Regions Financial Corporation — Q1 2018 Form 10-Q
Business context and reporting period
Regions is a Birmingham-based bank holding company serving the South, Midwest and Texas through commercial, consumer and wealth-management businesses. This unaudited filing covers the three months ended March 31, 2018; balance-sheet comparisons are with December 31, 2017. Unless otherwise noted, amounts are in millions of dollars.
Financial performance and position
| Metric | Q1 2018 / Mar. 31, 2018 | Comparable period / prior date |
|---|---|---|
| Net income | $414; $398 available to common shareholders | $301; $285 available to common shareholders in Q1 2017 |
| Diluted earnings per share | $0.35 | $0.23 from continuing operations in Q1 2017 |
| Net interest income and financing income, GAAP | $909 | $859 in Q1 2017 |
| Net interest income and financing income, taxable-equivalent | $922; net interest margin 3.46% | $881; margin 3.25% in Q1 2017 |
| Non-interest income / expense | $507 / $884 | $474 / $843 in Q1 2017 |
| Provision (credit) for loan losses | $(10) | $70 in Q1 2017 |
| Net charge-offs | $84; 0.42% annualized of average loans | $100; 0.51% in Q1 2017 |
| Cash flows | $154 operating; $(44) investing; $(906) financing; cash and equivalents ended at $3,185 | $732 operating; $(125) investing; $(1,684) financing; period-end cash $4,374 in Q1 2017 |
| Total assets / loans | $122,913 / $79,822 | $124,294 / $79,947 at Dec. 31, 2017 |
| Deposits / borrowed funds | $96,990 / $7,949 | $96,889 / $8,632 at Dec. 31, 2017 |
| Allowance for loan losses | $840; 1.05% of loans | $934; 1.17% at Dec. 31, 2017 |
| Stockholders’ equity | $15,866 | $16,192 at Dec. 31, 2017 |
Adjusted efficiency ratio was 60.54%, versus 61.91% in Q1 2017; GAAP efficiency ratio was 61.92%. Return on average tangible common equity, a non-GAAP measure, was 16.08%, versus 10.63%. The company reported a 23.6% effective tax rate, down from 30.3%.
Material changes versus comparable periods
- Common-shareholder income rose to $398 from $285, primarily reflecting higher net interest income and a lower loan-loss provision. The prior-year quarter included $8 of after-tax discontinued-operations income.
- Net interest margin improved 21 basis points year over year, with higher market rates partly offset by increased funding costs and lower average loan balances.
- Non-interest income increased $33, led by capital-markets and miscellaneous income. Non-interest expense rose $41, including higher salaries, outside services and professional fees.
- The loan-loss credit reflected improving credit measures, criticized-loan payoffs and paydowns, a $30 reduction in hurricane-specific reserves, and the effect of selling $254 of residential mortgage loans.
- Loans were broadly stable versus year-end: commercial loans increased, while investor real estate and consumer balances declined. Deposits rose $101; long-term borrowings fell $183 and short-term borrowings declined from $500 to zero.
- Accumulated other comprehensive loss worsened by $402 in the quarter, largely from unrealized losses on available-for-sale securities and cash-flow hedges, contributing to the decline in equity.
Outlook, risks, contingencies and unusual items
- For 2018, management expects low-single-digit adjusted average loan growth and low-single-digit average deposit growth, excluding brokered and Wealth Institutional Services deposits. Adjusted net interest income growth guidance was raised to 4%–6% from 3%–5%; adjusted non-interest income growth is expected at 3%–6% and adjusted non-interest expense relatively stable.
- Management targets an adjusted efficiency ratio below 60%, positive adjusted operating leverage of approximately 3%–5%, and a 20%–22% effective tax rate. Expected full-year net charge-offs are 35–50 basis points, with management expecting the lower end based on current trends and conditions. These are forward-looking, non-GAAP or management-defined measures where noted.
- Interest-rate simulations indicate asset sensitivity: a gradual +100-basis-point shift is estimated to increase annual net interest income by $101, while a gradual −100-basis-point shift is estimated to reduce it by $117. Management cautions that assumptions make these estimates non-predictive.
- On April 4, 2018, Regions agreed to sell Regions Insurance Group to BB&T Insurance Holdings. The sale, expected to close in Q3 subject to approvals and customary conditions, is expected to produce an after-tax gain of about $200 and approximately $300 of CET1 capital.
- Regions reported transitional Basel III CET1 ratios of 11.11% for the holding company and 12.92% for the bank; the company said it was compliant with LCR requirements. Holding-company cash was $1.3 billion. Bank borrowing capacity was $16.6 billion at the Federal Reserve and $17.3 billion at the FHLB, subject to collateral.
- Key risks include credit deterioration, interest-rate and deposit-pricing changes, securities valuation and liquidity, cyber and vendor exposures, regulatory requirements, and litigation. Management estimated $75–$150 of potential problem commercial and investor real-estate loans that could migrate to non-accrual in the next quarter.
- Regions is 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 said pending and threatened matters were not expected to materially affect the company overall, while acknowledging an adverse outcome could be material in a particular period. A separate Morgan Keegan-related case had a trial set for June 2018 and is subject to an indemnity with Raymond James.
- Regions expects CECL adoption in Q1 2020 to increase its allowance overall, with the amount dependent on portfolio mix, quality and economic conditions at adoption. It estimated $400–$600 of future lease obligations could be recognized on adoption of the new lease standard in 2019; it did not expect a material pre-tax income effect.
Most important facts for investors to verify
- Whether margin and earnings growth persist as deposit costs rise and loan balances evolve.
- Whether credit quality and charge-offs support the lower-end 2018 loss outlook, particularly for criticized and potential problem commercial real-estate credits.
- The final sale timing, approvals, gain and capital impact for Regions Insurance Group.
- The drivers and potential persistence of securities-related AOCI losses, and implications for capital and shareholder returns.
- Progress against adjusted expense, efficiency and operating-leverage targets, including the underlying non-GAAP reconciliations.
- Developments in the regulatory investigation, litigation matters, CECL implementation and lease-accounting estimates.