Regions Financial Corporation — Q1 2020 Form 10-Q
Reporting period: Three months ended March 31, 2020. Regions is a bank holding company operating across the South, Midwest, and Texas. Results reflect the initial effects of COVID-19 and the January 1, 2020 adoption of CECL. Dollar amounts are in millions unless stated otherwise.
Financial performance and position
| Metric | Q1 2020 / March 31, 2020 | Comparable period / prior date |
|---|---|---|
| Net interest income | $928; taxable-equivalent $940 | $948; taxable-equivalent $961 in Q1 2019 |
| Net interest margin | 3.44% taxable-equivalent | 3.51% in Q1 2019 |
| Provision for credit losses | $373 | $91 provision for loan losses in Q1 2019 |
| Non-interest income / expense | $485 / $836 | $502 / $860 in Q1 2019 |
| Net income / diluted EPS | $162 / $0.14; common-shareholder income $139 | $394 / $0.37; common-shareholder income $378 in Q1 2019 |
| Operating cash flow | $787 | $578 in Q1 2019 |
| Cash and cash equivalents | $5,255 | $4,114 at year-end 2019 |
| Total assets | $133,542 | $126,240 at year-end 2019 |
| Loans, net of unearned income | $88,098 | $82,963 at year-end 2019 |
| Total deposits | $100,030 | $97,475 at year-end 2019 |
| Total borrowed funds | $13,255 | $9,929 at year-end 2019 |
| Shareholders’ equity | $17,332 | $16,295 at year-end 2019 |
| Regulatory capital ratios, Regions Financial Corporation | CET1 9.45%; Tier 1 10.65%; total capital 12.53%; leverage 9.63% | Year-end 2019: 9.68%; 10.91%; 12.68%; 9.65%, respectively |
GAAP total revenue (net interest income plus non-interest income) was $1,413, compared with $1,450 a year earlier. The adjusted efficiency ratio was 57.89%, versus 58.29% in Q1 2019. Net charge-offs were $123, or an annualized 0.59% of average loans, versus $78 and 0.38% a year earlier. The allowance for credit losses was $1,665, or 1.89% of loans, and 261% of non-performing loans at quarter-end. Non-performing loans were $638 excluding loans held for sale, up from $507 at year-end.
Net cash used in investing activities was $5,280 and financing activities provided $5,634. The reported quarter-end cash and cash equivalents balance was $5,255.
Material changes and drivers
- Net income available to common shareholders fell to $139 from $378, primarily reflecting the sharp increase in credit-loss provision, alongside lower net interest income and fee income.
- Lower market rates reduced asset yields and net interest margin; lower funding costs partially offset the effect.
- COVID-related line utilization helped drive commercial and industrial loans up $5.4 billion from year-end. Deposits rose $2.6 billion, including growth in non-interest-bearing, money-market, and savings balances.
- Borrowed funds increased $3.3 billion from year-end, mainly from additional FHLB advances used to bolster cash and prepare for customer funding needs.
- CECL adoption increased the allowance by $501 million at January 1 and reduced retained earnings by $377 million after tax. The quarter’s subsequent allowance increase was attributed mainly to COVID-19 uncertainty.
- Accumulated other comprehensive income increased $1.4 billion, primarily from unrealized gains on securities and cash-flow hedges; this helped lift reported equity.
Outlook, commentary, risks, and unusual items
- Management rescinded its previously issued 2020 financial targets and three-year targets, citing economic uncertainty. Its outlook at the start of Q2 anticipated a 5.4% contraction in real GDP for 2020 and 2.6% growth in 2021; it cautioned that the outlook and credit-loss estimates were highly uncertain.
- Management warned that further material allowance increases could be required if economic conditions deteriorate or persist. Energy and restaurant borrowers were identified as particularly stressed; energy-related credits contributed to higher non-performing loans. The company estimated $225–$350 million of commercial and investor real estate loans could migrate to non-accrual in the next quarter.
- Regions reported strong liquidity and capital, with available sources including deposits, Federal Reserve balances, pledged collateral, FHLB capacity, unencumbered securities, and discount-window borrowing. At March 31, it reported $15.3 billion of FRB borrowing availability and approximately $17.6 billion of total FHLB capacity.
- Management said it had no current plan to reduce or eliminate the common dividend, but suspended anticipated share repurchases for 2020. The Q1 common dividend declared was $0.155 per share.
- As of May 4, Regions reported SBA authorization for more than 37,200 PPP applications totaling about $4.8 billion, with more than 19,600 applications and $3.6 billion funded. It had also processed customer payment-deferral requests; these figures are subsequent-to-quarter-end updates.
- COVID-related lower customer spending reduced Q1 non-interest income by an estimated $12 million. If spending levels persisted, management estimated a $20–$25 million monthly impact versus pre-March levels.
- Moody’s and Fitch revised Regions’ outlooks from positive to stable after quarter-end, citing pandemic-related economic, asset-quality, and profitability concerns. Regions reported no goodwill impairment trigger at March 31.
- Regions disclosed a U.S. Attorney investigation concerning a former customer relationship and related entities, including aspects of its anti-money-laundering and Bank Secrecy Act compliance. Management believed pending matters would not materially affect the company as a whole; it estimated reasonably possible legal losses above accruals of up to approximately $20 million.
- The Ascentium Capital acquisition, including approximately $2 billion in small-business loans and leases, closed April 1, 2020, after quarter-end.
Important facts for investors to verify
- How subsequent COVID-19 conditions, borrower deferrals, PPP activity, and government relief affected credit quality, charge-offs, and the allowance in later quarters.
- Whether loan growth from commercial line draws and deposit inflows persisted, and the resulting funding, liquidity, and net interest margin effects.
- Capital ratios and dividend capacity under the applicable regulatory requirements; the reported Q1 ratios were estimates and included the permitted CECL capital transition.
- Actual PPP loan funding and servicing economics, as well as the impact of the Ascentium acquisition after closing.
- Developments in the disclosed legal and regulatory investigation and any resulting financial, compliance, or reputational consequences.