Regions Financial (NYSE:RF) released abysmal fourth quarter earnings, but the bottom line losses were due to a goodwill write-down, not an operating issue. The bank is not in the clear, however, as its loan portfolio continues to deteriorate and further losses are likely to amount before the general economy emerges from recession.
The company lost $9.01 per share in the quarter on a GAAP basis, attributable to a non-cash impairment of the company's goodwill account. Regions Financial is required by accounting rules to test its goodwill account at the end of the year. If the bank determines that the fair value of its account is less than the book value, it must write down its value. Essentially, the write-down functions as an admission by Regions Financial that the value of the assets it purchased over the last few years declined in value. (Impairment charge is a term for writing off worthless goodwill, but you need to know what it means and the potential impact it can have on EPS. Learn more in Impairment Charges: The Good, The Bad and The Ugly.)
Regions Financial will not be the last bank to write down goodwill because many banks were acquired by other banking institutions on a regular basis at three to four times book value, if not more, during the peak of the cycle. This is not to say that AmSouth, however, which merged with Regions in 2006, had a great quarter. The company lost $244 million or 35 cents per share in the fourth quarter, excluding the goodwill charge, discontinued operations and merger-related charges.
The bank was also plagued by the continued deterioration of its loan portfolio during the quarter. Regions Financial has total non-performing assets totaling $1.8 billion, or 1.26% of total assets. In addition, the bank's net charge-offs reached $796 million by the end of the quarter. Regions Financial cited continued problems with "residential homebuilders, home equity (mainly second liens in Florida) and condominiums." Unfortunately for investors who thought the worst had passed, the loan portfolio contains approximately $9 billion in assets in these categories.
During the conference call, Regions President and CEO Dowd Ritter called the quarter "the most challenging in our company's history" and said "this is by far the most difficult credit cycle that we've ever witnessed."
Regions Financial received a $3.5 billion investment from the government as part of the Capital Purchase Program of the Troubled Asset Relief Plan (TARP) passed into law last year. The investment allowed the company to report a fairly strong Tier 1 capital ratio of 10.39%. (Find out how economic capital and regulatory capital affect risk management in How Do Banks Determine Risk?)
Other large regional banks that have received TARP investments from the U.S. Treasury include Suntrust Banks (NYSE:STI), which received $1.35 billion, PNC Financial (NYSE:PNC), which received $7.58 billion, and Fifth Third Bancorp (Nasdaq:FITB), which took in $3.41 billion.
Management at Regions Financial, perhaps in a pointed rebuke to opponents of the program, including taxpayers and members of Congress, highlighted the bank's 3% sequential loan growth in the quarter, which includes $12 billion in "new or renewed" loan production. Banks receiving TARP investments have been criticized for not lending the funds out and, thus, prolonging the recession.
Regions Financial's fourth quarter earnings were not as bad as the headline number indicated, but it was nothing to boast about either. Continued deterioration in the loan portfolio caused a loss in the quarter, which probably will continue on into the future. (Learn how to analyze a financial institution's financials in Analyzing a Bank's Financial Statements.)