Regions Financial Corporation — Q3 2018 Form 10-Q
Reporting period: Three and nine months ended September 30, 2018. Regions is a bank holding company operating across the South, Midwest, and Texas. Figures are in U.S. dollars; financial-statement amounts are in millions unless otherwise noted.
Financial performance and position
- Third-quarter earnings: Continuing-operations net income was $370 million, versus $312 million a year earlier. Net income available to common shareholders from continuing operations was $354 million, or $0.32 diluted EPS, compared with $296 million, or $0.25. Consolidated net income was $564 million, or $0.50 diluted EPS, including discontinued operations.
- Sale-related item: Discontinued operations included a $281 million pretax gain ($196 million after tax) from the July 2 sale of Regions Insurance Group. This materially boosted reported consolidated earnings.
- Net interest: Q3 net interest income and other financing income was $942 million ($955 million on a taxable-equivalent basis), up from $897 million ($920 million taxable-equivalent). Taxable-equivalent net interest margin was 3.50%, versus 3.36%.
- Fees, costs, and credit: Continuing-operations non-interest income rose to $519 million from $482 million; non-interest expense rose to $922 million from $853 million. The provision for loan losses was $84 million versus $76 million. Net charge-offs were $82 million, or an annualized 0.40% of average loans, versus $76 million, or 0.38%.
- Nine-month results: Continuing-operations net income was $1.162 billion, versus $921 million; net income available to common shareholders was $1.305 billion, versus $880 million, including $191 million from discontinued operations. Net interest income was $2.777 billion versus $2.638 billion; non-interest income was $1.538 billion versus $1.446 billion; and non-interest expense was $2.717 billion versus $2.571 billion.
- Balance sheet at September 30: Assets were $124.578 billion, loans $81.821 billion, deposits $93.255 billion, total borrowed funds $14.428 billion, and stockholders’ equity $14.770 billion. At December 31, 2017, the respective amounts were $124.294 billion, $79.947 billion, $96.889 billion, $8.632 billion, and $16.192 billion.
- Cash flow and liquidity: Cash and cash equivalents were $3.495 billion, down $486 million from year-end; nine-month operating cash flow was $1.271 billion, investing cash flow was negative $1.834 billion, and financing cash flow was positive $77 million. The company reported compliance with its liquidity coverage ratio requirements. Parent-company cash was $1.6 billion; stated Federal Reserve borrowing availability was $18.5 billion and total FHLB borrowing capacity was $17.5 billion.
- Capital and shareholder returns: Estimated transitional Basel III ratios for Regions Financial Corporation were 10.18% CET1, 10.97% Tier 1, 12.77% total capital, and 9.42% leverage. The company repurchased $1.752 billion of common stock during the first nine months, and declared $0.32 per share in common dividends. Tangible common equity to tangible assets was 7.60%, down from 8.71% at year-end.
Material changes versus comparable periods
- Q3 continuing-operations earnings increased, supported by higher net interest income and non-interest income, and lower income tax expense. The effective tax rate fell to 18.7% from 30.8%, primarily reflecting the lower federal corporate tax rate under Tax Reform.
- Higher rates and average loan balances supported net interest income and margin; increased deposit and wholesale funding costs partly offset the benefit. Deposit interest expense increased to $64 million from $42 million in Q3.
- Q3 non-interest expense included a $60 million contribution to the Regions Financial Corporation Foundation. Adjusted non-GAAP efficiency ratio was 58.05%, compared with 60.84% a year earlier.
- Loans increased $1.874 billion and deposits declined $3.634 billion from year-end 2017. Borrowed funds increased $5.796 billion, including higher short- and long-term borrowings.
- Equity declined $1.422 billion from year-end, reflecting $1.752 billion of share repurchases, dividends, and a $645 million after-tax decline in other comprehensive income, partly offset by net income.
- Credit indicators improved: non-performing loans excluding loans held for sale were $539 million versus $650 million at year-end; the allowance for loan losses was 1.03% of loans versus 1.17%.
Outlook, commentary, and risks
- 2018 expectations: Management forecast low-single-digit adjusted average loan growth; average deposits relatively stable (excluding brokered and Wealth Institutional Services deposits); adjusted net interest income growth of 5–6%; adjusted non-interest income growth of 4.5–5.5%; adjusted expenses relatively stable; adjusted efficiency ratio below 60%; positive adjusted operating leverage of approximately 3.5–4.5%; and an effective tax rate of approximately 21%.
- Management expected full-year net charge-offs of 35–50 basis points, then anticipating the lower end of the range. It cited interest rates, unemployment, commodity-price volatility, collateral values, and individual large credits as factors that could affect credit results.
- Regions was asset-sensitive in its September interest-rate simulations: a gradual +100 basis-point parallel shift was estimated to add $94 million to annual net interest income, while a −100 basis-point shift was estimated to reduce it by $112 million. Management cautioned that these hypothetical estimates depend on assumptions, particularly deposit pricing and mix, and are not forecasts.
- An October 2018 hurricane affected parts of the company’s footprint; management said the financial impact was not expected to be material, while noting its assessment was ongoing.
- Regions disclosed cooperation 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 program. Management said pending and threatened matters were not expected to have a material overall effect; reasonably possible losses above accruals were estimated at up to approximately $20 million in aggregate.
- Adoption of CECL, planned for 2020, may materially increase the allowance for credit losses; the eventual impact depends on portfolio quality and economic conditions at adoption. For the 2019 lease standard, Regions preliminarily estimated $400–$600 million of lease obligations to be recognized, subject to change.
- Other material risks described include interest-rate and prepayment risk, credit deterioration, deposit competition and funding costs, cyber and operational risks, regulatory changes, and litigation or regulatory proceedings.
Important facts for investors to verify
- Separate ongoing operating performance from the insurance-sale gain when assessing Q3 and nine-month earnings.
- Review the definitions and reconciliations of management’s adjusted growth, efficiency, and operating-leverage measures; these are non-GAAP measures.
- Track deposit outflows, funding mix, and borrowing costs alongside loan growth and net interest margin.
- Monitor credit quality, charge-offs, and management’s eventual CECL estimate, including sensitivity to economic forecasts.
- Check subsequent disclosures on the October hurricane, the regulatory investigation, litigation exposures, capital ratios, and completion of authorized share repurchases.