Regions Financial Corporation — Q3 2015 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2015; unaudited consolidated results. Comparisons are with the corresponding 2014 periods unless otherwise noted. Dollar amounts are in millions unless stated otherwise.
Business context
Regions is a bank holding company headquartered in Birmingham, Alabama, serving customers primarily across the South, Midwest and Texas. Its reportable businesses are Corporate Bank, Consumer Bank and Wealth Management. It operated 1,630 branches at quarter-end.
Financial performance and position
| Metric | Q3 2015 / September 30, 2015 | Comparison |
|---|---|---|
| Net income | $258; $242 available to common shareholders; diluted EPS $0.18 | Q3 2014: $320; $300 available to common; diluted EPS $0.22 |
| Continuing operations | Net income $262; diluted EPS available to common $0.19 | Q3 2014: $317; $0.21 |
| Net interest income | $836 GAAP; $855 taxable-equivalent | Q3 2014: $821 GAAP; $837 taxable-equivalent |
| Net interest margin | 3.13% taxable-equivalent | Q3 2014: 3.18% |
| Non-interest income / expense | $497 / $895 | Q3 2014: $497 / $826 |
| Provision for loan losses | $60 | Q3 2014: $24 |
| Assets / loans, net of unearned income | $124,789 / $81,063 | December 31, 2014: $119,563 / $77,307 |
| Deposits / borrowed funds | $97,178 / $7,364 | December 31, 2014: $94,200 / $5,715 |
| Allowance for loan losses | $1,115, or 1.38% of loans | December 31, 2014: $1,103, or 1.43% |
| Non-performing assets | $926; 1.14% of loans and related assets | December 31, 2014: $991; 1.28% |
| Stockholders’ equity | $16,952 | December 31, 2014: $16,873 |
For the first nine months, net income was $777 versus $931 in 2014; net income available to common shareholders was $729 versus $895, and diluted EPS was $0.54 versus $0.64. Net interest income was $2,471 versus $2,460; non-interest income was $1,557 versus $1,429; non-interest expense was $2,734 versus $2,463. Provision for loan losses rose to $172 from $61.
Cash flow: For the nine months, operating activities provided $1,565, investing activities used $4,335 and financing activities provided $3,774. Cash and cash equivalents increased $1,004 to $5,008.
Capital and liquidity: Estimated transitional Basel III CET1 ratios at September 30 were 10.98% for Regions Financial and 11.79% for Regions Bank. The company reported $3.2 billion on deposit with the Federal Reserve, $21.6 billion of Federal Reserve borrowing availability and $11.7 billion of FHLB availability, subject to collateral. Tangible common equity to tangible assets was 9.34%; this is a non-GAAP measure.
Material changes versus comparable periods
- Q3 net income available to common shareholders fell $58, primarily reflecting higher loan-loss provision and operating expenses, partly offset by higher net interest income.
- Q3 net interest income increased, but margin compressed five basis points as lower asset yields and loan-mix shifts outweighed reduced funding costs.
- Q3 non-interest expense increased $69. Deposit administrative fees included a $23 prior-assessment adjustment; the quarter also had a $24 million unfavorable comparison in provision for unfunded credit losses versus a $24 million recovery in Q3 2014.
- Loans grew $3.8 billion from year-end, led by commercial and industrial lending, which rose $3.2 billion. Deposits increased $3.0 billion, primarily from consumer non-time deposits.
- Long-term borrowings rose about $3.9 billion, mainly reflecting increased FHLB advances and a $750 million bank-note issuance; short-term borrowings were eliminated after customer repurchase agreements were phased out.
- Non-performing assets declined $65 from year-end, while non-performing commercial and industrial loans increased, primarily under pressure in energy lending.
Outlook, risks and unusual items
- Management expected moderate economic growth and an improving labor market for the remainder of 2015, while noting increased global uncertainty and uncertain timing of rate increases. Regions described its balance sheet as moderately asset-sensitive: a sustained 100-basis-point rise in long-term rates was estimated to add about $107 million to 12-month net interest income versus the modeled base case; these scenarios are not forecasts.
- Management expected 2015 net charge-offs to decline versus 2014, but provision expense to increase, citing loan growth, energy-related reserves and the Shared National Credit review. It cautioned that commodity prices and large commercial credits could cause credit-metric volatility.
- Direct energy loans were approximately $2.7 billion and indirect energy-related exposures approximately $554 million, for about $3.3 billion combined. Management warned prolonged low oil prices could worsen past-due, criticized, non-performing and charge-off measures.
- Q3 securities impairment charges included $6 million of other-than-temporary impairment. Nine-month results included a $90 million insurance recovery related to settlement of a previously reserved shareholder lawsuit, a $43 million debt-extinguishment loss, and $50 million of branch/property charges. The Q3 $23 million prior deposit-assessment adjustment was an unusual expense item.
- Regions adopted affordable-housing investment accounting guidance retrospectively in 2015; adoption reduced opening retained earnings by $116 million. The filing says other prior-period reclassifications were immaterial.
- Regions estimated reasonably possible legal losses in excess of accrued amounts of up to approximately $40 million, while noting that no excess loss was also possible. The Morgan Keegan indemnification obligation had a $201 million carrying amount. Management said pending matters were not expected to materially affect the company overall, but outcomes remain uncertain.
- Regions expected its bank’s CRA rating to be downgraded following an examination that was not yet final; a downgrade could restrict certain acquisitions and branch applications. The filing also highlights regulatory, cyber-security, interest-rate, prepayment, credit and liquidity risks.
- The Federal Reserve raised no objection to Regions’ 2015 capital plan. The company authorized an $875 million repurchase program through Q2 2016 and repurchased about $442 million through September 30; capital distributions remain subject to regulatory requirements and approvals.
Important facts for investors to verify
- Whether energy-related borrowers’ performance, oil prices and related reserves materially change subsequent credit quality, provision expense or charge-offs.
- Whether deposit-cost and asset-yield trends sustain net interest income and margin, and whether the interest-rate sensitivity assumptions remain appropriate.
- How much of the $150–$225 million estimated potential-problem commercial and investor real estate loan balance migrates to non-accrual status.
- Progress and outcome of the CRA examination, mortgage-related government inquiries, and legal matters, including losses beyond existing accruals and the Morgan Keegan indemnification.
- Capital ratios, regulatory liquidity compliance and the pace of share repurchases and dividends relative to earnings and regulatory constraints.
- The sustainability of reported earnings after distinguishing recurring operations from the insurance recovery, debt-extinguishment loss, branch charges and other identified unusual items.