Regions Financial: Preferred Shares Offer A 6.3% Yield (NYSE:RF)

Introduction

Regions Financial (NYSE:RF) is the holding company of Regions Bank, a bank headquartered in Alabama but has more branches in Florida and Tennessee than in its official home state (which ranks third). On a combined basis, those three states make up about 51% of the total amount of branches, and if you’d add in Georgia and Mississippi, the top five in terms of branches make up 68% of the bank’s total.

As interest rates have been increasing, the share prices of the preferred shares of most companies has been going down as the yield is increasing as well. In this article, I’ll have a good look at Regions’ Series E preferred shares (NYSE:RF.PE) which were issued with a preferred dividend yield of 4.45%. But as the preferred share price has fallen by about 30%, the securities are now yielding in excess of 6.2%.

Regions Financial got through the first quarter alright

We obviously still have to wait to see how the bank is dealing with the recent interest rate hikes from the Federal Reserve and what the impact will be in the short term (it should have a positive impact in the longer term but it usually takes banks 2-3 years to see the full impact of rate hikes in the financial results).

In the first quarter of 2022, Regions Financial reported a 4% increase in interest income, which jumped to $1.05B. Meanwhile, the interest expenses decreased yet again by about 20% to just $37M resulting in a net interest income of $1.02B, an increase of 5% compared to the $967M in Q1 2021.

The net non-interest expenses increased, from $287M to $349M, due to a combination of lower income (lower capital markets income and a lower mortgage income) and slightly higher expenses. The pre-tax income, including a $36M loan loss provision reversal, was $702M resulting a net income of $524M for an EPS of $0.56. In Q1 2021, the loan loss reversal was much higher, at $142M, and this boosted the net income to $614M or $0.64/share.

As these provision reversals are per definition non-recurring, investors in Regions Financial should mentally prepare themselves for the return of “normal” loan loss provisions. Of the $89B in loans, $51B are classified as commercial loans with about 90% being normal commercial and industrial loans.

Interestingly, although the consumer portfolio accounts for less than 35% of the loan portfolio, the total amount of provisions ($737M) accounts for in excess of 49% of the total provisions.

Having a total loan loss allowance of almost $1.5B on a $89.3B loan book should provide a decent cushion, especially when you see $89B of the loans are still accruing and just a few hundred million dollars in loans is classified as non-accrual. So the current amount of provisions should be sufficient for the foreseeable future.

The preferred shares are getting interesting

The most recent class of preferred shares issued by Regions Financial is the E-series, trading as (RF.PE). This is a non-cumulative preferred share issued about a year 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

AS you can imagine, the share price of the preferred shares has gone down substantially in the past few months as the share price is adjusting to the new market circumstances. These preferred shares are now trading at approximately $17.70 which means the preferred dividend yield has increased to almost 6.3%.

This does not mean the E-series is substantially cheaper than the other pr
eferred shares. The Series B (RF.PB) with a 6.375% preferred dividend are trading slightly above par while the 5.7% preferred shares (RF.PC) are trading at approximately $22.50 (there’s a 3% spread between bid and ask) which implies a preferred dividend yield of 6.33%. So the E-series actually have the lowest yield of the three issues but a sharp limit order could bring the yield in line with the other preferred share issues.

Investment thesis

The common shares of Regions Financial have a dividend yield of 3.4% based on a share price of $20 but the main driver for the common shares could be the sizable share buyback plan as Regions announced it planned to repurchase up to $2.5B of its own shares in the next 2.5 years. At the current share price, about 13% of the shares could be repurchased, paving the way for higher earnings per share and further dividend hikes.

In Regions Financial’s case, it doesn’t have to be an or/or case when investors are considering the common shares or the preferred shares. This could be an and/and investment with exposure to the common shares to take advantage of an improving financial result while the preferred securities offer a steady income stream.

I currently have no position in Regions Financial but I will likely write put options on the common shares and initiate a long position in the E-series of the preferred shares (unless one of the other series suddenly becomes substantially cheaper) over the next few weeks.