Regions Financial Corporation — Q1 2023 Form 10-Q
Business context and reporting period. Regions is a bank holding company serving customers across the South, Midwest and Texas, with nationwide specialty capabilities. This unaudited filing covers the three months ended March 31, 2023; balance-sheet comparisons are against December 31, 2022. Unless stated otherwise, amounts are in U.S. dollars.
Financial results and condition
- Earnings and revenue: Net income was $612 million, up from $548 million; net income available to common shareholders was $588 million, or $0.62 diluted EPS, versus $524 million, or $0.55. Net interest income was $1.417 billion GAAP ($1.430 billion taxable-equivalent), up from $1.015 billion ($1.026 billion taxable-equivalent). Net interest margin rose to 4.22% from 2.85%. Total non-interest income declined to $534 million from $584 million.
- Expenses and credit costs: Non-interest expense rose 10.1% to $1.027 billion, primarily reflecting higher salaries and employee benefits. Provision for credit losses was $135 million, compared with a $36 million benefit a year earlier. Net charge-offs were $83 million, or 0.35% of average loans, versus $46 million, or 0.21%.
- Loans and credit quality: Loans, net of unearned income, increased to $98.1 billion from $97.0 billion. The allowance for credit losses was $1.596 billion, or 1.63% of loans, compared with $1.582 billion, or 1.63%, at year-end. Non-performing loans, excluding loans held for sale, rose to $554 million from $500 million.
- Deposits, debt and liquidity: Deposits decreased $3.3 billion to $128.5 billion. Regions had $2.0 billion of short-term borrowings, versus none at year-end; total borrowed funds were $4.3 billion. Cash and cash equivalents were $8.8 billion, down from $11.2 billion. Management reported $53.8 billion of available liquidity sources at quarter-end, including cash, securities and borrowing capacity.
- Capital and equity: Estimated holding-company CET1 was 9.88% and Regions Bank CET1 was 10.67%. Total equity was $16.9 billion, up from $16.0 billion, including a $499 million improvement in other comprehensive income; accumulated other comprehensive loss remained $2.844 billion.
- Cash flow: Net cash from operating activities was $196 million, versus $584 million in Q1 2022. Investing activities used $1.096 billion and financing activities used $1.494 billion; cash and cash equivalents declined $2.394 billion during the quarter.
Material changes versus the prior comparable period
- Higher market rates, loan growth and a larger average securities portfolio drove higher interest income and net interest margin. Higher deposit and funding costs partly offset the benefit.
- Non-interest income fell $50 million year over year, notably from lower capital markets and mortgage income and service charges. Non-interest expense increased $94 million, led by salaries and benefits.
- Credit costs shifted from a provision benefit to an expense, while net charge-offs and non-performing loans increased, which management described as continued asset-quality normalization.
- Versus year-end 2022, deposits fell $3.3 billion and Regions drew $2.0 billion in short-term FHLB advances. AOCI improved during the quarter, but remained substantially negative.
Outlook, commentary and risks
Management’s 2023 expectations included adjusted total revenue growth of 6–8%, adjusted non-interest expense growth of approximately 6.5%, and adjusted operating leverage of approximately 1%. It expected ending loans to grow approximately 4%; deposits to decline $3–$5 billion in the first half, trending toward the higher end of that range, then be stable to modestly higher in the second half; net charge-offs to average approximately 35 basis points; and an effective tax rate of 22–23%. Management expected second-quarter net interest income to decline 1.5–3.5% from Q1, while full-year net interest income was expected to grow 12–14%. These interest-income expectations used the March 31 forward curve, including 75 basis points of rate cuts; a stable federal funds rate would put full-year growth toward the upper end of the range. The stated CET1 objective was to manage at or modestly above 10% near term.
Management cited bank-sector liquidity concerns, inflation, higher rates and uncertain economic conditions. It said March industry turmoil did not significantly affect Regions’ deposit levels, and characterized the deposit base as diversified and granular. Its allowance forecast anticipated weak economic growth and declining home prices in 2023, with uncertainty around credit conditions. Risks include further deposit outflows and funding-cost increases, recession and credit deterioration, securities valuation changes, interest-rate sensitivity, cyber and operational events, and potential FDIC special assessments. The filing states that the impact and timing of any FDIC special assessment were not reasonably estimable. Management considered reasonably possible legal losses in excess of accruals immaterial and did not expect pending or threatened matters to materially affect the company as a whole, while noting outcomes remain uncertain. No material changes to the 2022 Form 10-K risk factors were reported.
Important facts for investors to verify
- Whether actual deposit flows, deposit pricing and funding mix align with management’s 2023 assumptions, particularly amid sector-wide liquidity concerns.
- Whether net interest income and margin meet the outlook, given the stated rate-curve assumptions and sensitivity to deposit runoff, repricing and deposit betas.
- Whether credit normalization accelerates: monitor charge-offs, non-performing loans, criticized and classified commercial balances, and allowance adequacy.
- How the FDIC’s potential special assessment affects expense, and whether operational losses related to check fraud rise as anticipated.
- Capital and securities exposure: verify CET1 relative to management’s near-term objective and monitor the remaining AOCI loss and unrealized securities losses.
- Whether reported liquidity sources remain available under stress and whether contingent obligations, including guarantees and legal matters, change materially.