Regions Financial Corporation — FY 2017 Form 10-K
Business context and reporting period. Regions Financial Corporation is a Birmingham-based bank holding company operating across the South, Midwest and Texas. It provides commercial, consumer and mortgage banking, alongside wealth, insurance and other financial services. This annual report covers the fiscal year ended December 31, 2017; comparisons are primarily with 2016.
Financial performance and condition
| Metric | 2017 | 2016 |
|---|---|---|
| Net interest income and other financing income (GAAP) | $3.540 billion | $3.398 billion |
| Non-interest income | $2.105 billion | $2.153 billion |
| Non-interest expense | $3.624 billion | $3.617 billion |
| Provision for loan losses | $150 million | $262 million |
| Income from continuing operations | $1.257 billion | $1.158 billion |
| Net income | $1.263 billion | $1.163 billion |
| Net income available to common shareholders | $1.199 billion | $1.099 billion |
| Diluted EPS from continuing operations | $1.00 | $0.87 |
| Net interest margin (taxable-equivalent) | 3.32% | 3.14% |
| Adjusted efficiency ratio (non-GAAP) | 62.16% | 63.28% |
Net income and diluted EPS improved year over year. Higher asset yields and disciplined deposit pricing lifted net interest income and margin; lower loan-loss provision also supported earnings. Non-interest income declined, while expenses were broadly flat. The reported 2017 effective tax rate was 32.8%, including approximately $52 million of fourth-quarter tax expense related to Tax Reform; excluding that item, management reported a 30.1% rate.
Fourth quarter: Net income available to common shareholders was $319 million and diluted EPS was $0.27. The provision for loan losses was a $44 million credit. Quarterly income tax expense was $214 million, including Tax Reform-related effects.
Balance sheet and liquidity at year-end: Total assets were $124.3 billion, loans net of unearned income $79.9 billion, deposits $96.9 billion, stockholders’ equity $16.2 billion and long-term debt $8.1 billion. Total borrowings were $8.6 billion, including $500 million of short-term borrowings. Deposits declined $2.1 billion from 2016; loans declined $148 million. The loan-to-deposit ratio was 83%. Regions reported $1.7 billion of cash at the parent, $1.9 billion on deposit with the Federal Reserve, and $16.4 billion of Federal Reserve and $17.2 billion of FHLB borrowing capacity, subject to collateral. The company reported compliance with its LCR requirement; a numeric LCR is not provided in the supplied text.
Cash flows: Operating activities provided $2.281 billion; investing activities used $785 million; financing activities used $2.966 billion. Cash and cash equivalents ended the year at $3.981 billion, down from $5.451 billion.
Capital and shareholder returns: Estimated Basel III CET1, Tier 1 and total capital ratios were 11.05%, 11.86% and 13.78%, respectively; Regions and Regions Bank were classified as well-capitalized. The 2017 common dividend was $0.315 per share. Regions repurchased approximately 65.7 million shares for about $1.0 billion under its $1.47 billion authorization through the second quarter of 2018.
Material changes versus 2016
- Net interest margin rose 18 basis points to 3.32%; taxable-equivalent net interest income increased $148 million, or about 4%.
- Provision for loan losses fell $112 million to $150 million, reflecting improving credit indicators and commercial loan paydowns and risk-rating improvements. Net charge-offs nevertheless rose to $307 million, or 0.38% of average loans, from $277 million, or 0.34%.
- Non-performing loans excluding loans held for sale decreased to $650 million from $995 million; non-performing assets declined to $740 million from $1.098 billion. The allowance-to-loans ratio fell to 1.17% from 1.36%, while allowance coverage of non-performing loans increased to 1.44x from 1.10x.
- Non-interest income decreased $48 million, mainly because lower mortgage income, bank-owned life insurance and nonrecurring prior-year insurance proceeds were partly offset by growth in deposit, card, wealth and capital-markets fees.
- Loans shifted across categories: commercial and industrial loans rose $1.1 billion, while commercial real estate, investor real estate, home equity and indirect-vehicle balances declined. Residential first mortgages increased $621 million.
- Deposits declined, principally as Regions reduced higher-cost brokered sweep deposits and customers shifted among deposit products. Long-term borrowings increased approximately $369 million.
Outlook, commentary, risks and unusual items
Management expected 2018 average loan growth and average deposit growth in the low single digits, with loan growth excluding the indirect-vehicle portfolio and deposit growth excluding brokered and Wealth Institutional Services deposits. Other stated expectations were adjusted net interest income growth of 3%–5%, adjusted non-interest income growth of 3%–6%, adjusted expenses relatively stable, adjusted efficiency ratio below 60%, adjusted positive operating leverage of approximately 3%–5%, and an effective tax rate of 20%–22%. Management forecast net charge-offs of 35–50 basis points and expected the result to be toward the lower end, based on then-current conditions.
Management cited improving economic and credit trends, but identified interest-rate and deposit-pricing sensitivity, regional economic concentration, real estate and energy exposures, hurricanes, competition, cyber and third-party risks, and regulatory and legal matters as material risks. Regions recorded a $40 million hurricane-related loan-loss provision; it said the estimate remained uncertain and did not anticipate an increase based on information then available. The company also disclosed cooperation with a U.S. Attorney’s Office investigation concerning a former customer and related accounts, including aspects of anti-money-laundering and Bank Secrecy Act compliance. Management said pending matters were not expected to have a material overall effect, while acknowledging that unexpected developments could be material in a particular period. The Morgan Keegan sale indemnity obligation was reported as immaterial at year-end, but ultimate claims could exceed reserves.
Tax Reform reduced the federal corporate rate to 21% beginning in 2018 and prompted the fourth-quarter tax charge and deferred-tax revaluation. Regions also identified the expected 2020 adoption of CECL as likely to increase the allowance for credit losses, with the amount dependent on portfolio composition, credit quality and economic forecasts at adoption. Auditors issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded controls were effective as of December 31, 2017.
Most important facts for investors to verify
- Whether margin expansion and projected 2018 revenue growth materialized, especially as deposit costs respond to rising rates.
- Whether loan growth and credit performance met guidance, including hurricane-related exposure, energy and other large commercial credits, and the adequacy of the allowance.
- The actual impact of Tax Reform on recurring earnings, deferred tax assets and regulatory capital, and the eventual CECL transition impact.
- Developments and potential financial or reputational consequences from the disclosed anti-money-laundering investigation and other legal contingencies.
- Execution of the remaining share-repurchase authorization and dividend plans, subject to earnings, capital needs and regulatory approval.
- Liquidity and funding trends, including deposit mix, collateral-dependent borrowing capacity, and forthcoming public LCR disclosures.