Regions Financial Corporation — 2009 Form 10-K
Reporting period: Fiscal year ended December 31, 2009; filed February 22, 2010. The filing also reports fourth-quarter results. Regions is a regional bank and financial-services company operating across the South, Midwest and Texas. Year-end assets were $142.3 billion, deposits $98.7 billion and stockholders’ equity $17.9 billion.
Key financial results
| Metric | 2009 | 2008 |
|---|---|---|
| Total interest income | $5.332 billion | $6.563 billion |
| Net interest income | $3.335 billion | $3.843 billion |
| Net interest margin, taxable-equivalent | 2.67% | 3.23% |
| Non-interest income | $3.755 billion | $3.073 billion |
| Non-interest expense | $4.751 billion | $10.792 billion |
| Provision for loan losses | $3.541 billion | $2.057 billion |
| Net income (loss) | $(1.031) billion | $(5.596) billion |
| Net loss available to common shareholders | $(1.261) billion; $(1.27) per diluted share | $(5.622) billion; $(8.09) per diluted share |
| Operating cash flow | $1.994 billion | $2.007 billion |
Fourth-quarter 2009 net loss was $543 million; loss available to common shareholders was $606 million, or $0.51 per diluted share. Net interest income was $850 million and provision for loan losses was $1.179 billion.
Balance sheet, credit and capital
- Year-end loans were $90.7 billion, down 6.9% from 2008; deposits rose 8.6% to $98.7 billion. Total assets declined 2.7% to $142.3 billion.
- Cash and cash equivalents were $8.0 billion, down from $11.0 billion. Total borrowed funds were $22.1 billion, including $18.5 billion of long-term borrowings. Contractual long-term debt maturities in 2010 were approximately $5.5 billion.
- Net charge-offs were $2.253 billion, or 2.38% of average loans, versus $1.547 billion, or 1.59%, in 2008. Non-performing assets rose to $4.412 billion from $1.718 billion; the allowance for credit losses was $3.188 billion, or 3.52% of loans.
- Regulatory capital ratios improved: consolidated Tier 1 capital was 11.54%, total capital 15.78%, and leverage 8.90%. Tier 1 common equity, a non-GAAP measure, was 7.15%. Regions Bank was reported as well capitalized.
- Common stockholders’ tangible equity to tangible assets was 6.03%, up from 5.23%; this is a non-GAAP measure. The $950 million net deferred tax asset was considered realizable by management, but approximately $947 million was disallowed in regulatory Tier 1 capital calculations.
Material changes versus the prior period
- The annual loss narrowed substantially from 2008, primarily because 2008 included a $6.0 billion non-cash goodwill impairment charge and $201 million in merger charges. Regions recorded no goodwill impairment or AmSouth merger charges in 2009.
- Credit deterioration drove a $1.484 billion increase in the loan-loss provision and higher charge-offs and non-performing assets. Management cited residential homebuilder, condominium, Florida home-equity second-lien, and income-producing commercial real estate exposures.
- Net interest income fell $508 million and margin contracted 56 basis points. Lower loan yields and non-performing assets outweighed lower funding costs.
- Non-interest income rose $682 million, but included $587 million in leveraged-lease termination gains substantially offset by related tax expense, and a $61 million debt-extinguishment gain. Mortgage income increased to $259 million from $138 million.
- The company raised capital through a common-stock offering of 460 million shares that generated approximately $1.8 billion net, and issued $278 million net of Series B mandatory convertible preferred stock. Common shares outstanding rose to approximately 1.193 billion at year-end from 691 million.
Outlook, commentary and risks
- Management targeted a net interest margin of approximately 3% by the end of the fourth quarter of 2010, citing improving loan pricing, deposit costs and funding mix. It expected the asset-sensitive balance sheet to benefit if rates rose.
- Management expected net charge-offs and non-performing assets to remain elevated in 2010, with continued credit pressure in residential real estate and commercial real estate.
- The quarterly common dividend was reduced to $0.01 per share; Regions did not expect to raise it above that level for the foreseeable future. TARP terms restrict dividends and share repurchases, and the Treasury’s preferred stock dividend rises from 5% to 9% after five years if not redeemed.
- Regions said the bank subsidiary was not expected to pay dividends to the parent in the near term without regulatory approval, following losses in 2008 and 2009. Parent-company cash and cash equivalents were $4.1 billion at year-end; liquidity must also cover debt service and maturities.
- Key risks include recession and property-value declines, further credit losses, deposit and funding costs, credit-rating downgrades, deferred-tax-asset realization, regulatory reform and higher FDIC assessments. Ratings agencies downgraded Regions and Regions Bank during 2009; several ratings remained on negative outlook or watch.
- Material legal matters include SEC and FINRA investigations and proceedings concerning Morgan Keegan funds, an SEC lawsuit and state action related to auction-rate securities, and investor and shareholder litigation. Management stated that several matters were not expected to be material, but noted that some adverse outcomes could be material and exposures could not be reasonably estimated.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective as of December 31, 2009.
Important facts for investors to verify
- Whether credit quality stabilized after year-end, particularly in homebuilder, condominium, Florida home-equity and income-producing commercial real estate portfolios.
- Whether the allowance and deferred tax asset assumptions remain supportable as economic and earnings conditions evolve.
- Progress on 2010 debt maturities, funding access, deposit stability and the effects of FDIC-guaranteed program expirations and assessments.
- Actual margin performance against management’s approximately 3% year-end 2010 target, and whether reported fee income included significant non-recurring items.
- Developments in TARP repayment approval, preferred dividends, potential conversion dilution and common-dividend restrictions.
- Updates to Morgan Keegan-related investigations, auction-rate securities repurchases, litigation reserves and other contingencies; the filing does not provide a clear aggregate estimate of potential exposure.