Regions Financial Corporation today announced earnings for the fourth quarter and full year ended December 31, 2013. For the fourth quarter, the company reported net income available to common shareholders of $219 million and earnings per diluted share of $0.16. For the full year 2013, Regions reported net income available to common shareholders of $1.1 billion, an increase of 10 percent over 2012. Earnings per diluted share for 2013 was $0.77, an increase of 8.5 percent from the prior year. The full year results reflect continued loan growth and an expanding customer base.

There were a number of notable items in the fourth quarter, detailed below, which had the combined effect of reducing fourth quarter net income available to common shareholders by $75 million and diluted earnings per share by $0.05.

These items include the transfer of certain loans totaling $686 million, classified as troubled debt restructurings (TDRs), to held-for-sale as part of Regions' continued effort to further simplify and strengthen the balance sheet. This transfer resulted in an after-tax charge of $46 million. Also, the company benefited from certain leveraged lease terminations resulting in an after-tax impact of $6 million. During the quarter the company announced the consolidation of 30 branches that will drive greater efficiencies in the branch network, and resulted in an after-tax charge of $3 million. In addition, during the fourth quarter, Regions recorded a non-tax deductible charge of $58 million related to previously disclosed inquiries from government authorities concerning matters from 2009. Regions is in discussions with its banking supervisors to resolve their inquiries on these matters. The company also recorded a $40 million reduction to overall income tax expenses primarily related to valuation allowance adjustments. Finally, the company incurred an additional $25 million in pre-tax legal expenses related to adjustments to the indemnification reserve established in connection with the sale of Morgan Keegan, which is reflected in discontinued operations.

Continued execution of business priorities

Throughout 2013, Regions continued to successfully execute on its key business priorities. By leveraging Regions360, the company grew loans and expanded the number of customers while continuing to prudently manage expenses.

"2013 was a foundational year for Regions as we took decisive action to position the company for long-term, sustainable growth while also achieving positive loan growth," said Grayson Hall, president, chairman and CEO. "By focusing on meeting the financial needs of our customers and maintaining our efforts to operate more efficiently, we concluded the year with more customers and successfully lowered adjusted expenses(1) compared to the prior year. We are optimistic about growth prospects for 2014 as consumers and businesses begin the year with healthy balance sheets and the economy continues to improve."

Strengthening asset quality by further de-risking the balance sheet

During the fourth quarter, Regions transferred loans totaling approximately $686 million to held-for-sale. The loans transferred were primarily accruing first lien residential mortgages classified as troubled debt restructurings (TDRs) and the company expects to execute a sale of these loans early this year. This transaction, when completed, is expected to result in lower deposit administrative fees, improve the company's credit profile and further strengthen the company's balance sheet.

Net charge-offs totaled $278 million in the fourth quarter, including $151 million related to the transfer of residential mortgage loans to held-for-sale. Regions' provision for loan losses was $79 million for the quarter, of which $75 million was related to the loan transfers. The prior quarter's loan loss provision amounted to $18 million. The allowance for loan and lease losses represented 1.80 percent of total loans outstanding, a decline of 23 basis points from the prior quarter.

Non-performing loans (excluding loans held-for-sale) improved $272 million, or 20 percent, from the prior quarter and 36 percent from the prior year. The pace of loans migrating into non-performing loan status declined 12 percent from the previous quarter to$175 million and is down 50 percent from the previous year. In addition, commercial and investor real estate criticized and classified loans declined 14 percent in the quarter and were down 33 percent year-over-year.

Loan balances impacted by transfer of loans to held-for-sale

Total loan balances for the year reflect increased loan production offset by the impact of the transfer of residential mortgage loans to held-for-sale. Loans totaled $75 billion at the end of 2013, an increase of 1 percent from the end of the previous year. Excluding the transfer of residential mortgage loans to held-for-sale, year over year adjusted loan growth was 2 percent(1). This reflected the company's ability to successfully grow loans in a challenging economic environment.

Business lending drove overall loan growth throughout 2013 and was led by the company's specialized lending groups and asset based lending. Specifically, commercial and industrial loans grew 10 percent from the end of the previous year, marking the highest single year increase since 2008 and commitments for new loans increased 14 percent. Notably, in consumer loans the origination of loans for new home purchases increased to 52 percent of total originations, an increase of 15 percentage points from the prior year. This has offset the decline in balances related to mortgage refinancing activity. Importantly, total new and renewed loan production increased 8 percent for the full year.

For the fourth quarter, total average loan balances were up 1 percent from the previous quarter; however, ending loans declined 2 percent. This was primarily related to the residential mortgage loans transferred to held-for-sale, the termination of leveraged leases, and the repayment of loans, some of which were non-performing. Excluding the residential mortgage loans transferred, adjusted ending loans declined 1 percent(1); however, total earning assets increased $190 million from the previous quarter.

Commercial and industrial loans increased 2 percent quarter over quarter on an average basis, but declined 2 percent on an ending basis. Previously mentioned transactions impacted ending loan balances. Importantly, the company's commitments for future loans increased 1 percent to $38 billion. Investor real estate new loan production continued to increase as economic conditions in certain markets continued to improve. New loan production increased 2 percent from the previous quarter and 92 percent over the prior year. The increase in new loan production has served to offset de-risking; as a result, total loans in this portfolio declined only slightly from the previous quarter.

Total consumer lending production continues to be impacted by a decline in mortgage production, as expected. However, indirect auto lending achieved another solid quarter, growing 6 percent, partially offsetting the decline in mortgage production. The company has relationships with 2,140 dealers and continues to focus on increasing the number of loans per dealer by enhancing loan response time.

Mortgage loan balances declined $693 million sequentially; however, $686 million of this decline was attributable to the loans transferred to held-for-sale. Excluding the loan transfers, mortgage balances remained steady from the previous quarter. The home equity loan portfolio, which consists of home equity loans and lines of credit, declined modestly from the previous quarter. Pay downs on home equity lines of credit have been offset by the results of our increased focus on our home equity loan product.

Consumer credit card balances increased 6 percent from the previous quarter as the number of active credit card holders increased 4 percent. The company has been successful driving increases in the credit card portfolio through targeted marketing to existing customers and balance transfer offers.

Total funding costs continued to decline

Total funding costs were 34 basis points in the fourth quarter, a decline of 16 basis points from the same period in the prior year. This was a result of liability management actions in the second quarter and lower deposit costs. Average deposits for the fourth quarter totaled $92 billion, a decrease of $3 billion from the fourth quarter of 2012. The mix of deposits continued to improve in 2013, as ending low-cost deposits increased $746 million and higher cost time deposits declined $3.8 billion. Importantly, low-cost deposits as a percent of total deposits were 90 percent at the end of 2013, compared to 86 percent at the end of 2012. Deposit costs totaled 12 basis points in the fourth quarter, a decline of 10 basis points from the same period in the prior year, resulting from the positive change in deposit mix.

Net interest margin expanded 2 basis points sequentially and 16 basis points in 2013

Net interest income increased $8 million or 1 percent from the previous quarter driven primarily by the impact of rising long-term interest rates and by the related slow down in prepayments within the securities portfolio. The resulting net interest margin expanded 2 basis points to 3.26 percent in the fourth quarter, an increase of 16 basis points over the same period in the prior year.

Non-interest revenue and non-interest expense impacted by company initiatives

Non-interest revenue totaled $526 million, an increase of $31 million from the previous quarter. The previous quarter included a $24 million gain related to the divestiture of a non-core portion of the Wealth Management business, and the fourth quarter included a net gain of $17 million related to the sale of certain low-income housing investments. Additionally, during the fourth quarter the company terminated two leveraged leases that resulted in a gain of $39 million with an offsetting $33 million tax expense.

Non-interest revenue was also impacted by an expected decline in mortgage revenue due to a 23 percent decline in mortgage production as average mortgage interest rates continued to increase.

Total non-interest expense was $946 million, which included expenses related to the branch closures and the regulatory charge. Excluding these items, adjusted non-interest expense(1) was relatively stable from the third quarter. Salaries and benefits increased from the previous quarter as an increase in staffing in customer facing, revenue-generating and compliance positions was partially offset by a decline in mortgage operations expense.

Strong capital and solid liquidity

Regions' capital position remains strong as the Tier 1 ratio was estimated at 11.6* percent at quarter end. In addition, the Tier 1 Common ratio was estimated at 11.2* percent, an increase of 40 basis points from one year ago. Likewise, the company's liquidity position remained solid as the loan to deposit ratio at the end of the quarter was 81 percent.