Regions Financial Corporation — 2011 Form 10-K
Reporting period: Fiscal year ended December 31, 2011. This summary covers full-year results and selected fourth-quarter developments; the filing is an annual report, not a standalone quarterly filing.
Business context
Regions is a bank holding company based in Birmingham, Alabama, operating across the South, Midwest and Texas. At year-end, it reported $127.1 billion in assets, $95.6 billion in deposits and $16.5 billion in stockholders’ equity. Banking is its primary business. On January 11, 2012, after year-end, Regions agreed to sell Morgan Keegan to Raymond James.
Financial performance and condition
| Metric | 2011 | 2010 |
|---|---|---|
| Net interest income | $3.410 billion | $3.389 billion |
| Net interest margin, continuing operations, fully taxable-equivalent | 3.07% | 2.91% |
| Provision for loan losses | $1.530 billion | $2.863 billion |
| Non-interest income, continuing operations | $2.143 billion | $2.489 billion |
| Non-interest expense, continuing operations | $3.862 billion | $3.859 billion |
| Net income (loss) | $(215) million | $(539) million |
| Net income (loss) available to common shareholders | $(429) million | $(763) million |
| Net charge-offs | $1.970 billion; 2.44% of average loans | $2.792 billion; 3.22% |
| Non-performing assets | $2.996 billion | $3.918 billion |
| Long-term borrowings at year-end | $8.110 billion | $13.190 billion |
Continuing-operations net income was $189 million, but after preferred dividends and accretion, the continuing-operations loss available to common shareholders was $25 million. Regions reported a $404 million discontinued-operations loss. Excluding the specified goodwill impairment and regulatory-settlement tax benefit, management’s non-GAAP continuing-operations income available to common shareholders was $211 million, or $0.17 per diluted share; GAAP diluted loss per share was $0.34.
Cash flow: Operating activities provided $4.753 billion, investing activities provided $659 million, and financing activities used $5.086 billion. Cash and cash equivalents increased $326 million to $7.245 billion. Regions also reported more than $4.9 billion on deposit with the Federal Reserve, $2.5 billion of parent-company cash, an 81% loan-to-deposit ratio, $19.4 billion of Federal Reserve discount-window capacity, $5.4 billion of FHLB capacity and $9.9 billion of unencumbered liquid securities.
Capital and liquidity: Year-end regulatory Tier 1 and total capital ratios were 13.28% and 16.99%; the leverage ratio was 9.91%. Tier 1 common equity was 8.51% (non-GAAP). Management’s estimated Basel III Tier 1 and Tier 1 common ratios were 11.39% and 7.70%, respectively, subject to final U.S. rules and Regions’ calculation assumptions.
Changes versus the prior comparable period
- Credit costs improved substantially: provision for loan losses fell 47%, net charge-offs fell 29%, and non-performing assets declined 24% year over year. The allowance for loan losses fell to $2.745 billion from $3.185 billion; allowance coverage of non-performing loans rose to 1.16x from 1.01x.
- Net interest margin expanded as lower deposit costs more than offset lower asset yields. Average deposit costs declined to 0.49% from 0.78%; low-cost deposits grew, while average earning assets declined 5%.
- Total loans fell $5.3 billion, or 6.4%, led by a $5.2 billion decline in investor real estate loans. Deposits rose about $1.0 billion, with low-cost customer deposits up $4.4 billion.
- Non-interest income declined $346 million, primarily because securities gains and leveraged-lease termination gains were lower; mortgage income also declined. Adjusted non-interest expense, excluding identified items, declined 5% to $3.609 billion.
- Long-term debt declined $5.1 billion, reflecting maturities and repayments, including the maturity of $2.0 billion of TLGP bank notes. Total borrowed funds fell to $11.177 billion from $17.127 billion.
Outlook, commentary, risks and unusual items
- Morgan Keegan sale: The announced sale price was approximately $930 million, plus a planned $250 million pre-closing dividend, for expected total proceeds of about $1.18 billion, subject to adjustments and regulatory approval. Morgan Asset Management and Regions Morgan Keegan Trust were excluded. Regions agreed to indemnify the buyer for pre-closing litigation; the filing estimated approximately $210 million of additional liabilities to be recognized at closing.
- Goodwill impairment: Regions recorded a $745 million pre-tax non-cash impairment related to the investment-banking/brokerage/trust reporting unit ($253 million in continuing operations and $492 million in discontinued operations). The charge did not reduce regulatory capital. Fourth-quarter 2011 net loss was $548 million; loss available to common shareholders was $602 million, or $0.48 per diluted share.
- Management outlook: Management expected incremental improvement in net interest income and margin in 2012 as excess cash and non-performing assets declined. It expected net charge-offs and non-performing assets to decrease, but remain elevated relative to historical levels. Management was cautiously optimistic about credit trends while noting persistent unemployment and property-value pressure.
- Regulatory and revenue pressure: The debit-interchange rule was estimated to reduce annual debit-card revenue by approximately $180 million before mitigation; Regions reported $335 million of debit-card income in 2011. Management cited potential mitigation through pricing, products and expense management. Dodd-Frank, proposed enhanced prudential standards, Basel III, stress testing and deposit-insurance assessments could also affect costs, capital, liquidity and distributions.
- Credit and market risks: Residential and commercial real estate remained exposed to weak property markets and unemployment. The $13.0 billion home-equity portfolio included $7.1 billion of second-lien loans, including $2.8 billion in Florida. Regions reported $500–$600 million of potential problem commercial and investor-real-estate loans not then on non-accrual.
- Contingencies and shareholder distributions: Regions estimated reasonably possible litigation losses above accrued amounts of up to approximately $340 million, while also stating that it could incur no additional losses; outcomes are uncertain. The quarterly common dividend was $0.01 per share, and Regions did not expect to raise it above that level for the foreseeable future. Regions remained in the Treasury’s CPP, with related preferred-stock dividends, compensation restrictions and potential dilution.
Most important facts for investors to verify
- Whether the Morgan Keegan sale closed on expected terms, including final price adjustments, the pre-closing dividend and indemnification liabilities.
- Whether credit-quality improvement continued, especially in investor real estate, Florida second liens, troubled debt restructurings and potential problem loans.
- Whether the expected $180 million annual debit-interchange revenue reduction was mitigated, and how it affected fee income and margins.
- Regions’ subsequent capital-plan and stress-test results, Basel III implementation effects, and capacity to maintain liquidity and regulatory capital.
- The trend in common earnings excluding unusual items, while comparing it with GAAP results and preferred-stock obligations; also verify parent liquidity, debt maturities and dividend constraints.
- The status and possible financial effect of litigation and other contingencies. The filing reports unqualified audit opinions and management’s conclusion that internal control over financial reporting was effective as of year-end.