Regions Financial Corporation — Q3 2020 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2020. Amounts are in U.S. dollars; financial statement amounts are generally in millions unless stated otherwise. Regions is a bank holding company serving the South, Midwest and Texas.
Financial performance and condition
| Metric | Q3 2020 | Q3 2019 | Nine months 2020 | Nine months 2019 |
|---|---|---|---|---|
| Net interest income | $988 | $937 | $2,888 | $2,827 |
| Provision for credit losses | $113 | $108 | $1,368 | $291 |
| Non-interest income | $655 | $558 | $1,713 | $1,554 |
| Non-interest expense | $896 | $871 | $2,656 | $2,592 |
| Net income | $530 | $409 | $478 | $1,193 |
| Net income available to common shareholders | $501 | $385 | $403 | $1,137 |
| Diluted earnings per share | $0.52 | $0.39 | $0.42 | $1.13 |
Q3 taxable-equivalent net interest margin was 3.13%, down from 3.44% a year earlier; the taxable-equivalent net interest margin for the first nine months was 3.24%, versus 3.47%. Q3 GAAP efficiency ratio improved to 54.13% from 57.75%; the adjusted ratio was 55.28% versus 57.40%. Q3 effective tax rate was 16.5%, compared with 20.6%.
Q3 net income improved year over year, supported by higher net interest income and fee income, but included a $44 million valuation gain on an equity investment following its investee’s IPO. Nine-month net income declined substantially, reflecting the much higher credit-loss provision and pandemic-related conditions. Comparisons also require care because Regions adopted CECL in 2020; prior periods use the previous accounting method.
Cash flow, September year to date: Operating cash flow was $2.325 billion, investing cash flow was negative $6.830 billion, and financing cash flow was $13.864 billion. Cash and cash equivalents increased $9.359 billion to $13.473 billion.
Balance sheet and funding, September 30: Total assets were $145.180 billion, compared with $126.240 billion at year-end 2019. Loans were $88.359 billion, up from $82.963 billion; total deposits were $118.445 billion, up from $97.475 billion. Cash and cash equivalents were $13.473 billion. Short-term borrowings were zero, while long-term borrowings were $4.919 billion, down from $7.879 billion. Shareholders’ equity was $17.904 billion.
Credit and capital: The allowance for credit losses was $2.425 billion, or 2.74% of loans (2.90% excluding $4.594 billion of government-guaranteed PPP loans). Non-performing loans were 0.87% of loans, up from 0.63% at year-end; allowance coverage was 316% of non-performing loans. Q3 net charge-offs were $113 million, an annualized 0.50% of average loans. Estimated transitional CET1 was 9.32% at Regions Financial Corporation and 11.69% at Regions Bank. The Federal Reserve set Regions’ stress capital buffer at 3.0% for Q4 2020 through Q3 2021.
Material changes and management commentary
- Credit-loss provision for the first nine months rose to $1.368 billion from $291 million. The allowance increase reflected CECL adoption and expected losses associated with the economic impact and uncertainty of COVID-19. CECL adoption reduced retained earnings by $377 million, net of tax.
- Non-interest income rose 17% in Q3 year over year, notably from mortgage and capital markets activity and the $44 million equity valuation gain. Deposit service charges were down $34 million in Q3 as customer activity and overdraft fees remained affected by the pandemic.
- Q3 net interest income increased despite lower margin, as deposit costs fell and loan balances grew, including PPP lending, residential mortgage production and the April acquisition of Ascentium Capital. Elevated cash balances and lower-yielding PPP loans weighed on margin. Interest-rate hedges contributed $94 million to Q3 net interest income and $163 million in the first nine months.
- Regions acquired Ascentium Capital on April 1, adding approximately $1.9 billion of loans and leases to small businesses. The acquisition contributed $348 million of initial goodwill and $47 million of other intangible assets; purchase accounting estimates remained preliminary.
- COVID-19 customer payment deferrals totaled about $1.5 billion at September 30, down $4.2 billion from June 30. Regions reported approximately $4.6 billion of PPP loans. Management said liquidity and capital were strong and identified deposits, Federal Reserve cash, securities and borrowing capacity as liquidity sources.
- Management’s economic outlook remained uncertain. Its October baseline forecast expected U.S. real GDP to contract 3.8% in 2020 and grow 3.6% in 2021, with recovery to the pre-pandemic GDP level anticipated in Q1 2022. Regions rescinded previously issued 2020 and three-year financial targets; it provided no replacement financial guidance.
Risks, contingencies and unusual items
- COVID-19 could worsen borrower repayment capacity, collateral values, credit losses, fee income, liquidity needs and operating conditions. Management cited uncertainty around the pandemic, employment, government assistance and the pace of recovery. It estimated $150 million to $250 million of commercial and investor real estate loans could migrate to non-accrual in the following quarter.
- Payment deferrals and forbearances largely qualified for CARES Act relief from TDR classification. Most second residential mortgage forbearance periods expired in October; affected loans could be modified, granted further relief or evaluated for partial write-down and non-accrual status.
- The Federal Reserve’s capital-distribution restrictions limited share repurchases and constrained dividends. Regions maintained the common dividend at $0.155 per share for Q3 and declared the same amount for Q4. No 2020 share repurchases were planned.
- Regions disclosed reasonably possible legal losses of up to approximately $20 million in excess of accruals, while noting that no excess loss was also reasonably possible. It was responding to a CFPB civil investigative demand concerning overdraft practices; related inquiries could lead to proceedings or enforcement actions.
- Regions’ maximum quantifiable DUS loss-share guarantee exposure was approximately $1.4 billion; the filing states this is a severe theoretical maximum, not an estimate of expected loss. The recorded liability was approximately $5 million.
- Other material sensitivities include low interest rates, mortgage prepayments and MSR valuation, LIBOR transition, credit-rating changes, cyber and operational risk, and goodwill impairment. Regions reported no goodwill impairment trigger at quarter-end and no material impact from increased cyber events.
Key facts for investors to verify
- How the $2.425 billion allowance and subsequent credit trends evolve, particularly in criticized industries, commercial real estate and loans exiting deferral.
- Whether deposit growth and elevated cash balances persist, and how they affect net interest margin, asset sensitivity and funding needs.
- The durability of mortgage and capital markets fees, and the effect of weaker deposit service charges and consumer spending.
- Ascentium’s credit performance, integration results and final purchase accounting adjustments.
- Future Federal Reserve capital-distribution limits, dividend capacity and regulatory capital ratios.
- Developments in the CFPB overdraft inquiry, other legal matters and the DUS guarantee exposure.