Regions Financial Corporation — Q3 2022 Form 10-Q
Reporting period: Quarter and nine months ended September 30, 2022. Regions is a bank holding company providing commercial, consumer, mortgage, and wealth-management services, principally across the South, Midwest, and Texas.
Financial performance and condition
| Metric | Q3 2022 | Comparable period / change |
|---|---|---|
| Net interest income | $1.262 billion | Up from $965 million in Q3 2021 |
| Net interest margin, taxable-equivalent | 3.53% | 2.76% in Q3 2021 |
| Net income / diluted EPS | $429 million / $0.43 | $651 million / $0.65 in Q3 2021 |
| Net income available to common shareholders | $404 million | $624 million in Q3 2021 |
| Provision for credit losses | $135 million | $155 million benefit in Q3 2021 |
| Non-interest income / expense | $605 million / $1.170 billion | Income down $44 million; expense up $232 million year over year |
- For the first nine months, net interest income was $3.385 billion and net income was $1.560 billion, versus $2.895 billion and $2.083 billion, respectively, in 2021. Diluted EPS was $1.58 versus $2.06.
- Loans grew to $94.711 billion from $87.784 billion at year-end 2021, led by commercial and investor real estate lending. Deposits declined to $135.378 billion from $139.072 billion.
- At September 30, cash and cash equivalents were $15.666 billion, down from $29.411 billion at year-end. Nine-month operating cash flow was $1.826 billion; investing cash flow was negative $11.072 billion and financing cash flow negative $4.499 billion.
- Long-term borrowings were $2.274 billion, down from $2.407 billion. The company reported $15.6 billion of FHLB borrowing capacity and $14.1 billion of FRB borrowing availability, with no FHLB borrowings outstanding.
- Estimated holding-company CET1 was 9.29%, versus 9.57% at year-end. Shareholders’ equity fell to $15.173 billion from $18.326 billion, mainly reflecting a $3.921 billion nine-month decline in AOCI, including unrealized securities and hedge losses.
- Allowance for credit losses was $1.539 billion; non-performing loans excluding held-for-sale loans were $495 million. The allowance was 1.63% of loans and 311% of non-performing loans.
Material changes versus comparable periods
- Higher market rates, loan growth, and larger securities balances lifted Q3 net interest income and margin. Deposit and borrowing costs also rose, while elevated liquidity continued to weigh on margin.
- Q3 earnings fell chiefly because the prior-year period included a credit-loss benefit, while 2022 included a provision, higher operating expenses, and weaker non-interest income. Professional, legal, and regulatory expense included CFPB settlement costs.
- Q3 net charge-offs were $110 million, or 0.46% annualized, versus $30 million, or 0.14%, a year earlier. The 2022 figure included charge-offs connected with the sale of unsecured consumer loans.
- Regions sold $1.2 billion of unsecured consumer loans late in Q3. A $63 million fair-value mark was recorded through charge-offs, and the transaction produced a $31 million net provision benefit.
- Mortgage income declined amid lower production in the higher-rate environment. Total non-interest income was down year over year, while non-interest expense increased substantially.
Outlook, risks, and unusual items
- Management’s 2022 expectations, based on the September 30 forward rate curve, were adjusted revenue growth of 11–12%, adjusted expense growth of 4.5–5.5%, adjusted operating leverage of about 6%, average loan growth of about 9%, adjusted net charge-offs of about 20 basis points, an effective tax rate of 22–23%, and year-end deposits $5–$10 billion below year-end 2021. These are management expectations, not guarantees.
- Regions described itself as asset-sensitive: estimated 12-month net interest income increases under rising-rate scenarios and declines under falling-rate scenarios. Estimates vary materially depending on the retention and repricing of pandemic-related “surge” deposits.
- Hurricane Ian affected the company’s footprint near quarter-end. Regions recorded a $20 million related credit reserve but said customer impacts were still being assessed and could change the allowance.
- A September 28 CFPB consent order concerning historical overdraft practices requires a $50 million non-deductible civil penalty and approximately $141 million of customer redress. The filing says $50 million of insurance reimbursement proceeds were expected in Q4 2022. The settlement contributed to the quarter’s elevated professional, legal, and regulatory expenses.
- Regions estimated reasonably possible legal losses above accrued amounts of up to approximately $20 million, while noting some matters could not be estimated. Management said pending and threatened matters were not expected to have a material overall effect, but unexpected developments could produce a material period impact.
- Key risks include economic slowdown, inflation and borrower stress, interest-rate and securities valuation volatility, deposit competition and funding costs, evolving credit quality, regulatory and litigation exposure, cyber and operational risks, and LIBOR transition. The filing also highlights uncertainty in economic forecasts and Hurricane Ian exposures.
Important facts for investors to verify
- Whether deposit outflows and deposit repricing remain consistent with management’s outlook, and how this affects funding costs and net interest margin.
- Whether loan growth and credit quality support the stated charge-off outlook; monitor criticized/classified loans, non-performing assets, and the allowance.
- The final customer-redress cost, insurance recovery timing, and any further CFPB-related expense or obligations.
- Subsequent estimates of Hurricane Ian’s effects on customers, collateral, and credit reserves.
- Changes in AOCI and unrealized securities losses, capital ratios, and the company’s ability to maintain capital while paying dividends and repurchasing shares.
- Actual results against management’s adjusted, non-GAAP 2022 expectations; the filing cautions that such measures are not substitutes for GAAP results.