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RF > SEC Filings for RF > Form 10-Q on 8-May-2013All Recent SEC Filings

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Form 10-Q for REGIONS FINANCIAL CORP


8-May-2013

Quarterly Report


Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations

INTRODUCTION
The following discussion and analysis is part of Regions Financial Corporation's ("Regions" or "the Company") Quarterly Report on Form 10-Q to the Securities and Exchange Commission ("SEC") and updates Regions' Form 10-K for the year ended December 31, 2012, which was previously filed with the SEC. This financial information is presented to aid in understanding Regions' financial position and results of operations and should be read together with the financial information contained in the Form 10-K. Certain prior period amounts presented in this discussion and analysis have been reclassified to conform to current period classifications, except as otherwise noted. The emphasis of this discussion will be on the three months ended March 31, 2013 compared to the three months ended March 31, 2012 for the statement of income. For the balance sheet, the emphasis of this discussion will be the balances as of March 31, 2013 compared to December 31, 2012.
This discussion and analysis contains statements that may be considered "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. See pages 3 and 4 for additional information regarding forward-looking statements.

CORPORATE PROFILE
Regions is a financial holding company headquartered in Birmingham, Alabama, which operates throughout the South, Midwest and Texas. Regions provides traditional commercial, retail and mortgage banking services, as well as other financial services in the fields of asset management, wealth management, securities brokerage, insurance and other specialty financing. Regions conducts its banking operations through Regions Bank, an Alabama chartered commercial bank that is a member of the Federal Reserve System. At March 31, 2013, Regions operated 1,709 total branch outlets in Alabama, Arkansas, Florida, Georgia, Illinois, Indiana, Iowa, Kentucky, Louisiana, Mississippi, Missouri, North Carolina, South Carolina, Tennessee, Texas and Virginia. Regions operates under three business segments: Business Services, Consumer Services, and Wealth Management with the remainder split between Discontinued Operations and Other. See Note 14 "Business Segment Information" to the consolidated financial statements for more information regarding Regions' segment reporting structure. Regions also provides full-line insurance brokerage services primarily through Regions Insurance, Inc. which is included in the Wealth Management segment.
On January 11, 2012, Regions entered into a stock purchase agreement to sell Morgan Keegan & Company, Inc. ("Morgan Keegan") and related affiliates to Raymond James Financial, Inc. ("Raymond James"). The sale closed on April 2, 2012. Regions Investment Management, Inc. and Regions Trust were not included in the sale; they are included in the Wealth Management segment. See Note 2 "Discontinued Operations" to the consolidated financial statements for further discussion.
Regions' profitability, like that of many other financial institutions, is dependent on its ability to generate revenue from net interest income and non-interest income sources. Net interest income is the difference between the interest income Regions receives on interest-earning assets, such as loans and securities, and the interest expense Regions pays on interest-bearing liabilities, principally deposits and borrowings. Regions' net interest income is impacted by the size and mix of its balance sheet components and the interest rate spread between interest earned on its assets and interest paid on its liabilities. Non-interest income includes fees from service charges on deposit accounts, mortgage servicing and secondary marketing, trust and asset management activities, insurance activities, capital markets, and other customer services, which Regions provides. Results of operations are also affected by the provision for loan losses and non-interest expenses such as salaries and employee benefits, occupancy, professional fees, deposit administrative fees, other real estate owned and other operating expenses, as well as income taxes.

Economic conditions, competition, new legislation and related rules impacting regulation of the financial services industry and the monetary and fiscal policies of the Federal government significantly affect most financial institutions, including Regions. Lending and deposit activities and fee income generation are influenced by levels of business spending and investment, consumer income, consumer spending and savings, capital market activities, and competition among financial institutions, as well as customer preferences, interest rate conditions and prevailing market rates on competing products in Regions' market areas.
Regions' business strategy has been and continues to be focused on providing a competitive mix of products and services, delivering quality customer service and maintaining a branch distribution network with offices in convenient locations.


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FIRST QUARTER OVERVIEW
Regions reported net income available to common shareholders of $327 million, or $0.23 per diluted share, in the first quarter of 2013 compared to net income available to common shareholders of $145 million, or $0.11 per diluted share, in the first quarter of 2012. A significant decline in the first quarter 2013 provision for loan losses, decreased non-interest expenses, and decreased expense on preferred stock were the drivers of the improvement in results from the prior year period.
For the first quarter of 2013, net interest income (taxable-equivalent basis) from continuing operations totaled $811 million compared to $839 million in the first quarter of 2012. The net interest margin (taxable-equivalent basis) was 3.13 percent in the first quarter of 2013 compared to 3.09 percent in the first quarter of 2012. A smaller balance sheet, marked by a decline in loan volumes and average earning assets, and lower yields on both loans and securities, contributed to the decline in net interest income. The net interest margin increased primarily as a result of lower levels of non-accrual loans, a decline in lower yielding other interest-earning assets and continued improvement in deposit costs. Deposit costs were 18 basis points for the first quarter of 2013, as compared to 37 basis points for the first quarter of 2012.
The provision for loan losses totaled $10 million in the first quarter of 2013 compared to $117 million during the first quarter of 2012. Credit metrics, including net charge-offs, non-accrual, criticized and classified loan balances, and inflows of non-performing loans showed continued improving trends through the first three months of 2013 compared to 2012.
Net charge-offs totaled $180 million, or an annualized 0.99 percent of average loans, in the first quarter of 2013, compared to $332 million, or an annualized 1.73 percent for the first quarter of 2012. Net charge-offs were lower across most major loan categories when comparing the first quarter of 2013 period to the prior year period.
The allowance for loan losses at March 31, 2013 was 2.37 percent of total loans, net of unearned income, compared to 2.59 percent at December 31, 2012. Total non-performing assets were $1.8 billion at March 31, 2013, compared to $1.9 billion at December 31, 2012.
Non-interest income from continuing operations for the first quarter of 2013 was $501 million, compared to $524 million for the first quarter of 2012. Service charges on deposit accounts decreased $12 million in the first quarter of 2013 compared to the corresponding 2012 period primarily as a result of account attrition, overdraft policy changes and modified customer behavior. Mortgage income decreased $5 million in the first quarter of 2013 compared to the corresponding 2012 period due to the cost of hedging mortgage servicing rights and a change in strategy to retain 15 year fixed rate residential mortgage production versus selling into the secondary market. The Company also had a $7 million leveraged lease termination gain in the first quarter of 2012 that was not repeated in the first quarter of 2013.
Total non-interest expense from continuing operations was $842 million in the first quarter of 2013, a $71 million decrease from the first quarter of 2012. Amortization of core deposit intangible decreased $15 million due to a change in estimated life that was determined at year-end 2012. Other real estate owned expense decreased $21 million in the first quarter of 2013 compared to the first quarter of 2012 as result of declining balances and stabilizing real estate values. Deposit administrative fees decreased $14 million for the first quarter of 2013 when compared to the first quarter of 2012 due to improved performance metrics which improve the fee calculation. Lastly, the Company extinguished a liability in the fourth quarter of 2012 related to an investment by a third party in a subsidiary, which eliminated the subsidiary dividend amounts and other related costs of approximately $16 million that were historically expensed in the first quarter.
A discussion of activity within discontinued operations is included at the end of the Management's Discussion and Analysis section of this report.

TOTAL ASSETS
Regions' total assets at March 31, 2013 were $119.7 billion, compared to $121.3 billion at December 31, 2012. The decrease in total assets from year-end 2012 resulted mainly from a decrease in other interest-earning assets, as well as decreases in interest-bearing deposits in other banks and loans held for sale. The reduction in other interest-earning assets is a result of netting cash collateral against the related net derivative liability which began in the first quarter of 2013. Refer to Note 12 "Derivative Financial Instruments and Hedging Activities" for further information. The decrease in interest-bearing deposits in other banks is a result of normal day-to-day operating variations. The decrease in loans held for sale is due to a reduction in the number of mortgage refinances in the first quarter of 2013.


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SECURITIES
The following table details the carrying values of securities, including both
available for sale and held to maturity:
Table 1-Securities

                                                        March 31, 2013       December 31, 2012
                                                                     (In millions)
U.S. Treasury securities                               $            56     $                54
Federal agency securities                                          488                     555
Obligations of states and political subdivisions                     7                       9
Mortgage-backed securities:
Residential agency                                              20,940                  21,283
Residential non-agency                                              12                      13
Commercial agency                                                  808                     725
Commercial non-agency                                            1,158                   1,098
Corporate and other debt securities                              2,957                   2,835
Equity securities                                                  671                     682
                                                       $        27,097     $            27,254

Securities totaled $27.1 billion at March 31, 2013, a decrease of $0.2 billion from year-end 2012 levels. During the first three months of 2013, Regions purchased approximately $2.0 billion in available for sale mortgage-backed securities and $455 million in available for sale high quality investment grade corporate bonds. These purchases were partially offset by sales of approximately $405 million in available for sale mortgage-backed securities, sales of approximately $285 million in available for sale high quality investment grade corporate bonds, as well as paydowns and maturities.
Securities available for sale, which comprise nearly all of the securities portfolio, are an important tool used to manage interest rate sensitivity and provide a primary source of liquidity for the Company (see MARKET RISK-INTEREST RATE RISK and LIQUIDITY).


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LOANS
Loans, net of unearned income, represented approximately 70 percent of Regions'
interest-earning assets. The following table presents the distribution of
Regions' loan portfolio by portfolio segment and class, net of unearned income:
Table 2-Loan Portfolio

                                                              March 31, 2013               December 31, 2012
                                                               (In millions, net of unearned income)
Commercial and industrial                            $            27,602                 $            26,674
Commercial real estate mortgage-owner-occupied                     9,812                              10,095
Commercial real estate construction-owner-occupied                   325                                 302
Total commercial                                                  37,739                              37,071
Commercial investor real estate mortgage                           6,338                               6,808
Commercial investor real estate construction                         984                                 914
Total investor real estate                                         7,322                               7,722
Residential first mortgage                                        12,875                              12,963
Home equity                                                       11,546                              11,800
Indirect                                                           2,483                               2,336
Consumer credit card                                                 851                                 906
Other consumer                                                     1,120                               1,197
Total consumer                                                    28,875                              29,202
                                                     $            73,936                 $            73,995

Loans, net of unearned income, totaled $73.9 billion at March 31, 2013, relatively flat from year-end 2012 levels. Continued growth in commercial and industrial and indirect auto loan portfolios almost completely offset declines in investor real estate, commercial real estate mortgage, residential first mortgage and home equity products during the first three months of 2013. Commercial-The commercial portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases and other expansion projects. Commercial and industrial loans have increased $928 million or 3% since year-end due to Regions' integrated approach to specialized lending. Commercial also includes owner-occupied commercial real estate mortgage loans to operating businesses, which are loans for long-term financing of land and buildings, and are repaid by cash flow generated by business operations. These loans declined $283 million or 3% from year-end 2012 as a result of continued customer deleveraging. Owner-occupied construction loans are made to commercial businesses for the development of land or construction of a building where the repayment is derived from revenues generated from the business of the borrower. During the first quarter of 2013, total commercial loan balances increased $668 million, or 1.8%.
Investor Real Estate-Loans for real estate development are repaid through cash flow related to the operation, sale or refinance of the property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of real estate or income generated from the real estate collateral. A portion of Regions' investor real estate portfolio segment is comprised of loans secured by residential product types (land, single-family and condominium loans) within Regions' markets. Additionally, this category includes loans made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers. The investor real estate loan segment declined $400 million from 2012 year-end balances primarily due to continued payoffs and pay downs. Residential First Mortgage-Residential first mortgage loans represent loans to consumers to finance a residence. These loans are typically financed over a 15 to 30 year term and, in most cases, are extended to borrowers to finance their primary residence. These loans experienced an $88 million or 1% decline from year-end 2012, primarily due to customers continuing to pay down real estate debt. At the end of 2012, Regions began the process of retaining 15 year fixed-rate mortgage production on the balance sheet which has slowed the pace of decline. Approximately $180 million of these loans were retained on the balance sheet in the first quarter of 2013.

Home Equity-Home equity lending includes both home equity loans and lines of credit. This type of lending, which is secured by a first or second mortgage on the borrower's residence, allows customers to borrow against the equity in their home.


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Substantially all of this portfolio was originated through Regions' branch network. During the first quarter of 2013, home equity balances decreased $254 million to $11.5 billion, driven by continued consumer deleveraging and refinancing.
Indirect-Indirect lending, which is lending initiated through third-party business partners, is largely comprised of loans made through automotive dealerships. This portfolio class increased $147 million from year-end 2012, reflecting continued growth from the late 2010 re-entry into the indirect auto lending business. Regions currently has approximately 2,000 dealers in its network.
Consumer Credit Card-During the second quarter of 2011, Regions completed the purchase of approximately $1.0 billion of existing Regions-branded consumer credit card accounts from FIA Card Services. The products are primarily open-ended variable interest rate consumer credit card loans. In the third quarter of 2012, Regions assumed the servicing of these loans from FIA Card Services. Consumer credit card balances declined $55 million to $851 million during the first quarter of 2013.
Other Consumer-Other consumer loans include direct consumer installment loans, overdrafts and other revolving loans. Other consumer loans totaled $1.1 billion at March 31, 2013, relatively unchanged from prior year end.
CREDIT QUALITY
Certain of Regions' loans have been particularly vulnerable to weak economic conditions over the past several years, mainly investor real estate loans and home equity products (particularly Florida second lien). These loan types have a higher risk of non-collection than other loans.
The Company has made considerable efforts to de-risk its balance sheet. A primary focus has been reducing the Company's exposure in the investor real estate portfolio. Total investor real estate loans represented approximately 24% of total loans at December 31, 2008, and has been actively managed down to approximately 10% of total loans at March 31, 2013.
Home equity lending, while improving, remains a stressed portfolio for the Company. Total home equity lending represented approximately 16% of total loans at both March 31, 2013 and December 31, 2012. Losses in this portfolio generally track overall economic conditions. The main source of economic stress has been in Florida, where residential property values have declined significantly while unemployment rates remain high. Losses in Florida where Regions is in a second lien position are higher than first lien losses. The following sections provide further detail on the home equity portfolio.

HOME EQUITY
The home equity portfolio totaled $11.5 billion at March 31, 2013 as compared to
$11.8 billion at December 31, 2012. Substantially all of this portfolio was
originated through Regions' branch network.
The following tables provide details related to the home equity portfolio as
follows:
Table 3-Selected Home Equity Portfolio Information

                                               As of and for the Three Months Ended March 31, 2013
                             Florida                            All Other States                              Total
               1st Lien      2nd Lien       Total      1st Lien      2nd Lien       Total      1st Lien      2nd Lien       Total
                                                              (Dollars in millions)
Balance       $   1,844     $   2,355     $ 4,199     $   3,781     $   3,566     $ 7,347     $   5,625     $   5,921     $ 11,546
Net
charge-offs           5            17          22             5            10          15            10            27           37
Net
charge-off

%(1) 1.13 % 2.87 % 2.11 % 0.56 % 1.14 % 0.85 % 0.75 % 1.83 % 1.30 %

                                               As of and for the Three Months Ended March 31, 2012
                             Florida                            All Other States                              Total
               1st Lien      2nd Lien       Total      1st Lien      2nd Lien       Total      1st Lien      2nd Lien       Total
                                                              (Dollars in millions)
Balance       $   1,934     $   2,682     $ 4,616     $   3,826     $   4,200     $ 8,026     $   5,760     $   6,882     $ 12,642
Net
charge-offs          10            39          49             8            18          26            18            57           75
Net
charge-off

%(1) 2.03 % 5.74 % 4.27 % 0.86 % 1.70 % 1.30 % 1.25 % 3.28 % 2.39 %



(1) Net charge-off percentages are calculated on an annualized basis as a percent of average balances.


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Net charge-offs were an annualized 1.30 percent of home equity loans for the first three months of 2013 compared to an annualized 2.39 percent through the first three months of 2012. Losses in Florida-based credits remained at elevated levels, but the related net charge-off percentage decreased to 2.11 percent for the three months ended March 31, 2013 from 4.27 percent for the three months ended March 31, 2012. Tighter underwriting standards in place since 2008 and stabilizing home values in Florida are contributing to this improvement. Of the $11.5 billion home equity portfolio at March 31, 2013, approximately $10.1 billion were home equity lines of credit and $1.4 billion were closed-end home equity loans (primarily originated as amortizing loans). Beginning in May 2009, new home equity lines of credit have a 10-year draw period and a 10-year repayment period. Previously, the home equity lines of credit had a 20-year term with a balloon payment upon maturity or a 5-year draw period with a balloon payment upon maturity. The term "balloon payment" means there are no principal payments required until the balloon payment is due for interest-only lines of credit. As of March 31, 2013, none of Regions' home equity lines of credit have converted to mandatory amortization under the contractual terms. The majority of home equity lines of credit will either mature with a balloon payment or convert to amortizing status after fiscal year 2020.
Of the $10.1 billion of home equity lines of credit as of March 31, 2013, approximately 90 percent require monthly interest-only payments while the remaining approximately 10 percent require a payment equal to 1.5 percent of the outstanding balance, which would include some principal repayment. As of March 31, 2013, approximately 29 percent of borrowers were only paying the minimum amount due on the home equity line. In addition, approximately 56 percent of the home equity lines of credit balances have the option to amortize either all or a portion of their balance. As of March 31, 2013, approximately $371 million of the home equity line of credit balances have elected this option.
Regions' home equity loans have higher default and delinquency rates than home equity lines of credit, which is expected at origination of the loans, due to more stringent underwriting guidelines for a line of credit versus a loan reflecting the nature of the credit being extended. Therefore, home equity loans secured with a second lien are expected to and do have higher delinquency and loss rates than home equity lines of credit with a second lien. Regions is unable to track payment status on first liens held by another institution, including payment status related to loan modifications. When Regions' second lien position becomes delinquent, an attempt is made to contact the first lien holder and inquire as to the payment status of the first lien. However, Regions does not continuously monitor the payment status of the first lien position. Short sale offers and settlement agreements are often received by the home equity junior lien holders well before the loan balance reaches the delinquency threshold for charge-off consideration, potentially resulting in a full balance payoff/charge-off. Regions is presently monitoring the status of all first lien position loans that the Company owns or services and has a second lien, and is taking appropriate action when delinquent.
OTHER CONSUMER CREDIT QUALITY DATA
The Company calculates an estimate of the current value of property secured as collateral for both home equity and residential first mortgage lending products ("current LTV"). The estimate is based on home price indices compiled by the Federal Housing Finance Agency ("FHFA"). The FHFA data indicates trends for Metropolitan Statistical Areas ("MSAs"). Regions uses the FHFA valuation trends from the MSAs in the Company's footprint in its estimate. The trend data is applied to the loan portfolios taking into account the age of the most recent valuation and geographic area.
The following table presents current LTV data for components of the residential first mortgage and home equity classes of the consumer portfolio segment. Current LTV data for the remaining loans in the portfolio is not available, primarily because some of the loans are serviced by others. Data may also not be available due to mergers and systems integrations. The amounts in the table represent the entire loan balance. For purposes of the table below, if the loan balance exceeds the current estimated collateral, the entire balance is included in the "Above 100%" category, regardless of the amount of collateral available to partially offset the shortfall. The balances in the "Above 100%" category as a percentage of the portfolio balances slightly decreased in the residential first mortgage and home equity portfolios to 12% and 16%, respectively, as of March 31, 2013.


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Table 4-Estimated Current Loan to Value Ranges

                                            March 31, 2013                     December 31, 2012
. . .
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