REGIONS FINANCIAL CORP annual report, FY2013

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Regions Financial Corporation — FY 2013 Form 10-K

Reporting period: Fiscal year ended December 31, 2013; filed February 21, 2014. Regions is a financial holding company headquartered in Birmingham, Alabama, with banking operations across the South, Midwest and Texas.

Financial performance and condition

  • Earnings: Net income was $1.122 billion, versus $1.120 billion in 2012. Net income available to common shareholders rose to $1.090 billion from $991 million; diluted EPS was $0.77 versus $0.71. Continuing-operations diluted EPS was $0.78 versus $0.76.
  • Revenue and margin: Net interest income was $3.262 billion, down from $3.300 billion; taxable-equivalent net interest income was $3.316 billion versus $3.350 billion. Net interest margin increased to 3.20% from 3.11%, mainly as lower deposit costs and a shift toward lower-cost deposits offset weaker asset yields. Non-interest income declined to $2.019 billion from $2.100 billion.
  • Expenses and profitability: Non-interest expense increased to $3.556 billion from $3.526 billion. The adjusted efficiency ratio (non-GAAP) was 65.42%, compared with 64.42%. Return on average assets from continuing operations was 0.94%, up from 0.86%.
  • Credit: Provision for loan losses fell to $138 million from $213 million. Net charge-offs were $716 million, or 0.96% of average loans, versus $1.039 billion, or 1.37%. Non-performing assets fell to $1.3 billion from $1.9 billion. The allowance for loan losses declined to $1.341 billion, or 1.80% of loans, from $1.919 billion, or 2.59%.
  • Balance sheet: Year-end assets were $117.4 billion, down 3% from $121.3 billion; loans were $74.6 billion, up $614 million; deposits were $92.5 billion, down from $95.5 billion. Stockholders’ equity was $15.8 billion.
  • Capital: Regions reported Tier 1 and total risk-based capital ratios of 11.68% and 14.73%, respectively, and a leverage ratio of 10.03%. Its estimated fully phased-in Basel III CET1 ratio was 10.58% (non-GAAP estimate).
  • Debt and liquidity: Long-term borrowings declined to $4.830 billion from $5.861 billion; total borrowings were $7.012 billion. Cash and cash equivalents were $5.273 billion. Regions Bank held more than $3.6 billion on deposit with the Federal Reserve; the loan-to-deposit ratio was 81%. Available borrowing capacity was $22.2 billion at the Federal Reserve and $9.6 billion at the FHLB, in each case subject to available collateral; the company also reported about $10.5 billion of unencumbered liquid securities.
  • Cash flows: Operating activities provided $3.799 billion; investing activities used $125 million; financing activities used $3.890 billion. Cash and cash equivalents decreased $216 million during the year. These figures reflect banking balance-sheet activity and should be considered alongside the balance sheet and funding disclosures.

Changes versus prior period and notable items

  • Credit measures improved substantially, continuing a multiyear reduction in problem assets. Commercial and industrial loans grew $2.7 billion; total loans recorded the first annual net growth since 2008. Real-estate-based lending declined as a share of the portfolio.
  • Mortgage income fell $127 million to $236 million, with mortgage production down 18% to $6.6 billion as higher rates slowed demand. Deposit costs fell to 15 basis points from 30 basis points.
  • Fourth-quarter 2013 net income available to common shareholders was $219 million and diluted EPS was $0.16, versus $261 million and $0.18 in fourth-quarter 2012. Fourth-quarter provision expense increased to $79 million from $37 million.
  • Fourth-quarter expense included a $58 million non-tax-deductible regulatory charge related to government inquiries concerning 2009 matters, plus $5 million of branch-consolidation charges. Full-year expense also included $61 million of losses on early extinguishment of debt.
  • Regions transferred primarily accruing restructured residential mortgages with a $686 million book value to held-for-sale status at an estimated $535 million fair value, recording a $151 million charge-off.
  • The securities portfolio declined to $23.8 billion from $27.3 billion. Regions transferred $2.4 billion of available-for-sale securities to held-to-maturity; year-end available-for-sale securities had a $34 million net unrealized loss, compared with a $701 million net unrealized gain at year-end 2012.
  • Regions repurchased about 36 million common shares for $340 million under its authorized $350 million plan. The quarterly common dividend increased from $0.01 to $0.03 during 2013; annual dividends declared were $0.10 per share.

Outlook, risks and contingencies

  • Management outlook: Management expected 2014 loan growth of 3%–5%, relatively stable net interest margin if year-end 2013 economic conditions and rates persisted, and further improvement in net charge-offs and non-performing assets. The filing’s economic discussion anticipated U.S. real GDP growth of about 3% in 2014; this is an economic forecast, not company earnings guidance.
  • Regulatory capital and liquidity: Basel III requirements were scheduled to begin phasing in during 2015, with the 2.5% capital conservation buffer fully phased in by 2019. The proposed modified liquidity coverage ratio was expected to phase in from 2015 through 2017. Regions said it expected to comply, but noted that changes in cash or investment mix could affect compliance. Capital distributions remain subject to Federal Reserve review and approval.
  • Legal and regulatory exposure: The $58 million charge relates to unresolved inquiries; Regions stated that any eventual resolution could exceed the amount recorded. A HUD Inspector General/Department of Justice inquiry into FHA mortgage origination was in an early stage, with outcome not predictable. Separately, Regions estimated it was reasonably possible to incur up to approximately $100 million in aggregate losses above accruals on disclosed legal contingencies, while noting estimates may not cover every matter.
  • Morgan Keegan indemnity: Regions’ obligation to indemnify Raymond James for certain pre-sale legal matters had a $260 million carrying value at year-end. Actual liability could exceed the reserve; the obligation’s maximum potential amount was indeterminable.
  • Principal business risks: Exposure to economic conditions and real-estate values in the Southeast; credit losses, including second-lien home-equity exposure; deposit competition and low-rate pressure on earnings; interest-rate and prepayment sensitivity; below-investment-grade Moody’s rating on parent long-term debt; litigation and regulatory costs; cyberattacks and third-party service interruptions; and potential goodwill or deferred-tax-asset impairment.
  • Unusual operational disclosure: Regions reported denial-of-service attacks during 2013 that affected website performance and access, but said client data and account information remained secure.

Investor verification priorities

  1. Review the full notes on government inquiries, the FHA investigation, litigation estimates and the Raymond James indemnity; compare recorded reserves with potential outcomes.
  2. Assess whether falling allowance and provision levels remain adequate relative to portfolio mix, charge-offs, TDRs, potential problem loans and the mortgage transfer charge-off.
  3. Verify the assumptions behind management’s 2014 loan-growth, margin and credit-quality outlook, and monitor deposit trends and funding costs.
  4. Reconcile reported capital ratios with the estimated Basel III ratio and track regulatory approval of capital distributions and implementation of liquidity rules.
  5. Evaluate securities valuation and interest-rate exposure, including unrealized losses, the held-to-maturity transfer, mortgage servicing rights and the disclosed sensitivity of net interest income.
  6. Consider that audited financial statements received an unqualified opinion and management and the auditor reported effective internal control over financial reporting as of December 31, 2013.