Regions Financial Corporation — Q2 2020 Form 10-Q
Business context and reporting period. Regions is a regional bank holding company operating across the South, Midwest and Texas. This unaudited filing covers the quarter and six months ended June 30, 2020, during the COVID-19 pandemic. Comparisons are primarily with Q2 and the first half of 2019, or with December 31, 2019 for balance-sheet items.
Financial performance and condition
| Metric | Reported result | Comparison or context |
|---|---|---|
| Q2 net income (loss) | $(214) million; loss available to common shareholders $(237) million; diluted EPS $(0.25) | Q2 2019 net income was $390 million; common EPS was $0.37. |
| First-half net income (loss) | $(52) million; loss available to common shareholders $(98) million; diluted EPS $(0.10) | First-half 2019 net income was $784 million; common EPS was $0.74. |
| Q2 net interest income | $972 million GAAP; $985 million taxable-equivalent | GAAP was $942 million in Q2 2019. Taxable-equivalent net interest margin was 3.19%, down from 3.45%. |
| Q2 provision for credit losses | $882 million | Compared with $92 million provision for loan losses in Q2 2019. Q2 provision included $700 million above net charge-offs. |
| Q2 non-interest income / expense | $573 million / $924 million | Income rose $79 million year over year, led by mortgage and capital markets; expense rose $63 million, primarily from compensation. |
| Total assets and loans | Assets $144.1 billion; loans $90.5 billion at June 30 | Assets were $126.2 billion and loans $83.0 billion at year-end 2019. Loan growth included about $4.5 billion of PPP lending and the Ascentium acquisition. |
| Deposits and borrowings | Deposits $116.8 billion; short-term borrowings zero; long-term borrowings $6.4 billion | Deposits were $97.5 billion and total borrowings $9.9 billion at year-end 2019. |
| Credit quality and reserves | Allowance for credit losses $2.425 billion, or 2.68% of loans; non-performing loans excluding held-for-sale $614 million | Allowance was $914 million, or 1.10%, at year-end 2019. NPLs were $507 million then; allowance coverage of NPLs was 395% at June 30. |
| Liquidity and capital | Cash and cash equivalents $13.2 billion; CET1 ratio 8.87% at Regions Financial and 11.06% at Regions Bank | Cash was $4.1 billion at year-end. June capital ratios are estimated and reflect transitional regulatory treatment of CECL. |
| Cash flows, first half | Operating $1.644 billion; investing $(6.416) billion; financing $13.856 billion | Cash and cash equivalents increased $9.084 billion to $13.198 billion. |
Material changes and notable items
- Credit-loss expense surged amid COVID-19 uncertainty and deterioration in credit outlook. The allowance rose to $2.425 billion, including a $501 million increase in the allowance at CECL adoption on January 1, 2020 and further provision during the first half.
- Regions adopted CECL, reducing opening retained earnings by $377 million, net of tax. The filing notes that CECL and the prior incurred-loss accounting make some prior-period comparisons less directly comparable.
- Deposit balances grew sharply, partly as customers retained cash from credit-line draws, PPP loans and government stimulus. Regions held about $11.5 billion on deposit at the Federal Reserve at June 30, versus about $2.5 billion at year-end.
- On April 1, Regions acquired Ascentium Capital, adding approximately $1.9 billion in loans and leases. The acquisition generated $348 million of goodwill; preliminary purchase accounting remained subject to change.
- Regions issued $350 million of Series D preferred stock. The Federal Reserve’s stress test found Regions exceeded minimum capital levels; the company’s submitted capital plan provided for no share repurchases through year-end 2020.
Outlook, management commentary and risks
- Management withdrew its previously issued 2020 financial targets and three-year targets, citing economic uncertainty. It expected pandemic effects to continue affecting subsequent quarters.
- The filing’s July baseline forecast anticipated U.S. real GDP contracting 5.8% in 2020 and growing 3.3% in 2021; management emphasized substantial uncertainty around the pandemic, recovery, government relief and borrower performance.
- Credit exposures identified as particularly vulnerable included energy, restaurants, hotels, retail, travel and leisure, freight transportation and certain healthcare borrowers. Commercial and investor real-estate criticized balances increased about $1.7 billion from Q1; management estimated $325 million to $475 million of commercial and investor real-estate loans could migrate to non-accrual in the following quarter.
- Customer relief included deferrals and forbearances. As of June 30, Regions had processed approximately $1.9 billion of consumer payment deferrals/forbearances and $3.8 billion of business-customer requests. CARES Act relief allowed eligible COVID-19 modifications to avoid TDR classification; therefore, reported TDRs do not capture all modified loans.
- Regions reported approximately 44,600 PPP loans totaling $4.5 billion. PPP loans were federally guaranteed and carried no allowance; forgiveness timing and related scrutiny remained uncertain.
- Fee income faced pandemic-related pressure: management estimated that if spending levels persisted, non-interest income could be $10 million to $15 million lower per month than pre-March 2020 levels. Q2 service charges and card/ATM fees were down year over year, while mortgage and capital markets income increased.
- Regions reported strong liquidity and said it had not used the Federal Reserve’s PPP Liquidity Facility. Available borrowing capacity included approximately $14.7 billion at the Federal Reserve and $17.2 billion at the FHLB, subject to collateral. Management cautioned that economic stress, credit deterioration, deposit behavior, interest rates and relief-program changes could affect liquidity and results.
- The Federal Reserve restricted capital distributions in Q3 2020; Regions declared a $0.155-per-share common dividend for that quarter, within the stated limit. The filing warns that future restrictions or worsening conditions could affect dividend capacity.
- A second-quarter goodwill impairment test followed a triggering event; no impairment charge was recorded. Regions also disclosed an ongoing U.S. Attorney investigation concerning a former customer and related AML/BSA compliance matters. It estimated reasonably possible legal losses above accrued amounts of up to approximately $20 million, while noting outcomes remain uncertain.
Important facts for investors to verify
- How credit performance, criticized/classified loans, charge-offs and the $2.425 billion allowance evolve as pandemic relief and payment deferrals expire.
- Whether the unusually high deposit and cash balances persist, and how excess liquidity and PPP balances affect net interest margin and earnings.
- Ascentium’s contribution to revenue, credit costs and integration results, including final purchase-accounting adjustments.
- Capital ratios, regulatory distribution limits and the sustainability of the common dividend under the Federal Reserve’s restrictions.
- Progress and potential financial or reputational consequences of the disclosed AML/BSA investigation and other legal matters.