RF

Business Context and Reporting Period

Company: Regions Financial Corporation (Regions)
Filing Type: Form 10-K (Annual Report)
Period Ended: December 31, 2010
Overview: Regions is a financial holding company headquartered in Birmingham, Alabama, operating throughout the South, Midwest, and Texas. It provides commercial, retail, and mortgage banking services, as well as investment banking, asset management, and insurance services through subsidiaries including Morgan Keegan & Company, Inc. and Regions Insurance Group, Inc. As of December 31, 2010, the company reported total consolidated assets of approximately $132.4 billion and total consolidated deposits of approximately $94.6 billion.

Key Financial Metrics

Material Changes Versus Prior Period

• Reduced Losses: The net loss available to common shareholders improved by approximately $500 million compared to 2009, driven primarily by a decrease in the provision for loan losses ($2.9 billion in 2010 vs. $3.5 billion in 2009) and an increase in net interest income.
• Margin Expansion: Net interest margin expanded to 2.90% from 2.67% in 2009. This was achieved through a significant reduction in the cost of interest-bearing liabilities (deposit costs fell from 1.35% to 0.78%), which offset a decline in asset yields due to the low interest rate environment.
• Asset Reduction: Total loans decreased by $7.8 billion (8.6%), reflecting a strategic decision to reduce exposure to investor real estate and consumer deleveraging. Total assets decreased by approximately $10 billion.
• Expense Increases: Non-interest expense increased by $234 million, largely due to a $200 million non-deductible regulatory charge related to Morgan Keegan, increased FDIC premiums, and higher costs associated with other real estate owned (OREO).
• Credit Quality: While non-performing assets decreased by $494 million to $3.9 billion, net charge-offs increased to $2.8 billion (3.22% of average loans) compared to $2.3 billion (2.38%) in 2009, reflecting the seasoning of losses and opportunistic asset dispositions.

Guidance, Outlook, Risks, and Unusual Items

• Regulatory Charge: A significant unusual item was a $200 million regulatory charge recorded in 2010 related to administrative proceedings against Morgan Keegan regarding certain funds previously administered. This charge was non-deductible for tax purposes.
• Dividend Policy: Regions reduced its quarterly common stock dividend to $0.01 per share and does not expect to increase it above this level for the foreseeable future. This is partly due to restrictions under the U.S. Treasury's Capital Purchase Program (TARP/CPP), which limits dividends to $0.10 per share without Treasury consent until the preferred stock is redeemed or transferred.
• Regulatory Environment: The company faces significant uncertainty and potential cost increases from the Dodd-Frank Wall Street Reform and Consumer Protection Act and Basel III capital requirements. Proposed rules on debit card interchange fees could reduce revenues from this source to approximately one-quarter of current levels.
• Credit Outlook: Management expects credit costs to remain elevated compared to historical levels due to high unemployment and pressured property valuations, particularly in Florida and the Southeast. However, credit metrics are trending favorably.
• Capital Position: Regions remains well-capitalized, exceeding all regulatory requirements. Pro forma Basel III ratios are projected to be above minimums, though the full impact of new regulations is not yet known.

Key Facts for Investor Verification

• TARP Participation: Verify the status of the $3.5 billion Series A Preferred Stock issued to the U.S. Treasury and the associated restrictions on dividends and share repurchases.
• Investor Real Estate Exposure: Confirm the current balance and credit quality of the investor real estate portfolio, which represents a significant concentration of risk, particularly in Florida.
• Regulatory Charges: Monitor the status of the $200 million Morgan Keegan regulatory charge and any potential additional litigation or settlement costs.
• Debit Card Revenue: Assess the potential impact of final Dodd-Frank interchange fee regulations on non-interest income, as current revenues could be significantly reduced.
• FDIC Assessments: Verify the impact of the new FDIC assessment rule (effective April 2011), which changes the assessment base from deposits to average consolidated assets less tangible equity, likely increasing future expenses.