Regions Financial Corporation — Q1 2017 Form 10-Q
Business 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 report covers the three months ended March 31, 2017; income and cash flow are compared with Q1 2016, while balance-sheet changes are compared with December 31, 2016. Amounts below are U.S. dollars unless noted.
Financial performance
| Metric | Q1 2017 | Comparable / change |
|---|---|---|
| Net income | $301 million | $273 million in Q1 2016 |
| Net income available to common shareholders | $285 million; diluted EPS $0.23 | $257 million; diluted EPS $0.20 |
| Continuing-operations income available to common shareholders | $278 million; diluted EPS $0.23 | $257 million; diluted EPS $0.20 |
| Net interest income and other financing income | $859 million GAAP; $881 million taxable-equivalent | $862 million GAAP; $883 million taxable-equivalent |
| Net interest margin | 3.25% taxable-equivalent | 3.19% in Q1 2016 |
| Non-interest income / expense | $510 million / $877 million | $506 million / $869 million |
| Provision for loan losses | $70 million | $113 million in Q1 2016 |
| Net charge-offs | $100 million; 0.51% annualized of average loans | $68 million; 0.34% in Q1 2016 |
| Operating cash flow | $736 million | $788 million in Q1 2016 |
| Cash and cash equivalents, period-end | $4.374 billion | Down $1.077 billion from year-end 2016 |
Management attributed the year-over-year earnings increase primarily to the lower loan-loss provision. Net interest margin improved on higher market rates, hedging effects and increased securities balances, partly offset by lower average loans and higher funding costs. Total taxable-equivalent revenue was $1.391 billion, compared with $1.389 billion in Q1 2016. The adjusted efficiency ratio, a non-GAAP measure, was 62.75%, versus 60.63%.
Financial position, credit and capital
- Total assets were $124.545 billion, down from $125.968 billion at year-end. Loans, net of unearned income, were $79.869 billion, versus $80.095 billion; total deposits were $99.424 billion, versus $99.035 billion.
- Long-term borrowings fell to $6.010 billion from $7.763 billion, mainly due to a $1.8 billion reduction in Federal Home Loan Bank advances. Stockholders’ equity was $16.722 billion, compared with $16.664 billion.
- The allowance for loan losses was $1.061 billion, or 1.33% of loans, versus $1.091 billion and 1.36% at year-end. Non-performing assets were $1.093 billion, broadly stable from $1.098 billion; non-performing loans excluding loans held for sale rose to $1.004 billion from $995 million.
- Estimated transitional Basel III CET1 capital ratios were 11.33% for Regions Financial and 12.32% for Regions Bank. The estimated fully phased-in pro forma CET1 ratio was 11.22% (non-GAAP). Regions reported full compliance with the liquidity coverage ratio requirements.
- Common shares repurchased during Q1 totaled approximately 10.2 million for $150 million. The declared quarterly common dividend was $0.065 per share, up from $0.06 a year earlier; the Board approved an increase to $0.07 beginning in Q2 2017.
Outlook, risks and unusual items
- 2017 outlook: Management assumed GDP growth of 2%–2.5% and market-forward interest rates as of March 28. It expected average loans to be flat to slightly down year over year, revising prior low-single-digit growth guidance; average deposits were expected to be relatively stable, also revised from prior low-single-digit growth guidance.
- Management expected full-year net interest income and other financing income to rise 3%–5%; adjusted non-interest income growth of 1%–3%; adjusted non-interest expense flat to up 1%; an adjusted efficiency ratio of approximately 62%; positive adjusted operating leverage of 2%–4%; an effective tax rate of 30%–32%; and net charge-offs of 35–50 basis points. Adjusted measures are non-GAAP, and actual results may differ.
- Q1’s $39 million in charge-offs on three large commercial loans in energy, healthcare and education contributed to higher charge-offs year over year. Management cited possible credit-metric volatility, including from large commercial exposures and commodity-price fluctuations. Direct and indirect energy-related loans totaled approximately $2.5 billion, about 3% of total loans.
- Interest-rate sensitivity analysis estimated annual net interest income increases of $130 million under a gradual +100-basis-point shift and $226 million under +200 basis points; a gradual −50-basis-point shift was estimated to reduce it by $70 million. These are model-based estimates, not forecasts, and depend on assumptions including deposit pricing and mix.
- Legal contingencies include the Morgan Keegan indemnification of Raymond James, with a $25 million carrying amount at March 31. A New Jersey appellate court affirmed dismissal of RICO claims in a covered case but reversed dismissal of commercial-disparagement and tortious-interference claims and remanded them, with damages limited. Management said estimated losses above accruals, in aggregate, would be immaterial, while noting that adverse developments could be material in a particular period. The Fannie Mae DUS loss-share guarantee had a maximum quantifiable contingent liability of $621 million; its estimated fair-value liability was approximately $4 million.
- Q1 discontinued operations produced $7 million net income, primarily from recovery of Morgan Keegan-related legal expenses. Other notable items included $150 million of share repurchases and a $15 million after-tax reduction in other comprehensive income. Management reported no interim goodwill impairment indicator requiring a test and no material effect from accounting standards adopted in Q1.
Most important facts for investors to verify
- Whether reported loan and deposit trends, net interest margin, and the revised 2017 guidance are consistent with subsequent quarterly results.
- Whether higher Q1 net charge-offs are isolated large-credit events or signal broader deterioration, particularly in commercial and energy exposures; also monitor non-performing loans and the allowance.
- Whether deposit costs and deposit mix respond as assumed in management’s interest-rate sensitivity and earnings outlook.
- How capital distributions, including the higher dividend and remaining repurchase authorization, affect capital and liquidity, subject to regulatory requirements.
- Developments in the indemnified litigation and other regulatory or legal matters, and any resulting change in accruals, cash flows or business practices.