Regions Financial Corporation — Q1 2015 Form 10-Q
Reporting period: Three months ended March 31, 2015; unaudited. Regions is a bank holding company serving consumer, commercial and wealth-management customers, primarily across the South, Midwest and Texas.
Financial performance and condition
| Metric | Q1 2015 / March 31, 2015 | Comparable period / prior year-end |
|---|---|---|
| Net income | $234 million; $218 million available to common shareholders; diluted EPS $0.16 | $315 million; $307 million available to common shareholders; diluted EPS $0.22 |
| Continuing-operations income | $236 million | $303 million |
| Net interest income | $815 million GAAP; $832 million taxable-equivalent | $816 million GAAP; $831 million taxable-equivalent |
| Net interest margin | 3.18% taxable-equivalent | 3.26% |
| Provision for loan losses | $49 million | $2 million |
| Non-interest income / expense | $470 million / $905 million | $457 million / $817 million |
| Total assets | $122.4 billion | $119.6 billion at December 31, 2014 |
| Loans, net of unearned income | $78.2 billion | $77.3 billion at December 31, 2014 |
| Deposits | $97.5 billion | $94.2 billion at December 31, 2014 |
| Borrowed funds | $5.3 billion, including $3.2 billion long-term | $5.7 billion total at December 31, 2014 |
| Stockholders’ equity | $17.1 billion | $16.9 billion at December 31, 2014 |
| Cash and cash equivalents | $6.0 billion at period end | $4.0 billion at year-end; Q1 net increase $2.0 billion |
Cash flow for Q1 was $294 million from operating activities, negative $904 million from investing activities and positive $2.632 billion from financing activities. The allowance for loan losses was $1.098 billion, or 1.40% of loans; net charge-offs were $54 million, an annualized 0.28% of average loans. Non-performing assets were $970 million, down from $991 million at year-end.
At March 31, Regions reported estimated transitional Basel III capital ratios of 11.41% CET1, 12.20% Tier 1 and 14.63% total capital at the holding company; its leverage ratio was 10.64%. The company also reported $21.5 billion of Federal Reserve borrowing availability and $10.0 billion of FHLB capacity, subject to collateral requirements.
Changes versus the prior comparable period
- Net income available to common shareholders fell 29%, and diluted EPS declined from $0.22 to $0.16. Higher loan-loss provision and non-interest expense were the main reported drivers.
- Taxable-equivalent net interest income was essentially flat, while net interest margin compressed 8 basis points, reflecting lower asset yields that outweighed reduced funding costs.
- Non-interest expense increased $88 million. Q1 2015 included a $43 million debt-extinguishment loss and $22 million of branch consolidation and property charges; Q1 2014 benefited from a $35 million gain on sale of troubled debt restructurings.
- Net charge-offs declined from $82 million (0.44% annualized) to $54 million (0.28%). Non-performing assets and total non-performing loans also decreased from year-end 2014.
- Loans grew $936 million and deposits grew $3.277 billion from year-end, while long-term borrowings declined $254 million. Asset growth was funded primarily by low-cost deposit growth.
Outlook, management commentary and risks
- Management expected 2015 net loan charge-offs to decline somewhat from 2014 and non-performing assets to continue improving. It cautioned that commodity-price volatility, unemployment, rates, property values and large individual credits could create volatility.
- Management expected net interest margin to remain stable to moderately rise if economic growth, interest rates and targeted loan growth followed its anticipated course; if rates stayed near year-end 2014 levels, it expected modest margin pressure of approximately 10 basis points over the remainder of 2015. Regions described its balance sheet as moderately asset-sensitive.
- The Federal Reserve raised no objection to Regions’ 2015 capital plan. Subsequent to quarter-end, the board approved a quarterly common dividend increase to $0.06 per share beginning with the July 2015 payment and a new $875 million repurchase plan through Q2 2016. By May 5, approximately 7 million shares had been repurchased for $68 million.
- Regions adopted new affordable-housing investment accounting guidance retrospectively; adoption reduced opening retained earnings by $116 million. The filing says the adoption did not otherwise materially affect reported results as described in the notes.
- Legal matters include Morgan Keegan-related indemnification obligations, securities and shareholder litigation, and government inquiries into mortgage origination and underwriting practices. The Morgan Keegan indemnification liability had a $204 million carrying value. Regions estimated reasonably possible losses in excess of accruals of up to approximately $160 million, while noting outcomes are uncertain.
- Other key risks include credit deterioration, interest-rate and mortgage-prepayment sensitivity, regulatory capital and liquidity requirements, funding costs, cybersecurity and operational disruption, and potential litigation or regulatory penalties. Management expected compliance with the modified Liquidity Coverage Ratio when implemented, without significant balance-sheet changes, but noted liquidity needs could change.
Important facts for investors to verify
- Whether the higher provision reflects deterioration in the identified commercial and industrial credits, especially energy and healthcare exposures, and how criticized loans evolve.
- Whether loan growth, deposit mix and funding costs support management’s margin outlook amid low interest rates and possible deposit repricing.
- The sustainability of earnings after excluding the debt-extinguishment and branch charges, and comparing against the prior-year TDR-sale gain.
- Progress, cost and regulatory constraints on the new dividend and $875 million repurchase authorization.
- Developments in legal proceedings and mortgage-related investigations, including exposure beyond recorded accruals and the Morgan Keegan indemnity.