Regions Financial Corporation — FY2012 Form 10-K
Reporting period: Year ended December 31, 2012; filed February 21, 2013. Figures are generally in U.S. dollars. Regions is a bank holding company headquartered in Birmingham, Alabama, operating primarily in the South, Midwest and Texas. It reported $121.3 billion in assets and $95.5 billion in deposits at year-end.
Financial results and condition
| Metric | FY2012 / year-end 2012 | FY2011 / year-end 2011 |
|---|---|---|
| Net income (loss) | $1.120 billion | $(215) million |
| Net income (loss) available to common shareholders | $991 million; diluted EPS $0.71 | $(429) million; diluted EPS $(0.34) |
| Continuing-operations income available to common shareholders | $1.050 billion; diluted EPS $0.76 | $(25) million; diluted EPS $(0.02) |
| Net interest income | $3.300 billion | $3.410 billion |
| Non-interest income / expense | $2.100 billion / $3.526 billion | $2.143 billion / $3.862 billion |
| Net interest margin, taxable-equivalent basis | 3.11% | 3.07% |
| Provision for loan losses | $213 million | $1.530 billion |
| Net charge-offs | $1.039 billion; 1.37% of average loans | $1.970 billion; 2.44% |
| Non-performing assets | $1.919 billion | $2.996 billion |
| Loans / allowance for loan losses | $73.995 billion / $1.919 billion; allowance 2.59% of loans | $77.594 billion / $2.745 billion; allowance 3.54% |
| Assets / deposits / stockholders’ equity | $121.347 billion / $95.474 billion / $15.499 billion | $127.050 billion / $95.627 billion / $16.499 billion |
| Long-term debt / total borrowed funds | $5.861 billion / $7.435 billion | $8.110 billion / $11.177 billion |
| Regulatory capital ratios | Tier 1 12.00%; total capital 15.38%; leverage 9.65%; Tier 1 common 10.84% | Tier 1 13.28%; total capital 16.99%; leverage 9.91%; Tier 1 common 8.51% |
Cash flow: Net cash from operating activities was $2.441 billion, investing activities provided $1.007 billion, and financing activities used $5.204 billion. Cash and cash equivalents declined $1.756 billion to $5.489 billion. Management reported $857 million of parent-company cash, more than $3.5 billion on deposit at the Federal Reserve, $19.6 billion of Federal Reserve borrowing capacity and $6.7 billion of FHLB capacity, subject to available collateral. The loan-to-deposit ratio was 78%.
Margins and expenses: The efficiency ratio was 64.42% (non-GAAP). Deposit costs fell to 0.30% from 0.49%, helping lift margin, but average earning assets fell to $107.8 billion from $112.2 billion. Net interest income declined despite lower funding costs.
Material changes versus the prior comparable period
- Regions returned to profitability, with net income of $1.120 billion versus a $215 million loss in 2011. The improvement chiefly reflected the sharp reduction in loan-loss provision and the absence of 2011 goodwill impairment charges.
- Credit measures improved: net charge-offs fell 47%, non-performing assets fell 36%, and the provision for loan losses fell to $213 million. Investor real estate loans declined 28% to $7.7 billion.
- Total loans decreased $3.6 billion, or 4.6%, mainly from investor real estate run-off and consumer deleveraging. Commercial and industrial loans and indirect auto lending grew. Deposits were nearly flat, while low-cost deposits rose 7.6% to $82.0 billion and time deposits declined.
- Net interest income declined $110 million on a GAAP basis; taxable-equivalent net interest income fell $95 million. Non-interest income declined $43 million, including lower service charges and securities gains; mortgage income increased.
- Non-interest expense declined $336 million. The 2011 comparison included a $253 million continuing-operations goodwill impairment and $75 million in branch consolidation charges. 2012 expense included higher compensation and a $42 million REIT investment termination cost.
Outlook, management commentary, risks and unusual items
- Outlook: Management expected net charge-offs to continue improving in 2013, while noting that economic conditions, real estate values, interest rates, unemployment and large individual credits could cause volatility. It described growth in net interest income and margin as challenging if low-rate, low-growth conditions persisted, but cited further deposit-cost reductions and liability management as potential offsets.
- Economic outlook: The filing anticipated U.S. GDP growth of approximately 2.0% in 2013, with slower growth in the first half and faster growth in the second. Fiscal policy, European risks and persistently high unemployment were identified as downside risks.
- Interest-rate exposure: Regions characterized its balance sheet as moderately asset sensitive. Its modeled annual net interest income impact for a 100-basis-point rise was +$216 million under gradual change and +$262 million under an instantaneous shift; a 50-basis-point decline was estimated to reduce it by $112 million and $135 million, respectively. These are scenario estimates, not forecasts.
- Regulation and capital: Regions estimated a Basel III Tier 1 common ratio of approximately 8.87% at year-end, above the cited 7% fully phased-in minimum, based on proposed rules and company assumptions. The Federal Reserve had delayed the proposed rules’ effective date indefinitely as of the filing. Regions submitted its 2013 capital plan in January 2013; the Federal Reserve’s response was expected by March 14, 2013. The company said it anticipated meeting the proposed liquidity coverage requirements, while emphasizing that final rules and implementation remained uncertain.
- Capital actions: Regions issued $875 million of common equity in March 2012 and repurchased $3.5 billion of Treasury TARP preferred stock in April, eliminating $175 million in annual preferred dividends. It repurchased the related Treasury warrant for $45 million. In November, it issued $500 million of 6.375% non-cumulative preferred stock and redeemed approximately $345 million of 8.875% trust preferred securities. Common dividends were $0.04 per share for the year and remained subject to board and regulatory review.
- Morgan Keegan sale and indemnity: The sale to Raymond James closed April 2, 2012 for $1.2 billion. Regions recorded a $19 million pre-tax gain, but retained indemnification obligations for pre-closing litigation. The obligation’s year-end carrying value was $345 million and estimated fair value $329 million; the maximum potential payments are indeterminable. Regions estimated reasonably possible losses above accrued amounts of up to approximately $40 million across certain matters, including indemnified matters. A February 2013 SEC-related court judgment ordered Morgan Keegan to pay a minimal penalty and repurchase certain auction-rate securities still held by plaintiffs; the matter falls under the indemnity.
- Other risks and contingencies: Key exposures include Southeastern U.S. economic and real estate conditions; Florida second-lien home equity lending; funding and deposit outflows; interest-rate and prepayment risk; regulatory capital and liquidity changes; litigation; deferred tax asset realizability; and operational, cyber and third-party service risks. Regions disclosed denial-of-service attacks in October and December 2012 that disrupted website access, but reported no client-data breach. Management said pending litigation was not expected to materially affect the company as a whole, while acknowledging that an adverse outcome could be material in a particular reporting period.
- Unusual accounting matters: Regions reported $763 million in net deferred tax assets and a $70 million valuation allowance. Goodwill was $4.816 billion; the 2012 annual impairment test found no impairment, though reporting units had limited valuation headroom in places. The 2011 goodwill impairment totaled $745 million, including discontinued operations. The filing also disclosed an immaterial reclassification of prior-period dividend entries between retained earnings and additional paid-in capital, with no impact on total equity or regulatory capital.
Most important facts for investors to verify
- Whether credit improvement continued after 2012 and whether the lower provision and charge-offs were sustainable; review potential problem commercial and investor real estate loans, reported at $250–$350 million.
- Whether the $1.919 billion non-performing asset balance and $1.919 billion allowance adequately reflect residual real estate and Florida second-lien risks; compare allowance coverage and subsequent charge-offs.
- Whether core deposit growth and lower deposit costs can offset shrinking earning assets and securities yields, and how actual results compare with Regions’ interest-rate sensitivity scenarios.
- How the Morgan Keegan indemnity develops, including legal costs, settlements, the auction-rate securities judgment and any payments beyond the recorded obligation.
- Whether capital distributions, dividends and capital ratios remain supported by regulatory approvals and final Basel III and stress-test requirements; note the 2012 common-equity issuance and share-count increase.
- Whether deferred tax assets, goodwill valuations and other significant estimates remain recoverable under actual earnings, credit and market conditions.
- Confirm the cash-flow, liquidity and debt figures against the audited statements and notes. The independent auditor issued an unqualified opinion on the financial statements and internal controls were reported effective as of December 31, 2012.