Regions Financial Corporation — Q1 2019 Form 10-Q
Reporting period: Three months ended March 31, 2019; balance-sheet comparisons are against December 31, 2018. Regions is a bank holding company operating across the South, Midwest and Texas.
Financial performance and condition
| Metric | Q1 2019 | Comparable period / prior date |
|---|---|---|
| Net interest income and other financing income (GAAP) | $948 million | $909 million in Q1 2018 |
| Net interest margin (taxable-equivalent) | 3.53% | 3.46% in Q1 2018 |
| Non-interest income | $502 million | $507 million in Q1 2018 |
| Non-interest expense | $860 million | $884 million in Q1 2018 |
| Net income / common shareholders’ income | $394 million / $378 million | $414 million / $398 million in Q1 2018 |
| Diluted earnings per share | $0.37 | $0.35 in Q1 2018 |
| Loans, net of unearned income | $84.43 billion | $83.15 billion at Dec. 31, 2018 |
| Total deposits | $95.72 billion | $94.49 billion at Dec. 31, 2018 |
| Total assets / total equity | $128.80 billion / $15.52 billion | $125.69 billion / $15.09 billion at Dec. 31, 2018 |
| Cash and cash equivalents at period end | $3.81 billion | $3.19 billion at March 31, 2018 |
| Allowance for loan losses | $853 million; 1.01% of loans | $840 million; 1.01% at Dec. 31, 2018 |
| Regulatory capital ratios (estimated) | CET1 9.81%; total capital 12.35% | CET1 9.90%; total capital 12.46% at Dec. 31, 2018 |
Cash flow: Operating activities provided $578 million; investing activities used $1.69 billion and financing activities provided $1.38 billion. Cash and cash equivalents increased $269 million during the quarter.
Debt and liquidity: Short-term borrowings were $1.60 billion and long-term borrowings were $12.96 billion. The company reported $2.3 billion of cash at the holding company, $19.8 billion of borrowing availability from the Federal Reserve and $17.5 billion of total FHLB borrowing capacity; it said it was compliant with LCR requirements.
Material changes versus comparable periods
- Net income declined $20 million year over year, principally because the loan-loss provision rose from a $10 million credit to a $91 million expense. Higher net interest income and lower operating expenses partly offset the increase.
- Net charge-offs were $78 million, or an annualized 0.38% of average loans, versus $84 million and 0.42% in Q1 2018. Non-performing assets were $597 million, up from $566 million at year-end; non-performing loans were 0.63% of loans, versus 0.61%.
- Interest income increased, but funding costs also rose: interest expense on deposits was $108 million versus $49 million in Q1 2018. Management attributed improved margin to higher asset yields, particularly on loans, exceeding the increase in funding costs.
- Non-interest income fell $5 million. Lower capital markets and mortgage income and a $7 million net securities loss were partly offset by higher deposit service charges, card fees and bank-owned life insurance income. Non-interest expense declined $24 million, including lower salaries, professional fees and FDIC assessments.
- Deposits increased $1.2 billion from year-end, with a shift toward higher-cost products. Long-term borrowings rose $533 million, mainly following a $500 million senior-note issuance.
Outlook, management commentary and risks
- Management’s 2019 expectations: adjusted average loan growth in the low-to-mid-single digits; adjusted total revenue growth of 2%–4%; relatively stable adjusted non-interest expense; net charge-offs of 40–50 basis points; and an effective tax rate of 20%–22%. It expects positive operating leverage each year.
- Three-year targets for 2021 include adjusted return on average tangible common equity of 18%–20%, adjusted efficiency ratio below 55%, and annual net charge-offs of 40–65 basis points.
- Regions discontinued new indirect auto originations in Q1 because competition-driven margin compression reduced portfolio returns; it plans to complete in-process closings by the end of Q2 and will continue direct auto lending.
- The company expects CECL adoption on January 1, 2020 and warned it may materially increase the allowance for credit losses. Initial modeling indicated potential increases particularly in longer-dated consumer loans; the effect will depend on portfolio quality and economic conditions at adoption.
- Regions disclosed cooperation with a U.S. Attorney’s Office investigation concerning a former customer relationship and related Bank Secrecy Act and anti-money-laundering compliance. Management estimated reasonably possible legal losses above accruals of up to approximately $20 million, while noting the outcome is uncertain and could be material in a particular reporting period.
- Key stated risks include credit deterioration, interest-rate and deposit-pricing changes, liquidity and funding needs, market and prepayment risk, cyber and third-party security events, regulatory requirements, litigation, and LIBOR transition. Interest-rate sensitivity estimates are scenario-based, not forecasts; a 100-basis-point instantaneous increase was estimated to raise annual net interest income by $94 million, while a 100-basis-point decrease was estimated to reduce it by $179 million.
- After quarter-end, Regions completed a $500 million Series C preferred-stock issuance on April 30, 2019. It also continued common-stock repurchases under its capital plan.
Most important facts for investors to verify
- Whether loan-loss provisioning and non-performing loan trends remain consistent with management’s 2019 charge-off outlook.
- Whether loan growth, deposit mix and higher funding costs support the revenue and margin outlook.
- Execution of expense initiatives and progress toward the adjusted efficiency-ratio target; these are non-GAAP measures.
- Capital and liquidity levels, planned share repurchases, and the impact of the Series C preferred issuance.
- CECL implementation assumptions and estimated adoption impact, along with developments in the disclosed regulatory investigation and other legal matters.