Regions Financial Corporation — Q3 2017 Form 10-Q
Business context and period. Regions is a bank holding company serving the South, Midwest and Texas, with commercial, consumer and mortgage banking and wealth-management businesses. This unaudited filing covers the quarter and nine months ended September 30, 2017; balance-sheet comparisons are with December 31, 2016. Amounts below are in millions unless stated otherwise.
Financial performance and position
| Metric | Q3 2017 | Q3 2016 | Nine months 2017 | Nine months 2016 |
|---|---|---|---|---|
| Net income | $311 | $320 | $928 | $868 |
| Net income available to common shareholders | $295 | $304 | $880 | $820 |
| Diluted EPS | $0.25 | $0.24 | $0.73 | $0.65 |
| Net interest income and other financing income (GAAP) | $898 | $835 | $2,639 | $2,545 |
| Non-interest income | $515 | $599 | $1,550 | $1,631 |
| Non-interest expense | $886 | $934 | $2,672 | $2,718 |
| Provision for loan losses | $76 | $29 | $194 | $214 |
- Margins and operating efficiency: Taxable-equivalent net interest margin was 3.36% in Q3 (3.06% prior year) and 3.31% for the first nine months (3.13% prior year). Q3 adjusted efficiency ratio, a non-GAAP measure, was 61.68% versus 65.27%.
- Balance sheet at September 30: Total assets were $123.3 billion, down from $126.0 billion at year-end. Loans were $79.4 billion, down from $80.1 billion; deposits were $97.6 billion, down from $99.0 billion. Stockholders’ equity was $16.6 billion.
- Debt and liquidity: Borrowed funds totaled $6.7 billion, versus $7.8 billion at year-end, including $600 million of short-term borrowings. Cash and cash equivalents were $3.8 billion, compared with $5.5 billion at year-end. Regions reported compliance with the liquidity coverage ratio requirement; available borrowing capacity was $16.1 billion at the Federal Reserve and $17.5 billion at the FHLB.
- Cash flows, nine months: Operating activities provided $2.0 billion; investing activities provided $38 million; financing activities used $3.7 billion. Cash and cash equivalents decreased $1.7 billion to $3.8 billion, with financing outflows including deposit decline, dividends and $775 million of share repurchases.
- Capital and credit: Estimated transitional CET1 ratios were 11.30% for Regions and 12.44% for Regions Bank. The allowance for loan losses was $1.041 billion, or 1.31% of loans, versus 1.36% at year-end. Non-performing loans were $760 million, down from $995 million; non-performing assets were $839 million, down from $1.098 billion.
Material changes and management commentary
- Q3 common earnings declined year over year, while diluted EPS increased from $0.24 to $0.25 as average shares outstanding fell. Higher net interest income and lower non-interest expense were offset by higher loan-loss provision and lower non-interest income.
- Q3 non-interest income fell $84 million year over year. Contributing factors included $47 million of insurance proceeds in Q3 2016 that did not recur, weaker mortgage and capital-markets income, and operating-lease impairment charges. Nine-month non-interest income fell $81 million.
- Q3 net charge-offs were $76 million, or an annualized 0.38% of average loans, versus $54 million and 0.26% a year earlier. For the first nine months, net charge-offs were $244 million versus $194 million.
- Hurricanes affected Regions’ footprint during Q3. The provision included an estimated $40 million of hurricane-related loan losses. Management said the assessment remained incomplete near quarter-end and that updated borrower information could change loss estimates. Loan exposures included approximately $3.2 billion in the Houston area and $16.2 billion in Florida.
- Loans shifted across categories: commercial and industrial loans grew $431 million from year-end, while total loans declined. Indirect vehicle loans fell $551 million, partly reflecting termination of a third-party purchase arrangement; indirect other-consumer loans grew $398 million.
- Regions repurchased approximately 34.6 million shares for about $500 million through September under a $1.47 billion capital plan. The quarterly common dividend increased to $0.09 per share in Q3. The Federal Reserve gave no objection to the 2017 capital plan.
Outlook, risks and contingencies
- 2017 management expectations: Average loans slightly down and average deposits relatively stable year over year; net interest income and other financing income up 3%–5%; adjusted non-interest income relatively stable; adjusted non-interest expense flat to up 1%; adjusted efficiency ratio about 62%; adjusted operating leverage about 2%; effective tax rate 30%–31%; and net charge-offs of 35–50 basis points. These include non-GAAP measures where specified.
- Management described the balance sheet as moderately asset-sensitive. Its model estimated that a sustained parallel rate increase of 100 basis points would raise 12-month net interest income by $131 million under a gradual shift or $154 million under an instantaneous shift; a 50-basis-point decline was estimated to reduce it by $68 million or $102 million, respectively. These are scenario estimates, not forecasts.
- Key risks include economic and borrower-credit deterioration, interest-rate and deposit-pricing changes, real-estate and commodity exposure, mortgage prepayments and servicing-right valuations, regulatory and capital requirements, cyber and operational risks, and litigation or regulatory proceedings. Management noted energy-related lending exposure of approximately $2.5 billion, including direct and indirect loans.
- Regions was cooperating with a U.S. Attorney’s Office investigation concerning a former customer, related accounts and aspects of its anti-money-laundering and Bank Secrecy Act compliance program. A New Jersey case involving pre-sale Morgan Keegan conduct continued on remanded claims after appellate proceedings; it is subject to Regions’ indemnity to Raymond James. Management said estimated losses in excess of accruals, in aggregate, would be immaterial, while noting adverse outcomes could be material in a particular period.
- The Fannie Mae DUS loss-share guarantee had a maximum quantifiable contingent liability of approximately $834 million; its recorded fair value was about $4 million. The maximum assumes default of all covered loans and no collateral recovery and is not management’s expected loss.
- Regions expects CECL adoption in 2020 to increase the allowance for credit losses; the amount will depend on portfolio quality and economic conditions at adoption. Management did not expect the other discussed pending accounting standards to have a material impact, where stated.
Important facts for investors to verify
- Whether hurricane-related borrower assessments change loan-loss provisions, delinquencies or charge-offs in subsequent filings.
- Whether the 2017 net charge-off outlook and 3%–5% net interest income growth expectation are achieved, and how deposit costs and loan balances evolve.
- Whether fee-income weakness, including mortgage and capital-markets activity, and operating-lease impairment charges persist.
- Progress and potential outcomes of the AML/BSA investigation and litigation matters, including the Raymond James indemnification.
- Use of the remaining share-repurchase authorization, dividend decisions, and capital and liquidity ratios as regulatory rules and market conditions change.