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RF > SEC Filings for RF > Form 10-Q on 7-May-2014All Recent SEC Filings

Show all filings for REGIONS FINANCIAL CORP

Form 10-Q for REGIONS FINANCIAL CORP


7-May-2014

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' Annual Report on Form 10-K for the year ended December 31, 2013, 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, 2014 compared to the three months ended March 31, 2013 for the consolidated statements of income. For the consolidated balance sheet, the emphasis of this discussion will be the balances as of March 31, 2014 compared to December 31, 2013. 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 in 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, 2014, Regions operated 1,673 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 reportable business segments: Business Services, Consumer Services, and Wealth Management with the remainder split between Discontinued Operations and Other. See Note 13 "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, card and ATM fees, mortgage servicing and secondary marketing, investment management and trust 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 and legal expenses, deposit administrative fees, 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, if not all, 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 $311 million, or $0.22 per diluted share, in the first quarter of 2014 compared to net income available to common shareholders of $327 million, or $0.23 per diluted share, in the first quarter of 2013. Increased net interest income, lower non-interest expenses, and slightly lower provision for loan losses were more than offset by lower non-interest income compared to the prior year period.
For the first quarter of 2014, net interest income (taxable-equivalent basis) from continuing operations totaled $831 million compared to $811 million in the first quarter of 2013. The net interest margin (taxable-equivalent basis) was 3.26 percent for the first quarter of 2014 and 3.13 percent in the first quarter of 2013. The increase in net interest income was driven by a decline in interest-bearing liabilities and total funding costs and was partially offset by a decline in loan yields. These factors drove the $20 million increase in net interest income (taxable-equivalent basis), and also drove the 13 basis point improvement in net interest margin. Total deposit costs were 12 basis points for the first quarter of 2014, as compared to 18 basis points for the first quarter of 2013. Total funding costs, which include deposits, short-term borrowings and long-term debt, were 33 basis points for the first quarter of 2014, as compared to 45 basis points for the first quarter of 2013.
The provision for loan losses totaled $2 million in the first quarter of 2014 compared to $10 million during the first quarter of 2013. Credit metrics, including net charge-offs and non-accrual loan balances, showed continued improving trends through the first three months of 2014 compared to 2013. Net charge-offs totaled $82 million, or an annualized 0.44 percent of average loans, in the first quarter of 2014, compared to $180 million, or an annualized 0.99 percent for the first quarter of 2013. Net charge-offs were lower across most major loan categories when comparing the first quarter of 2014 period to the prior year period.
The allowance for loan losses at March 31, 2014 was 1.67 percent of total loans, net of unearned income, compared to 1.80 percent at December 31, 2013. Total non-performing assets were $1.2 billion at March 31, 2014, compared to $1.3 billion at December 31, 2013.
Non-interest income from continuing operations for the first quarter of 2014 was $438 million, compared to $501 million for the first quarter of 2013. The decline from the prior year was driven primarily by a $32 million decrease in mortgage income. Mortgage loan production fell 47 percent from the first quarter of 2013 as consumer demand for mortgage loans slowed due to rising interest rates.
Total non-interest expense from continuing operations was $817 million in the first quarter of 2014, a $25 million decrease from the first quarter of 2013. Decreased deposit administration fees and a net gain on the sale of certain primarily accruing residential first mortgage loans classified as troubled debt restructurings ("TDRs") held for sale were the drivers of the decrease. 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, 2014 were $117.9 billion, compared to $117.4 billion at December 31, 2013. The increase in total assets from year-end 2013 resulted mainly from a $1.1 billion increase in loans, offset by a $660 million decrease in loans held for sale as a result of the sale of certain primarily accruing residential first mortgage loans classified as TDRs. Refer to the "Loans Held For Sale" section for further information.


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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, 2014       December 31, 2013
                                                                     (In millions)
U.S. Treasury securities                               $            58     $                57
Federal agency securities                                          419                     425
Obligations of states and political subdivisions                     4                       5
Mortgage-backed securities:
Residential agency                                              17,347                  17,474
Residential non-agency                                               9                       9
Commercial agency                                                1,336                   1,154
Commercial non-agency                                            1,254                   1,211
Corporate and other debt securities                              2,845                   2,827
Equity securities                                                  660                     676
                                                       $        23,932     $            23,838

Regions maintains a highly rated securities portfolio consisting primarily of agency mortgage-backed securities. Total securities at March 31, 2014 increased $94 million from year-end 2013 primarily due to market rate improvements in the fair value of the available for sale securities portfolio.
Securities available for sale, which comprise the majority 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 the "Market Risk-Interest Rate Risk" and "Liquidity Risk" sections for more information.

LOANS HELD FOR SALE
Loans held for sale totaled $395 million at March 31, 2014, consisting primarily of $352 million of residential real estate mortgage loans and $40 million of non-performing investor real estate loans. At December 31, 2013, loans held for sale totaled $1.1 billion, consisting primarily of $963 million of residential real estate mortgage loans, including $535 million of certain primarily accruing residential first mortgage loans classified as TDRs that were transferred to loans held for sale in the fourth quarter of 2013, and $82 million of non-performing investor real estate loans. Substantially all of the TDR loans held for sale were sold in the first quarter of 2014. The level of residential real estate mortgage loans held for sale that are part of the Company's mortgage originations to be sold in the secondary market fluctuates depending on the timing of origination and sale to third parties.


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LOANS
Loans, net of unearned income, represented approximately 73 percent of Regions'
interest-earning assets at March 31, 2014. 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, 2014               December 31, 2013
                                                              (In millions, net of unearned income)
Commercial and industrial                           $            30,466                 $            29,413
Commercial real estate mortgage-owner-occupied                    9,257                               9,495
Commercial real estate construction-owner-occupied                  375                                 310
Total commercial                                                 40,098                              39,218
Commercial investor real estate mortgage                          5,338                               5,318
Commercial investor real estate construction                      1,654                               1,432
Total investor real estate                                        6,992                               6,750
Residential first mortgage                                       12,136                              12,163
Home equity                                                      11,148                              11,294
Indirect                                                          3,253                               3,075
Consumer credit card                                                917                                 948
Other consumer                                                    1,136                               1,161
Total consumer                                                   28,590                              28,641
                                                    $            75,680                 $            74,609

PORTFOLIO CHARACTERISTICS
The following sections describe the composition of the portfolio segments and classes in Table 2 and explain changes in balances from the 2013 year-end. See Note 4 "Loans and the Allowance for Credit Losses" to the consolidated financial statements for additional discussion.
Regions has a diversified loan portfolio, in terms of product type, collateral and geography. At March 31, 2014, commercial loans represented 53 percent of total loans, net of unearned income, investor real estate loans represented 9 percent, residential first mortgage loans totaled 16 percent, home equity lending totaled 15 percent, other consumer loans comprised 2 percent, indirect loans equaled 4 percent and consumer credit card loans made up the remaining 1 percent of loans. Following is a discussion of risk characteristics of each loan type.
Loans, net of unearned income, totaled $75.7 billion at March 31, 2014, an increase of approximately $1.1 billion from year-end 2013 levels. Continued growth in commercial and industrial and indirect auto loan portfolios, along with increases in commercial investor real construction loans, more than offset declines in commercial real estate mortgage, residential first mortgage and home equity lending during the first three months of 2014.
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 $1.1 billion or 4 percent 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 $238 million or 3 percent from year-end 2013 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 2014, total commercial loan balances increased approximately $880 million, or 2 percent.
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. After several years of successful emphasis on decreasing


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Regions' exposure in this portfolio segment, total investor real estate loans increased $242 million from 2013 year-end balances. This marks the first quarter the Company has generated net growth in this portfolio in over four years. 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 a $27 million decline from year-end 2013, primarily due to customers continuing to pay down real estate debt. At the end of 2012, Regions began retaining 10 and 15 year fixed-rate mortgage production on its balance sheet rather than selling into the secondary market, which has slowed the pace of decline. Approximately $75 million of these 10 and 15-year fixed rate loans were retained on the balance sheet through the first three months of 2014.
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. Substantially all of this portfolio was originated through Regions' branch network. During the first quarter of 2014, home equity balances decreased $146 million to $11.1 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 $178 million from year-end 2013, reflecting continued growing demand for automobile loans. Regions increased the average number of loans per dealer by 13 percent during the first quarter of 2014. Regions expects to continue to increase pull-through rates for existing dealers and further expand the dealer network.
Consumer Credit Card-Consumer credit card lending represents primarily open-ended variable interest rate consumer credit card loans. These balances decreased $31 million to $917 million during the first quarter of 2014 following a seasonally high fourth 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, 2014, a decrease of $25 million from prior year end.
CREDIT QUALITY
Regions believes that its loan portfolio is well diversified by product, client, and geography throughout its footprint. However, the loan portfolio may be exposed to certain concentrations of credit risk which exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, certain loan products, or certain regions of the country.
Commercial
The commercial portfolio segment generated the majority of the Company's loan growth in the first three months of 2014, particularly commercial and industrial loans. Over half of the Company's total loans are included in the commercial portfolio segment. These balances are spread across numerous industries, as disclosed in "Table 11-Selected Industry Balances" in the Annual Report on Form 10-K for the year ended December 31, 2013. The Company manages the related risks to this portfolio by setting certain lending limits for each significant industry. At March 31, 2014 and December 31, 2013, no single industry exceeded 15 percent of the total commercial portfolio balance. Indirect
Regions re-entered the indirect automotive lending market in October 2010 and has experienced steady portfolio growth. Regions is focused on prudent growth strategies by establishing mutually beneficial, prime lending relationships with a select group of franchised new car dealers. Regions' credit policy stipulates that only prime quality auto loans are originated, and purchased loans are monitored on a regular basis with performance having been consistent with the originated portfolio.
Home Equity
The home equity portfolio totaled $11.1 billion at March 31, 2014 as compared to $11.3 billion at December 31, 2013. Substantially all of this portfolio was originated through Regions' branch network.


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The following table presents information regarding the future maturities of the Company's home equity lines of credit as of March 31, 2014. Table 3-Home Equity Lines of Credit - Future Maturities

            First Lien     % of Total     Second Lien     % of Total     Total
                                   (Dollars in millions)
      2014 $         21         0.24 %   $         164         1.82 %   $   185
      2015           24         0.27               178         1.97         202
      2016           31         0.34                41         0.46          72
      2017            6         0.07                12         0.13          18
      2018           19         0.21                27         0.30          46
 2019-2023        1,283        14.23             1,125        12.49       2,408
 2024-2028        2,772        30.77             3,175        35.24       5,947
Thereafter           74         0.82                58         0.64         132
     Total $      4,230        46.95 %   $       4,780        53.05 %   $ 9,010

Of the $11.1 billion home equity portfolio at March 31, 2014, approximately $9.0 billion were home equity lines of credit and $2.1 billion were closed-end home equity loans (primarily originated as amortizing loans). Beginning in May 2009, new home equity lines of credit had 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, 2014, none of Regions' home equity lines of credit have converted to mandatory amortization under the contractual terms. As presented in the table above, 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 $9.0 billion of home equity lines of credit as of March 31, 2014, approximately 91 percent require monthly interest-only payments while the remaining approximately 9 percent require a payment equal to 1.5 percent of the outstanding balance, which would include some principal repayment. As of March 31, 2014, approximately 30 percent of borrowers were only paying the minimum amount due on the home equity line. In addition, approximately 57 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, 2014, approximately $284 million of the home equity line of credit balances have elected this option.
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. Regions services the first lien on approximately 23 percent of the entire second lien home equity portfolio as of March 31, 2014. Regions believes that the results related to the non-Regions-serviced first liens would not be significantly different than that of the portfolio which Regions services. 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 a third party. The third party data indicates trends for Metropolitan Statistical Areas ("MSAs"). Regions uses the third party 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 remained the same in the residential first mortgage portfolio at 6 percent, while the home equity portfolio decreased from 13 percent to 11 percent, when comparing March 31, 2014 to December 31, 2013.


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Table 4-Estimated Current Loan to Value Ranges

                                    March 31, 2014                                    December 31, 2013
                      Residential              Home Equity               Residential               Home Equity
                    First Mortgage       1st Lien       2nd Lien       First Mortgage       1st Lien        2nd Lien
                                                              (In millions)
Estimated current
loan to value:
Above 100%         $           694     $      285     $       896     $           733     $       416     $     1,034
80% - 100%                   2,020            688           1,281               2,050             737           1,294
Below 80%                    8,944          4,849           2,540               8,899           4,646           2,501
. . .
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