Regions Financial Corporation — Q2 2021 Form 10-Q
Business context and reporting period. Regions is a bank holding company serving the South, Midwest and Texas through commercial, consumer and wealth-management businesses. This unaudited filing covers the quarter and six months ended June 30, 2021; comparisons below are with Q2 or the first six months of 2020, or with December 31, 2020 for balance-sheet measures.
Financial performance and position
- Q2 earnings: Net income was $790 million and diluted EPS was $0.77; net income available to common shareholders was $748 million. A year earlier, Regions reported a $214 million net loss and a $0.25 loss per diluted share. First-half net income was $1.432 billion versus a $52 million loss in 2020; diluted EPS was $1.41 versus a $0.10 loss.
- Revenue and margins: Q2 net interest income was $963 million, down $9 million year over year; total revenue was $1.582 billion, up from $1.545 billion. Taxable-equivalent net interest margin fell to 2.81% from 3.19%; the company’s adjusted margin, a non-GAAP measure, was 3.31% versus 3.36%. Q2 non-interest income rose 8% to $619 million, while non-interest expense fell 2.8% to $898 million. The GAAP efficiency ratio improved to 56.39% from 59.35%.
- Credit costs and asset quality: Q2 included a $337 million benefit from credit losses, versus an $882 million provision in Q2 2020. First-half benefit was $479 million, versus a $1.255 billion provision. Q2 net charge-offs were $47 million, or 0.23% annualized of average loans, compared with $182 million, or 0.80%, a year earlier. At June 30, the allowance for credit losses was $1.684 billion, or 2.00% of loans; non-performing loans excluding held-for-sale loans were 0.79% of loans.
- Balance sheet and funding: Total assets were $155.6 billion, up from $147.4 billion at year-end 2020. Deposits increased to $131.5 billion from $122.5 billion; loans were $84.1 billion, down from $85.3 billion. Long-term borrowings declined to $2.87 billion from $3.57 billion. Cash and cash equivalents were $25.6 billion, versus $18.0 billion at year-end.
- Cash flow and capital: For the first six months, operating cash flow was $1.428 billion, investing cash flow was negative $1.479 billion, and financing cash flow was $7.689 billion; cash and cash equivalents increased $7.638 billion. At June 30, estimated parent-company CET1 was 10.37%, total capital 13.85%, and leverage capital 8.56%. Tangible common equity to tangible assets was 7.58%, a non-GAAP measure.
Material changes and notable items
- Management attributed the large year-over-year earnings improvement chiefly to lower expected credit losses and the resulting reserve release, alongside lower charge-offs. The allowance declined $609 million during the first half, reflecting an improved economic outlook, stimulus effects and previously provided-for charge-offs; management also noted continued uncertainty and estimation imprecision.
- Deposit growth, largely associated with government stimulus and new accounts, left substantial excess cash at the Federal Reserve and pressured margins. Regions also cited repricing of fixed-rate loans and securities at lower market rates. Deposit and borrowing costs fell and partly offset lower asset yields.
- Non-interest income benefited from stronger deposit service charges, card fees and other income. Q2 included an $18 million individual bank-owned life insurance claim gain. Mortgage income and capital-markets income were lower than in Q2 2020.
- Regions issued $400 million of Series E preferred stock and redeemed $500 million of Series A preferred stock in Q2. It repurchased about 8.0 million common shares for $167 million during the first half, under a $2.5 billion authorization. The Board raised the Q3 2021 common dividend 10% to $0.17 per share.
- Accumulated other comprehensive income decreased $664 million in the first half, mainly from changes in unrealized gains on securities and hedging derivatives.
Outlook, risks and contingencies
- 2021 expectations: Adjusted revenue is expected to be stable to modestly higher, depending on the timing and amount of PPP loan forgiveness; adjusted non-interest expense stable to modestly higher; adjusted average loans down low single digits; adjusted ending loans up low single digits; net charge-offs of 25–35 basis points; and an effective tax rate of 22–23%. These expectations exclude the pending EnerBank acquisition and include non-GAAP measures.
- Management expected net interest income excluding PPP loans and excess cash to grow through the remainder of 2021, supported by hedging, balance-sheet management and deposit rates. It expected long-term rate pressure to become more neutral near year-end. Its economic outlook anticipated rapid near-term growth but recognized inflation, supply constraints and COVID-19 variants as uncertainties.
- Regions reported $269 million of outstanding COVID-related payment deferrals at June 30, down 95% from $5.7 billion a year earlier; 71% were government-guaranteed residential mortgages. About $2.9 billion of PPP loans remained outstanding, and management expected approximately 80% of the original $6.2 billion to be forgiven by year-end 2021.
- Regions had $12.8 billion of Federal Reserve borrowing availability and $15.2 billion of FHLB borrowing capacity, with no FHLB borrowings outstanding. Management described liquidity and capital as strong. It intended to manage CET1 within a 9.25%–9.75% operating range, toward the midpoint by year-end.
- The EnerBank USA home-improvement lender acquisition, announced in June, was expected to close in Q4 2021 subject to regulatory approval. Other risks include the pace of economic recovery, inflation and interest rates, credit quality, deposit repricing or outflows, LIBOR transition, cybersecurity and regulatory matters.
- Regions disclosed cooperation with a CFPB investigation into overdraft practices. It estimated reasonably possible litigation losses above accrued amounts of up to approximately $20 million, while stating that pending litigation and inquiries were not expected to have a material effect overall. The DUS mortgage servicing guarantee had a maximum quantifiable contingent liability of $1.6 billion; the company said this is not representative of expected loss, and recorded a $5 million liability.
Most important facts for investors to verify
- Whether the substantial credit-loss benefit and reduced allowance remain appropriate as stimulus fades and economic conditions evolve.
- Loan growth, PPP forgiveness, deposit retention and repricing, and the resulting impact on net interest income and margin.
- Progress against the 2021 outlook, including the stated loan, expense, charge-off and tax expectations, noting their adjusted/non-GAAP basis where applicable.
- Capital return plans, regulatory capital levels and the effect of the common-stock repurchase authorization and dividend increase.
- EnerBank closing conditions and integration risks, as well as developments in the CFPB inquiry and other legal or regulatory matters.