment |
1,062 | 962 | 784 | 2,808 | ||||||||||||
Total |
$ | 1,175 | $ | 1,302 | $ | 787 | $ | 3,264 | ||||||||
Portion of loan portfolio ending balance: |
||||||||||||||||
Individually evaluated for impairment |
$ | 469 | $ | 1,248 | $ | 19 | $ | 1,736 | ||||||||
Collectively evaluated for impairment |
34,999 | 13,579 | 31,057 | 79,635 | ||||||||||||
Total loans evaluated for impairment |
$ | 35,468 | $ | 14,827 | $ | 31,076 | $ | 81,371 | ||||||||
14
The following describe the risk characteristics relevant to each of the portfolio segments.
CommercialThe commercial loan portfolio segment includes commercial and industrial, representing loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases or other expansion projects. Commercial also includes owner-occupied commercial real estate loans to operating businesses, which are loans for long-term financing of land and buildings, and are repaid by cash flow generated by business operations. Owner-occupied construction loans are made to commercial businesses for the development of land or construction of a building where the repayment is derived from revenues generated from the business of the borrower. Collection risk in this portfolio is driven by the creditworthiness of underlying borrowers, particularly cash flow from customers business operations.
Investor Real EstateLoans for real estate development are repaid through cash flow related to the operation, sale or refinance of the property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of real estate or income generated from the real estate collateral. A portion of Regions investor real estate portfolio segment is comprised of loans secured by residential product types (land, single-family and condominium loans) within Regions markets. Additionally, these loans are made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers. Loans in this portfolio segment are particularly sensitive to valuation of real estate.
ConsumerThe consumer loan portfolio segment includes residential first mortgage, home equity, and indirect and other consumer loans. Residential first mortgage loans represent loans to consumers to finance a residence. These loans are typically financed over a 15 to 30 year term and, in most cases, are extended to borrowers to finance their primary residence. Home equity lending includes both home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrowers residence, allows customers to borrow against the equity in their home. Real estate market values as of the time the loan or line is secured directly affect the amount of credit extended and, in addition, changes in these values impact the depth of potential losses. Indirect lending, which is lending initiated through third-party business partners, is largely comprised of loans made through automotive dealerships. Other consumer loans include direct consumer installment loans, overdrafts and other revolving credit, and educational loans. Loans in this portfolio segment are sensitive to unemployment and other key consumer economic measures.
The following tables present credit quality indicators for the loan portfolio segments and classes, excluding loans held for sale, as of March 31, 2011, December 31, 2010 and March 31, 2010. Commercial and investor real estate loan classes are detailed by categories related to underlying credit quality and probability of default. These categories are utilized to develop the associated allowance for credit losses.
| Passincludes obligations where the probability of default is considered low; |
| Special Mentionincludes obligations that have potential weakness which may, if not reversed or corrected, weaken the credit or inadequately protect the Companys position at some future date. Obligations in this category may also be subject to economic or market conditions which may, in the future, have an adverse affect on debt service ability; |
| Substandard Accrualincludes obligations that exhibit a well-defined weakness which presently jeopardizes debt repayment, even though they are currently performing. These obligations are characterized by the distinct possibility that the Company may incur a loss in the future if these weaknesses are not corrected; |
| Non-accrualincludes obligations where management has determined that full payment of principal and interest is in doubt. |
Classes in the consumer portfolio segment are disaggregated by accrual status. Consumer loans are charged down to estimated value and placed on non-accrual status based on period of delinquency, unless the loan is
15
well-secured and in process of collection. The associated allowance for credit losses is generally based on historical losses of the various classes adjusted for current economic conditions.
March 31, 2011 | ||||||||||||||||||||
Pass | Special Mention | Substandard Accrual |
Non-accrual | Total | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Commercial and industrial |
$ | 21,388 | $ | 561 | $ | 754 | $ | 446 | $ | 23,149 | ||||||||||
Commercial real estate mortgageowner occupied |
10,249 | 307 | 685 | 648 | 11,889 | |||||||||||||||
Commercial real estate constructionowner occupied |
363 | 21 | 15 | 31 | 430 | |||||||||||||||
Total commercial |
$ | 32,000 | $ | 889 | $ | 1,454 | $ | 1,125 | $ | 35,468 | ||||||||||
Commercial investor real estate mortgage |
8,395 | 1,235 | 2,160 | 1,142 | 12,932 | |||||||||||||||
Commercial investor real estate construction |
758 | 331 | 358 | 448 | 1,895 | |||||||||||||||
Total investor real estate |
$ | 9,153 | $ | 1,566 | $ | 2,518 | $ | 1,590 | $ | 14,827 | ||||||||||
Accrual | Non-accrual | Total | ||||||||||||||||||
(In millions) | ||||||||||||||||||||
Residential first mortgage |
$ | 14,101 | $ | 303 | $ | 14,404 | ||||||||||||||
Home equity |
13,805 | 69 | 13,874 | |||||||||||||||||
Indirect and other consumer |
2,798 | | 2,798 | |||||||||||||||||
Total consumer |
$ | 30,704 | $ | 372 | $ | 31,076 | ||||||||||||||
$ | 81,371 | |||||||||||||||||||
December 31, 2010 | ||||||||||||||||||||
Pass | Special Mention | Substandard Accrual |
Non-accrual | Total | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Commercial and industrial |
$ | 20,764 | $ | 517 | $ | 792 | $ | 467 | $ | 22,540 | ||||||||||
Commercial real estate mortgageowner occupied |
10,344 | 283 | 813 | 606 | 12,046 | |||||||||||||||
Commercial real estate constructionowner occupied |
393 | 25 | 23 | 29 | 470 | |||||||||||||||
Total commercial |
$ | 31,501 | $ | 825 | $ | 1,628 | $ | 1,102 | $ | 35,056 | ||||||||||
Commercial investor real estate mortgage |
8,755 | 1,300 | 2,301 | 1,265 | 13,621 | |||||||||||||||
Commercial investor real estate construction |
904 | 342 | 589 | 452 | 2,287 | |||||||||||||||
Total investor real estate |
$ | 9,659 | $ | 1,642 | $ | 2,890 | $ | 1,717 | $ | 15,908 | ||||||||||
Accrual | Non-accrual | Total | ||||||||||
(In millions) | ||||||||||||
Residential first mortgage |
$ | 14,613 | $ | 285 | $ | 14,898 | ||||||
Home equity |
14,170 | 56 | 14,226 | |||||||||
Indirect and other consumer |
2,776 | | 2,776 | |||||||||
Total consumer |
$ | 31,559 | $ | 341 | $ | 31,900 | ||||||
$ | 82,864 | |||||||||||
16
March 31, 2010 | ||||||||||||||||||||
Pass | Special Mention |
Substandard Accrual |
Non-accrual | Total | ||||||||||||||||
(In millions) | ||||||||||||||||||||
Commercial and industrial |
$ | 19,141 | $ | 636 | $ | 926 | $ | 517 | $ | 21,220 | ||||||||||
Commercial real estate mortgageowner occupied |
10,386 | 280 | 739 | 623 | 12,028 | |||||||||||||||
Commercial real estate constructionowner occupied |
502 | 30 | 28 | 38 | 598 | |||||||||||||||
Total commercial |
$ | 30,029 | $ | 946 | $ | 1,693 | $ | 1,178 | $ | 33,846 | ||||||||||
Commercial investor real estate mortgage |
9,703 | 1,959 | 2,697 | 1,343 | 15,702 | |||||||||||||||
Commercial investor real estate construction |
1,977 | 762 | 978 | 986 | 4,703 | |||||||||||||||
Total investor real estate |
$ | 11,680 | $ | 2,721 | $ | 3,675 | $ | 2,329 | $ | 20,405 | ||||||||||
Accrual | Non-accrual | Total | ||||||||||
(In millions) | ||||||||||||
Residential first mortgage |
$ | 15,393 | $ | 199 | $ | 15,592 | ||||||
Home equity |
15,066 | | 15,066 | |||||||||
Indirect and other consumer |
3,265 | | 3,265 | |||||||||
Total consumer |
$ | 33,724 | $ | 199 | $ | 33,923 | ||||||
$ | 88,174 | |||||||||||
The following tables include an aging analysis of days past due (DPD) for each portfolio class as of March 31, 2011, December 31, 2010 and March 31, 2010:
March 31, 2011 | ||||||||||||||||||||||||||||
Accrual Loans | ||||||||||||||||||||||||||||
30-59 DPD | 60-89 DPD | 90+ DPD | Total 30+ DPD |
Total Accrual |
Non-accrual | Total | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Commercial and industrial |
$ | 67 | $ | 37 | $ | 10 | $ | 114 | $ | 22,703 | $ | 446 | $ | 23,149 | ||||||||||||||
Commercial real estate mortgageowner occupied |
72 | 27 | 8 | 107 | 11,241 | 648 | 11,889 | |||||||||||||||||||||
Commercial real estate constructionowner occupied |
2 | | | 2 | 399 | 31 | 430 | |||||||||||||||||||||
Total commercial |
141 | 64 | 18 | 223 | 34,343 | 1,125 | 35,468 | |||||||||||||||||||||
Commercial investor real estate mortgage |
190 | 142 | 13 | 345 | 11,790 | 1,142 | 12,932 | |||||||||||||||||||||
Commercial investor real estate construction |
19 | 16 | 1 | 36 | 1,447 | 448 | 1,895 | |||||||||||||||||||||
Total investor real estate |
209 | 158 | 14 | 381 | 13,237 | 1,590 | 14,827 | |||||||||||||||||||||
Residential first mortgage |
174 | 103 | 315 | 592 | 14,101 | 303 | 14,404 | |||||||||||||||||||||
Home equity |
112 | 73 | 174 | 359 | 13,805 | 69 | 13,874 | |||||||||||||||||||||
Indirect and other consumer |
40 | 7 | 6 | 53 | 2,798 | | 2,798 | |||||||||||||||||||||
Total consumer |
326 | 183 | 495 | 1,004 | 30,704 | 372 | 31,076 | |||||||||||||||||||||
$ | 676 | $ | 405 | $ | 527 | $ | 1,608 | $ | 78,284 | $ | 3,087 | $ | 81,371 | |||||||||||||||
17
December 31, 2010 | ||||||||||||||||||||||||||||
Accrual Loans | ||||||||||||||||||||||||||||
30-59 DPD | 60-89 DPD | 90+ DPD | Total 30+ DPD |
Total Accrual |
Non-accrual | Total | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Commercial and industrial |
$ | 60 | $ | 43 | $ | 9 | $ | 112 | $ | 22,073 | $ | 467 | $ | 22,540 | ||||||||||||||
Commercial real estate mortgageowner occupied |
47 | 54 | 6 | 107 | 11,440 | 606 | 12,046 | |||||||||||||||||||||
Commercial real estate constructionowner occupied |
3 | | 1 | 4 | 441 | 29 | 470 | |||||||||||||||||||||
Total commercial |
110 | 97 | 16 | 223 | 33,954 | 1,102 | 35,056 | |||||||||||||||||||||
Commercial investor real estate mortgage |
120 | 91 | 5 | 216 | 12,356 | 1,265 | 13,621 | |||||||||||||||||||||
Commercial investor real estate construction |
30 | 12 | 1 | 43 | 1,835 | 452 | 2,287 | |||||||||||||||||||||
Total investor real estate |
150 | 103 | 6 | 259 | 14,191 | 1,717 | 15,908 | |||||||||||||||||||||
Residential first mortgage |
185 | 118 | 359 | 662 | 14,613 | 285 | 14,898 | |||||||||||||||||||||
Home equity |
146 | 78 | 198 | 422 | 14,170 | 56 | 14,226 | |||||||||||||||||||||
Indirect and other consumer |
51 | 14 | 6 | 71 | 2,776 | | 2,776 | |||||||||||||||||||||
Total consumer |
382 | 210 | 563 | 1,155 | 31,559 | 341 | 31,900 | |||||||||||||||||||||
$ | 642 | $ | 410 | $ | 585 | $ | 1,637 | $ | 79,704 | $ | 3,160 | $ | 82,864 | |||||||||||||||
March 31, 2010 | ||||||||||||||||||||||||||||
Accrual Loans | ||||||||||||||||||||||||||||
30-59 DPD | 60-89 DPD | 90+ DPD | Total 30+ DPD |
Total Accrual |
Non-accrual | Total | ||||||||||||||||||||||
(In millions) | ||||||||||||||||||||||||||||
Commercial and industrial |
$ | 86 | $ | 35 | $ | 24 | $ | 145 | $ | 20,703 | $ | 517 | $ | 21,220 | ||||||||||||||
Commercial real estate mortgageowner occupied |
148 | 47 | 6 | 201 | 11,405 | 623 | 12,028 | |||||||||||||||||||||
Commercial real estate constructionowner occupied |
4 | 3 | | 7 | 560 | 38 | 598 | |||||||||||||||||||||
Total commercial |
238 | 85 | 30 | 353 | 32,668 | 1,178 | 33,846 | |||||||||||||||||||||
Commercial investor real estate mortgage |
225 | 67 | 42 | 334 | 14,359 | 1,343 | 15,702 | |||||||||||||||||||||
Commercial investor real estate construction |
136 | 23 | 6 | 165 | 3,717 | 986 | 4,703 | |||||||||||||||||||||
Total investor real estate |
361 | 90 | 48 | 499 | 18,076 | 2,329 | 20,405 | |||||||||||||||||||||
Residential first mortgage |
191 | 114 | 365 | 670 | 15,393 | 199 | 15,592 | |||||||||||||||||||||
Home equity |
138 | 85 | 249 | 472 | 15,066 | | 15,066 | |||||||||||||||||||||
Indirect and other consumer |
50 | 15 | 8 | 73 | 3,265 | | 3,265 | |||||||||||||||||||||
Total consumer |
379 | 214 | 622 | 1,215 | 33,724 | 199 | 33,923 | |||||||||||||||||||||
$ | 978 | $ | 389 | $ | 700 | $ | 2,067 | $ | 84,468 | $ | 3,706 | $ | 88,174 | |||||||||||||||
18
The following tables present details related to the Companys impaired loans as of March 31, 2011 and December 31, 2010. Loans deemed to be impaired include non-accrual commercial and investor real estate loans, excluding leasing, and all TDRs (including accruing commercial, investor real estate, and consumer TDRs). Loans which have been fully charged-off do not appear in the tables below. The related allowance represents the following components which correspond to impaired loans:
| Individually evaluated impaired loans (non-accrual commercial and investor real estate loans equal to or greater than $2.5 million), |
| Collectively evaluated impaired loans (non-accrual commercial and investor real estate loans less than $2.5 million, which are evaluated based on pools of loans with similar risk characteristics), |
| Accruing and non-accruing TDRs equal to or greater than $2.5 million are individually evaluated like any other impaired loan over the quantitative scope. Accruing and non-accruing TDRs less than $2.5 million are included with pools of loans with similar risk characteristics and evaluated collectively. |
Impaired Loans As of March 31, 2011 |
||||||||||||||||||||||||||||||||||||
Book Value (3) | ||||||||||||||||||||||||||||||||||||
Legal Balance (1) |
Charge-offs and Payments Applied (2) |
Total Impaired Loans |
Impaired Loans with No Related Allowance |
Impaired Loans with Related Allowance |
Related Allowance for Loan Losses |
Coverage % (4) | Average Balance |
Interest Income Recognized (5) |
||||||||||||||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||||||||||||||||||
Commercial and industrial |
$ | 542 | $ | 117 | $ | 425 | $ | 41 | $ | 384 | $ | 167 | 52.4 | % | $ | 436 | $ | | ||||||||||||||||||
Commercial real estate mortgageowner occupied |
788 | 105 | 683 | 25 | 658 | 198 | 38.5 | 705 | 1 | |||||||||||||||||||||||||||
Commercial real estate constructionowner occupied |
49 | 17 | 32 | | 32 | 8 | 51.0 | 32 | | |||||||||||||||||||||||||||
Total commercial |
1,379 | 239 | 1,140 | 66 | 1,074 | 373 | 44.4 | 1,173 | 1 | |||||||||||||||||||||||||||
Commercial investor real estate mortgage |
1,540 | 221 | 1,319 | 94 | 1,225 | 354 | 37.3 | 1,367 | 2 | |||||||||||||||||||||||||||
Commercial investor real estate construction |
628 | 148 | 480 | 69 | 411 | 142 | 46.2 | 496 | | |||||||||||||||||||||||||||
Total investor real estate |
2,168 | 369 | 1,799 | 163 | 1,636 | 496 | 39.9 | 1,863 | 2 | |||||||||||||||||||||||||||
Residential first mortgage |
1,138 | 63 | 1,075 | | 1,075 | 132 | 17.1 | 1,061 | 9 | |||||||||||||||||||||||||||
Home equity |
397 | 14 | 383 | | 383 | 54 | 17.1 | 379 | 5 | |||||||||||||||||||||||||||
Indirect and other consumer |
65 | | 65 | | 65 | 1 | 1.5 | 65 | 1 | |||||||||||||||||||||||||||
Total consumer |
1,600 | 77 | 1,523 | | 1,523 | 187 | 16.5 | 1,505 | 15 | |||||||||||||||||||||||||||
Total impaired loans |
$ | 5,147 | $ | 685 | $ | 4,462 | $ | 229 | $ | 4,233 | $ | 1,056 | 33.8 | % | $ | 4,541 | $ | 18 | ||||||||||||||||||
(1) | Legal balance represents the contractual obligation due from the customer and includes the net book value plus charge-offs and payments applied. |
(2) | Charge-offs and payments applied represents cumulative partial charge-offs taken, as well as interest payments received that have been applied against the outstanding principal balance. |
(3) | Book value represents the legal balance less charge-offs and payments applied; it is shown before any allowance for loan losses. |
(4) | Coverage % represents charge-offs and payments applied plus the related allowance as a percent of the legal balance. |
(5) | Represents interest income on loans modified in a TDR, and are therefore considered impaired, which are on accruing status. |
19
Impaired Loans As of December 31, 2010 |
||||||||||||||||||||
Legal Balance (1) |
Charge- offs and Payments Applied (2) |
Book Value (3) |
Related Allowance for Loan Losses |
Coverage % (4) | ||||||||||||||||
(Dollars in millions) | ||||||||||||||||||||
Commercial and industrial |
$ | 545 | $ | 124 | $ | 421 | $ | 102 | 41.5 | % | ||||||||||
Commercial real estate mortgageowner occupied |
746 | 96 | 650 | 167 | 35.3 | |||||||||||||||
Commercial real estate constructionowner occupied |
47 | 16 | 31 | 10 | 55.3 | |||||||||||||||
Total commercial |
1,338 | 236 | 1,102 | 279 | 38.5 | |||||||||||||||
Commercial investor real estate mortgage |
1,693 | 273 | 1,420 | 319 | 35.0 | |||||||||||||||
Commercial investor real estate construction |
638 | 150 | 488 | 154 | 47.6 | |||||||||||||||
Total investor real estate |
2,331 | 423 | 1,908 | 473 | 38.4 | |||||||||||||||
Residential first mortgage |
1,113 | 60 | 1,053 | 126 | 16.7 | |||||||||||||||
Home equity |
378 | 13 | 365 | 46 | 15.6 | |||||||||||||||
Indirect and other consumer |
67 | | 67 | 1 | 1.5 | |||||||||||||||
Total consumer |
1,558 | 73 | 1,485 | 173 | 15.8 | |||||||||||||||
Total impaired loans |
$ | 5,227 | $ | 732 | $ | 4,495 | $ | 925 | 31.7 | % | ||||||||||
(1) | Legal balance represents the contractual obligation due from the customer and includes the net book value plus charge-offs and payments applied. |
(2) | Charge-offs and payments applied represents cumulative partial charge-offs taken, as well as interest payments received that have been applied against the outstanding principal balance. |
(3) | Book value represents the legal balance less charge-offs and payments applied; it is shown before any allowance for loan losses. |
(4) | Coverage % represents charge-offs and payments applied plus the related allowance as a percent of the legal balance. |
A significant majority of residential first mortgage, home equity, and indirect and other consumer loans in the table above are considered impaired due to their status as a TDR. Over 90 percent of consumer TDRs were accruing at March 31, 2011.
In addition to the impaired loans detailed in the tables above, there were approximately $381 million in non-performing loans classified as held for sale at March 31, 2011, compared to $304 million at December 31, 2010. The loans are larger balance credits, primarily investor real estate, where management does not have the intent to hold these loans for the foreseeable future. The loans are carried at an amount approximating a price which will be recoverable through the loan sale market. During the quarter ended March 31, 2011, approximately $188 million in non-performing loans were transferred to held for sale; this amount is net of charge-offs of $105 million recorded upon transfer. At both March 31, 2011 and December 31, 2010, non-accrual loans including loans held for sale totaled $3.5 billion.
During the quarter ended March 31, 2011, Regions purchased approximately $162 million in indirect loans from a third party.
NOTE 4Loan Servicing
The fair value of mortgage servicing rights is calculated using various assumptions including future cash flows, market discount rates, expected prepayment rates, servicing costs and other factors. A significant change in prepayments of mortgages in the servicing portfolio could result in significant changes in the valuation adjustments, thus creating potential volatility in the carrying amount of mortgage servicing rights.
20
The table below presents an analysis of mortgage servicing rights for the three months ended March 31, 2011 and 2010, under the fair value measurement method:
Three Months Ended March 31 |
||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Carrying value, beginning of period |
$ | 267 | $ | 247 | ||||
Additions |
16 | 17 | ||||||
Increase (decrease) in fair value: |
||||||||
Due to change in valuation inputs or assumptions |
5 | 11 | ||||||
Other changes (1) |
(6 | ) | (5 | ) | ||||
Carrying value, end of period |
$ | 282 | $ | 270 | ||||
(1) | Represents economic amortization associated with borrower repayments. |
Data and assumptions used in the fair value calculation related to mortgage servicing rights (excluding related derivative instruments) as of March 31, 2011 and 2010 are as follows:
March 31 | ||||||||
2011 | 2010 | |||||||
(Dollars in millions) | ||||||||
Unpaid principal balance |
$ | 25,767 | $ | 23,469 | ||||
Weighted-average prepayment speed (CPR; percentage) |
12.2 | % | 12.2 | % | ||||
Estimated impact on fair value of a 10% increase |
$ | (14 | ) | $ | (12 | ) | ||
Estimated impact on fair value of a 20% increase |
$ | (27 | ) | $ | (23 | ) | ||
Option-adjusted spread (basis points) |
633 | 576 | ||||||
Estimated impact on fair value of a 10% increase |
$ | (6 | ) | $ | (6 | ) | ||
Estimated impact on fair value of a 20% increase |
$ | (13 | ) | $ | (11 | ) | ||
Weighted-average coupon interest rate |
5.39 | % | 5.74 | % | ||||
Weighted-average remaining maturity (months) |
283 | 288 | ||||||
Weighted-average servicing fee (basis points) |
28.7 | 28.9 |
The sensitivity calculations above are hypothetical and should not be considered to be predictive of future performance. Changes in fair value based on adverse changes in assumptions generally cannot be extrapolated because the relationship of the change in assumption to the change in fair value may not be linear. Also, the effect of an adverse variation in a particular assumption on the fair value of the mortgage servicing rights is calculated without changing any other assumption, while in reality changes in one factor may result in changes in another which may either magnify or counteract the effect of the change. The derivative instruments utilized by Regions would serve to reduce the estimated impacts to fair value included in the table above.
Regions uses various derivative instruments and/or trading securities to mitigate the effect of changes in the fair value of its mortgage servicing rights in the statement of operations. The table below presents the impact on the statements of operations associated with changes in mortgage servicing rights and related derivative and/or trading securities for the three months ended March 31, 2011 and 2010.
Three Months Ended March 31 |
||||||||
2011 | 2010 | |||||||
(In millions) | ||||||||
Net interest income |
$ | | $ | 3 | ||||
Brokerage income |
| 4 | ||||||
Mortgage income |
(11 | ) | 16 | |||||
Total |
$ | (11 | ) | $ | 23 | |||
21
During the three months ended March 31, 2011 and 2010, Regions recognized $21 million and $20 million, respectively, in contractually specified servicing fees, late fees and other ancillary income resulting from the servicing of mortgage loans.
Regions recourse liability, which primarily relates to residential mortgage loans, totaled $32 million at both March 31, 2011 and December 31, 2010. During the three months ended March 31, 2011, $7 million of provision expense (included in other non-interest expense) was recorded and $7 million of losses was charged-off against the reserve. The recourse liability represents Regions estimated credit losses on contingent repurchases of loans or make-whole payments related to residential mortgage loans previously sold. This recourse primarily arises due to defects in the underwriting of the sold loans.
NOTE 5Goodwill
Goodwill allocated to each reportable segment is presented as follows:
March 31 2011 |
December 31 2010 |
March 31 2010 |
||||||||||
(In millions) | ||||||||||||
Banking/Treasury |
$ | 4,691 | $ | 4,691 | $ | 4,691 | ||||||
Investment Banking/Brokerage/Trust |
745 | 745 | 745 | |||||||||
Insurance |
125 | 125 | 123 | |||||||||
$ | 5,561 | $ | 5,561 | $ | 5,559 | |||||||
Regions evaluates each reporting units goodwill for impairment on an annual basis in the fourth quarter, or more often if events or circumstances indicate that there may be impairment. Adverse changes in the economic environment, declining operations, or other factors could result in a decline in the implied fair value of goodwill. A goodwill impairment test includes two steps. Step One, used to identify potential impairment, compares the estimated fair value of a reporting unit with its carrying amount, including goodwill. If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired. If the carrying amount of a reporting unit exceeds its estimated fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. Step Two of the goodwill impairment test compares the implied estimated fair value of reporting unit goodwill with the carrying amount of that goodwill. If the carrying amount of goodwill for that reporting unit exceeds the implied fair value of that units goodwill, an impairment loss is recognized in an amount equal to that excess.
During the first quarter of 2011, Regions assessed the indicators of goodwill impairment as of February 28, 2011, and through the date of the filing of the Quarterly Report on Form 10-Q for the quarter ended March 31, 2011. The indicators assessed included:
| Recent operating performance, |
| Changes in market capitalization, |
| Regulatory actions and assessments, |
| Changes in the business climate (including legislation, legal factors and competition), |
| Company-specific factors (including changes in key personnel, asset impairments, and business dispositions), and |
| Trends in the banking industry. |
Based on the assessment of the indicators above, quantitative testing of goodwill was required for all of Regions reporting units for the March 31, 2011 interim period.
22
For purposes of performing Step One of the goodwill impairment test, Regions uses both the income and market approaches to value its reporting units. The income approach, which is the primary valuation approach, consists of discounting projected long-term future cash flows, which are derived from internal forecasts and economic expectations for the respective reporting units. The significant inputs to the income approach include expected future cash flows, the long-term target tangible equity to tangible assets ratio, and the discount rate.
Regions uses the public company method and the transaction method as the two market approaches. The public company method applies a value multiplier derived from each reporting units peer group to a financial metric of the reporting unit (e.g. last twelve months of earnings before interest, taxes and deprecation, tangible book value, etc.) and an implied control premium to the respective reporting unit. The control premium is evaluated and compared to similar financial services transactions. The transaction method applies a value multiplier to a financial metric of the reporting unit based on comparable observed purchase transactions in the financial services industry for the reporting unit (where available).
Regions uses the output from these approaches to determine the estimated fair value of each reporting unit. Listed below are tables of assumptions used in estimating the fair value of each reporting unit for the March 31, 2011, December 31, 2010 and March 31, 2010 interim periods. The tables include the discount rate used in the income approach, the market multiplier used in the market approaches, and the public company method control premium applied to all reporting units.
As of First Quarter 2011 |
Banking/ Treasury |
Investment Banking/ Brokerage/Trust |
Insurance | |||||||||
Discount rate used in income approach |
15 | % | 15 | % | 12 | % | ||||||
Public company method market multiplier (1) |
1.0 | x | 1.8 | x | 16.0 | x | ||||||
Transaction method market multiplier (2) |
1.2 | x | 2.1 | x | n/a |
(1) | For the Banking/Treasury and Investment Banking/Brokerage/Trust reporting units, these multipliers are applied to tangible book value. For the Insurance reporting unit, this multiplier is applied to the last twelve months of net income. In addition to the multipliers, a 30 percent control premium is assumed for each reporting unit. |
(2) | For the Banking/Treasury and Investment Banking/Brokerage/Trust reporting units, these multipliers are applied to tangible book value. |
As of Fourth Quarter 2010 |
Banking/ Treasury |
Investment Banking/ Brokerage/Trust |
Insurance | |||||||||
Discount rate used in income approach |
15 | % | 14 | % | 11 | % | ||||||
Public company method market multiplier (1) |
1.0 | x | 1.6 | x | 17.3 | x | ||||||
Transaction method market multiplier (2) |
1.3 | x | 2.1 | x | n/a |
(1) | For the Banking/Treasury and Investment Banking/Brokerage/Trust reporting units, these multipliers are applied to tangible book value. For the Insurance reporting unit, this multiplier is applied to the last twelve months of net income. In addition to the multipliers, a 30 percent control premium is assumed for each reporting unit. |
(2) | For the Banking/Treasury and Investment Banking/Brokerage/Trust reporting units, these multipliers are applied to tangible book value. |
23
As of First Quarter 2010 |
Banking/ Treasury |
Investment Banking/ Brokerage/Trust |
Insurance | |||||||||
Discount rate used in income approach |
16 | % | 13 | % | 13 | % | ||||||
Public company method market multiplier (1) |
0.8 | x | 1.8 | x | 21.0 | x | ||||||
Transaction method market multiplier (2) |
0.9 | x | 2.2 | x | n/a |
(1) | For the Banking/Treasury and Investment Banking/Brokerage/Trust reporting units, these multipliers are applied to tangible book value. For the Insurance reporting unit, this multiplier is applied to the last twelve months of net income. In addition to the multipliers, a 30 percent control premium is assumed for each reporting unit. |
(2) | For the Banking/Treasury and Investment Banking/Brokerage/Trust reporting units, these multipliers are applied to tangible book value. |
Regions utilizes the capital asset pricing model (CAPM) in order to derive the base discount rate. The inputs to the CAPM include the 20-year risk-free rate, 5-year beta for a select peer set, and the market risk premium based on published data. Once the output of the CAPM is determined, a size premium is added (also based on a published source) as well as a company-specific risk premium, which is an estimate determined by the Company and meant to compensate for the risk inherent in the future cash flow projections and inherent differences (such as business model and market perception of risk) between Regions and the peer set. The table below summarizes the discount rate used in the goodwill impairment tests of the Banking/Treasury reporting unit for the reporting periods indicated:
1st Quarter 2011 |
4th Quarter 2010 |
3rd Quarter 2010 |
2nd Quarter 2010 |
1st Quarter 2010 |
||||||||||||||||
Discount Rate |
15 | % | 15 | % | 16 | % | 16 | % | 16 | % |
In estimating future cash flows, a balance sheet as of the test date and an income statement for the last twelve months of activity for the reporting unit are compiled. From that point, future balance sheets and income statements are projected based on the inputs discussed below. Cash flows are based on expected future capitalization requirements due to balance sheet growth and anticipated changes in regulatory capital requirements. The baseline cash flows utilized in all models correspond to the most recent internal forecasts and/or budgets that range from 1 to 5 years. These internal forecasts are based on inputs developed in the Companys capital planning process.
Specific factors as of the date of filing the financial statements that could negatively impact the assumptions used in assessing goodwill for impairment include: disparities in the level of fair value changes in net assets compared to equity; adverse business trends resulting from litigation and/or regulatory actions; higher loan losses; lengthened forecasts of unemployment in excess of 10 percent beyond 2012; future increased minimum regulatory capital requirements above current thresholds (refer to Note 13 Regulatory Capital Requirements and Restrictions to the 2010 consolidated financial statements filed on Form 10-K for the year ended December 31, 2010 for a discussion of current minimum regulatory requirements); future federal rules and regulations resulting from the Dodd-Frank Act; and/or a protraction in the current low level of interest rates beyond 2012.
24
The Step One analyses performed for the Investment Banking/Brokerage/Trust and Insurance reporting units during the first quarter of 2011 indicated that their estimated fair values exceeded their carrying values (including goodwill). Therefore, a Step Two analysis was not required for these reporting units.
The Step One analysis performed for the Banking/Treasury reporting unit during the first quarter of 2011 indicated that the carrying value (including goodwill) of the reporting unit exceeded its estimated fair value. Therefore, Step Two was performed for the Banking/Treasury reporting unit. For purposes of performing Step Two of the goodwill impairment test, Regions compared the implied estimated fair value of the Banking/Treasury reporting unit goodwill with the carrying amount of that goodwill. In order to determine the implied estimated fair value, a full purchase price allocation was performed in the same manner as if a business combination had occurred. As part of the Step Two analysis, Regions estimated the fair value of all of the assets and liabilities of the reporting unit, including unrecognized assets and liabilities. The fair values of certain material financial assets and liabilities and the valuation methodologies are discussed in Note 11 Fair Value Measurements. Based on the results of the Step Two analysis performed, Regions concluded the Banking/Treasury reporting units goodwill was not impaired for the March 31, 2011 interim period.
NOTE 6Stockholders Equity and Comprehensive Income (Loss)
On November 14, 2008, Regions completed the sale of 3.5 million shares of its Fixed Rate Cumulative Perpetual Preferred Stock, Series A, to the U.S. Treasury as part of the Capital Purchase Program (CPP). Regions will pay the U.S. Treasury on a quarterly basis a 5 percent dividend, or $175 million annually, for each of the first five years of the investment, and 9 percent thereafter unless Regions redeems the shares. As part of its purchase of the preferred securities, the U.S. Treasury also received a warrant to purchase 48.3 million shares of Regions common stock at an exercise price of $10.88 per share, subject to anti-dilution and other adjustments. Regions received $3.5 billion from issuance of the Series A preferred shares and the warrant. The fair value allocation of the $3.5 billion between the preferred shares and the warrant resulted in $3.304 billion allocated to the preferred shares and $196 million allocated to the warrant. Accrued dividends on the preferred shares reduced retained earnings by $43 million during the first three months of 2011 and $44 million during the first three months of 2010. The unamortized discount on the preferred shares was $111 million at March 31, 2011, $120 million at December 31, 2010 and $149 million at March 31, 2010. Discount accretion on the preferred shares reduced retained earnings by $9 million and $8 million during the first quarter of 2011 and 2010, respectively. Both the preferred securities and the warrant are accounted for as components of Regions regulatory Tier 1 capital.
On May 20, 2009, the Company issued 287,500 shares of mandatorily convertible preferred stock, Series B (Series B shares), generating net proceeds of approximately $278 million. By June 2010, all Series B shares had been converted to common shares as allowed by their terms. Accrued dividends on the Series B shares reduced retained earnings by $7 million for the first three months of 2010.
At March 31, 2011, Regions had 23.1 million common shares available for repurchase through open market transactions under an existing share repurchase authorization. There were no treasury stock purchases through open market transactions during the first three months of 2011. The Companys ability to repurchase its common stock is limited by the terms of the CPP mentioned above.
The Board of Directors declared a $0.01 cash dividend for the first quarter of both 2011 and 2010. Regions does not expect to increase its quarterly dividend above $0.01 for the foreseeable future.
Comprehensive income (loss) is the total of net income (loss) and all other non-owner changes in equity. Items are recognized as components of comprehensive income (loss) and are displayed in the consolidated statements of changes in stockholders equity. In the calculation of comprehensive income (loss), certain reclassification adjustments are made to avoid double-counting items that are displayed as part of net income (loss) for a period that also had been displayed as part of other comprehensive income (loss) in that period or earlier periods.
25
The following disclosure reflects the components of comprehensive income (loss) and any associated reclassification amounts:
Three Months Ended March 31, 2011 | ||||||||||||
Before Tax | Tax Effect | Net of Tax | ||||||||||
(In millions) | ||||||||||||
Net income |
$ | 57 | $ | 12 | $ | 69 | ||||||
Net unrealized holding gains and losses on securities available for sale arising during the period |
(81 | ) | 33 | (48 | ) | |||||||
Less: reclassification adjustments for net securities gains realized in net income |
82 | (29 | ) | 53 | ||||||||
Net change in unrealized gains and losses on securities available for sale |
(163 | ) | 62 | (101 | ) | |||||||
Net unrealized holding gains and losses on derivatives arising during the period |
1 | | 1 | |||||||||
Less: reclassification adjustments for net gains realized in net income |
50 | (19 | ) | 31 | ||||||||
Net change in unrealized gains and losses on derivative instruments |
(49 | ) | 19 | (30 | ) | |||||||
Net actuarial gains and losses arising during the period |
19 | (8 | ) | 11 | ||||||||
Less: amortization of actuarial loss and prior service credit realized in net income |
11 | (4 | ) | 7 | ||||||||
Net change from defined benefit plans |
8 | (4 | ) | 4 | ||||||||
Comprehensive income (loss) |
$ | (147 | ) | $ | 89 | $ | (58 | ) | ||||
Three Months Ended March 31, 2010 | ||||||||||||
Before Tax | Tax Effect | Net of Tax | ||||||||||
(In millions) | ||||||||||||
Net income (loss) |
$ | (357 | ) | $ | 161 | $ | (196 | ) | ||||
Net unrealized holding gains and losses on securities available for sale arising during the period |
106 | (39 | ) | 67 | ||||||||
Less: reclassification adjustments for net securities gains realized in net income (loss) |
59 | (21 | ) | 38 | ||||||||
Net change in unrealized gains and losses on securities available for sale |
47 | (18 | ) | 29 | ||||||||
Net unrealized holding gains and losses on derivatives arising during the period |
34 | (13 | ) | 21 | ||||||||
Less: reclassification adjustments for net gains realized in net income (loss) |
63 | (24 | ) | 39 | ||||||||
Net change in unrealized gains and losses on derivative instruments |
(29 | ) | 11 | (18 | ) | |||||||
Net actuarial gains and losses arising during the period |
17 | (7 | ) | 10 | ||||||||
Less: amortization of actuarial loss and prior service credit realized in net income (loss) |
11 | (4 | ) | 7 | ||||||||
Net change from defined benefit plans |
6 | (3 | ) | 3 | ||||||||
Comprehensive income (loss) |
$ | (333 | ) | $ | 151 | $ | (182 | ) | ||||
26
NOTE 7Earnings (Loss) per Common Share
The following table sets forth the computation of basic earnings (loss) per common share and diluted earnings (loss) per common share:
Three Months Ended March 31 |
||||||||
2011 | 2010 | |||||||
(In millions, except per share amounts) |
||||||||
Numerator: |
||||||||
Net income (loss) |
$ | 69 | $ | (196 | ) | |||
Preferred stock dividends and accretion |
(52 | ) | (59 | ) | ||||
Net income (loss) available to common shareholders |
$ | 17 | $ | (255 | ) | |||
Denominator: |
||||||||
Weighted-average common shares outstandingbasic |
1,257 | 1,194 | ||||||
Potential common shares |
2 | | ||||||
Weighted-average common shares outstandingdiluted |
1,259 | 1,194 | ||||||
Earnings (loss) per common share: |
||||||||
Basic |
$ | 0.01 | $ | (0.21 | ) | |||
Diluted |
0.01 | (0.21 | ) |
The effect from the assumed exercise of 39 million stock options for the three months ended March 31, 2011 was not included in the above computations of diluted earnings per common share because such amounts would have had an antidilutive effect on earnings per common share.
Basic and diluted weighted-average common shares outstanding are the same for the three months ended March 31, 2010 due to the net loss.
As discussed in Note 6, common shares were issued in June of 2010 in connection with the conversion of the remaining Series B mandatorily convertible preferred shares, which were originally issued in May 2009. Under applicable accounting literature, such shares should be included in the denominator in arriving at diluted earnings per share as if they were issued at the beginning of the reporting period or as of the date issued, if later. Prior to conversion, these shares were not included in the computation above as such amounts would have had an antidilutive effect on earnings (loss) per common share.
NOTE 8Share-Based Payments
Regions has long-term incentive compensation plans that permit the granting of incentive awards in the form of stock options, restricted stock, restricted stock awards and units, and/or stock appreciation rights. While Regions has the ability to issue stock appreciation rights, none have been issued to date. The terms of all awards issued under these plans are determined by the Compensation Committee of the Board of Directors; however, no awards may be granted after the tenth anniversary from the date the plans were initially approved by shareholders. Options and restricted stock usually vest based on employee service, generally within three years from the date of the grant. The contractual lives of options granted under these plans range from seven to ten years from the date of grant.
On May 13, 2010, the shareholders of the Company approved the Regions Financial Corporation 2010 Long-Term Incentive Plan (2010 LTIP), which permits the Company to grant to employees and directors various forms of incentive compensation. These forms of incentive compensation are similar to the types of compensation approved in prior plans. The 2010 LTIP authorizes 100 million common share equivalents available for grant, where grants of options count as one share equivalent and grants of full value awards
27
(e.g., shares of restricted stock and restricted stock units) count as 2.25 share equivalents. Unless otherwise determined by the Compensation Committee of the Board of Directors, grants of restricted stock and restricted stock units accrue dividends as they are declared by the Board of Directors, and the dividends are paid upon vesting of the award. The 2010 LTIP closed all prior long-term incentive plans to new grants, and accordingly, prospective grants must be made under the 2010 LTIP or a successor plan. All existing grants under prior long-term incentive plans were unaffected by this amendment. The number of remaining share equivalents available for future issuance under the active long-term compensation plan was approximately 90 million at March 31, 2011.
STOCK OPTIONS
During the first quarter of 2011, Regions made stock option grants that vest based upon a service condition. The fair value of these stock options was estimated on the date of the grant using a Black-Scholes option pricing model and related assumptions. The stock options vest ratably over a 3-year term.
The following table summarizes the weighted-average assumptions used and the estimated fair values related to stock options granted during the three months ended March 31:
March 31, 2011 |
||||
Expected option life |
5.8 yrs. | |||
Expected volatility |
74.0% | |||
Expected dividend yield |
2.2% | |||
Risk-free interest rate |
2.4% | |||
Fair value |
$ 4.11 |
The following table details the activity during the first three months of 2011 and 2010 related to stock options:
For the Three Months Ended March 31 | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Number of Options |
Wtd. Avg. Exercise Price |
Number of Options |
Wtd. Avg. Exercise Price |
|||||||||||||
Outstanding at beginning of period |
54,999,626 | $ | 24.41 | 52,968,560 | $ | 26.34 | ||||||||||
Granted |
114,065 | 7.43 | | | ||||||||||||
Exercised |
(18,442 | ) | 3.29 | (24,589 | ) | 3.29 | ||||||||||
Canceled/Forfeited |
(5,911,560 | ) | 23.62 | (2,715,395 | ) | 20.12 | ||||||||||
Outstanding at end of period |
49,183,689 | $ | 24.47 | 50,228,576 | $ | 26.69 | ||||||||||
Exercisable at end of period |
41,491,421 | $ | 27.72 | 45,139,348 | $ | 27.62 | ||||||||||
RESTRICTED STOCK AWARDS
In the first quarter of 2011 and 2010, Regions granted approximately 425 thousand and 350 thousand restricted shares, respectively, that vest based upon a service condition. Dividend payments during the vesting period are deferred to the end of the vesting term. The fair value of these restricted shares was estimated based upon the fair value of the underlying shares on the date of the grant. The valuation was not adjusted for the deferral of dividends.
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The following table details the activity during the first three months of 2011 and 2010 related to restricted share awards and units:
For the Three Months Ended March 31 | ||||||||||||||||
2011 | 2010 | |||||||||||||||
Number of Shares |
Wtd. Avg. Grant Date Fair Value |
Number of Shares |
Wtd. Avg. Grant Date Fair Value |
|||||||||||||
Non-vested at beginning of period |
4,930,444 | $ | 12.13 | 5,964,594 | $ | 17.15 | ||||||||||
Granted |
425,013 | 7.38 | 353,314 | 6.64 | ||||||||||||
Vested |
(1,079,779 | ) | 24.50 | (262,407 | ) | 33.40 | ||||||||||
Forfeited |
(6,817 | ) | 14.90 | (814,567 | ) | 18.75 | ||||||||||
Non-vested at end of period |
4,268,861 | $ | 8.52 | 5,240,934 | $ | 15.38 | ||||||||||
NOTE 9Pension and Other Postretirement Benefits
Net periodic pension and other postretirement benefits cost included the following components:
For The Three Months Ended March 31 | ||||||||||||||||
Pension | Other
Postretirement Benefits |
|||||||||||||||
2011 | 2010 | 2011 | 2010 | |||||||||||||
(In millions) | ||||||||||||||||
Service cost |
$ | 10 | $ | 9 | $ | | $ | | ||||||||
Interest cost |
23 | 23 | | 1 | ||||||||||||
Expected return on plan assets |
(30 | ) | (25 | ) | | | ||||||||||
Amortization of actuarial loss |
11 | 11 | | | ||||||||||||
$ | 14 | $ | 18 | $ | | $ | 1 | |||||||||
NOTE 10Derivative Financial Instruments and Hedging Activities
Regions enters into derivative financial instruments to manage interest rate risk, facilitate asset/liability management strategies and manage other exposures. These derivative instruments primarily include interest rate swaps, options on interest rate swaps, interest rate caps and floors, Eurodollar futures, forward rate contracts and forward sale commitments. All derivative financial instruments are recognized on the consolidated balance sheets as other assets or other liabilities at fair value. Regions enters into master netting agreements with counterparties and/or requires collateral to cover exposures. In at least some cases, counterparties post at a zero threshold regardless of rating.
Interest rate swaps are agreements to exchange interest payments based upon notional amounts. Interest rate swaps subject Regions to market risk associated with changes in interest rates, as well as the credit risk that the counterparty will fail to perform. Option contracts involve rights to buy or sell financial instruments on a specified date or over a period at a specified price. These rights do not have to be exercised. Some option contracts such as interest rate floors, involve the exchange of cash based on changes in specified indices. Interest rate floors are contracts to hedge interest rate declines based on a notional amount. Interest rate floors subject Regions to market risk associated with changes in interest rates, as well as the credit risk that the counterparty will fail to perform. Forward rate contracts are commitments to buy or sell financial instruments at a future date at a specified price or yield. Regions primarily enters into forward rate contracts on market instruments, which expose Regions to market risk associated with changes in the value of the underlying financial instrument, as well as the credit risk that the counterparty will fail to perform. Eurodollar futures are futures contracts on Eurodollar deposits. Eurodollar futures subject Regions to market risk associated with changes in interest rates. Because futures contracts are cash settled daily, there is minimal credit risk associated with Eurodollar futures.
29
The following tables present the notional and fair value of derivative instruments on a gross basis:
March 31, 2011 | ||||||||||||||||||||
Notional Value |
Asset Derivatives | Liability Derivatives | ||||||||||||||||||
Balance Sheet Location | Fair Value |
Balance Sheet Location | Fair Value |
|||||||||||||||||
(In millions) | ||||||||||||||||||||
Derivatives in fair value hedging relationships |
||||||||||||||||||||
Interest rate swaps |
$ | 8,080 | Other assets | $ | 176 | Other liabilities | $ | | ||||||||||||
Total |
8,080 | 176 | | |||||||||||||||||
Derivatives in cash flow hedging relationships |
||||||||||||||||||||
Interest rate swaps |
13,380 | Other assets | 22 | Other liabilities | 115 | |||||||||||||||
Total |
13,380 | 22 | 115 | |||||||||||||||||
Total derivatives designated as hedging instruments |
$ | 21,460 | $ | 198 | $ | 115 | ||||||||||||||
Derivatives not designated as hedging instruments |
||||||||||||||||||||
Interest rate swaps |
$ | 50,931 | Other assets | $ | 1,417 | Other liabilities | $ | 1,470 | ||||||||||||
Interest rate options |
3,727 | Other assets | 29 | Other liabilities | 22 | |||||||||||||||
Interest rate futures and forward commitments |
42,731 | Other assets | 9 | Other liabilities | 9 | |||||||||||||||
Other contracts |
1,626 | Other assets | 63 | Other liabilities | 60 | |||||||||||||||
Total derivatives not designated as hedging instruments |
$ | 99,015 | $ | 1,518 | $ | 1,561 | ||||||||||||||
Total derivatives |
$ | 120,475 | $ | 1,716 | $ | 1,676 | ||||||||||||||