REGIONS FINANCIAL CORP annual report, FY2014

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Regions Financial Corporation — 2014 Form 10-K

Business context and reporting period. Regions is a Birmingham-based financial holding company providing commercial, consumer and mortgage banking, wealth management, insurance and related services across the South, Midwest and Texas. This annual filing covers the fiscal year ended December 31, 2014; comparative results are primarily for 2013. Regions reported approximately $119.7 billion in assets, $94.2 billion in deposits and $17.0 billion in stockholders’ equity at year-end. The filing reorganized reporting into Corporate Bank, Consumer Bank and Wealth Management; prior segment results were recast.

Financial and operating performance

  • Earnings and revenue: Net income was $1.155 billion, up from $1.122 billion in 2013. Net income available to common shareholders was $1.103 billion, or $0.80 per diluted share, versus $1.090 billion, or $0.77, in 2013. Continuing-operations income available to common shareholders was $1.090 billion, versus $1.103 billion. GAAP net interest income rose to $3.279 billion from $3.262 billion; non-interest income fell 9.8% to $1.821 billion.
  • Margins and expenses: Taxable-equivalent net interest margin was 3.21%, up 1 basis point. Non-interest expense declined 3.5% to $3.432 billion. The adjusted efficiency ratio was 65.50%, essentially unchanged from 65.42%.
  • Credit: Provision for loan losses fell to $69 million from $138 million; net charge-offs fell to $307 million, or 0.40% of average loans, from $716 million, or 0.96%. Non-performing assets declined to $991 million from $1.3 billion. The allowance for loan losses was $1.103 billion, or 1.43% of loans, versus $1.341 billion, or 1.80%.
  • Balance sheet and funding: Loans grew $2.7 billion, or 4%, to $77.3 billion. Deposits increased $1.7 billion to $94.2 billion, with growth in low-cost transaction and savings balances offsetting lower time deposits. Long-term borrowings declined $1.4 billion to $3.5 billion; total borrowed funds were $5.7 billion. Cash and cash equivalents were $4.0 billion, down from $5.3 billion.
  • Cash flow: Operating activities provided $2.096 billion; investing activities used $3.770 billion; financing activities provided $405 million. Cash and cash equivalents decreased $1.269 billion during the year.
  • Capital and liquidity: Regions reported Basel I Tier 1 and total risk-based capital ratios of 12.54% and 15.26%; estimated fully phased-in Basel III CET1 was 11.00%. Regions and Regions Bank were described as well-capitalized. The bank had a loan-to-deposit ratio of 82%; parent cash was $1.9 billion, and reported borrowing availability was $21.3 billion at the Federal Reserve and $9.9 billion at the FHLB.

Material changes versus 2013

  • Mortgage income fell $87 million, or 36%, to $149 million, primarily as mortgage production slowed and mortgage servicing rights valuation declined. Deposit service charges fell $39 million; card and ATM fees rose $15 million.
  • Credit quality improved materially, including lower charge-offs, non-performing assets and troubled debt restructurings. Commercial and industrial loans grew $3.3 billion; indirect loans grew $567 million.
  • Lower deposit and borrowing costs supported margin: total deposit cost fell to 11 basis points from 15 basis points, while long-term borrowings declined. Lower asset yields continued to constrain earnings potential.
  • Stockholders’ equity rose to $17.0 billion from $15.8 billion, reflecting earnings and a $486 million net preferred-stock issuance, partly offset by common share repurchases and dividends. Regions repurchased approximately 25 million shares for $248 million during 2014 under a $350 million plan; it completed the plan in February 2015 with another approximately 11 million shares repurchased for $102 million.

Outlook, commentary, risks and unusual items

  • Management outlook: Management expected 2015 year-end loan growth of 4%–6% and anticipated further improvement in non-performing assets and net charge-offs. If rates rose moderately alongside loan growth, management expected margin to remain stable to moderately higher; if rates stayed near year-end 2014 levels, it estimated 10–12 basis points of margin pressure during 2015. These are expectations, not guarantees.
  • Q4 and other notable items: Fourth-quarter non-interest expense included a $100 million contingent legal and regulatory accrual and $16 million of branch-consolidation charges; a $35 million gain on sale of modified residential mortgage loans partly offset costs. Regions recorded $93 million of professional, legal and regulatory expense for 2014, including the $100 million accrual and a recovery related to a matter settled below its prior estimate. It also announced 50 branch consolidations in Q4 2014.
  • Legal and regulatory exposure: Regions Bank entered a joint consent order with the Federal Reserve and Alabama State Banking Department and a deferred prosecution agreement with the SEC in June 2014. The company reported cooperation with government inquiries concerning FHA mortgage origination and underwriting and Fannie Mae/Freddie Mac loans. It estimated reasonably possible losses in excess of accruals of up to approximately $160 million, while noting actual outcomes could differ. The Morgan Keegan sale indemnification liability was approximately $206 million at year-end.
  • Industry and portfolio risks: The filing highlights sensitivity to low or changing interest rates, deposit competition, economic conditions in Regions’ Southeastern footprint, residential and commercial real estate, and commodity prices. Energy-related lending was approximately $3.4 billion including indirect exposures; falling oil prices late in 2014 could pressure borrowers and collateral. Approximately $4.7 billion of home equity loans and lines were in second-lien positions.
  • Other risks and constraints: Regions identified cyber and operational risk, litigation, regulatory and consumer-compliance costs, capital and liquidity rules, and rating-related funding costs. Moody’s rated Regions Financial Corporation senior notes Ba1; the filing notes this rating was below investment grade. Regions expected to meet the modified liquidity coverage requirements without material balance-sheet changes, subject to future conditions.
  • Accounting item to reconcile: The filing’s MD&A estimates a $110–$125 million reduction to retained earnings from adopting the affordable-housing investment accounting guidance in 2015, while Note 1 says the cumulative effect was not material. The filing text does not reconcile these statements; verify the adoption impact in subsequent reporting.
  • Controls and audit: Management and the independent auditor concluded internal control over financial reporting was effective as of December 31, 2014. The auditor issued an unqualified opinion on the consolidated financial statements.

Most important facts for investors to verify

  1. Whether 2015 loan growth, credit improvement and the margin outlook materialized, particularly under actual interest-rate conditions.
  2. Trends in energy borrower performance, second-lien home equity exposure, criticized loans and the adequacy of the allowance.
  3. Resolution and financial consequences of the regulatory orders, mortgage investigations, other legal matters and Morgan Keegan indemnification claims, including whether losses exceed recorded accruals.
  4. The actual retained-earnings and income-statement effects of the affordable-housing accounting adoption, given the inconsistent estimates in this filing.
  5. Capital and liquidity capacity under Basel III, CCAR and liquidity requirements, and any effect on dividends, repurchases or funding costs.