Regions Financial Corporation — Q2 2023 Form 10-Q
Business context and reporting period. Regions is a bank holding company operating primarily across the South, Midwest and Texas, with retail, commercial and mortgage banking, wealth management and specialty financial services. This unaudited quarterly filing covers the three and six months ended June 30, 2023; comparisons below are to Q2 or first-half 2022 unless otherwise stated.
Financial performance and condition
| Metric | Q2 2023 | Prior-year comparison / period-end |
|---|---|---|
| Net interest income | $1.381 billion; taxable-equivalent $1.393 billion | $1.108 billion GAAP in Q2 2022 |
| Net interest margin | 4.04% taxable-equivalent | 3.06% in Q2 2022 |
| Net income / common EPS | $581 million / $0.59 diluted | $583 million / $0.59 diluted in Q2 2022 |
| Net income available to common shareholders | $556 million | $558 million in Q2 2022 |
| Provision for credit losses | $118 million | $60 million in Q2 2022 |
| Non-interest income / expense | $576 million / $1.111 billion | $640 million / $948 million in Q2 2022 |
- For the first half, net income was $1.193 billion, up from $1.131 billion; diluted EPS was $1.22 versus $1.15. Net interest income was $2.798 billion versus $2.123 billion, and taxable-equivalent NIM was 4.13% versus 2.96%.
- At June 30, total assets were $155.656 billion; loans were $99.191 billion, up from $97.009 billion at year-end 2022. Deposits were $126.959 billion, down from $131.743 billion. Shareholders’ equity was $16.639 billion.
- Borrowed funds increased to $7.293 billion from $2.284 billion at year-end, including $3.0 billion of short-term borrowings and $4.293 billion of long-term borrowings. First-half cash from operating activities was $593 million, compared with $1.505 billion; investing cash outflow was $1.694 billion and financing cash outflow was $240 million. Cash and cash equivalents ended at $9.886 billion.
- Reported CET1 capital ratio was estimated at 10.07% for Regions Financial Corporation and 10.77% for Regions Bank. Available liquidity sources totaled $52.9 billion, including $7.4 billion cash at the Federal Reserve, securities and borrowing capacity.
- Allowance for credit losses was $1.633 billion, or 1.65% of loans; net charge-offs were $81 million, or 0.33% of average loans, in Q2. Non-performing loans excluding held-for-sale loans were $492 million, or 0.50% of loans.
Material changes versus comparable periods
- Higher rates and loan growth lifted Q2 net interest income and NIM, but higher deposit and funding costs partly offset asset yield gains. Q2 interest expense rose to $358 million from $47 million.
- Q2 non-interest income fell 10% year over year, led by lower capital markets, mortgage and deposit service-charge income. Non-interest expense increased 17.2%; operational losses were $95 million versus $13 million, primarily reflecting elevated check fraud. Management said countermeasures were implemented and losses had returned to normalized levels.
- First-half provision for credit losses rose to $253 million from $24 million, reflecting credit normalization, loan growth and economic outlook considerations. First-half net charge-offs were $164 million versus $84 million a year earlier.
- Deposits declined $4.8 billion from year-end, with rate-seeking customers and use of off-balance-sheet funding solutions contributing. Time deposits and brokered deposits increased, while non-interest-bearing balances fell.
- Accumulated other comprehensive loss was $3.440 billion at June 30, compared with $3.343 billion at year-end; available-for-sale securities had $3.329 billion of gross unrealized losses. Management attributed securities losses to interest-rate movements and reported no identified credit impairment in the securities positions.
Outlook, risks and unusual items
- Management’s 2023 expectations: adjusted total revenue growth of 6–8%; taxable-equivalent net interest income growth of 12–14%; adjusted non-interest expense growth of about 6.5%; positive adjusted operating leverage; ending loans up 3–4%; deposits modestly lower in the second half; net charge-offs/average loans around 35 basis points; effective tax rate of 21–22%; and CET1 managed at or modestly above 10%. Net interest income outlook uses the market-implied forward rate curve as of June 30.
- Management’s baseline forecast anticipated U.S. real GDP growth of 2.0% in 2023 and 0.9% in 2024, with slower growth, easing but above-target inflation, cooling labor demand and downside uncertainty. Further Federal Reserve rate increases remained possible; recession and tighter credit conditions were cited as concerns.
- Regions reported estimated uninsured deposits of $47.3 billion; it said more than 60% of deposits were FDIC-insured and approximately $7.5 billion were collateralized. It described its deposit base as diversified and granular, while acknowledging industry-wide deposit and liquidity pressures.
- The FDIC proposed a special assessment for losses from recent bank failures. If finalized as proposed, Regions estimated its cost at approximately $111 million; the filing says the amount would be accrued when the rule is finalized. Moody’s affirmed ratings but changed the outlook to negative on August 7, 2023.
- The Board declared a 20% increase in the quarterly common dividend to $0.24 on July 19, 2023, payable October 2, 2023. No common shares were repurchased in the first half of 2023.
- Legal proceedings arise in the ordinary course. Management estimated reasonably possible losses in excess of accruals as immaterial and did not expect pending or threatened matters to materially affect the Company as a whole, while noting outcomes remain uncertain. The maximum quantifiable Fannie Mae loan loss-share liability was approximately $1.9 billion, but the filing says this is not representative of expected loss.
- Other risks include interest-rate sensitivity, deposit competition and funding costs, credit deterioration, securities valuation, fraud and cybersecurity, regulatory changes, and economic weakness. The filing reported no material change in previously disclosed risk factors.
Most important facts for investors to verify
- Whether revenue growth and margin gains can persist as deposit costs rise and deposits shift toward higher-cost products.
- Trends in loan quality, criticized commercial and investor real estate exposures, charge-offs, and the adequacy of the allowance under changing economic assumptions.
- Liquidity and deposit developments, including uninsured balances, brokered funding, and use of secured borrowing capacity.
- The final FDIC special-assessment rule and its effect on expenses, alongside the scale and persistence of operational fraud losses.
- Progress against management’s 2023 revenue, expense, loan, deposit, credit-cost and capital expectations; these are forward-looking estimates, not guarantees.
- The scale and timing of potential AOCI effects, securities values and capital impacts if interest rates or funding conditions change.