Regions Financial Corporation — FY2016 Form 10-K
Reporting period: Fiscal year ended December 31, 2016; comparisons are primarily with FY2015. Regions is a Birmingham-based financial holding company providing commercial, consumer and mortgage banking, wealth management, insurance and related services, principally across the South, Midwest and Texas. At year-end, it reported $126.0 billion in assets, $99.0 billion in deposits and $16.7 billion in stockholders’ equity.
Key financial results and position
| Metric | FY2016 / year-end | FY2015 / comparison |
|---|---|---|
| Net income available to common shareholders from continuing operations | $1.094 billion; $0.87 diluted EPS | $1.011 billion; $0.76 diluted EPS |
| Net interest income and other financing income, GAAP | $3.398 billion | $3.307 billion |
| Net interest income, taxable-equivalent basis | $3.482 billion | $3.382 billion |
| Net interest margin, taxable-equivalent basis | 3.14% | 3.13% |
| Non-interest income | $2.153 billion | $2.071 billion |
| Non-interest expense | $3.617 billion | $3.607 billion |
| Provision for loan losses | $262 million | $241 million |
| Total assets / deposits / loans, net of unearned income | $125.968 billion / $99.035 billion / $80.095 billion | $126.050 billion / $98.430 billion / $81.162 billion |
| Long-term borrowings | $7.763 billion | $8.349 billion |
| Operating cash flow / investing cash flow / financing cash flow | $1.954 billion / $(631) million / $(1.186) billion | $1.572 billion / $(6.124) billion / $5.862 billion |
- Net income from continuing operations was $1.158 billion, up from $1.075 billion. Reported net income, including discontinued operations, was $1.163 billion versus $1.062 billion.
- Net charge-offs increased to $277 million, or 0.34% of average loans, from $238 million, or 0.30%. Non-accrual loans rose to $995 million from $782 million; non-performing assets increased to $1.098 billion from $920 million.
- The allowance for loan losses was $1.091 billion, or 1.36% of loans, similar to 2015. Allowance coverage of non-performing loans declined to 1.10x from 1.41x; excluding direct energy loans, the adjusted coverage ratio was 1.38x versus 1.37x.
- Regulatory capital ratios were estimated at 11.21% CET1, 11.98% Tier 1 and 14.15% total capital. Regions and Regions Bank were classified as well-capitalized. The company reported compliance with its liquidity coverage ratio requirement.
- Liquidity included $5.451 billion in cash and cash equivalents, including $3.6 billion on deposit with the Federal Reserve; parent-company cash was $1.0 billion. Loan-to-deposit ratio was 81%. Disclosed borrowing availability was $15.6 billion at the Federal Reserve and $16.4 billion at the FHLB, subject to available collateral.
- Common dividends declared were $0.255 per share, compared with $0.23 in 2015. Regions repurchased $839 million of common stock during 2016; 46.5 million shares costing about $485 million were repurchased under the then-current plan by year-end.
Material changes versus FY2015
- Common continuing-operations earnings increased, supported by higher net interest income and fee income, while the net interest margin improved by only one basis point.
- Non-interest income rose 4%, led by capital markets fees, card and ATM fees, and bank-owned life insurance income. Non-interest expense was nearly flat; lower legal and regulatory expense and FDIC assessments offset higher salaries, equipment expense and unfunded-credit-loss provision.
- Credit costs and problem assets worsened, principally because of energy-related commercial credit migration and charge-offs. Energy charge-offs were $37 million. Direct energy loans were about $2.1 billion; indirect energy-related loans were approximately $536 million.
- Loans declined $1.1 billion, with lower commercial and investor real estate balances partly offset by consumer growth. Deposits increased $605 million. Long-term borrowings declined $586 million, reflecting lower FHLB advances and a debt tender, partly offset by $1.1 billion of new senior notes.
- Operating cash flow increased, while investing cash outflow narrowed substantially from 2015; financing cash flow shifted from a large inflow to an outflow, including $839 million of share repurchases.
Outlook, commentary, risks and unusual items
- 2017 outlook: Management forecast low-single-digit average loan and deposit growth; net interest income and other financing income growth of 2%–4%; adjusted non-interest income growth of 3%–5%; adjusted non-interest expense flat to up 1%; an adjusted efficiency ratio of about 62%; positive adjusted operating leverage of 2%–4%; and net charge-offs of 35–50 basis points. These are management estimates, not guarantees, and depend on the assumed interest-rate and economic scenarios.
- Management’s baseline economic outlook was GDP growth of approximately 2.0%–2.5% in 2017, with uncertainty around fiscal, regulatory and trade policies, interest rates, and global markets. It described expected average loan growth as low single digits.
- Credit risks include energy borrower stress, rising criticized and classified commercial loans, regional economic concentration, real estate exposure and second-lien home-equity loans. Total energy-related loans were about 3% of total loans; approximately $3.9 billion of home-equity loans and lines were in second-lien position.
- Interest-rate risk is material: Regions described itself as moderately asset-sensitive. Its modeled 12-month net interest income response ranged from a $127 million increase under a gradual +100-basis-point shift to a $66 million decrease under a gradual −50-basis-point shift. These are scenario estimates and depend on assumptions about deposit pricing and balance-sheet behavior.
- Other principal risks include deposit competition and funding costs, regulatory and capital constraints, litigation and indemnification exposure, cybersecurity and third-party operational risk, severe weather, and changes in mortgage prepayment speeds and mortgage-servicing-right values.
- Regions recorded $50 million of insurance proceeds in 2016, including $47 million related to a previously disclosed HUD/FHA mortgage settlement. FY2015 included $91 million of insurance proceeds related to a class-action settlement. The Morgan Keegan sale indemnification obligation had a $28 million carrying value at year-end; management said estimated losses beyond accruals, including indemnification matters, were immaterial in aggregate, while noting outcomes remain uncertain.
- Off-balance-sheet commitments included $44.408 billion of unused commitments to extend credit and $1.425 billion of standby letters of credit. Contractual totals do not necessarily represent amounts expected to be funded. Regions’ maximum quantifiable Fannie Mae DUS loss-share exposure was $559 million, subject to an extreme default-and-collateral-loss scenario; the recorded liability was about $4 million.
- The Federal Reserve reinstated Regions Bank’s overall CRA rating to “Satisfactory” in December 2016, resolving the previously disclosed “Needs to Improve” rating and associated activity restrictions. The independent auditor gave an unqualified opinion on the financial statements and internal controls; management also concluded internal control over financial reporting was effective.
Important facts for investors to verify
- Whether energy-related credit deterioration stabilizes, and how criticized loans, non-accruals, charge-offs and allowance coverage evolve.
- Whether 2017 loan and deposit growth, net interest income, fee income, expenses and credit-cost guidance were achieved; compare actual results with the stated rate assumptions.
- How common dividends and repurchases progress under regulatory capital plans, and whether capital ratios remain comfortably above phased-in requirements.
- Whether liquidity, deposit pricing and borrowing capacity remain adequate under stress, including the collateral availability supporting Federal Reserve and FHLB borrowing.
- Developments in legal, regulatory and contingent exposures, including the Morgan Keegan indemnity and DUS guarantee; the filing does not provide a determinable maximum for the Morgan Keegan indemnity.
- Potential adoption effects of the expected-credit-loss standard (CECL), scheduled for 2020; Regions stated that the impact was still being evaluated and could be material to allowance and capital at adoption.