Regions Financial Corporation — Q3 2021 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2021. Regions is a financial holding company providing banking and related services across the South, Midwest and Texas. Financial amounts below are in U.S. dollars; “Q3” comparisons are year over year, and balance-sheet comparisons are against December 31, 2020.
Financial performance and condition
- Q3 earnings: Net income was $651 million versus $530 million; net income available to common shareholders was $624 million versus $501 million. Diluted EPS was $0.65 versus $0.52.
- Q3 revenue and margins: Net interest income was $965 million versus $988 million; taxable-equivalent net interest income was $976 million versus $1.000 billion. Non-interest income was $649 million versus $655 million. Net interest margin was 2.76% versus 3.13%; the adjusted, non-GAAP margin was 3.30% versus 3.41%. The GAAP efficiency ratio was 57.71%, compared with 54.13%; adjusted efficiency ratio was 56.58%, compared with 55.28%.
- Q3 credit costs: The provision for credit losses was a benefit of $155 million, compared with a $113 million provision in Q3 2020. Net charge-offs were $30 million, or 0.14% of average loans on an annualized basis, versus $113 million, or 0.50%.
- Nine-month results: Net income was $2.083 billion versus $478 million; diluted EPS was $2.06 versus $0.42. Net interest income was $2.895 billion versus $2.888 billion; non-interest income was $1.909 billion versus $1.713 billion. Credit-loss provision was a benefit of $634 million versus a $1.368 billion provision.
- Balance sheet and funding: Total assets were $156.2 billion, up from $147.4 billion; deposits were $132.0 billion, up from $122.5 billion. Loans were $83.3 billion, down from $85.3 billion. Long-term borrowings were $2.45 billion, down from $3.57 billion.
- Liquidity and cash flow: Cash and cash equivalents were $27.5 billion, versus $18.0 billion at year-end, including $25.8 billion on deposit with the Federal Reserve. For the first nine months, operating cash flow was $2.27 billion, investing cash flow was negative $352 million, and financing cash flow was $7.63 billion. Regions reported $16.2 billion of FHLB borrowing capacity and $12.8 billion of Federal Reserve borrowing availability, with no FHLB borrowings outstanding.
- Capital and equity: Estimated September 30 CET1 ratios were 10.76% for Regions Financial Corporation and 12.35% for Regions Bank. Shareholders’ equity was $18.6 billion. Nine-month other comprehensive loss was $783 million, primarily reflecting changes in securities and derivative valuations.
Material changes and notable items
- Q3 net interest income and margin declined year over year, mainly due to lower loan balances, lower asset yields, and elevated cash from deposit growth. Lower deposit and borrowing costs partly offset the pressure.
- Deposit growth was primarily attributed to pandemic-related inflows and new account growth. Loan balances fell, including as PPP loans were forgiven and indirect auto balances ran off.
- The allowance for credit losses declined to $1.499 billion from $2.293 billion at year-end. Management attributed the reduction mainly to an improving economic outlook and stronger credit trends. The allowance was 1.80% of loans and 283% of non-performing loans, excluding loans held for sale.
- Non-performing loans excluding loans held for sale fell to $530 million from $745 million at year-end; the ratio to loans was 0.64%, versus 0.87% as stated in management’s discussion.
- Non-interest expense rose 4.7% in Q3 to $938 million. The quarter included a $20 million pre-tax charge for early extinguishment of debt. Mortgage income fell to $50 million from $108 million, while capital markets income increased to $87 million from $61 million.
- Regions completed its $650 million 1.80% senior-note issuance and redeemed its 3.80% senior notes in August; the debt redemption generated the $20 million charge. It issued $400 million of Series E preferred stock and redeemed all Series A preferred stock during Q2. Common-stock repurchases totaled $167 million in Q2; repurchases were paused in Q3 pending the EnerBank closing.
- EnerBank USA was acquired on October 1, 2021, after quarter-end, adding approximately $3.1 billion in consumer loans. Regions announced an agreement to acquire Sabal Capital Partners on October 4; closing was expected in Q4, subject to regulatory approval. These acquisitions were excluded from the stated 2021 expectations.
Outlook, risks and contingencies
- 2021 expectations: Adjusted revenue up modestly, dependent in part on the timing and amount of PPP forgiveness; adjusted non-interest expense up modestly; adjusted average loans down low single digits; adjusted ending loans up low single digits; net charge-offs/average loans approximately 25 basis points; and effective tax rate of 22%–23%, excluding potential tax legislation. Management noted these expectations excluded the EnerBank and Sabal acquisitions.
- Management expected Q4 net interest income to be stable, excluding PPP, excess cash, an outsized Q3 credit recovery, and the acquisitions, with hedging, balance-sheet management and deposit rates as supports. It expected consumer service charges to remain 10%–15% below pre-pandemic levels.
- Management described economic recovery as continuing, but subject to uncertainty from COVID-19, supply-chain and labor constraints, inflation and the pace of recovery. It noted that elevated pandemic-related deposits could reprice or leave as rates rise. Regions reported asset sensitivity in its 12-month rate analysis, with modeled income impacts dependent on deposit behavior and scenario assumptions.
- Key risks include credit deterioration, interest-rate and liquidity changes, deposit repricing or attrition, cyber and operational threats, regulatory and legal matters, LIBOR transition, and acquisition integration and execution.
- Regions was cooperating with a CFPB investigation into certain overdraft practices and policies. It estimated reasonably possible litigation and claims losses above accrued amounts of up to approximately $20 million, while noting that no excess loss was also reasonably possible. The maximum quantifiable DUS loss-share guarantee was approximately $1.6 billion; Regions stated this amount was not representative of expected loss.
- Regions reported no material change to the risk factors in its 2020 Form 10-K and concluded disclosure controls and procedures were effective.
Most important facts for investors to verify
- Whether the credit-cost benefit and improving asset-quality trends persist, and how the allowance responds to economic, inflation and pandemic developments.
- Whether deposit growth remains stable and low-cost, and the resulting effect on net interest margin as rates and deposit pricing change.
- Performance against the 2021 expectations, particularly loan growth, PPP forgiveness, service charges, expenses and charge-offs.
- EnerBank integration and contribution following its October 1 closing, and Sabal’s regulatory approval, closing and expected economics.
- Developments in the CFPB overdraft inquiry, other legal contingencies, and the transition of LIBOR-referenced products and contracts.
- Capital and liquidity after dividends, repurchases and acquisitions; reported CET1 ratios were estimates, and the filing’s interest-rate sensitivity scenarios depend on assumptions.