Overdraft settlement and fee reductions take toll on Regions

Lower overdraft fee income and a multimillion-dollar overdraft-related regulatory settlement dampened third-quarter profits at Regions Financial.

Professional, legal and regulatory expenses were $199 million in the quarter, more than nine times larger than a year earlier. The cost increase stemmed primarily from the Birmingham, Alabama, company's settlement last month of Consumer Financial Protection Bureau charges that it imposed illegal overdraft fees on consumers.

A few months earlier, Regions updated its service charge policies to reduce certain overdraft fees and eliminate nonsufficient funds charges. Those changes, as well as a decline in mortgage revenues, dragged noninterest income down 6.8% to $605 million, executives at the $158 billion-asset company said during a call with analysts Friday.

Gary Tramontina

Those factors and others drove down Regions' third-quarter net income by 34% year over year to $429 million. 

Over the past year, many banks have reined in their overdraft fee policies after facing public and regulatory criticism that some charges unfairly penalized customers. Overdraft fees averaged $29.80, according to research conducted this summer by Bankrate.com, which found an 11% decline in penalty costs from last year.

On the conference call, Regions executives raised their projections for full-year service charges — which include overdraft fee income — to $630 million from an earlier estimate of $600 million. However, they maintained their projection of $550 million for 2023.

In September, the CFPB ordered Regions to pay a $50 million civil money penalty and at least $141 million in customer refunds after the company charged "authorized-positive fees" on consumer accounts. Regions' second overdraft-related penalty in seven years was tied to fee charges on ATM withdrawals and debit card purchases when there was enough money in an account to complete a transaction but insufficient funds when the transaction was posted.

Regions did not admit to any wrongdoing. It responded to the regulatory penalty last month in a statement that said the company "cooperated with the investigation" but disagreed "with the CFPB's characterizations."

The company expects to receive a $50 million insurance payment in the fourth quarter to offset part of the cost of the settlement, Chief Financial Officer David Turner said on the call.

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Meanwhile, Regions also pointed to its addition of $20 million in loan-loss reserves to cover looming costs associated with Hurricane Ian's damage to the Gulf Coast in September as another factor that weighed on third-quarter earnings.

Net interest income of $1.3 billion was 30.8% larger than in the same period last year, driven by rising interest rates, loan growth and lower deposit costs. Net interest margin expanded 77 basis points to 3.53% during the same period.

Regions' total loan portfolio grew 13.6% to $94.7 billion, with similar growth in both commercial and consumer lending.

Deposits rose 2.7% year over year to $135.5 billion but declined 2.9% since midyear. The company attributed the latter figure to a return of pre-pandemic seasonal patterns following two years of government stimulus-boosted higher savings rates.

Regions' revenue rose 15.7% from the third quarter of last year to $1.9 billion. Its earnings per share of 43 cents fell short of the 59-cent average of estimates from analysts surveyed by FactSet Research Systems.