Regions Financial Corporation — 2015 Form 10-K
Business context and reporting period. Regions is a financial holding company headquartered in Birmingham, Alabama, serving markets across the South, Midwest and Texas through banking and related financial services. This annual report covers the fiscal year ended December 31, 2015; quarterly figures below identify the fourth quarter where available. At year-end, Regions reported $126.1 billion in assets, $98.4 billion in deposits and $16.8 billion in stockholders’ equity.
Financial performance and position
| Metric | 2015 | 2014 |
|---|---|---|
| Net interest income and other financing income, GAAP | $3.307 billion | $3.280 billion |
| Net interest income and other financing income, taxable-equivalent | $3.382 billion | $3.343 billion |
| Net interest margin, taxable-equivalent | 3.13% | 3.21% |
| Non-interest income | $2.071 billion | $1.903 billion |
| Non-interest expense | $3.607 billion | $3.432 billion |
| Provision for loan losses | $241 million | $69 million |
| Income from continuing operations | $1.075 billion | $1.134 billion |
| Net income available to common shareholders, continuing operations | $1.011 billion | $1.082 billion |
| Diluted EPS, continuing operations | $0.76 | $0.78 |
| Net cash from operating activities | $1.572 billion | $2.107 billion |
Fourth-quarter 2015 net income was $285 million and diluted EPS was $0.21, compared with $216 million and $0.15 in fourth-quarter 2014. Fourth-quarter loan-loss provision was $69 million versus $8 million a year earlier.
Year-end loans, net of unearned income, grew 5% to $81.2 billion; deposits rose 4% to $98.4 billion. The loan-to-deposit ratio was 83%. Cash and cash equivalents were $5.3 billion, including $3.9 billion on deposit with the Federal Reserve; parent-company cash was $759 million. Regions reported $21.5 billion of Federal Reserve borrowing capacity and $12.1 billion of total FHLB borrowing capacity, with $5.3 billion of FHLB advances outstanding.
Long-term borrowings increased to $8.3 billion from $3.5 billion, principally reflecting increased FHLB advances and a $750 million senior bank-note issuance. At year-end, estimated Basel III capital ratios were 10.93% CET1, 11.65% Tier 1 and 13.88% total capital; Regions and Regions Bank were classified as well-capitalized. The allowance for loan losses was $1.106 billion, or 1.36% of loans. Net charge-offs were $238 million, 0.30% of average loans.
Changes versus the prior year
- Common-shareholder income from continuing operations declined to $1.011 billion from $1.082 billion, while net interest income, taxable-equivalent, increased modestly. Margin fell 8 basis points as earning-asset yields declined more than funding costs.
- Provision expense rose to $241 million from $69 million, driven by loan growth, higher reserves for energy-related loans and the Shared National Credit review. Net charge-offs nevertheless declined to 0.30% from 0.40% of average loans.
- Non-interest income increased $168 million, including $91 million of insurance proceeds related to settlement of a previously disclosed 2010 class-action lawsuit. Non-interest expense increased $175 million, including higher salaries, branch/property charges, FDIC assessments, debt-extinguishment costs and legal/regulatory costs.
- Non-performing assets declined to $920 million from $991 million. However, criticized and classified commercial loans increased to $3.4 billion from $2.7 billion, primarily due to a small number of larger energy exposures.
Outlook, risks and unusual items
- Management expected 2016 average loan growth of 3%–5% and net interest income and other financing income growth of 2%–4%. Management cautioned that achieving the high end was less certain, including because legislation reduced the Federal Reserve stock dividend; the estimated annual reduction was approximately $18 million.
- Management expected 2016 net charge-offs of 0.25%–0.35% of average loans, with results likely near the upper end given oil prices. The filing cites energy-sector weakness, modest economic growth, low interest rates, competition for deposits, and interest-rate and credit risks as significant uncertainties.
- Regions corrected the accounting for certain lessor leases in the fourth quarter: approximately $834 million was reclassified from loans to other earning assets, and the cumulative pre-tax effect reduced net interest income by $15 million. This was a classification correction, not a stated cash loss.
- Regions Bank’s CRA rating was downgraded from “Satisfactory” to “Needs to Improve,” based on matters underlying a CFPB consent order concerning overdrafts and Regulation E. The downgrade restricts certain acquisitions and branch applications until the rating improves; another examination was expected to begin in 2016.
- Legal matters include HUD and FHFA inquiries into mortgage practices and the Morgan Keegan indemnification obligation related to its 2012 sale. The indemnification liability was $77 million at year-end. Regions estimated reasonably possible losses in excess of accruals of up to approximately $40 million in aggregate, while noting outcomes remain uncertain.
- The Federal Reserve did not object to Regions’ 2015 capital plan. The plan included a quarterly common dividend increase to $0.06 per share and up to $875 million of repurchases; about $520 million had been repurchased by year-end. The plan and future capital distributions remain subject to regulatory review.
- Goodwill was not impaired in the 2015 annual test. The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting; management also concluded internal controls were effective.
Investor verification priorities
- Track energy-related credit quality, criticized/classified loans, provisions and charge-offs, including whether management’s 2016 loss outlook is borne out.
- Assess whether loan growth and funding-cost trends support the 2016 net interest income and margin outlook, including the impact of the Federal Reserve stock-dividend change.
- Verify the status and financial consequences of the CRA rating restrictions, consent orders, HUD/FHFA inquiries and Morgan Keegan indemnification claims.
- Monitor capital, liquidity and borrowing costs as Basel III and LCR requirements phase in, and confirm regulatory approval for dividends and repurchases.
- Review the lease reclassification and related accounting disclosures, and distinguish recurring earnings from the $91 million insurance proceeds and other significant items.