10 Hidden Gems in the Regions Financial Annual Report (RF)

Regions Financial Corporation (NYSE: RF) is one of the many widely held companies which filed its annual report under form 10-K with the SEC.  Investors rarely look through these annual reports due to the length and how dry they are, but this is where “the hidden gems and factoids” are that investors often overlook or fail to know about.  Not all points are bad.

In our review we have taken out ten of these lesser-known factoids for review and added color where appropriate.

Regions today… Here is the current breakdown of branches by state: Alabama-244; Arkansas-100; Florida-397; Georgia-142; Illinois-68; Indiana-64; Iowa-13; Kentucky-16; Louisiana-118; Mississippi-147; Missouri-67; North Carolina-9; South Carolina-36; Tennessee-263; Texas-85; Virginia-3….FOR A GRAND TOTAL of 1,772.  As of December 31, 2010, Regions and its subsidiaries had 27,829 employees.  Total salaries and employee benefits increased $49 million, or 2 percent, in 2010. The year-over-year increase in salaries and employee benefits cost is due to higher pension and 401(k) expense as explained below. Although salaries and benefits expense increased, headcount was reduced approximately 2 percent in 2010

Financial Summary… At December 31, 2010, Regions had total consolidated assets of approximately $132.4 billion, total consolidated deposits of approximately $94.6 billion and total consolidated stockholders’ equity of approximately $16.7 billion.  The bank’s market cap as of Thursday’s close was $9.3 billion.  Also, don’t forget that it owns Morgan Keegan & Company with approximately 1,200 financial advisors offering products and services from over 321 offices.  It also owns Regions Insurance Group, Inc., Regions Equipment Finance Corporation, and some reinsurance operations.

Available capital… Regions had interest-bearing deposits in other banks of $4.9 billion, and the loan-to-deposit ratio was 88 percent; borrowing capacity with the Federal Reserve Discount Window was $16.6 billion based on available collateral and borrowing capacity with the FHLB was $1.2 billion based on available collateral. During 2010, the provision for loan losses decreased to $2.9 billion compared to $3.5 billion in 2009. Regions noted on its capital ratios, “The minimum guideline to be considered well-capitalized for Tier 1 capital and Total capital is 6.0 percent and 10.0 percent, respectively. At December 31, 2010, Regions’ consolidated Tier 1 capital ratio was 12.40 percent and its Total capital ratio was 16.35 percent.”

No hurry on dividends… Do not expect any immediate return to a dividend here in the first wave expected over the next quarter.  It noted, “As a result of Regions Bank’s $975 million loss in 2009 and $252 million loss in 2010, Regions Bank cannot, without approval from the Federal Reserve, declare or pay a dividend to Regions until such time as Regions Bank is able to satisfy the criteria discussed in the preceding sentence. Given the losses in 2009 and 2010, Regions Bank may not be able to pay dividends to Regions in the near term without obtaining regulatory approval… Under Alabama law, Regions Bank may not pay a dividend in excess of 90 percent of its net earnings until the bank’s surplus is equal to at least 20 percent of capital.”

Anti-Takeover provisions… Regions has anti-takeover provisions in place.  It notes, “Certain provisions of state and federal law and our certificate of incorporation may make it more difficult for someone to acquire control of us without our Board of Directors’ approval. Under federal law, subject to certain exemptions, a person, entity or group must notify the federal banking agencies before acquiring control of a bank holding company. Acquisition of 10 percent or more of any class of voting stock of a bank holding company or state member bank, including shares of our common stock, creates a rebuttable presumption that the acquirer “controls” the bank holding company or state member bank. Also, as noted under the “Supervision and Regulation” section of Item 1. of this Annual Report on Form 10-K, a bank holding company must obtain the prior approval of the Federal Reserve before, among other things, acquiring direct or indirect ownership or control of more than 5 percent of the voting shares of any bank, including Regions Bank. There also are provisions in our certificate of incorporation that may be used to delay or block a takeover attempt. As a result, these statutory provisions and provisions in our certificate of incorporation could result in Regions being less attractive to a potential acquirer.”

Risk Factors… While “RISK FACTORS” always brings out the worst sounding outcome as humanly possible, the risk factors here seem to go on and on.  It starts on Page 20 of the annual report and ends on Page 36.

Securities gains could influence the quarter earnings… In January 2011, Regions sold approximately $1.5 billion in securities, primarily agency mortgage-backed securities, and recognized a net pre-tax gain of approximately $52 million.  That might not be enough to make for a full positive earnings report but that could influence the net results outside of normal operations.

Tax deferrals… “At December 31, 2010, the Company reported a net deferred tax asset of $1.4 billion. Of this amount, $960 million was generated from differences between the financial statement carrying amounts and the corresponding tax bases of assets and liabilities, of which a significant portion relates to the allowance for loan losses. These net deferred tax assets have not yet reduced taxable income and therefore, do not have a set expiration date. The remaining $427 million net deferred tax asset balance relates to tax carryforwards that have defined expiration dates which are typically 15 or 20 years from the date of creation. Of the $427 million, $92 million of this deferred tax asset is related to tax carryforwards that have expiration dates prior to the tax year 2023, and a valuation allowance of $14 million exists against these amounts.”

Extended maturity and duration schedule… The average life of the securities portfolio (excluding equities) at December 31, 2010 was estimated to be 6.6 years, with a duration of approximately 3.4 years. This is now a longer securities maturity schedule and that can pose added risks.  At the end of 2009 its estimated average life was 3.9 years with a duration of approximately 1.9 years for the portfolio.  In a rising rate environment, that can pose challenges.

Legal Proceedings… There are two pages of notes under legal proceedings and these include dismissed shareholder suits in the trust preferred shares as well as inquiries from SEC and regulators, class actions, overdraft fee cases, and more.

Again, not all of these are meant to be negative at Regions.  Despite some serious risks that could come down the pipe much of the news was good.  In a keyword search in the annual report, the terms “bankruptcy” and “going concern” did not appear.  The idea is to find some of the hidden or lesser-known data points for investors.  As always, know what you are investing in.

JON C. OGG