Regions Financial Corporation — Q3 2023 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2023. Regions is a bank holding company headquartered in Birmingham, Alabama, operating across the South, Midwest and Texas, with banking, mortgage, commercial, wealth and specialty financial services businesses. Unaudited financial statements are presented in millions unless otherwise noted.
Financial performance and condition
| Metric | Q3 2023 | Q3 2022 | Change / context |
|---|---|---|---|
| Net interest income | $1,291 | $1,262 | Up 2.3%; taxable-equivalent net interest margin was 3.73%, versus 3.53%. |
| Provision for credit losses | $145 | $135 | Higher, reflecting credit normalization and incremental portfolio risk. |
| Non-interest income | $566 | $605 | Down 6.4%, principally from capital markets, deposit service charges and mortgage income. |
| Non-interest expense | $1,093 | $1,170 | Down 6.6%; comparison benefited from a $179 million CFPB-related settlement expense in Q3 2022. |
| Net income | $490 | $429 | Up 14.2%; net income available to common shareholders was $465 million. |
| Diluted EPS | $0.49 | $0.43 | Up from the prior-year quarter. |
For the first nine months, net income was $1.683 billion versus $1.560 billion; diluted EPS was $1.71 versus $1.58. Taxable-equivalent net interest income was $4.127 billion versus $3.419 billion, and net interest margin was 3.99% versus 3.15%. Non-interest income declined to $1.676 billion from $1.829 billion, while non-interest expense rose to $3.231 billion from $3.051 billion. Provision for credit losses increased to $398 million from $159 million.
Balance sheet at September 30: Total assets were $153.6 billion, compared with $155.2 billion at year-end 2022. Loans were $98.9 billion, up from $97.0 billion. Deposits were $126.2 billion, down from $131.7 billion; non-interest-bearing deposits fell to $44.6 billion from $51.3 billion. Total borrowed funds increased to $6.3 billion from $2.3 billion. Shareholders’ equity was $16.1 billion. Accumulated other comprehensive loss widened to $4.236 billion from $3.343 billion, primarily reflecting securities and derivative valuation changes.
Cash flow and liquidity: In the first nine months, operating cash flow was $1.453 billion, investing cash flow was negative $1.451 billion and financing cash flow was negative $2.213 billion. Cash and cash equivalents ended at $9.016 billion, down from $11.227 billion at year-end 2022. Reported available liquidity sources totaled $56.7 billion, including $7.5 billion of cash at the Federal Reserve, $18.9 billion of liquid securities available for use and borrowing availability from the FHLB and Federal Reserve.
Capital and credit: Estimated Regions Financial CET1 was 10.29% at September 30; Regions Bank’s was 10.82%. The allowance for credit losses was $1.677 billion, or 1.70% of loans, versus 1.63% at year-end 2022. Q3 net charge-offs were $101 million, or 0.40% of average loans. Non-performing loans, excluding loans held for sale, rose to $642 million from $500 million at year-end; non-performing assets rose to $659 million from $516 million.
Material changes versus comparable periods
- Higher market rates and average loan balances lifted Q3 net interest income and margin, but higher deposit and other funding costs partly offset the gains. Management also noted that approximately $6 billion of hedges became active and reduced current-period net interest income.
- Deposit balances decreased by $5.5 billion from year-end 2022 amid customer rate-seeking and remixing into higher-cost products. Time deposits increased, partly offsetting declines in other categories.
- Credit costs increased year over year; management cited adverse risk migration and continued normalization, including heightened risk in office, select multifamily markets and EnerBank. Commercial and investor real estate criticized balances increased during Q3.
- Q3 expense fell year over year mainly because the prior-year quarter included the CFPB settlement. Conversely, operational losses reached $75 million in Q3, versus $13 million a year earlier, primarily due to check-related fraud. Management said new fraud claims had slowed after countermeasures were adjusted.
- Available-for-sale securities had $4.125 billion of gross unrealized losses at September 30, primarily attributed by management to interest-rate movements; management reported no identified credit impairment and said it did not intend, nor expect to be required, to sell the positions before recovery.
Outlook, risks and unusual items
2023 expectations disclosed by management: Adjusted total revenue growth of 5%–6%; adjusted non-interest expense growth of approximately 9.5%; low-single-digit ending loan growth; and deposits stable to modestly lower in Q4. Management expected adjusted net charge-offs to average slightly above 35 basis points and an effective tax rate of 21%–22%. It expected to manage CET1 at approximately 10% over the near term. These are forward-looking, non-GAAP expectations where specified; actual results may differ.
Management’s economic baseline anticipated slower activity after strong Q3 GDP growth, a gradual rise in unemployment and inflation remaining above the Federal Reserve’s target into 2024. It described substantial uncertainty around rates, credit conditions, deposit competition and recession risk. Its rate-sensitivity analysis estimated that a parallel +100-basis-point shift would increase 12-month net interest income by $10 million under an instantaneous shock or $19 million under a gradual change; the filing cautions that these estimates are hypothetical and assumption-dependent.
- The FDIC proposed a special assessment related to recent bank failures. If finalized as drafted, Regions estimated its assessment at approximately $111 million, with accrual expected when the rule is finalized.
- Moody’s affirmed ratings but changed its outlook to negative in August 2023. The filing notes that a downgrade could affect funding costs, market access, collateral requirements and liquidity.
- Federal regulators proposed long-term debt requirements and Basel III “Endgame” capital changes; Regions was evaluating their potential effects.
- Legal proceedings are described as ordinary-course matters. Management estimated reasonably possible losses in excess of accrued amounts to be immaterial and did not expect pending or threatened matters to materially affect the company as a whole.
- Regions raised its quarterly common dividend 20% to $0.24 per share in Q3. It made no common-stock repurchases during the first nine months, but reported repurchasing 9.6 million shares for $140 million after quarter-end through November 6, 2023.
- Regions adopted guidance on troubled debt restructurings and related disclosures in January 2023; the transition reduced the allowance by $38 million and increased retained earnings by $28 million, net of tax.
Important facts for investors to verify
- Whether deposit outflows stabilize and how continued deposit remixing affects funding costs and net interest margin.
- Whether loan delinquencies, criticized credits, non-performing loans and net charge-offs continue to rise, particularly in commercial real estate and other identified higher-risk portfolios.
- How the proposed FDIC special assessment and potential regulatory capital or long-term debt rules affect expense, capital and funding plans.
- Whether check-fraud losses remain elevated and whether management’s countermeasures reduce operational losses.
- How interest-rate changes affect securities values, AOCI, hedging costs and Regions’ ability to achieve its 2023 revenue, expense and credit-cost expectations.