Regions Financial Corporation reported earnings for the quarter and year ended December 31, 2012.

Key points:

• Reported net income available to common shareholders of $261 million or $0.18 per diluted share as compared to $301 million or $0.21 per diluted share in the third quarter
  • Reported net income from continuing operations available to common shareholders of $273 million or $0.19 per diluted share
  • Adjusted net income available to common shareholders from continuing operations¹ was $311 million or $0.22 per diluted share as compared to $312 million or $0.22 per diluted share in the third quarter
• Reported full year 2012 net income from continuing operations available to common shareholders of $1.1 billion or $0.76 per diluted share
• Adjusted pre-tax pre-provision income¹ (PPI) from continuing operations totaled $493 million, a 5 percent increase from the prior quarter
  • Net interest income was stable and totaled $818 million; the resulting net interest margin was 3.10 percent
  • Non-interest revenue was $536 million, a 1 percent increase on a linked quarter basis. Total revenue was $1.35 billion, stable linked quarter
  • Non-interest expenses totaled $902 million, reflecting a 4 percent increase linked quarter. Adjusted non-interest expenses¹ decreased$20 million, or 2 percent linked quarter.
• Asset quality improvement continues
  • Non-performing assets declined $296 million or 13 percent linked quarter; inflows of non-performing loans amounted to $350 million, down 24% linked quarter
  • Net charge-offs of $180 million decreased 31 percent linked quarter to 96 basis points; loan loss provision of $37 million was $143 million less than net charge-offs
  • Business services criticized loans declined $639 million linked quarter or 12 percent
  • Allowance for loan losses as a percentage of loans declined 15 basis points linked quarter to 2.59 percent, while the ratio of allowance for loan losses to non-performing loans increased 5 basis points to 1.14x
• Balance sheet
  • Funding mix continued to improve as low-cost deposits grew $2.1 billion linked quarter and higher cost time deposits declined $1.5 billion
  • Deposit costs declined to 22 basis points, down 6 basis points from third quarter and 18 basis points from the prior year
  • Loan growth in the middle market commercial and industrial and indirect auto portfolios continued, with average loans up 1.5 percent and 6.7 percent linked quarter, respectively. Average total loans decreased 1.4 percent linked quarter due to continued business and consumer deleveraging.
  • Loan yields were up 3 basis points linked quarter to 4.21 percent
• Capital and liquidity positions remain strong
  • Solid capital position with an estimated Tier 1 ratio of 12.0 percent and Tier 1 Common ratio¹ of 10.8 percent at December 31, 2012
  • Successfully issued depositary shares representing preferred stock of $500 million, redeemed $345 million of trust preferred securities, and extinguished a $203 million liability associated with an investment by a third party in a subsidiary
  • Tangible common book value per share¹ was $7.11, an increase of $0.09 from the prior quarter
  • Liquidity position remains strong with a low loan-to-deposit ratio of 78 percent

Building a foundation for sustainable growth

Regions reported fourth quarter net income available to common shareholders of $261 million or $0.18 per diluted share and net income available to common shareholders from continuing operations of $273 million or $0.19 per diluted share.

Adjusted net income available to common shareholders from continuing operations¹, which excludes costs resulting from the termination of a third party investment in a subsidiary, was $311 million or $0.22 per diluted share as compared to $312 million or $0.22 cents per diluted share in the third quarter. Adjusted pre-tax pre-provision income¹ totaled $493 million, up $24 million linked quarter.

"Although challenging economic headwinds persist, Regions has maintained an intense focus on meeting the needs of our customers," said Grayson Hall, president and CEO. "I am pleased with the progress we made in 2012 and am encouraged that our efforts are building a strong foundation for sustainable growth in 2013 and beyond."

To help drive its growth efforts, the company recently launched Regions360, a unique relationship banking model that begins with a full and detailed view of customers' financial situation and deepens those relationships through assisting customers in achieving their financial goals and helping them succeed financially. The model is backed by a robust suite of management practices and tools that include systematic referrals across business lines, standardized implementation of proven best practices, training and certification for providing customers with advice and guidance, as well as detailed measurement through a standard performance dashboard based on the company's successful service quality improvement effort. Through Regions360, the company expects to maximize opportunities to cross-sell throughout its consumer services, business, and Wealth Management lines of business.

In addition, new products, services, and channel capabilities that broaden Regions appeal and contribute to customer growth have been introduced and will continue into 2013. These include:

• Completed roll out of Now Banking, the first comprehensive suite of solutions for underserved households is growing customers at a rate of 10 percent per month
• Newly launched Regions "E-Access account" designed for customers who bank using online, mobile and cards
• Improved the digital experience with new mobile apps, including iPads, enhanced person-to-person payments with mobile cash back rewards, introduction of Regions My GreenInsights personal financial management tools, and improved online account opening and payment capabilities
• First quarter roll out of an industry leading mobile check deposit solution and check cashing at ATMs allowing customers to fund accounts from anywhere and access funds immediately
• New Front Counter and Teller Image, along with a new sales and service platform designed to drive cost efficiencies, improve customer experience and increase sales effectiveness
• Continued to expand the Wealth Management line of business; through an agreement with a third party vendor, Regions will offer a full suite of financial planning and investment services through its branch network to better meet the needs of mass-affluent customers and families

Continued growth in middle market commercial and industrial and indirect auto lending offset by declines in other loan portfolios as customers continue to deleverage

Commercial and industrial loans experienced continued growth in the fourth quarter, particularly in lending to middle market customers. Average loans in this category were up 1.5 percent compared to the prior quarter and 8.7 percent over the same period last year. Total commercial and industrial commitments grew $1.4 billion, or 4.2 percent linked quarter, while commercial loan production (including renewals) totaled $10.4 billion, of which $4.3 billion were new loan originations.

Strong growth in indirect auto loan production and continued steady performance in commercial and industrial lending partially offset anticipated declines in real estate loans and continued deleveraging among both commercial clients and consumers. Average loans declined 1.4 percent sequentially driven by declines in investor real estate and commercial owner-occupied loans. Investor real estate now comprises 10 percent of the total loan portfolio compared to 14 percent one year ago.

Consumer loan production totaled $2.9 billion in the fourth quarter, which is an increase of 21 percent over the prior year. Indirect auto loans experienced an increase in average balances of 6.7 percent linked quarter. This was offset by declines in the residential mortgage and home equity portfolios as consumers continue to pay down debt. As an extension of the bank's growing indirect auto business, Regions recently launched theRegions Auto Center and Auto Buying Service, allowing customers to research, shop for, finance, and insure a vehicle through the Regions Auto Centerhoused on the company's website.

The company's aggregate loan yield was up 3 basis points linked quarter to 4.21 percent, driven primarily by interest recoveries on non-accrual loans.

Funding mix improvement continues to drive decline in deposit costs

Average low-cost deposits grew 1.9 percent linked quarter while higher cost time deposits declined 8.5 percent. This continued shift drove an improvement in the company's funding mix during the quarter, as average low-cost deposits as a percentage of total deposits rose to 86 percent compared to 80 percent last year. This positive mix shift resulted in deposit costs declining to 22 basis points for the quarter, down 6 basis points from third quarter and 18 basis points from last year. Total funding costs declined to 50 basis points, down 18 basis points from one year ago.

Taxable equivalent net interest income was $831 million, a $1 million increase linked quarter. The resulting net interest margin expanded 2 basis points linked quarter to 3.10 percent, primarily attributable to interest recoveries and lower deposit costs.

Service charges income drives growth in non-interest revenue; continued focus on expense management

Non-interest revenues totaled $536 million, up 1 percent linked quarter. Service charges income increased to $254 million, which is 4 percent higher than the prior quarter. Mortgage production for the quarter was approximately $2.1 billion, an 18 percent increase from the prior year. HARP II loan production year-to-date was $1.6 billion, surpassing the full year company goal of $1 billion in HARP II loans. As of the end of the quarter, analysis indicated that less than approximately 20 percent of HARP-eligible loans have refinanced. Throughout 2012 approximately 50 percent of HARP II applications were for homeowners whose mortgage was not originally serviced by Regions. Customers continue to take advantage of the low interest rate environment through traditional and HARP II mortgages for both refinancing and new home purchases.

Additionally, non-interest revenue has also benefited from the Now Banking suite of products, which was developed to meet the needs of consumers who rely on check cashing services, money remittance, money orders and prepaid cards, either in addition to or in place of a checking account. The number of customers utilizing the products has grown by approximately 25,000 customers a month since the launch of Now Banking in the first quarter of 2012.

Adjusted non-interest expenses¹ were $849 million, a decrease of $20 million linked quarter and $22 million or 2.5 percent from the prior year. OnNovember 30, 2012, Regions entered into an agreement with a third party investor in Regions Asset Management Company, Inc., a real estate investment trust, pursuant to which the investment was fully redeemed. This resulted in extinguishing a $203 million liability, including accrued, unpaid interest, as well as incurring early termination costs of approximately $42 million on a pre-tax basis and $38 million on an after-tax basis for the fourth quarter. Excluding the early termination costs, during 2012 Regions incurred approximately $28 million of non-interest expenses related to this liability. Additionally, during the quarter professional and legal expenses benefitted from a $20 million decrease in legal reserves.

Asset quality improvement continues

Asset quality continued to improve in the fourth quarter. The provision for loan losses totaled $37 million or $143 million less than net charge-offs. Total net charge-offs decreased linked quarter by 31 percent, or $82 million, to $180 million, the lowest level in almost five years. Net charge-offs as a percentage of total average loans decreased to 0.96 percent, below 1 percent for the first time in over four years. The company's loan loss allowance to non-performing loan coverage ratio was 1.14x and the allowance for loan losses as a percentage of loans was 2.59 percent as of December 31, 2012.

Non-performing assets totaled $1.9 billion and were down $296 million or 13 percent linked quarter. Inflows of non-performing loans were $350 million, down $211 million or 38 percent from the prior year. Business Services criticized loans also declined 12 percent in the quarter and are down 29 percent year-over-year.

Strong capital and solid liquidity

Tier 1 and Tier 1 common¹ capital ratios remained strong, ending the fourth quarter at an estimated 12.0 percent and 10.8 percent, respectively. Additionally in the quarter, the company completed an offering of depositary shares representing preferred stock of $500 million, and part of the proceeds were used to redeem $345 million of trust preferred securities.

The company's liquidity position at both the bank and the holding company remains solid. As of December 31, 2012, the company's loan-to-deposit ratio was 78 percent. Tangible common book value per share reached $7.11 for the fourth quarter, up from $7.02 in the prior quarter.