Regions Financial Corporation — Q2 2015 Form 10-Q
Reporting period: Quarter and six months ended June 30, 2015. Dollar amounts are in millions unless stated otherwise. Regions is a bank holding company headquartered in Birmingham, Alabama, operating across the South, Midwest and Texas through Corporate Bank, Consumer Bank and Wealth Management.
Financial performance
| Metric | Q2 2015 | Q2 2014 | Six months 2015 | Six months 2014 |
|---|---|---|---|---|
| Net income | $285 | $296 | $519 | $611 |
| Net income available to common shareholders | $269 | $288 | $487 | $595 |
| Diluted EPS | $0.20 | $0.21 | $0.36 | $0.43 |
| Net interest income, GAAP | $820 | $823 | $1,635 | $1,639 |
| Provision for loan losses | $63 | $35 | $112 | $37 |
| Non-interest income | $590 | $475 | $1,060 | $932 |
| Non-interest expense | $934 | $820 | $1,839 | $1,637 |
- Taxable-equivalent net interest margin was 3.16% in Q2 2015, down from 3.24% a year earlier; first-half margin was 3.17%, versus 3.25%. Management attributed compression to lower asset yields, only partly offset by lower funding costs.
- Q2 non-interest income included a $90 million insurance recovery related to settlement of a previously accrued shareholder lawsuit. Excluding that recovery, adjusted non-interest income rose 5% year over year, according to management.
- Q2 adjusted efficiency ratio was 64.45%, compared with 63.18% a year earlier. This is a non-GAAP measure and excludes specified items.
Balance sheet, cash flow and capital
- Total assets were $121.9 billion at June 30, up from $119.6 billion at year-end 2014, principally reflecting loan growth. Loans net of unearned income increased to $80.1 billion from $77.3 billion.
- Total deposits rose to $97.1 billion from $94.2 billion, including growth in non-interest-bearing demand and savings deposits; time deposits declined. Total borrowed funds were $5.4 billion, down from $5.7 billion.
- Cash and cash equivalents were $3.755 billion, compared with $4.004 billion at year-end. For the first half, operating cash flow was $767 million, investing cash flow was negative $3.149 billion and financing cash flow was positive $2.133 billion; cash declined $249 million.
- Stockholders’ equity was $16.9 billion. Estimated transitional Basel III CET1 ratios at June 30 were 11.30% for Regions Financial Corporation and 11.99% for Regions Bank. The estimated fully phased-in pro forma CET1 ratio was 11.05%.
- Regions reported $22.3 billion of Federal Reserve borrowing availability and $10.2 billion of FHLB availability, subject to pledged collateral. It expected to meet the modified Liquidity Coverage Ratio requirements when phased in, without significant balance-sheet changes.
Credit quality and material changes
- Net charge-offs were $46 million in Q2, or 0.23% annualized, versus $67 million and 0.35% a year earlier. First-half net charge-offs were $100 million, or 0.26% annualized, compared with $149 million and 0.40% in 2014.
- The allowance for loan losses was $1.115 billion, or 1.39% of loans, versus $1.103 billion and 1.43% at year-end. Non-performing assets declined to $911 million from $991 million; non-performing loans excluding loans held for sale were $751 million, down from $829 million.
- The higher provision reflected loan growth and results of the Shared National Credit industry-wide exam. Management cautioned that credit metrics could be volatile and said economic conditions and individual large credits could affect future provision and charge-offs.
- Commercial and industrial loans grew 8% from year-end to $35.3 billion. Energy loans directly related to the sector were approximately $2.7 billion; total direct and indirect energy-related exposure was about $3.3 billion, concentrated mainly in Texas and South Louisiana. Management warned prolonged low oil prices could pressure credit quality.
- In Q2, professional, legal and regulatory expense increased year over year, including contingent legal and regulatory accruals. Branch/property charges included land reclassified as held for sale. First-half expense also included a $43 million loss on early debt extinguishment.
- Regions repurchased about 17 million shares for $172 million in Q2 under a new $875 million authorization and increased its quarterly common dividend to $0.06 per share. The company reported further repurchases of about 10 million shares for $101 million through August 4, 2015.
Outlook, contingencies and other notable items
- Management expected 2015 net loan charge-offs to decline from 2014 and non-performing assets to continue improving, while noting sensitivity to real estate values, rates, unemployment, commodity prices and large individual credits.
- Management expected net interest margin to remain stable to moderately higher if economic conditions and rates rose moderately and targeted loan growth was achieved. If rates fell to year-end 2014 levels, it estimated modest margin pressure of approximately 6–8 basis points over the rest of 2015. Its interest-rate simulations showed estimated annual net interest income increases of $129 million under a gradual +100-basis-point scenario and decreases of $95 million under a gradual -50-basis-point scenario; these are hypothetical, assumption-dependent estimates.
- Regions estimated reasonably possible losses above recorded legal accruals of up to approximately $40 million, while also stating that no additional loss was possible. It was cooperating with FHA and FHFA investigations into mortgage origination, underwriting and quality-control practices; outcomes and potential penalties were uncertain.
- Regions adopted proportional amortization accounting for qualified affordable-housing investments retrospectively from January 1, 2015. Adoption reduced opening retained earnings by $116 million. The filing also reported a July 31 issuance of $750 million in 2.25% senior bank notes due 2018 and an August 3 acquisition announcement for The A.I. Group, an employee-benefits consulting and insurance brokerage firm.
- Management assessed goodwill indicators and concluded no interim impairment test was required. The filing identified interest-rate, credit, liquidity, regulatory, litigation, cyber-security and operational risks, among others.
Key facts investors should verify
- How much of reported fee-income growth is recurring after excluding the $90 million insurance recovery, and whether expense growth persists.
- Whether loan growth and the Shared National Credit review lead to further provision increases, particularly in energy-related lending and other criticized credits.
- Progress in non-performing assets and charge-offs, and the assumptions supporting management’s allowance adequacy and credit outlook.
- Execution of share repurchases and dividends, regulatory capital and liquidity compliance, and the effects of the new accounting treatment and subsequent financing/acquisition activity.
- Resolution and potential costs of legal matters and mortgage-related investigations; the filing does not provide a definitive outcome.