Regions Financial Corporation — 2018 Form 10-K
Reporting period: Fiscal year ended December 31, 2018. This is an annual filing, not a standalone fourth-quarter report; fourth-quarter figures are identified separately where noted. Regions is a regional bank holding company headquartered in Birmingham, Alabama, operating across the South, Midwest and Texas.
Financial performance and condition
| Metric | 2018 | 2017 |
|---|---|---|
| Net income from continuing operations available to common shareholders | $1.504 billion | $1.177 billion |
| Diluted EPS from continuing operations | $1.36 | $0.98 |
| Net interest income and other financing income, taxable-equivalent | $3.786 billion | $3.629 billion |
| Net interest margin, taxable-equivalent | 3.50% | 3.32% |
| Non-interest income | $2.019 billion | $1.962 billion |
| Non-interest expense | $3.570 billion | $3.491 billion |
| Provision for loan losses | $229 million | $150 million |
| Net charge-offs / average loans | 0.40% | 0.38% |
| Total assets at year-end | $125.688 billion | $124.294 billion |
| Total loans, net of unearned income, at year-end | $83.152 billion | $79.947 billion |
| Deposits at year-end | $94.491 billion | $96.889 billion |
| Long-term borrowings at year-end | $12.424 billion | $8.132 billion |
Profitability and margins: Net income from continuing operations was $1.568 billion, up from $1.241 billion. The effective tax rate declined to 19.8% from 33.3%, principally following the federal corporate tax rate reduction from 35% to 21%. The GAAP efficiency ratio improved to 61.50% from 62.44%; the adjusted non-GAAP ratio improved to 59.26% from 61.35%.
Cash flow: Net cash from operating activities was $2.275 billion, investing activities used $3.045 billion, and financing activities provided $327 million. Cash and cash equivalents declined by $443 million to $3.538 billion at year-end. The filing’s bank-level liquidity disclosures report $1.5 billion on deposit with the Federal Reserve and a loan-to-deposit ratio of 88%.
Capital and liquidity: At year-end, estimated regulatory ratios were 9.90% CET1, 10.68% Tier 1, 12.46% total capital and 9.32% leverage at the holding company; Regions and Regions Bank were classified as well-capitalized. Parent-company cash was $1.9 billion. Reported borrowing availability included $19.0 billion at the Federal Reserve and $8.7 billion at the FHLB based on available collateral; the filing separately reports total FHLB capacity, including outstanding advances, of approximately $17.2 billion. Regions was compliant with its modified LCR requirement.
Fourth-quarter reference: Q4 2018 continuing-operations income was $406 million; net income available to common shareholders was $390 million and diluted continuing-operations EPS was $0.37.
Material changes versus 2017
- Net interest margin expanded by 18 basis points as loan and other earning-asset yields rose more than funding costs. Taxable-equivalent net interest income increased about 4%.
- Loans grew $3.2 billion, or 4.0%, led by commercial and industrial lending. Deposits fell $2.4 billion; deposit costs rose to 26 basis points from 16 basis points.
- Credit indicators improved overall: non-performing assets declined to $566 million from $740 million, and non-performing loans excluding held-for-sale loans fell to $496 million from $650 million. The allowance-to-loans ratio declined to 1.01% from 1.17%, while net charge-offs edged up to 0.40% from 0.38%.
- Long-term borrowings increased $4.3 billion, primarily from higher FHLB advances and senior-note issuance. Stockholders’ equity fell to $15.1 billion from $16.2 billion, reflecting $2.1 billion of share repurchases, dividends and a $215 million reduction in accumulated other comprehensive income, partly offset by earnings.
- Non-interest expense rose 2.3%. Higher salaries, severance, outside services and legal/regulatory expenses were partly offset by lower FDIC assessments and branch-consolidation costs.
Outlook, commentary, risks and unusual items
- 2019 expectations: Management forecast low-single-digit adjusted average loan growth, adjusted non-interest expense relatively stable, an effective tax rate of 20%–22%, and net charge-offs of 40–50 basis points of average loans. These are management expectations, not guarantees.
- Management expected economic growth to moderate, with Regions forecasting U.S. real GDP growth of approximately 2.6% in 2019. It identified trade-policy uncertainty, geopolitical tensions, faster-than-expected rate increases and economic or housing weakness as downside risks.
- Regions is asset-sensitive in its interest-rate modeling: a gradual parallel increase of 100 basis points was estimated to raise annual net interest income by $105 million, while a 100-basis-point decrease was estimated to reduce it by $119 million. Management cautions that these are hypothetical estimates dependent on deposit behavior, balance-sheet composition and other assumptions.
- The sale of Regions Insurance Group closed July 2, 2018 and generated a $281 million pre-tax gain ($196 million after tax), reported in discontinued operations. Total net income, including discontinued operations, was $1.759 billion.
- Regions repurchased approximately 90.4 million shares for about $1.7 billion under its 2018–2019 plan and raised its quarterly common dividend from $0.09 to $0.14 per share beginning in Q3 2018. The Federal Reserve did not object to the 2018 capital plan.
- In January 2019, Regions decided to discontinue indirect auto originations, citing competition-driven margin compression; it planned to stop new originations in Q1 2019 and complete in-process closings by the end of Q2.
- CECL was scheduled for adoption on January 1, 2020. The company expected a potentially material increase in credit-loss allowances, with consumer portfolios likely to account for much of the increase; the amount remained dependent on portfolio quality and economic conditions at adoption.
- Legal contingencies: Regions estimated reasonably possible losses above recorded accruals of up to approximately $20 million at year-end, while noting outcomes are uncertain. It was cooperating with a U.S. Attorney’s Office investigation involving a former customer and related anti-money-laundering/Bank Secrecy Act compliance matters. The Morgan Keegan sale indemnity obligation was reported as immaterial, although ultimate claims could exceed reserves. The DUS loss-share guarantee had a maximum quantifiable contingent exposure of about $1.2 billion; its recorded fair-value liability was approximately $4 million.
- Other significant risks include credit deterioration, regional economic and severe-weather exposure, deposit competition and funding costs, interest-rate and mortgage-prepayment risk, cybersecurity and third-party disruptions, regulation, LIBOR transition, and potential capital or liquidity constraints. The filing also disclosed $4.8 billion of goodwill; the 2018 qualitative impairment assessment found no impairment indicator requiring a quantitative test.
- The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management and the auditor concluded internal control was effective as of December 31, 2018.
Important facts for investors to verify
- Reconcile the reported earnings improvement with the insurance-sale gain, lower tax rate and share-count reduction; distinguish continuing operations from total net income.
- Track deposit balances, deposit pricing and borrowing growth, including the sustainability and cost of the increased FHLB and senior-note funding.
- Assess credit trends against the lower allowance ratio, higher provision and charge-offs, commercial industry exposures, and management’s 2019 charge-off outlook.
- Check capital ratios and the scope and timing of regulatory relief, including the capital plan, permitted distributions and ongoing regulatory requirements.
- Monitor execution of the share-repurchase and dividend plans, and the financial effects of exiting indirect auto lending.
- Evaluate CECL implementation and its eventual effect on allowances, earnings and regulatory capital; review the unresolved legal investigation and contingencies, including the Morgan Keegan indemnity and DUS guarantee.