REGIONS FINANCIAL CORP quarterly report, Q2 FY2016

Regions Financial Corporation — Q2 2016 Form 10-Q

Reporting period: Quarter and six months ended June 30, 2016. Regions is a bank holding company headquartered in Birmingham, Alabama, serving customers across the South, Midwest and Texas.

Financial performance

MetricQ2 2016Q2 2015Six months 2016Six months 2015
Net income$275 million$285 million$548 million$519 million
Net income available to common shareholders$259 million$269 million$516 million$487 million
Diluted EPS$0.20$0.20$0.40$0.36
Net interest income and other financing income, GAAP$848 million$820 million$1.710 billion$1.635 billion
Provision for loan losses$72 million$63 million$185 million$112 million
Non-interest income$526 million$590 million$1.032 billion$1.060 billion
Non-interest expense$915 million$934 million$1.784 billion$1.839 billion
Net interest margin, taxable-equivalent3.15%3.16%3.17%3.17%
  • Q2 continuing-operations income was $272 million, versus $289 million a year earlier. Management attributed the lower common income mainly to lower non-interest income, partly offset by higher net interest income and lower expenses.
  • Q2 taxable-equivalent net interest income was $869 million, up $30 million year over year. The reported GAAP figure was $848 million.
  • Non-interest income fell $64 million in Q2, principally because the prior-year quarter included $90 million of insurance proceeds. Excluding specified significant items, adjusted Q2 non-interest income was $520 million versus $494 million.
  • Q2 non-interest expense declined $19 million. The prior-year comparison included a net $48 million accrual for contingent legal and regulatory expenses; adjusted expense was $889 million versus $859 million.
  • Adjusted efficiency ratio was 63.98% in Q2 and 62.30% for the first half. These are non-GAAP measures; the corresponding GAAP ratios were 65.62% and 64.08%.

Balance sheet, liquidity and capital

  • Total assets were $126.2 billion at June 30, broadly unchanged from year-end 2015. Loans were $81.7 billion, up $540 million; deposits were $97.2 billion, down $1.2 billion.
  • Cash and cash equivalents were $4.2 billion, down $1.1 billion from year-end. First-half operating cash flow was $1.130 billion; investing cash outflow was $1.076 billion and financing cash outflow was $1.131 billion.
  • Long-term borrowings were $9.0 billion, up $619 million, primarily reflecting $1.1 billion of 3.20% senior note issuance, partly offset by lower FHLB advances. Total borrowed funds were $9.0 billion.
  • Stockholders’ equity was $17.4 billion, up from $16.8 billion. The increase included $548 million of net income and $528 million of favorable other comprehensive income, partly offset by $354 million of share repurchases and dividends.
  • Estimated transitional Basel III CET1 ratios were 10.98% for Regions Financial and 11.80% for Regions Bank. The company reported full compliance with LCR requirements at June 30.
  • Regions reported $22.3 billion of Federal Reserve borrowing availability and $12.3 billion of FHLB borrowing capacity, subject to pledged collateral. It stated it did not currently rely on short-term unsecured wholesale funding.

Credit quality and material changes

  • Non-performing assets rose to $1.145 billion from $920 million at year-end; non-performing loans excluding loans held for sale increased to $1.025 billion from $782 million. Management cited continued low oil prices and downgrades of large energy credits.
  • Q2 net charge-offs were $72 million, or an annualized 0.35% of average loans, versus $46 million and 0.23% a year earlier. First-half net charge-offs were $140 million, or 0.34%, versus $100 million and 0.26%.
  • The allowance for loan losses was $1.151 billion, equal to 1.41% of loans, compared with 1.36% at year-end. The direct energy portfolio allowance was approximately 9% of that portfolio, up from approximately 6% at year-end.
  • Direct energy loans were approximately $2.4 billion; including indirect energy-related loans, total exposure was approximately $2.9 billion, or 4% of total loans. The portfolio was concentrated primarily in Texas and South Louisiana.
  • Commercial and industrial loans increased $303 million from year-end, while owner-occupied commercial real estate loans declined $345 million. Residential first mortgages increased $353 million; home equity balances declined $146 million.
  • Non-interest income was also affected by stronger card and ATM fees and capital-markets fees, while first-half securities gains were lower in part because Regions sold energy-related corporate bonds and recorded $5 million of losses on those sales.

Outlook, risks and contingencies

  • For 2016, management expected average loan growth of 3%–5% versus Q4 2015, tracking toward the lower end; average deposits were expected to be relatively stable, revised from earlier growth expectations after planned deposit reductions.
  • Management expected net interest income and other financing income to rise 2%–4%; adjusted non-interest income to increase 4%–6%; adjusted expenses to be flat to modestly higher; adjusted efficiency ratio below 63%; and adjusted operating leverage of 2%–4%.
  • Management expected full-year net charge-offs of 25–35 basis points, at the top end of the range. It noted potential credit volatility from large commercial credits and commodity prices.
  • Regions planned to eliminate $300 million of existing non-interest expenses between 2016 and 2018, expecting to achieve 35%–45% of that reduction in 2016. It also expected average loan growth and interest-rate outcomes to be sensitive to economic conditions and rates.
  • The Federal Reserve gave no objection to Regions’ 2016 capital plan. A new $640 million repurchase plan was authorized in July 2016; approximately 9.4 million shares for $85 million had been repurchased by August 4. A potential common dividend increase beginning in Q2 2017 was subject to Board consideration.
  • Regions reached an agreement in principle with the Department of Justice on a HUD-related FHA lending settlement, subject to final review and approval; the company said existing reserves covered it and expected no material effect. It estimated possible litigation losses above accruals, in aggregate, to be immaterial, but cautioned outcomes remain uncertain.
  • The bank’s CRA rating had been downgraded to “Needs to Improve,” restricting certain acquisitions and branch applications until the rating improves. The next examination was expected to commence in 2016.
  • Other stated risks include energy-sector deterioration, interest-rate and deposit-pricing changes, loan losses, litigation and regulatory actions, cyber and third-party security risks, and potential funding-cost increases from credit-rating downgrades.

Important facts for investors to verify

  • Whether energy-related credit deterioration continues and how it affects non-performing assets, provisions and charge-offs.
  • Whether deposit balances and funding costs track management’s revised expectations, and whether loan growth reaches the guided range.
  • How recurring fee income and expenses compare with adjusted guidance after removing prior-period insurance proceeds and legal accruals.
  • Progress against the $300 million expense-reduction plan, the $640 million repurchase authorization and any future dividend decision.
  • Final terms and approval of the HUD settlement, developments in other legal and regulatory matters, and the outcome of the CRA examination.
  • Capital and liquidity compliance, including the effect of changing collateral availability, interest rates and balance-sheet composition.