Regions Financial Corporation — Q2 2017 Form 10-Q
Business context and period. Unaudited results cover the quarter and six months ended June 30, 2017; comparisons are with the corresponding 2016 periods unless otherwise noted. Regions is a bank holding company operating across the South, Midwest and Texas, with Corporate Bank, Consumer Bank and Wealth Management segments.
Financial performance and position
| Metric | Q2 2017 | Q2 2016 | Six months 2017 | Six months 2016 |
|---|---|---|---|---|
| Net interest income and other financing income (GAAP), $ millions | 882 | 848 | 1,741 | 1,710 |
| Non-interest income, $ millions | 525 | 526 | 1,035 | 1,032 |
| Non-interest expense, $ millions | 909 | 915 | 1,786 | 1,784 |
| Net income, $ millions | 316 | 275 | 617 | 548 |
| Net income available to common shareholders, $ millions | 300 | 259 | 585 | 516 |
| Diluted EPS | $0.25 | $0.20 | $0.48 | $0.40 |
- Q2 taxable-equivalent net interest margin was 3.32%, up from 3.15%; six-month margin was 3.28%, versus 3.17%. Management cited higher rates, deposit-cost management and balance-sheet actions, partly offset by lower average loans.
- Q2 provision for loan losses was $48 million, versus $72 million; six-month provision was $118 million, versus $185 million. Six-month net charge-offs rose to $168 million from $140 million, or 0.42% of average loans annualized versus 0.34%.
- At June 30, total assets were $124.6 billion; loans were $80.1 billion; deposits were $98.1 billion; and stockholders’ equity was $16.9 billion. Total assets and deposits were down from year-end 2016.
- Cash and cash equivalents were $4.1 billion, down $1.3 billion from year-end. Six-month operating cash flow was $1.2 billion; investing cash flow was negative $561 million and financing cash flow negative $1.9 billion.
- Total borrowed funds were $7.4 billion, including $600 million short-term borrowings, compared with $7.8 billion total borrowed funds at year-end. Long-term borrowings declined by about $1.0 billion.
- Non-performing assets fell to $912 million from $1.1 billion at year-end; non-performing loans excluding loans held for sale were $823 million. The allowance for loan losses was $1.041 billion, or 1.30% of loans, down from 1.36% at year-end.
- Transitional Basel III CET1 ratios were 11.47% for Regions Financial and 12.49% for Regions Bank; the company reported full compliance with LCR requirements. These regulatory ratios are on a transitional basis.
Material changes and notable items
- Q2 common earnings increased mainly from higher net interest income and a lower loan-loss provision. Non-interest income was essentially flat; higher deposit, card and trust fees were offset by lower mortgage income and securities gains.
- Credit indicators improved overall: non-performing assets declined and management cited energy-portfolio improvement. However, six-month charge-offs increased, including large commercial credits in energy, healthcare and education; TDR loans rose to $1.45 billion from $1.39 billion at year-end.
- Deposits declined $942 million from year-end, chiefly due to reductions in interest-bearing transaction and money-market accounts, partly offset by growth in non-interest-bearing and savings deposits. Commercial and industrial loans increased, while indirect vehicle loans declined following termination of a third-party purchase arrangement.
- Q2 salaries and benefits included a $10 million pension settlement charge. First-half operating lease impairment charges totaled $12 million. Regions recorded a $5 million gain in Q2 from a previously deferred gain on affordable-housing mortgage loan sales.
- The Federal Reserve did not object to Regions’ 2017 capital plan. A new $1.47 billion repurchase authorization runs from Q3 2017 through Q2 2018; approximately 9.9 million shares costing $144.9 million had been repurchased by August 3. The quarterly common dividend was approved at $0.09 beginning in Q3, versus $0.07 for Q2.
Guidance, risks and contingencies
- Management’s 2017 expectations: average loans flat to slightly down (excluding the terminated vehicle-loan arrangement); average deposits relatively stable; net interest income growth of 3%–5%; adjusted non-interest income growth of 1%–3%; adjusted expenses flat to up 1%; adjusted efficiency ratio about 62%; positive adjusted operating leverage of 2%–4%; effective tax rate of 30%–31%; and net charge-offs of 35–50 basis points.
- Management described Regions as moderately asset-sensitive. Its modeled 12-month net interest income response was positive $134 million for a gradual +100-basis-point shift and negative $68 million for a gradual -50-basis-point shift. The filing cautions that these simulations depend on assumptions and are not forecasts.
- Principal risks include changing interest rates, deposit pricing and mix, economic conditions, borrower credit quality, real estate and commodity prices, competition, regulation, cyber and operational threats, and access to funding and capital. Energy lending was approximately $2.5 billion including direct and indirect exposure.
- Legal matters include a government investigation concerning a former customer and related AML/BSA compliance, and litigation tied to the former Morgan Keegan business. The company said estimated losses above accruals, in aggregate, would be immaterial, while noting that outcomes are inherently uncertain and an adverse development could be material in a particular period.
- Regions’ Fannie Mae DUS loss-share guarantee had a maximum quantifiable contingent liability of $687 million; its recorded fair-value liability was approximately $4 million. The maximum assumes all covered loans default and collateral has no value.
Important facts for investors to verify
- Whether the improvement in non-performing assets and energy credit quality continues, given higher first-half net charge-offs and large-credit volatility.
- Delivery against 2017 net interest income, expense, efficiency and credit-cost expectations, including the sensitivity of deposit costs and balances to rate changes.
- Execution and regulatory conditions for the $1.47 billion repurchase plan and the increased quarterly dividend.
- Deposit trends, funding costs, liquidity buffers and capital ratios; the filing states LCR compliance but does not provide a clear LCR percentage in the supplied text.
- Developments in the AML/BSA investigation, Morgan Keegan-related litigation and DUS guarantee exposure.