RF - Regions Financial: A Strong Q3 Performance But I Remain On The Sidelines

2023-11-13 10:30:00 ET

Summary

• Regions Financial is a large regional bank operating primarily in the South, Midwest, and Texas, with the highest number of branch locations in Florida.
• The bank's net interest income increased by a low single-digit percentage in the third quarter of this year.
• The preferred shares of Regions Financial could be attractive to income-focused investors, with a current preferred dividend yield of approximately 6.85%.

Introduction

Regions Financial ( RF ) is a large regional financial institution focusing on the South, Midwest and Texas from its headquarters in Alabama. The bank also has offices in Chicago, New York and Washington DC where it is servicing its customers but the state with the highest amount of branch locations was Florida with 275 branches as of the end of last year.

As regional banks have been hit pretty hard this year, I wanted to revisit Regions Financial to see if the bank’s preferred shares are now attractive from a risk/reward ratio.

A look at the earnings profile

The net interest income result is an important element for a bank and the main driver of the profit. In the third quarter of this year, the bank generated a total interest income of $1.77B while its interest expenses six-folded to $475M compared to the third quarter of last year (and the increasing deposit costs are the main reason why the stock was recently downgraded by JPMorgan). This means the net interest income increased by a low single digit percentage as it grew from $1.26B in the third quarter of last year to $1.29B in the third quarter of this year.

The bank’s income statement (shown in the image above) also indicates the regional bank recorded a net non-interest expense of almost $560M and the pre-tax and pre provision income was approximately $764M. The bank recorded $145M in loan loss provisions an after also paying the relevant income taxes, the net income was $490M of which $465M was attributable to the common shareholders.

This means the EPS was approximately $0.49, and the 9M 2023 EPS jumped to $1.72 which is an increase of just over 8% compared to the 9M result generated in 2022.

The bank needs about $25M per quarter to cover its preferred dividends (which explains the difference between the $490M net income and the $465M of net income attributable to the common shareholders of Regions Financial. So from a preferred dividend coverage perspective, the preferred dividends are well covered as the bank needed just over 5% of its earnings to cover them. And looking at the net income in the first nine months of the year, the total required payout ratio was even less than 5% of the reported net income.

Preferred shares could be a potentially be attractive to income-focused investors

Other authors here on Seeking Alpha have done their due diligence on the bank, and this resulted in one sell rating and in one hold rating . However, my main focus is on the ability of the bank to continue to pay its preferred dividends. I’m not very interested in the common shares at this point, and I wanted to focus on the preferred shares.

In my previous article, I decided to focus on a recently issued series of (non-cumulative) preferred shares issued by Regions Financial: the E-series, trading as ( RF.PR.E ). This is a non-cumulative preferred share issued about 2.5 years ago when Regions Financial was able to take advantage of the very low interest rates in the market. These preferred shares have a preferred dividend of $1.1125 per share (paid in quarterly installments) which represented a preferred dividend yield of 4.45% based on the issue price of $25/share. The securities can be called from June 15, 2026, on but in the current interest rate environment that is obviously quite unlikely. In fact, Regions Financial’s decision to issue those preferred shares when it was able to secure those conditions likely was one of the best decisions made by the management. Securing perpetual equity capital for a cost of capital of just 4.45% was an excellent decision.

The share price of the preferred shares has obviously decreased due to a combination of worries in the US banking sector earlier this year in combination with higher interest rates on the financial markets.

The Series E preferred shares are currently trading at $16.21, which means the current preferred dividend yield is approximately 6.85%. That’s attractive but I can understand investors would prefer to take a lower preferred dividend from the bigger financial institutions like JPMorgan ( JPM ) or Bank of America ( BAC ).

Investment thesis

I currently have no position in Regions Financial nor in its preferred shares. I am keeping an eye on the bank’s performance but at this point I’d prefer to take the 6.8% preferred dividend yield from Wells Fargo ( WFC ) over the preferred shares from Regions Financial due to the diversification offered by Wells Fargo.

I will continue to keep an eye on the financial performance of Regions Financial but at this moment, I think a ‘hold’ is probably the best rating.

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