Regions Financial Corporation — Q3 2019 Form 10-Q
Business context and reporting period. Regions is a bank holding company operating across the South, Midwest and Texas, providing commercial, consumer and mortgage banking, wealth management and related financial services. This unaudited filing covers the quarter and nine months ended September 30, 2019; balance-sheet comparisons are against December 31, 2018. Dollar amounts below are in millions unless stated otherwise.
Financial performance and condition
| Metric | Q3 2019 | Comparable period / change |
|---|---|---|
| Net income available to common shareholders | $385; diluted EPS $0.39 | $548; diluted EPS $0.50 in Q3 2018 |
| Continuing-operations income available to common shareholders | $385; diluted EPS $0.39 | $354; diluted EPS $0.32 in Q3 2018 |
| Net interest income and other financing income | $937 GAAP; $950 taxable-equivalent | $942 GAAP; $956 taxable-equivalent in Q3 2018 |
| Net interest margin | 3.44% taxable-equivalent | 3.47% in Q3 2018 |
| Non-interest income / expense | $558 / $871 | $519 / $922 in Q3 2018 |
| Provision for loan losses | $108 | $84 in Q3 2018 |
- Nine-month results: net income was $1.193 billion versus $1.353 billion in 2018; continuing-operations income available to common shareholders was $1.137 billion versus $1.114 billion. Diluted EPS from continuing operations was $1.13 versus $0.99.
- Margins and efficiency: Q3 adjusted efficiency ratio was 57.40%, compared with 58.05% a year earlier; GAAP efficiency ratio was 57.75% versus 62.59%. The adjusted measure excludes specified items and is non-GAAP.
- Credit: Q3 net charge-offs were $92 million, or an annualized 0.44% of average loans, versus $82 million, or 0.40%, a year earlier. At September 30, the allowance for loan losses was $869 million, 1.05% of loans, and 188% of non-performing loans. Non-performing loans were 0.56% of loans, down from 0.60% at year-end 2018.
- Balance sheet: assets were $128.1 billion, loans $82.8 billion, deposits $94.3 billion and stockholders’ equity $16.6 billion. Since year-end, loans declined $366 million and deposits declined $186 million. Cash and cash equivalents were $5.067 billion, up from $3.538 billion.
- Funding and liquidity: short-term borrowings rose to $5.401 billion from $1.600 billion, while long-term borrowings declined to $9.128 billion from $12.424 billion. Regions reported $2.5 billion of parent-company cash, $17.3 billion of FRB borrowing availability and $17.5 billion of FHLB capacity; the bank’s outstanding FHLB borrowings were $8.4 billion. The company reported compliance with LCR requirements at quarter-end.
- Capital: estimated transitional CET1 was 9.58% at the holding company and 11.67% at the bank. Fully phased-in pro forma CET1 was estimated at 9.53%. Tangible common equity to tangible assets, a non-GAAP measure, was 8.44%, up from 7.80% at year-end.
- Cash flow, first nine months: operating activities provided $2.084 billion, investing activities provided $222 million and financing activities used $777 million. Net cash increased $1.529 billion.
Material changes versus the prior comparable period
- Q3 2018 included a $196 million after-tax gain from the Regions Insurance Group sale, reported in discontinued operations. This explains why total common income and EPS fell year over year even as continuing-operations common income and EPS improved.
- Q3 continuing-operations revenue increased 2.3% to $1.495 billion, while non-interest expense fell 5.5%. Higher fee income and lower expenses were partly offset by increased loan-loss provision and income taxes.
- Net interest margin eased as funding costs rose. For the first nine months, taxable-equivalent net interest income increased to $2.867 billion from $2.815 billion, while the reported margin was 3.47% versus 3.46%.
- Nine-month provision for loan losses rose to $291 million from $134 million. Management attributed the increase to higher loan balances and net charge-offs and increases in classified loans; the 2018 comparison benefited from hurricane-reserve releases and a mortgage-loan sale.
- Accumulated other comprehensive income improved to $295 million from a $964 million loss at year-end, primarily reflecting securities and derivative valuation changes. This contributed to the increase in reported equity.
Outlook, management commentary, risks and unusual items
- 2019 expectations: management revised full-year adjusted average loan growth to low- to mid-single digits; adjusted total revenue growth to approximately 2% (from the lower end of 2%–4%); adjusted non-interest expense to relatively stable (from stable to down slightly); and the effective tax rate to 20%–21% (from 20%–22%). It expected net charge-offs of 40–50 basis points and positive adjusted operating leverage.
- Management said higher funding costs pressured Q3 net interest income and margin, partly offset by higher short-term rates, securities repositioning, loan growth and favorable loan remixing. It described Regions as modestly asset-sensitive at quarter-end, but estimated falling-rate scenarios could reduce net interest income; sensitivity estimates depend on assumptions and are not forecasts.
- Management expected 2019 net charge-offs of 0.40%–0.50% of average loans. It estimated $130–$210 million of potential problem commercial and investor real estate loans that could migrate to non-accrual status in the following quarter.
- Regions expected adoption of CECL on January 1, 2020 to increase its $917 million September 30 allowance by approximately $500–$600 million. The estimate was preliminary and subject to change; the transition was expected to reduce beginning retained earnings, net of tax, and could affect ongoing earnings.
- Regions discontinued new indirect auto lending in Q1 2019, citing competition-driven margin compression, and completed in-process closings by the end of Q2. It planned to exit a third-party indirect-other-consumer lending relationship in Q4. The Highland Associates acquisition closed August 1, 2019.
- Legal contingencies: Regions estimated reasonably possible losses in excess of accrued amounts of up to approximately $20 million, while also stating it could incur no excess losses. It was cooperating with a U.S. Attorney’s Office investigation concerning a former customer relationship and related anti-money-laundering and Bank Secrecy Act compliance. Management believed pending matters would not materially affect the company as a whole, but outcomes remain uncertain.
- Other exposures include interest-rate and mortgage-prepayment risk, deposit competition and funding costs, credit and collateral risks, cyber and third-party operational risks, and the transition from LIBOR. Regions also disclosed a maximum quantifiable $1.2 billion Fannie Mae DUS loss-share exposure; this is a worst-case contractual amount, not expected loss, and the recorded liability was approximately $5 million.
Important facts for investors to verify
- Whether loan-loss trends, potential problem loans and the CECL transition estimate develop in line with management’s assumptions.
- Whether revised 2019 revenue, expense, loan-growth, charge-off and tax expectations are achieved; review the company’s non-GAAP definitions and reconciliations.
- How deposit pricing, funding mix, interest rates and the planned forward-starting hedges affect net interest income and margin.
- Whether liquidity, capital ratios and borrowing capacity remain adequate as funding needs and regulatory requirements change.
- Developments in the federal investigation and other legal matters, including any effect on expenses, reputation or controls.
- The results of the indirect-auto exit and third-party lending relationship exit, and the assumptions underlying mortgage-servicing-right valuations.