Regions Financial Corporation — Q3 2014 Form 10-Q
Business context and reporting period. Regions is a bank holding company headquartered in Birmingham, Alabama, serving markets across the South, Midwest and Texas. This unaudited filing covers the quarter and nine months ended September 30, 2014; comparisons are with the corresponding 2013 periods, or December 31, 2013 for balance-sheet measures. Amounts are in millions of dollars unless stated otherwise.
Key financial metrics
| Metric | Q3 / September 30, 2014 | Comparable period / prior year-end |
|---|---|---|
| Net income | $325; $305 available to common shareholders | $293; $285 available to common shareholders in Q3 2013 |
| Diluted earnings per share | $0.22 | $0.20 in Q3 2013 |
| Net interest income | $821 GAAP; $837 taxable-equivalent | $824 GAAP; $838 taxable-equivalent in Q3 2013 |
| Net interest margin | 3.18% taxable-equivalent | 3.24% in Q3 2013 |
| Non-interest income / expense | $478 / $826 | $495 / $884 in Q3 2013 |
| Adjusted efficiency ratio | 63.59% non-GAAP | 67.29% in Q3 2013 |
| Net income, nine months | $944; $908 available to common shareholders | $895; $871 available to common shareholders in 2013 |
| Net cash from operating activities, nine months | $1,518 | $3,146 in 2013 |
| Total assets | $119.2 billion | $117.4 billion at December 31, 2013 |
| Loans, net of unearned income | $76.6 billion | $74.6 billion at December 31, 2013 |
| Deposits | $94.1 billion | $92.5 billion at December 31, 2013 |
| Total borrowed funds | $5.7 billion | $7.0 billion at December 31, 2013 |
| Cash and cash equivalents | $4.8 billion | $5.3 billion at December 31, 2013 |
| Allowance for loan losses | $1.18 billion; 1.54% of loans | $1.34 billion; 1.80% at December 31, 2013 |
| Estimated Basel III CET1 ratio | 11.22% non-GAAP | 10.58% at December 31, 2013 |
Material changes and operating trends
- Q3 net income available to common shareholders rose $20 million year over year. Lower non-interest expense more than offset weaker non-interest income; net interest income was nearly unchanged.
- Q3 margin compressed six basis points as loan and securities yields declined; lower funding costs only partly offset this. Nine-month taxable-equivalent net interest margin increased to 3.23% from 3.18%.
- Q3 non-interest income declined $17 million year over year. Mortgage income fell amid slower mortgage demand, and Q3 2013 included a $24 million gain on the sale of non-core Wealth Management assets. Q3 2014 included a $9 million gain from termination of leveraged leases.
- Q3 non-interest expense fell $58 million year over year, including lower deposit administrative fees and a $24 million recovery on unfunded credit losses. For the first nine months, reported expense included a $35 million gain on sale of TDR loans.
- Loans increased about $2.0 billion from year-end, mainly from commercial and industrial and indirect auto lending; home equity and some commercial real estate balances declined. Deposit growth was concentrated in non-interest-bearing demand, transaction and domestic money-market accounts.
- Credit indicators improved: Q3 net charge-offs were $75 million, or 0.39% annualized, versus $114 million, or 0.60%, in Q3 2013. Non-performing assets declined to $1.0 billion from $1.3 billion at year-end 2013.
- Long-term borrowings decreased about $1.0 billion, primarily due to FHLB advance maturities. Stockholders’ equity rose to $17.2 billion from $15.8 billion, reflecting earnings, preferred stock issuance and improved accumulated other comprehensive income, partly offset by dividends.
Outlook, risks and unusual items
- Management expected modest near-term margin pressure: assuming rates remained at then-current levels, it forecast one to three basis points of margin compression in Q4 2014, while expecting net interest income to grow with loan growth. It expected 2014 net charge-offs and non-performing assets to continue improving versus 2013.
- Management identified possible volatility in credit costs from economic conditions, real estate values, interest rates, unemployment and large individual credits. It estimated $125 million to $200 million of potential problem commercial and investor real estate loans that could migrate to non-accrual in the next quarter.
- Regions expected to meet the modified Liquidity Coverage Ratio requirements upon implementation without significant balance-sheet changes. The filing reported $21.3 billion of Federal Reserve borrowing availability and $9.8 billion of FHLB availability, subject to collateral.
- Regions planned to pilot a revised deposit-account posting order process in Q1 2015. Management’s preliminary estimate was a $10 million to $15 million quarterly pre-tax reduction in service charges after anticipated full implementation in the second half of 2015; the estimate depended on assumptions and was subject to change.
- Legal matters included Morgan Keegan-related indemnification obligations and investigations into mortgage origination, underwriting and quality-control practices for FHA-insured loans and loans sold to Fannie Mae and Freddie Mac. The carrying value of the Raymond James indemnification obligation was $208 million. Regions estimated reasonably possible legal losses in excess of accruals of up to approximately $170 million, while noting it could also incur no excess losses.
- Capital actions remain subject to regulatory considerations. Regions issued $500 million of Series B preferred stock in April 2014 and raised its common dividend to $0.05 per quarter. No repurchases under the new $350 million plan had occurred by September 30; by November 4, the company reported repurchases of approximately $114.7 million.
- Other risks disclosed include interest-rate and mortgage prepayment exposure, deposit competition, credit and liquidity risks, cyber threats, regulatory changes, and the possibility that legal or regulatory outcomes could materially affect a particular period.
Most important facts for investors to verify
- Whether loan growth and improving credit metrics continue without deterioration in criticized, non-accrual or potential problem loans.
- Whether margin pressure, mortgage-related revenue weakness and the estimated impact of the posting-order change affect future earnings as management anticipated.
- How Basel III implementation, capital requirements, regulatory approvals and subsequent share repurchases affect capital ratios and distributions.
- Developments in the mortgage investigations and other litigation, including any changes to the $170 million estimate of possible losses above accruals and the Raymond James indemnification obligation.
- Cash-flow comparability: operating cash flow was $1.5 billion for the first nine months of 2014 versus $3.1 billion in 2013; review the cash-flow statement for the drivers of the difference.