Dear Fellow Shareholders,
For the past three years, the management team at Regions has worked diligently to navigate through a difficult environment as well as to strengthen and prepare the company for opportunities post the financial crisis. This has required trust and patience on the part of our shareholders, for whom I am very grateful. Thanks to the efforts of the more than 23,000 associates at Regions, I am pleased to report that we returned to profitability in 2012 and are moving forward from a better position of strength.
2012 was a transformative year for Regions. To use a sports analogy, after being forced to play defense for some time now, 2012 was the year when we began to play offense. We made substantial investments during the past 12 months to grow our bank again, and we will accelerate those efforts further in the year ahead. We are focused on several initiatives that will drive future growth, and I will address those in more detail shortly, but first, let's review the achievements of the past year.
Most importantly, 2012 marked a return to sustainable profitability for Regions. Your company earned $1.1 billion from continuing operations in 2012, or $0.76 per diluted share. Notably, our progress was reflected in our stock price, with a 66% rebound ranking us among the best performers of any bank in 2012.
We also strengthened our balance sheet with fewer problem loans and stronger capital, which further positions us well for future growth. The improvement in our asset quality metrics was significant, with non-performing assets, including assets held for sale, decreasing 36% year-over-year. At the end of 2012, non-performing assets stood at $1.9 billion, which was the lowest level in four years. Our capital position remains strong as our estimated Tier 1 Capital ratio at December 31 stood at 12%, and our estimated Tier 1 Common ratio increased approximately 230 basis points from the end of 2011 to 10.8%.
As positive as this performance was, it also reflected the challenging economic environment in which we still operate. We realize that Regions – like the rest of the industry – must now demonstrate that we can prudently generate organic growth. We understand the challenge, and our management team is focused on moving forward and addressing that challenge.
I am confident that the steps we have taken over the past three years – and particularly in 2012 – have positioned Regions to capture more than its share of growth in 2013 and beyond. We have emerged from the financial crisis stronger than before, with a solid capital base and a strong presence in some of the fastest growing markets in the country. We also expect Regions and our customers to benefit from our investments in a single operating platform, which today gives our associates an integrated view of every account each customer holds. We believe this is a distinct competitive advantage. And, given that our loan-to-deposit ratio remains relatively low at 78%, we still have substantial lending capacity to tap as the economy strengthens and as our customers' borrowing needs increase.
We raised new equity capital. The Federal Reserve conducted an industrywide stress test, and Regions ranked fifth of the 19 banks in its Comprehensive Capital Analysis and Review. With the markets showing renewed confidence in banks, we raised approximately $900 million in new common equity last March to repay our TARP obligation. In October, we raised $500 million in preferred stock that also strengthened regulatory capital, and at the end of 2012, our Tier 1 Common ratio was 10.8%.
We divested Morgan Keegan. In April 2012, we completed the sale of our brokerage and investment banking company, Morgan Keegan, to Raymond James Financial, Inc., for approximately $1.2 billion. This move gave us the ability to better focus on the fundamentals of our core business. Following the sale, we also established the Regions Wealth Management Group, which provides clients with comprehensive financial planning, investment and banking solutions, as well as access to premier investment managers through our open architecture solution. This strategy allows us to offer clients a unique value proposition while providing us with growth potential. But most importantly, this simplifies our business model and allows us to focus on serving customers as one team.
We repaid our TARP obligation. In 2008, during the financial crisis, Regions and many other banks issued new preferred stock and warrants to the U.S. Treasury under the Troubled Asset Relief Program (TARP). I am pleased to report that in April, we completed our repurchase of the $3.5 billion of Series A Preferred Stock issued under TARP's Capital Purchase Program. The repurchase not only eliminated the payment of $175 million in annual dividends on these securities, but it also strengthened our ability to compete more effectively going forward.
These weren't our only achievements in 2012. We also received upgrades in our credit ratings, invested in new risk-management resources and made further improvements in our loan portfolio. None of these achievements could have occurred without the dedication and determination of our team. Our associates rose to the many challenges of the past three years and achieved some of the highest customer-service ratings in the financial industry.
As optimistic as I am in my outlook for Regions, I need to acknowledge the many challenges that our industry still faces – not the least of which is that the pace of economic recovery remains slow. We are encouraged by the recent improvement in the housing recovery, but our internal forecast at Regions is that the U.S. economy may not grow by more than 2% in 2013. This means we could still face challenges in finding demand for credit from consumers and businesses.
In addition, our industry is still resolving the legal and regulatory overhang from the crisis and adjusting to a new, more comprehensive framework that is still being implemented. Given the many complexities in the Dodd-Frank Wall Street Reform and Consumer Protection Act, regulators have implemented less than half of the regulations required by Dodd-Frank—which means our industry will continue to adjust and comply with the many additional regulations and interpretations.
But from my perspective, these challenges are far less daunting than the ones the industry faced a few years ago. And our performance in 2012 gives me confidence that we are moving forward and positioned to achieve growth and operating performance that has not been possible in recent years. Let's look at a few other measures of our 2012 performance, as our progress there provides the foundation on which to build. Specifically, we believe three key factors to our improved results have been the improvement in the quality of our loan portfolio, our ability to reduce our already low funding costs, and our expense disciplines.
Through the efforts of our risk management team, our workout specialists and our bankers, we made measurable improvements in the quality and performance of our loan portfolio. The provision we set aside for loan losses totaled $213 million in 2012. The company's loan loss allowance to non-performing loan coverage ratio was 1.14 times and the allowance for loan losses was 2.59% of all loans outstanding as of December 31, 2012. It is worth noting that charge-offs started trending down in 2012, and net charge-offs declined 47% for the full year – the lowest annual level since 2008.
Total new and renewed loan production was a strong $57 billion for the full year. New production totaled $28 billion, up 14% from the prior year. However, our total loan portfolio fell by 5% to $74 billion as we continued to experience declines in investor real estate and consumers and small business owners continued to deleverage. We expect our lending production to remain strong in 2013, and one of our top priorities is to increase consumer lending. At the end of 2012, consumer lending represented 39% of our loan portfolio, with business services comprising the remaining 61%. Many of our peer banks have a better balance between consumer and business lending, and we are striving to achieve a similar balance.
In some lending segments we did see growth. Our consumer portfolio, excluding real estate, grew 10%. This was due in part to the 26% increase in auto loans we made through our growing network of over 1,900 dealers, and our move in 2011 to reacquire our Regions-branded credit card portfolio. We also instituted many new programs to grow our credit card portfolio. For instance, we made enhancements to the technology platforms in our branches that inform our tellers which customers are the best candidates for various banking products, including our credit card.
In our commercial and industrial portfolio, loan demand remained strong throughout 2012. This success was driven in part by our integrated approach to specialized lending where our local bankers work with experienced lenders to meet customer needs. Total new production for this portfolio was a solid $15 billion, up 3% from 2011. We finished the year with new business pipelines slightly above the same level at the end of 2011, and loan commitments increased 12% from the prior year.
Another key to our performance in 2012 was our ability to improve our funding costs. Thanks to our success at attracting low-cost deposits through our over 1,700 branches, we continued to enjoy a favorable improvement in funding costs. Our funding mix has continued to improve as low-cost deposits grew 8% to $82 billion during 2012 and higher cost time deposits declined 31% to $13 billion — falling from 20% of total deposits at the end of 2011 to 14% at the end of 2012. As a result, we entered 2013 with a better funding mix and total funding costs of 0.58%, which is 19 basis points lower than in the prior year.
The opportunity remains for us to improve our funding costs even further, given that another $8.3 billion in higher-cost CDs and other time deposits will mature during 2013. This gives us an opportunity that should enable us to generate better margins when interest rates rise again. Also, we will continue to prudently evaluate liability management opportunities as we look to further reduce our total funding costs, including long-term debt.
Even as we were making some structural changes to the bank, we maintained a strong discipline on expenses. Non-interest expenses from continuing operations totaled $3.5 billion, or 9% below our 2011 expenses. At the end of 2012, our efficiency ratio—defined as non-interest expenses as a share of revenues—stood at 62.7%, which was in line with our peer group. Among the banks in our peer group, we have the second lowest expense-to-assets ratio at 2.79%.
We have an extensive and competitive branch network – one of the largest among our peers. However, we continuously analyze our locations to ensure that we have the correct number of branches in our markets. In fact, as a cost-efficiency strategy, we have reduced our number of branches by 13% since 2007. We continue to believe that physical branches are a key component of our distribution strategy and provide a competitive advantage over many of our competitors. We are investing aggressively in our contact center technology, mobile banking and web-based services. We are committed to providing a comprehensive set of distribution capabilities to serve our customers with efficiency and convenience.
We have been able to shift, where appropriate, more customer activity to the Internet from the branches and contact center. In fact, more than 40% of our consumer checking customers now use Regions online banking services. The launch of our mobile remote deposit capture product in 2013 is expected to provide increased efficiency and convenience to our customers who prefer mobile banking.
While we believe there will always be opportunities to improve our efficiency ratio, we are being disciplined in our approach to expense management. We believe we should be very thoughtful in making investments and eliminating expenditures in order to mitigate the risk of unintended consequences so that we do not reduce our ability to serve customers and grow our business.
Our belief is that expense reductions and investing for growth should be balanced. We also believe that expense discipline should be part of our bank's culture rather than introducing occasional efficiency campaigns where the pressure to meet short-term cost cutting targets supercedes good judgment over the long term.
In recent years, we have implemented many new growth initiatives, most of which are showing great promise. But just as important is our value system, which serves as the cornerstone for how we run the company. Our mission is "to achieve superior economic value for our shareholders over time by making life better for our customers, our associates and our communities and creating shared value as we help them meet their financial goals and aspirations."
In the wake of the financial crisis, we have reaffirmed our commitment to these values and our mission. During the crisis, the banking industry was criticized for a variety of practices that led to a lack of trust in banks and bankers. As a result, the industry still has work to do to rebuild confidence among its customers and the public at large.
There is little doubt that rebuilding public trust will take time. In the meantime, I believe it is incumbent upon Regions to take a fundamental approach to dealing with customers, one based on relationships rather than transactions. To that end, we have shifted Regions away from the transactional mindset toward a business model that is built on the values of respect, integrity and relationships—and always acting in the customer's best long-term interests. Truth be told, banking should be simple and straightforward and result in customers being sold products they need and understand. This is basic banking. In many ways, it is just a return to the fundamentals of banking historically practiced by this industry.
There is a term for this approach: creating shared value with relationship banking.
For Regions, creating shared value means that we will develop sustainable relationships that are driven by serving the long-term interests of our customers and communities.
As part of our commitment to shared value, we now ask ourselves three questions when we develop a new product or service:
This decision-making process ensures that we are doing more than just offering products and services that produce a profit. We are also building stronger customer relationships, a sustainable business and communities that thrive. By way of example, this approach motivated us to provide the financing needed by the Karns Volunteer Fire Department in Knoxville, Tenn., to construct a new fire station. It is also why we said "yes" when T&D Farms needed funding for a successful farming business it operates in Inverness, Miss., an impoverished community in the Mississippi Delta that needs all the jobs it can get. And we were able to see the opportunity when Oakhurst Medical Centers in Atlanta, Ga., needed help expanding their facility so that more patients could be served. While the total project costs exceeded $6 million, Oakhurst only received a $5 million grant from the U.S. Department of Health and Human Services for new construction and expansion. Regions was able to step in and provide a $1 million construction loan and permanent financing thereafter. By supporting these enterprises and creating new jobs, Regions helps promote the economic activity that builds on itself—and makes growth a reality for Regions and these communities alike.
In addition to our shared value approach, we are also proud of our charitable contributions, as well as the volunteer efforts of our associates which strengthen the communities we serve. In the first half of 2012 alone, Regions associates volunteered for nearly 5,300 community service activities, which included teaching more than 3,300 financial education classes. But we believe that we can make an even bigger impact on our communities by helping our customers achieve their financial goals. If we provide the products and services that help our customers and communities succeed financially, we will create value as a result for our shareholders.
As we move forward and transition to growth, the concept of creating shared value will serve as our guiding principle. We understand that growth will be somewhat challenging as overall economic growth remains muted and consumers and businesses are reluctant to make new investments or take on more debt given the economic uncertainties. However, we are confident that as the economic recovery strengthens, Regions should be well-positioned to earn more than its fair share of the growth.
For example, we operate in 16 states, but in seven Southeastern states where we hold 85% of our customer deposits, these markets have been growing above the national average. Regions has significant share in each of these markets. At mid-year 2012, Regions held a 9.4% share of the weighted average deposits in our core markets, placing us a close third in market share among all banks. We hold the leading market share in Alabama, Tennessee and Mississippi, and rank fourth or better in Florida, Louisiana and Arkansas.
We believe that performance results have to be built on a foundation of service. Our associates have worked hard to bolster Regions' reputation and delivery of customer service. In recent years, our associates have earned high marks in consumer studies conducted by Gallup, J.D. Power and Associates, TNS, Prime Performance and Temkin. Regions conducts more than 200,000 customer surveys every year in all of its businesses, and these surveys give us more confidence in our ability to provide customers with the products and services that meet their needs.
When you consider that 4 million households bank with Regions today and that 50% have only one service such as a checking account or a mortgage, you start to understand our incredible opportunity. The Regions360 program we introduced last fall helps us seize this opportunity with a focus on deepening customer relationships. Regions360 begins with getting a full detailed understanding of our customers' financial situations. It continues with connecting their goals with the best products and services across all of our lines of business to help them achieve these goals. The end result is that we have created shared value for our customers and built stronger and deeper relationships with them. Our associates have been going through companywide training in new techniques and technologies to improve their ability to identify our customers' needs and provide the advice, guidance and education to help our customers meet their goals – regardless of which of our various business lines can help them meet those goals.
We have developed new protocols for identifying – and then meeting – our customers' needs, and believe we have done just that with the Now Banking service we launched in 2012. This service gives unbanked and under banked customers the ability to cash checks, transfer funds, reload prepaid debit cards and expedite bill payment. More than 350,000 of our customers currently use the Now Banking service, half of whom are new to the bank. In addition, we have invested tremendous resources in providing financial education to our customers and communities. Enhancing financial education improves the quality of financial decisions and strengthens our communities. I believe this is a great example of where Regions is identifying the unmet needs of our community and then meeting them with educational programs as well as products and services that are fair, affordable, understandable – and sustainable.
For all of our accomplishments in 2012, we realize that the task before us is to grow our business revenues. New programs such as Now Banking, Regions360 and our many new referral initiatives should position Regions to meet more of our customers' needs as the economy strengthens and loan demand picks up. I feel confident that Regions associates have the resources, the relationships and the resolve to make 2013 a fulfilling year for our customers, our communities and our shareholders.
With the guidance of our Board of Directors, Regions has a clear path forward. I want to thank these dedicated individuals for the support and expertise they have provided over the past year. I also want to express my personal gratitude to our chairman, Earnie Deavenport, for his wise counsel, leadership and support.
I want to recognize Dr. Condoleezza Rice for the wisdom and insights she has provided as an advisor to our Board of Directors. I also want to thank the members of our Operating Committee for the leadership they have provided in recent years. Additionally, I want to express my sincere appreciation to our remarkable team of Regions associates. In every way, they are the heart and soul of this great organization.
Finally, I thank you, our shareholders, for your continuing support and your investment.
President and Chief Executive Officer