Get Started for Free Contexxia identifies hard-to-find pieces of information in SEC filings. No more highlighters, no more redlining, no more poring over huge documents. REGIONS FINANCIAL CORP (1281761) 10-Q published on May 08, 2019 at 1:12 pm
Reporting Period: Mar 30, 2019
Regions' lease portfolio is primarily composed of property leases that are classified as either operating or finance leases with the majority classified as operating leases. Property leases, which primarily include office locations and retail branches, typically have original lease terms ranging from 1 year to 20 years, some of which may also include an option to extend the lease beyond the original lease term. In some circumstances, Regions may also have an option to terminate the lease early with advance notice. Regions includes renewal and termination options within the lease term if deemed reasonably certain of exercise. As most leases do not state an implicit rate, Regions utilizes the incremental borrowing rate based on information available at the lease commencement date to determine the present value of lease payments. Leases with a term of 12 months or less are not recorded on the balance sheet, and Regions continues to recognize lease payments as an expense over the lease term as appropriate. The remainder of the lease portfolio is comprised of equipment leases that have remaining lease terms of 1 year to 3 years.
Regions engages in both direct financing and sales-type leasing. Regions also has portfolios of leveraged and operating leases. These arrangements provide equipment financing for leased assets, such as vehicles and aircraft. At the commencement date, Regions (lessor) enters into an agreement with the customer (lessee) to lease the underlying equipment for a specified lease term. The lease agreements may provide customers the option to terminate the lease by buying the equipment at fair market value at the time of termination or at the end of the lease term. Regions' equipment finance asset management group performs due diligence procedures on the lease residual and overall equipment values as part of the origination process. Regions performs lease residual value reviews on an ongoing basis.. In order to manage the residual value risk inherent in some of its direct financing leases, Regions purchases residual value insurance from an independent third party. The sales-type, direct financing and leveraged leases are recorded within loans on the consolidated balance sheet and operating leases are recorded within other earning assets on the consolidated balance sheet.
Total deposits at March 31, 2019 increased approximately $1.2 billion compared to year-end 2018 levels, with the deposit mix experiencing movement from lower cost to higher cost products. During the first quarter of 2019, balance increases in interest-bearing transaction accounts, savings, customer time deposits, and brokered treasury time deposits were partially offset by balance decreases in non-interest-bearing demand and money market accounts. Specifically, interest-bearing transaction and time deposit balances increased due to the offering of higher rates, portfolio remixing, and overall account growth. Savings account balances increased, generally reflecting seasonal trends. The non-interest-bearing demand decline was due primarily to customers using liquidity to pay down debt or invest in their businesses, as well as portfolio remixing. The decrease in money market account balances reflects the final portion of a longer-term initiative to reduce higher-cost retail brokered sweep deposits. Treasury brokered time deposits were used to supplement incremental balance sheet funding needs.
The calculation of the fully phased-in pro-forma "Common equity Tier 1" (CET1) is based on Regions’ understanding of the Final Basel III requirements. For Regions, the Basel III framework became effective on a phased-in approach starting in 2015 with full implementation extending to 2019. The Basel III rules are now fully phased in, other than with respect to deductions and adjustments whose transitional treatment has been extended until the federal banking agencies' September 2017 proposal to revise and simplify the capital treatment of selected categories of assets is finalized. The calculation provided in the following table includes estimated pro-forma amounts for the ratio on a fully phased-in basis. Regions’ current understanding of the final framework includes certain assumptions, including the Company’s interpretation of the requirements, and informal feedback received through the regulatory process. Regions’ understanding of the framework is evolving and will likely change as analyses and discussions with regulators continue. Because Regions is not currently subject to the fully phased-in capital rules, this pro-forma measure is considered to be a non-GAAP financial measure, and other entities may calculate it differently from Regions’ disclosed calculation. Since analysts and banking regulators may assess Regions’ capital adequacy using the fully phased-in Basel III framework, Regions believes that it is useful to provide investors the ability to assess Regions’ capital adequacy on this same basis.
As market interest rates have increased in recent years, larger magnitude falling rate shock scenarios have become possible, although the probability of such a movement is currently low. Regions has established a scenario by which yield curve tenors will fall to a consistent level. The shock magnitude for each tenor, when compared to market forward rates, equates to the lesser of -200 basis points, or a rate modestly lower than the historical all-time minimum. This provides a sufficiently punitive rate environment, while maintaining a higher level of reasonableness. An instantaneous shock under this environment would be expected to reduce net interest income and other financing income when compared to the base case by $384 million over the next 12 months.