Regions Financial Corporation — Q1 2016 Form 10-Q
Reporting period: Three months ended March 31, 2016; balance-sheet comparisons are against December 31, 2015. Regions is a bank holding company operating across the South, Midwest and Texas. Financial statements are unaudited.
Financial results
| Metric | Q1 2016 | Q1 2015 / comparison |
|---|---|---|
| Net interest income and other financing income (GAAP) | $862 million | $815 million |
| Net interest income, taxable-equivalent | $883 million | $832 million |
| Net interest margin, taxable-equivalent | 3.19% | 3.18% |
| Non-interest income | $506 million | $470 million |
| Non-interest expense | $869 million | $905 million |
| Provision for loan losses | $113 million | $49 million |
| Net income | $273 million | $234 million |
| Net income available to common shareholders | $257 million | $218 million |
| Diluted earnings per common share | $0.20 | $0.16 |
Management attributed improved earnings primarily to higher net interest income and non-interest income, plus lower non-interest expense; the higher loan-loss provision partially offset those gains. Adjusted non-GAAP efficiency ratio was 60.63%, versus 64.91%; adjusted non-GAAP operating leverage and efficiency figures are management-defined and should be assessed alongside GAAP results.
Operating cash flow was $790 million, investing cash flow was negative $656 million, and financing cash flow was negative $1.058 billion. Cash and cash equivalents ended the quarter at $4.390 billion, down $924 million from year-end, mainly reflecting lower interest-bearing deposits at other banks and normal operating variations.
Balance sheet, credit and capital
- Total assets were $125.539 billion, down from $126.050 billion. Loans, net of unearned income, were $81.606 billion, up from $81.162 billion; deposits were $98.154 billion, down from $98.430 billion.
- Long-term borrowings were $7.851 billion, down $498 million. The decrease mainly reflected a $1 billion reduction in FHLB advances, partly offset by issuing $500 million of 3.20% senior notes. Short-term borrowings were zero at quarter-end.
- Stockholders’ equity was $17.211 billion, compared with $16.844 billion at year-end. The increase included $273 million net income and $357 million of other comprehensive income, offset in part by common and preferred dividends and $175 million of first-quarter share repurchases.
- Allowance for loan losses was $1.151 billion, or 1.41% of loans, versus $1.106 billion and 1.36% at year-end. Net charge-offs were $68 million, an annualized 0.34% of average loans, versus $54 million and 0.28% a year earlier.
- Non-performing assets rose to $1.112 billion from $920 million; non-performing loans excluding loans held for sale were $993 million, up from $782 million. Management cited downgrades of large energy credits amid low oil prices. Direct and indirect energy-related loans totaled approximately $3.2 billion, or 4% of loans; related direct-energy allowance coverage was 8%, compared with 6% at year-end.
- Transitional Basel III CET1 ratios were estimated at 10.87% for Regions Financial Corporation and 11.65% for Regions Bank. The fully phased-in pro forma CET1 ratio, a non-GAAP estimate, was 10.71%. Regions reported compliance with applicable LCR requirements at March 31.
Changes and unusual items
- Compared with Q1 2015, non-interest income rose 7.7%, led by capital markets fees, card and ATM fees, bank-owned life insurance and affordable housing revenue. Net securities losses of $5 million replaced $5 million of gains a year earlier; Regions said it sold energy-related corporate bonds to reduce downgrade exposure.
- Non-interest expense fell 4.0%, principally because Q1 2015 included a $43 million debt-extinguishment loss and higher branch/property charges. Q1 2016 included $12 million of severance costs; salary and benefit expense increased $17 million.
- Management reorganized business segments and changed loan-loss provision and cost-allocation methods in Q1; prior-period segment data was recast. Goodwill testing after the reorganization found no impairment.
- Regions purchased servicing rights on approximately $2.6 billion of residential mortgages for about $24 million. Residential mortgage servicing rights ended at $239 million, down from $252 million, including a $36 million negative valuation-input change and $8 million of economic amortization.
Guidance, commentary and risks
- For 2016, management expected average loan growth of 3%–5% and average deposit growth of 2%–4%, relative to Q4 2015 averages; net interest income and other financing income growth of 2%–4%; adjusted non-interest income growth of 4%–6%; adjusted non-interest expense flat to modestly higher; adjusted efficiency ratio below 63%; and adjusted operating leverage of 2%–4%.
- Management planned to eliminate $300 million of existing non-interest expense over 2016–2018 and expected 35%–45% of that reduction in 2016. Expected full-year net charge-offs were 25–35 basis points, with results expected toward the upper end given oil prices. If the Federal Reserve did not raise rates further in 2016, management expected net interest income growth toward the low-to-middle part of its range.
- Interest-rate sensitivity estimates showed annual net interest income increasing $124 million under a gradual +100 basis-point shift and declining $75 million under a gradual -50 basis-point shift; instantaneous scenarios were +$160 million and -$132 million, respectively. These modeled outcomes depend on assumptions, especially deposit pricing, deposit mix and balance-sheet composition, and are not forecasts.
- Regions estimated reasonably possible legal losses above accruals of up to approximately $40 million, while noting that no excess loss was also reasonably possible. Management believed pending litigation and inquiries would not materially affect the Company overall, but described outcomes as inherently uncertain. Mortgage-related HUD and FHFA inquiries remained ongoing. The Morgan Keegan indemnification liability was $73 million.
- Regions Bank’s CRA rating had been downgraded to “Needs to Improve,” restricting certain activities, including acquisitions of insured depository institutions and some branch applications, until the rating improves. The next examination was expected to commence in 2016.
- Principal risks discussed include energy-credit deterioration, economic and real-estate conditions, interest-rate and prepayment changes, deposit competition, litigation and regulatory matters, capital and liquidity requirements, and cybersecurity and third-party operational risks.
The Board approved an increase in the quarterly common dividend to $0.065 per share on April 21, 2016. The existing $875 million repurchase authorization ran through Q2 2016; approximately $695 million had been repurchased through March 31, with additional repurchases of about $160.5 million reported through May 5. Capital distributions remain subject to regulatory considerations.
Investor verification priorities
- Track energy-related criticized, non-accrual and non-performing loans, provisioning, charge-offs and oil-price assumptions against management’s upper-range credit-loss outlook.
- Reconcile quarterly cash-flow movements, deposit trends, FHLB funding reductions and liquidity capacity; verify continued LCR compliance.
- Review the assumptions and exclusions behind non-GAAP guidance, efficiency ratio, operating leverage and fully phased-in capital estimates.
- Monitor legal and regulatory developments, including the stated possible losses above accruals, mortgage investigations and CRA restrictions.
- Confirm execution and regulatory approval conditions for the dividend increase and remaining share repurchases.