Regions Financial Corporation — Q2 2019 Form 10-Q
Reporting period: Three and six months ended June 30, 2019; balance-sheet comparisons are to December 31, 2018. Regions is a bank holding company serving the South, Midwest and Texas, with Corporate Bank, Consumer Bank and Wealth Management segments. Figures are in U.S. dollars; financial amounts are in millions unless stated otherwise.
Financial performance
| Metric | Q2 2019 | Q2 2018 | Change / context |
|---|---|---|---|
| Net income | $390 | $375 | Up 4% |
| Net income available to common shareholders | $374 | $359 | Up 4% |
| Diluted EPS | $0.37 | $0.32 | Up 16% |
| Net interest income and other financing income, GAAP | $942 | $926 | Up $16 |
| Net interest income, taxable-equivalent basis | $956 | $938 | Up $18 |
| Net interest margin, taxable-equivalent basis | 3.45% | 3.49% | Down 4 basis points |
| Non-interest income | $494 | $512 | Down $18 |
| Non-interest expense | $861 | $911 | Down $50 |
| Provision for loan losses | $92 | $60 | Up $32 |
| GAAP efficiency ratio | 59.37% | 62.74% | Improved |
| Adjusted efficiency ratio | 58.33% | 60.41% | Improved; non-GAAP |
Q2 pretax income from continuing operations was $483, versus $467 a year earlier. Management attributed higher earnings primarily to lower non-interest expense, partly offset by higher loan-loss provision. For the six months, net income was $784 versus $789; common EPS was $0.74 versus $0.67. Six-month net interest income on a taxable-equivalent basis was $1.917 billion versus $1.860 billion, while the margin was 3.49% versus 3.48%.
Balance sheet, cash flow and capital
- Total assets were $127.5 billion, up from $125.7 billion at year-end. Loans, net of unearned income, were $83.6 billion versus $83.2 billion; deposits were $95.0 billion versus $94.5 billion.
- Cash and cash equivalents were $4.5 billion, up $950 million from year-end. For the first six months, operating cash flow was $1.321 billion, investing cash flow was $35 million, financing cash flow was negative $406 million, and cash increased $950 million.
- Total borrowed funds were $13.5 billion, compared with $14.0 billion at year-end. Short-term borrowings rose to $4.25 billion from $1.60 billion, while long-term borrowings declined to $9.21 billion from $12.42 billion, primarily reflecting a shift in FHLB advances.
- Stockholders’ equity was $16.6 billion versus $15.1 billion. A $943 million six-month increase in accumulated other comprehensive income, largely from securities and derivatives, contributed to the increase; Regions also issued $490 million of Series C preferred stock.
- Estimated holding-company CET1 capital was 9.87%; Regions Bank’s was 11.54%. Regions reported compliance with applicable LCR requirements. It reported $3.0 billion of cash at the holding company, $19.0 billion of FRB borrowing availability and $17.4 billion of FHLB borrowing capacity.
Credit quality and material changes
- Q2 net charge-offs were $92 million, or an annualized 0.44% of average loans, compared with $62 million, or 0.32%, a year earlier. The six-month net charge-off ratio was 0.41% versus 0.37%.
- At June 30, the allowance for loan losses was $853 million, or 1.02% of loans, compared with $840 million, or 1.01%, at year-end. Non-performing loans were $533 million, excluding loans held for sale, and 0.64% of loans, versus 0.60% at year-end. Non-performing assets totaled $604 million.
- Commercial and industrial loans increased $1.2 billion from year-end; consumer loans declined, notably indirect vehicle loans, down $638 million. Regions stopped originating indirect auto loans in Q1 because competition compressed returns, completing in-process closings by the end of Q2. Direct auto lending continues.
- Q2 non-interest income fell mainly because capital markets and mortgage income declined and the securities portfolio recorded a $19 million net loss. The securities loss reflected sales of primarily lower-yielding agency mortgage-backed securities as Regions repositioned its portfolio.
- Non-interest expense fell 5.5% year over year, with lower salaries, FDIC assessments and professional fees. Staffing reductions and lower severance costs contributed; full-time equivalent headcount declined to 19,765 from 20,326 a year earlier.
Outlook, risks and unusual items
- Management’s 2019 outlook: adjusted average loan growth in the low-to-mid single digits; adjusted total revenue growth at the lower end of the 2%–4% range; adjusted non-interest expense stable to slightly down; net charge-offs of 40–50 basis points; and an effective tax rate of 20%–22%. Regions expected positive adjusted operating leverage. Revenue-growth and expense expectations were revised from prior guidance.
- Regions estimated adoption of CECL on January 1, 2020 could increase the allowance for credit losses by approximately $400–$600 million, based on March 31 loan balances and its then-current assumptions. The estimate is subject to change and adoption will reduce beginning retained earnings, net of tax.
- Interest-rate sensitivity modeling showed estimated 12-month net interest income changes of +$86 million under a gradual +100 basis-point shift and −$111 million under a gradual −100 basis-point shift. These are scenario estimates, not forecasts; Regions noted the balance sheet was modestly asset-sensitive and sensitivity was expected to decline as forward-starting hedges enter the measurement period.
- Key risks include credit deterioration and economic conditions, deposit pricing and funding costs, interest-rate and prepayment exposure, LIBOR transition, competition, regulatory requirements, cyber and operational risks, and litigation or regulatory proceedings.
- Regions said it was cooperating with a U.S. Attorney’s Office investigation concerning a former customer and related accounts, including aspects of its anti-money-laundering and Bank Secrecy Act compliance. Management considered the outcome of pending matters not expected to materially affect the Company as a whole, but estimated reasonably possible losses above accrued amounts of up to approximately $20 million; actual outcomes remain uncertain.
- After quarter-end, Regions closed its acquisition of Highland Associates on August 1, 2019. It authorized up to $1.37 billion of common-share repurchases for Q3 2019 through Q2 2020; approximately 9.3 million shares had been repurchased for $144.8 million by August 6. The quarterly common dividend was increased to $0.155 per share on July 24.
Most important facts for investors to verify
- Whether loan-loss provision, charge-offs and non-performing loans continue to rise, and whether the 40–50 basis-point full-year charge-off outlook holds.
- Whether deposit repricing and funding costs continue to pressure net interest margin despite loan and securities yield growth.
- The basis and eventual realized impact of the estimated $400–$600 million CECL allowance increase.
- Execution and funding effects of planned repurchases, the higher dividend, and the Highland Associates acquisition.
- Developments in the U.S. Attorney’s Office investigation and other legal contingencies, as well as progress on LIBOR transition.