INTRODUCTION
The following discussion and analysis is part ofRegions Financial Corporation's ("Regions" or the "Company") Quarterly Report on Form 10-Q filed with theSEC and updates Regions' Annual Report on Form 10-K for the year endedDecember 31, 2021 , which was previously filed with theSEC . This financial information is presented to aid in understanding Regions' financial position and results of operations and should be read together with the financial information contained in Regions' Annual Report on Form 10-K. See Note 1 "Basis of Presentation" and Note 12 "Recent Accounting Pronouncements" to the consolidated financial statements for further detail. The emphasis of this discussion will be on the three months endedMarch 31, 2022 compared to the three months endedMarch 31, 2021 for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as ofMarch 31, 2022 compared toDecember 31, 2021 . This discussion and analysis contains statements that may be considered "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. See pages 7 through 9 for additional information regarding forward-looking statements. CORPORATE PROFILE Regions is a financial holding company headquartered inBirmingham, Alabama , that operates in the South, Midwest andTexas . In addition, Regions operates several offices delivering specialty capabilities inNew York ,Washington D.C. ,Chicago and other locations nationwide. Regions provides financial solutions for a wide range of clients including retail and mortgage banking services, commercial banking services and wealth and investment services. Further, Regions and its subsidiaries deliver specialty capabilities including merger and acquisition advisory services, capital market solutions, home improvement lending and others. Regions conducts its banking operations throughRegions Bank , anAlabama state-chartered commercial bank that is a member of theFederal Reserve System . AtMarch 31, 2022 , Regions operated 1,294 total branch outlets. Regions carries out its strategies and derives its profitability from three reportable business segments:Corporate Bank ,Consumer Bank , and Wealth Management, with the remainder in Other. See Note 10 "Business Segment Information" to the consolidated financial statements for more information regarding Regions' segment reporting structure. Regions' business strategy is focused on providing a competitive mix of products and services, delivering quality customer service, and continuing to develop and optimize distribution channels that include a branch distribution network with offices in convenient locations, as well as electronic and mobile banking. Regions' profitability, like that of many other financial institutions, is dependent on its ability to generate revenue from net interest income as well as non-interest income sources. Net interest income is primarily the difference between the interest income Regions receives on interest-earning assets, such as loans and securities, and the interest expense Regions pays on interest-bearing liabilities, principally deposits and borrowings. Regions' net interest income is impacted by the size and mix of its balance sheet components and the interest rate spread between interest earned on its assets and interest paid on its liabilities. Non-interest income includes fees from service charges on deposit accounts, card and ATM fees, mortgage servicing and secondary marketing, investment management and trust activities, capital markets and other customer services which Regions provides. Results of operations are also affected by the provision for credit losses and non-interest expenses such as salaries and employee benefits, occupancy, professional, legal and regulatory expenses,FDIC insurance assessments, and other operating expenses, as well as income taxes. Economic conditions, competition, new legislation and related rules impacting regulation of the financial services industry and the monetary and fiscal policies of the Federal government significantly affect most, if not all, financial institutions, including Regions. Lending and deposit activities and fee income generation are influenced by levels of business spending and investment, consumer income, consumer spending and savings, capital market activities, and competition among financial institutions, as well as customer preferences, interest rate conditions and prevailing market rates on competing products in Regions' market areas. OnDecember 17, 2021 , Regions entered into an agreement to acquireClearsight Advisors, Inc. , a leading-edge mergers and acquisitions firm headquartered inMcLean, Virginia . The transaction closed onDecember 31, 2021 . OnOctober 4, 2021 , Regions entered into an agreement to acquireSabal Capital Partners, LLC , a diversified financial services firm that facilitates lending in the small-balance commercial real estate market headquartered inIrvine, California . The transaction closed onDecember 1, 2021 . Refer to the "Acquisitions" section for more detail.
On
consumer lending institution specializing in home improvement lending
headquartered in
2021
consumers. Refer to the “Acquisitions” section for more detail.
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Table of Contents FIRST QUARTER OVERVIEW First Quarter Results Regions reported net income available to common shareholders of$524 million , or$0.55 per diluted share, in the first quarter of 2022 compared to$614 million , or$0.63 per diluted share, in the first quarter of 2021. The primary drivers of the decrease in net income from the prior year period were a smaller benefit from credit losses and lower non-interest income, partially offset by higher net interest income. For the first quarter of 2022, net interest income (taxable-equivalent basis) totaled$1.0 billion , up$48 million compared to the first quarter of 2021. The net interest margin (taxable-equivalent basis) was 2.85 percent for the first quarter of 2022 and 3.02 percent in the first quarter of 2021. The increase in net interest income was primarily driven by increases in average loan balances and average debt securities balances, as well as lower funding costs. Net interest margin was negatively impacted by continued elevated liquidity as evidenced by higher average cash balances held at theFederal Reserve . Refer to Table 18 "Consolidated Average Daily Balances and Yield/Rate Analysis" for further details. The benefit for credit losses totaled$36 million in the first quarter of 2022, as compared to a benefit of$142 million during the first quarter of 2021. The current quarter benefit was primarily due to positive asset quality and waning pandemic concerns partially offset by loan growth and heightened economic volatility. Refer to the "Allowance for Credit Losses" section for further detail. Net charge-offs totaled$46 million , or an annualized 0.21 percent of average loans, in the first quarter of 2022, compared to$83 million , or an annualized 0.40 percent for the first quarter of 2021. The decrease was primarily driven by broad-based improvements across most portfolios. Refer to the "Allowance for Credit Losses" section for further detail. The allowance was 1.67 percent of total loans, net of unearned income atMarch 31, 2022 compared to 1.79 percent atDecember 31, 2021 . The decrease was a result of the factors discussed above. The allowance was 446 percent of total non-performing loans atMarch 31, 2022 compared to 349 percent atDecember 31, 2021 . Refer to the "Allowance for Credit Losses" section for further detail. Non-interest income was$584 million for the first quarter of 2022, a$57 million decrease from the first quarter of 2021. The decrease was primarily driven by declines in mortgage income, capital markets income, and market value adjustments on employee benefit assets. These decreases were partially offset by increases in service charges, card and ATM fees, and other non-interest income. See Table 22 "Non-Interest Income" for more detail.
Total non-interest expense was
million
Expense” for more detail.
Income tax expense for the three months endedMarch 31, 2022 was$154 million compared to$180 million for the same period in 2021. See "Income Taxes" toward the end of the Management's Discussion and Analysis section of this report for more detail. CapitalRegions and Regions Bank are required to comply with regulatory capital requirements established by Federal and State banking agencies, which include quantitative requirements including the CET1 ratio. The CET1 ratio atMarch 31, 2022 was estimated at 9.39 percent. For additional information on Regions' regulatory capital requirements see the "Regulatory Requirements" section. In the second quarter of 2021, Regions received the results of the Company's voluntary participation in 2021 CCAR. The FRB communicated that the Company exceeded all minimum capital levels under the supervisory stress test and the Company's stress capital buffer for the fourth quarter of 2021 through the third quarter of 2022 will be floored at 2.5 percent. As part of the Company's capital plan, onApril 21, 2021 , the Board authorized the repurchase of up to$2.5 billion of the Company's common stock, permitting purchases from the second quarter of 2021 through the first quarter of 2022. OnApril 20, 2022 , the Company declared a cash dividend for the second quarter of 2022 of$0.17 per share of common stock. Also onApril 20, 2022 , the Board authorized the repurchase of up to$2.5 billion of the Company's common stock, permitting purchases from the second quarter of 2022 through the fourth quarter of 2024. As ofMay 4, 2022 , Regions had repurchased approximately 725 thousand shares of common stock at a total cost of$15 million under this plan. All of these shares were immediately retired upon repurchase and therefore will not be included in treasury stock. 47
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Expectations
2022 Expectations
Category Expectation
Total Adjusted Revenue (1) Up 4.5-5.5%
Adjusted Non-Interest Expense Up 3-4%
Adjusted Operating Leverage Positive
Average Loans Up 4-5%
Net Charge-Offs / Average Loans
Approximately 20-30 basis points
Effective Tax Rate (2)
21-23%
Near the
mid-point of a 9.25-9.75% operating
CET1 range _____ (1)The total adjusted revenue expectation is consistent with the expectation that was disclosed in Exhibit 99.3 of the Form 8-K filed with theSEC onApril 22, 2022 . This expectation utilizes the forward interest rate curve atMarch 31, 2022 , and does not contemplate purchases of debt securities available for sale subsequent toMarch 31, 2022 . See the "Market Risk-Interest Rate Risk" section for further discussion of those purchases. (2)Does not include the impact of potential tax legislation. Regions believes that expressing certain expectations as non-GAAP measures will assist investors in analyzing the operating results of the Company and predicting future performance on the same basis as that applied by management. The reconciliation with respect to these forward-looking non-GAAP measures is expected to be consistent with the actual non-GAAP reconciliations within Management's Discussion and Analysis of this Form 10-Q.
BALANCE SHEET ANALYSIS
The following sections provide expanded discussion of significant changes in
certain line items in asset, liability, and shareholders’ equity categories.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents decreased approximately$1.5 billion from year-end 2021 toMarch 31, 2022 , due primarily to a decrease in cash on deposit with the FRB. While deposit balances increased in the first quarter of 2022 due to seasonality, Regions has an active cash management strategy in which the Company has deployed some excess liquidity from deposit growth as opportunities exist given market interest rates, primarily through securities purchases. See the "Debt Securities ", "Liquidity", and "Deposits" sections for more information.
DEBT SECURITIES
The following table details the carrying values of debt securities, including
both available for sale and held to maturity:
Table 1-
March 31, 2022 December 31, 2021
(In millions)
U.S. Treasury securities $ 1,030 $ 1,132
Federal agency securities 700 92
Obligations of states and political subdivisions 3 4
Mortgage-backed securities:
Residential agency 20,423 19,319
Residential non-agency 1 1
Commercial agency 6,307 6,915
Commercial non-agency 464 536
Corporate and other debt securities 1,320 1,381
$ 30,248 $ 29,380
Debt securities available for sale, which constitute the majority of the
securities portfolio, are an important tool used to manage interest rate
sensitivity and provide a primary source of liquidity for the Company. Regions
maintains a highly rated securities portfolio consisting primarily of agency
mortgage-backed securities. See Note 2 "Debt Securities " to the consolidated
financial statements for additional information. Also see the "Market
Risk-Interest Rate Risk" and "Liquidity" sections for more information.
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Debt securities increased$868 million fromDecember 31, 2021 toMarch 31, 2022 driven by increases in federal agency securities and residential agency securities. In the first quarter of 2022, Regions made purchases of debt securities available for sale, excluding normal reinvestment of maturities, totaling approximately$2.1 billion consisting primarily of federal agency and residential agency securities. Approximately$1.5 billion of the purchases related to a hedging strategy with the remaining purchases related to active cash management strategies. Partially offsetting the first quarter purchases were declines in market valuations driven by an increase in market interest rates.
See the “Market Risk-Interest Rate Risk” section for more information regarding
purchases of debt securities available for sale subsequent to
LOANS HELD FOR SALE
Loans held for sale totaled$694 million atMarch 31, 2022 , consisting of$479 million of residential real estate mortgage loans,$168 million of commercial loans,$40 million of consumer and other performing loans, and$7 million of non-performing loans. AtDecember 31, 2021 , loans held for sale totaled$1.0 billion , consisting of$680 million of residential real estate mortgage loans,$257 million of commercial loans,$53 million of consumer and other performing loans, and$13 million of non-performing loans. The levels of residential real estate mortgage loans held for sale that are part of the Company's mortgage originations fluctuate depending on the timing of origination and sale to third parties. Commercial loans held for sale include commercial mortgage loans originated for sale to third parties and commercial loans originally recorded as held for investment when management has the intent to sell. Levels of commercial loans held for sale fluctuate based on timing of sale to third parties.
LOANS
Loans, net of unearned income, represented approximately 61 percent of Regions' interest-earning assets as ofMarch 31, 2022 . The following table presents the distribution of Regions' loan portfolio by portfolio segment and class, net of unearned income: Table 2-Loan Portfolio March 31, 2022 December 31, 2021 (In millions, net of unearned income) Commercial and industrial $ 45,643 $ 43,758 Commercial real estate mortgage-owner-occupied (1) 5,181 5,287 Commercial real estate construction-owner-occupied (1) 273 264 Total commercial 51,097 49,309 Commercial investor real estate mortgage 5,557 5,441 Commercial investor real estate construction 1,607 1,586 Total investor real estate 7,164 7,027 Residential first mortgage 17,373 17,512 Home equity lines 3,602 3,744 Home equity loans 2,500 2,510 Consumer credit card 1,133 1,184 Other consumer-exit portfolios 909 1,071 Other consumer 5,557 5,427 Total consumer 31,074 31,448 $ 89,335 $ 87,784 __________
(1)Collectively referred to as CRE.
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Table of Contents PORTFOLIO CHARACTERISTICS The following sections describe the composition of the portfolio segments and classes disclosed in Table 2, explain changes in balances from 2021 year-end, and highlight the related risk characteristics. Regions believes that its loan portfolio is well diversified by product, client, and geography throughout its footprint. However, the loan portfolio may be exposed to certain concentrations of credit risk which exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, certain loan products, or certain regions of the country. Refer to Note 5 "Allowance for Credit Losses" to the Annual Report on Form 10-K for the year endedDecember 31, 2021 for additional information regarding Regions' portfolio segments and related classes, as well as the risks specific to each.
Commercial
The commercial portfolio segment includes commercial and industrial loans to commercial customers for use in normal business operations to finance working capital needs, equipment purchases and other expansion projects. Commercial and industrial loans increased$1.9 billion since year-end 2021. The increase in commercial and industrial loan balances was driven by new loan production and a continued increase in line utilization. In the first quarter of 2022, commercial and industrial loan growth was broad-based and included increases in the information, manufacturing, real estate and wholesale goods industries. TheMarch 31, 2022 commercial and industrial loan balance also included$437 million of PPP loans, a decrease of$311 million compared toDecember 31, 2021 , reflecting continued PPP loan forgiveness. The commercial portfolio also includes owner-occupied commercial real estate mortgage loans to operating businesses, which are loans for long-term financing on land and buildings, and are repaid by cash generated by business operations. Owner-occupied commercial real estate construction loans are made to commercial businesses for the development of land or construction of a building where the repayment is derived from revenues generated from the business of the borrower. Over half of the Company's total loans are included in the commercial portfolio segment. These balances are spread across numerous industries as noted in the table below. The Company manages the related risks to this portfolio by setting certain lending limits for each significant industry.
The following tables provide detail of Regions’ commercial lending balances in
selected industries.
Table 3-Commercial Industry Exposure
March 31, 2022
Unfunded
Loans Commitments Total Exposure
(In millions)
Administrative, support, waste and repair $ 1,498 $ 1,119 $ 2,617
Agriculture 341 274 615
Educational services 3,218 1,013 4,231
Energy 1,422 2,741 4,163
Financial services 5,579 6,388 11,967
Government and public sector 2,873 444 3,317
Healthcare 3,788 2,320 6,108
Information 2,265 1,296 3,561
Manufacturing 4,979 4,139 9,118
Professional, scientific and technical services 2,287 1,337 3,624
Real estate (1) 7,658 7,398 15,056
Religious, leisure, personal and non-profit
services 1,673 661 2,334
Restaurant, accommodation and lodging 1,527 430 1,957
Retail trade 2,412 2,264 4,676
Transportation and warehousing 3,044 1,566 4,610
Utilities 2,215 2,929 5,144
Wholesale goods 4,095 3,069 7,164
Other (2) 223 3,335 3,558
Total commercial $ 51,097 $ 42,723 $ 93,820
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December 31, 2021 (3)
Unfunded
Loans Commitments Total Exposure
(In millions)
Administrative, support, waste and repair $ 1,489 $ 1,141 $ 2,630
Agriculture 336 253 589
Educational services 2,975 948 3,923
Energy 1,361 2,678 4,039
Financial services 5,582 5,933 11,515
Government and public sector 2,845 526 3,371
Healthcare 3,918 2,270 6,188
Information 1,929 1,233 3,162
Manufacturing 4,629 4,270 8,899
Professional, scientific and technical services 2,235 1,409 3,644
Real estate (1) 7,343 7,720 15,063
Religious, leisure, personal and non-profit
services 1,733 730 2,463
Restaurant, accommodation and lodging 1,658 433 2,091
Retail trade 2,247 2,307 4,554
Transportation and warehousing 3,030 1,538 4,568
Utilities 2,131 2,895 5,026
Wholesale goods 3,756 3,189 6,945
Other (2) 112 2,425 2,537
Total commercial $ 49,309 $ 41,898 $ 91,207
________
(1)"Real estate" includes REITs, which are unsecured commercial and industrial
products that are real estate related.
(2)"Other" contains balances related to non-classifiable and invalid business
industry codes offset by payments in process and fee accounts that are not
available at the loan level.
(3)As customers' businesses evolve (e.g. up or down the vertical manufacturing
chain), Regions may need to change the assigned business industry code used to
define the customer relationship. When these changes occur, Regions does not
recast the customer history for prior periods into the new classification
because the business industry code used in the prior period was deemed
appropriate. As a result, comparable period changes may be impacted.
Loans for real estate development are repaid through cash flows related to the operation, sale or refinance of the property. This portfolio segment includes extensions of credit to real estate developers or investors where repayment is dependent on the sale of real estate or income generated from the real estate collateral. A portion of Regions' investor real estate portfolio segment consists of loans secured by residential product types (land, single-family and condominium loans) within Regions' markets. Additionally, this category includes loans made to finance income-producing properties such as apartment buildings, office and industrial buildings, and retail shopping centers. Total investor real estate loans increased$137 million in comparison to 2021 year-end balances.
Residential First Mortgage
Residential first mortgage loans represent loans to consumers to finance a residence. These loans are typically financed over a 15 to 30 year term and, in most cases, are extended to borrowers to finance their primary residence. These loans decreased$139 million in comparison to 2021 year-end balances. The decrease in residential first mortgage loans was primarily driven by the first quarter of 2022 re-securitization and sale of approximately$285 million ofGinnie Mae loans that had been previously re-purchased from their pools. Approximately$1.0 billion in new loan originations were retained on the balance sheet through the first three months of 2022.
Home Equity Lines
Home equity lines are secured by a first or second mortgage on the borrower's residence and allow customers to borrow against the equity in their homes. Home equity lines decreased by$142 million in comparison to 2021 year-end balances, continuing the pace of decline experienced in the past several years as payoffs and paydowns outpaced production. Substantially all of this portfolio was originated through Regions' branch network. Beginning inDecember 2016 , new home equity lines of credit have a 10-year draw period and a 20-year repayment term. During the 10-year draw period customers do not have an interest-only payment option, except on a very limited basis. FromMay 2009 toDecember 2016 , home equity lines of credit had a 10-year draw period and a 10-year repayment term. Prior to 51
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May 2009 , the predominant structure was a 20-year draw period with a balloon payment upon maturity. The term "balloon payment" means there are no principal payments required until the balloon payment is due for interest-only lines of credit. The following table presents information regarding the future principal payment reset dates for the Company's home equity lines of credit as ofMarch 31, 2022 . The balances presented are based on maturity date for lines with a balloon payment and draw period expiration date for lines that convert to a repayment period.
Table 4-Home Equity Lines of Credit – Future Principal Payment Resets
First Lien % of Total Second Lien % of Total Total
(Dollars in millions)
2022 $ 101 2.81 % $ 81 2.25 % $ 182
2023 83 2.30 % 63 1.74 % 146
2024 125 3.47 % 84 2.34 % 209
2025 123 3.40 % 127 3.53 % 250
2026 170 4.73 % 172 4.78 % 342
2027-2032 1,366 37.92 % 1,018 28.26 % 2,384
2032-2036 41 1.14 % 41 1.13 % 82
Thereafter 4 0.12 % 3 0.08 % 7
Total $ 2,013 55.89 % $ 1,589 44.11 % $ 3,602
Home Equity Loans
Home equity loans are also secured by a first or second mortgage on the
borrower's residence, are primarily originated as amortizing loans, and allow
customers to borrow against the equity in their homes. Substantially all of this
portfolio was originated through Regions' branch network.
Other Consumer Credit Quality Data
The Company calculates an estimate of the current value of property secured as
collateral for both residential first mortgage and home equity lending products
("current LTV"). The estimate is based on home price indices compiled by a third
party. The third party data indicates trends for MSAs. Regions uses the third
party valuation trends from the MSAs in the Company's footprint in its estimate.
The trend data is applied to the loan portfolios taking into account the age of
the most recent valuation and geographic area.
The following table presents current LTV data for components of the residential
first mortgage, home equity lines and home equity loans classes of the consumer
portfolio segment. Current LTV data for some loans in the portfolio is not
available due to mergers and systems integrations. The amounts in the table
represent the entire loan balance. For purposes of the table below, if the loan
balance exceeds the current estimated collateral the entire balance is included
in the "Above 100%" category, regardless of the amount of collateral available
to partially offset the shortfall.
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Table 5-Estimated Current Loan to Value Ranges
March 31, 2022
Residential Home Equity Lines of Credit Home Equity Loans
First Mortgage 1st Lien 2nd Lien 1st Lien 2nd Lien
(In millions)
Estimated current LTV:
Above 100% $ 3 $ - $ - $ 2 $ -
Above 80% - 100% 1,505 3 5 14 4
80% and below 15,592 1,983 1,527 2,300 163
Data not available 273 27 57 12 5
$ 17,373 $ 2,013 $ 1,589 $ 2,328 $ 172
December 31, 2021
Residential Home Equity Lines of Credit Home Equity Loans
First Mortgage 1st Lien 2nd Lien 1st Lien 2nd Lien
(In millions)
Estimated current LTV:
Above 100% $ 5 $ 1 $ - $ 2 $ 1
Above 80% - 100% 1,667 6 8 16 4
80% and below 15,564 2,053 1,588 2,305 167
Data not available 276 29 59 11 4
$ 17,512 $ 2,089 $ 1,655 $ 2,334 $ 176
Consumer Credit Card
Consumer credit card lending represents primarily open-ended variable interest
rate consumer credit card loans. These balances decreased
year-end 2021.
Other Consumer-Exit Portfolios
Other consumer-exit portfolios includes lending initiatives through third parties consisting of loans made through automotive dealerships and other point of sale lending. Regions ceased originating new loans related to these businesses prior to 2020 and therefore the portfolio balance has decreased$162 million from year-end 2021.
Other Consumer
Other consumer loans primarily include indirect and direct consumer loans,
overdrafts and other revolving loans. Other consumer loans increased
million
improvement lending from the fourth quarter 2021 acquisition of EnerBank.
Regions considers factors such as periodic updates of FICO scores, unemployment,
home prices, and geography as credit quality indicators for consumer loans. FICO
scores are obtained at origination and refreshed FICO scores are obtained by the
Company quarterly for all consumer loans. For more information on credit quality
indicators refer to Note 3 "Loans and the Allowance for Credit Losses" .
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Table of Contents ALLOWANCE The allowance consists of two components: the allowance for loan losses and the reserve for unfunded credit commitments. Unfunded credit commitments includes items such as letters of credit, financial guarantees and binding unfunded loan commitments. The allowance totaled$1.5 billion as ofMarch 31, 2022 compared to$1.6 billion atDecember 31, 2021 , which represents management's best estimate of expected losses over the life of the loan and credit commitment portfolios. Key drivers of the change in the allowance are presented in Table 6 below. While many of these items overlap regarding impact, they are included in the category most relevant. Table 6- Allowance Changes Three Months EndedMarch 31, 2022 March 31, 2021 (In millions)
Allowance for credit losses, beginning balance
2,293
Net charge-offs (46)
(83)
Provision over (less than) net charge-offs:
Economic/Qualitative (54) (130) Changes in portfolio credit quality/uncertainty (13) (14) Changes in specific reserves 8 (17) Other portfolio changes (1) 23 19 Total provision over (less than) net charge-offs (82)
(225)
Allowance for credit losses, ending balance
2,068 _______ (1)This line item includes the net impact of portfolio growth, portfolio run-off, pay-downs and changes in the mix of total outstanding loans. This line item excludes the impact of PPP loans of$437 million and$4.3 billion as ofMarch 31, 2022 and 2021, respectively, which are fully backed by theU.S. government and have an immaterial associated allowance. Credit metrics are monitored throughout the quarter in order to understand external macro-views, trends and industry outlooks, as well as Regions' internal specific views of credit metrics and trends. The first quarter of 2022 exhibited continued strong asset quality performance. While total net charge-offs remained relatively flat, commercial and investor real estate criticized balances decreased approximately$366 million and classified balances decreased$238 million compared to the fourth quarter of 2021. Non-performing loans, excluding held for sale, and non-performing assets decreased approximately$116 million and$123 million , respectively, compared to the fourth quarter of 2021. Regions'March 2022 baseline forecast was generally improved compared to theDecember 2021 forecast with continued increases in key model variables including HPI and unemployment with stable GDP growth after the first quarter of 2022. TheMarch 2022 baseline forecast anticipates above-trend real GDP growth in 2022, supported primarily by consumer spending and business investments in equipment, machinery and intellectual property, with potential for further support from government spending in 2023 and beyond. The Company expects that by mid-2023 the economy will be back on a GDP growth path of around 2.5 percent that prevailed prior to the COVID-19 pandemic. While the baseline forecast anticipates a double-digit increase in the HPI for full-year 2022, quarter over quarter growth is expected to decelerate sharply into 2023. As measured by CPI, inflation is expected to remain above theFOMC's 2.0 percent target for the remainder of 2022 and into 2023. Furthermore, ongoing disruptions in supply chains and shipping networks, labor supply constraints, inflationary pressures, and geopolitical tensions provide significant uncertainty over the near-term forecast. Patterns of economic activity within the Regions footprint are expected to be broadly similar to those seen in theU.S. as a whole. In deriving itsMarch 2022 forecast, Regions benchmarks its internal forecast with external forecasts and external data available. The table below reflects a range of macroeconomic factors utilized in the Base forecast over the two-year R&S forecast period as ofMarch 31, 2022 . The unemployment rate is the most significant macroeconomic factor among the CECL models. Unemployment rates in the first quarter and the forecasted periods remained normalized. 54
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Table 7- Macroeconomic Factors in the Forecast
Pre-R&S Base R&S Forecast
Period March 31, 2022
1Q2022 2Q2022 3Q2022 4Q2022 1Q2023 2Q2023 3Q2023 4Q2023 1Q2024
Real GDP, annualized % change 1.1 % 3.4 % 4.8 % 3.5 % 3.2 % 3.0 % 2.5 % 2.5 % 2.3 %
Unemployment rate 3.8 % 3.5 % 3.3 % 3.3 % 3.2 % 3.1 % 3.1 % 3.1 % 3.0 %
HPI, year-over-year % change 19.0 % 15.9 % 11.5 % 7.9 % 4.1 % 2.5 % 2.6 % 2.7 % 3.0 %
S&P 500 4,456 4,439 4,496 4,561 4,631 4,722 4,804 4,886 4,960
CPI, year-over-year % change 7.9 % 7.6 % 6.6 % 5.2 % 3.6 % 2.4 % 2.1 % 2.1 % 2.0 %
The waning pandemic concerns and positive credit performance during the quarter
(described above) were significant drivers of the modeled decreases in the
allowance.
While Regions' quantitative allowance methodologies strive to reflect all risk factors, any estimate involves assumptions and uncertainties resulting in some level of imprecision. The qualitative framework has a general imprecision component which is meant to acknowledge that model and forecast errors are inherent in any modeling estimate. TheMarch 31, 2022 general imprecision allowance remained relatively stable compared to the fourth quarter of 2021 and reflects uncertainty in the current environment, including the risk of persistent inflation at elevated levels, geopolitical tension impacts and supply chain issues.
Based on the overall analysis performed, management deemed an allowance of
billion
credit commitment portfolios as of
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Details regarding the allowance and net charge-offs, including an analysis of activity from the previous year's totals, are included in Table 8 "Allowance for Credit Losses." Net charge-offs decreased$37 million year-over-year, primarily driven by a decline in net charge-offs in the commercial and industrial portfolio and commercial investor real estate mortgage portfolio partially offset by$9 million in net charge-offs from the addition of the EnerBank. As noted, economic trends such as interest rates, unemployment, volatility in commodity prices, collateral valuations and inflationary pressure will impact the future levels of net charge-offs and may result in volatility of certain credit metrics during the remainder of 2022 and beyond. See the "Quarterly Overview" section for details on expectations for net charge-offs in 2022.
Table 8-Allowance for Credit Losses
Three Months Ended March 31
2022 2021
(Dollars in millions)
Allowance for loan losses at January 1 $ 1,479 $ 2,167
Loans charged-off:
Commercial and industrial 23 45
Commercial real estate mortgage-owner-occupied 3 1
Commercial real estate construction-owner-occupied - 1
Commercial investor real estate mortgage - 15
Residential first mortgage - 1
Home equity lines 1 2
Home equity loans 1 -
Consumer credit card 10 12
Other consumer-exit portfolios 6 11
Other consumer 33 26
77 114
Recoveries of loans previously charged-off:
Commercial and industrial 13 16
Commercial real estate mortgage-owner-occupied - -
Commercial real estate construction-owner-occupied - -
Commercial investor real estate mortgage - -
Residential first mortgage 2 1
Home equity lines 3 3
Home equity loans 1 -
Consumer credit card 2 3
Other consumer-exit portfolios 2 2
Other consumer 8 6
31 31
Net charge-offs (recoveries):
Commercial and industrial 10 29
Commercial real estate mortgage-owner-occupied 3 1
Commercial real estate construction-owner-occupied - 1
Commercial investor real estate mortgage - 15
Residential first mortgage (2) -
Home equity lines (2) (1)
Home equity loans - -
Consumer credit card 8 9
Other consumer-exit portfolios 4 9
Other consumer 25 20
46 83
Provision for (benefit from) loan losses (17) (108)
Allowance for loan losses at March 31 1,416 1,976
Reserve for unfunded credit commitments at January 1 95 126
Provision for (benefit from) unfunded credit losses (19) (34)
Reserve for unfunded credit commitments at March 31 76 92
Allowance for credit losses at March 31 $ 1,492 $ 2,068
Loans, net of unearned income, outstanding at end of period $ 89,335 $ 84,755
Average loans, net of unearned income, outstanding for the period
$ 87,814 $ 84,755 56
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Three Months Ended March 31
2022 2021
(Dollars in millions)
Net loan charge-offs (recoveries) as a % of average loans, annualized (1):
Commercial and industrial
0.09 % 0.28 % Commercial real estate mortgage-owner-occupied 0.20 % 0.09 % Commercial real estate construction-owner-occupied (0.03) % 0.93 % Total commercial 0.10 % 0.26 % Commercial investor real estate mortgage (0.01) % 1.11 % Total investor real estate (0.01) % 0.82 % Residential first mortgage (0.05) % - % Home equity-lines of credit (0.17) % (0.06) % Home equity-closed-end (0.07) % - % Consumer credit card 2.83 % 3.19 % Other consumer-exit portfolios 1.83 % 1.98 % Other consumer 1.89 % 3.56 % Total consumer 0.44 % 0.52 % Total 0.21 % 0.40 % Ratios:
Allowance for credit losses at end of period to loans, net of unearned income
1.67 % 2.44 %
Allowance for loan losses at end of period to loans, net of unearned income
1.59 % 2.33 %
Allowance for credit losses at end of period to non-performing loans, excluding loans
held for sale
446 % 280 % Allowance for loan losses at end of period to non-performing loans, excluding loans held for sale 423 % 268 % _______
(1)Amounts have been calculated using whole dollar values.
Allocation of the allowance for credit losses by portfolio segment and class is
summarized as follows:
Table 9-Allowance Allocation
March 31, 2022 December 31, 2021
Allowance Allowance to Allowance Allowance to
Loan Balance Allocation Loans % (1) Loan Balance Allocation Loans % (1)
(Dollars in millions)
Commercial and industrial $ 45,643 $ 557 1.2 % $ 43,758 $ 613 1.4 %
Commercial real estate mortgage-owner-occupied 5,181 107 2.1 % 5,287 118 2.2 %
Commercial real estate construction-owner-occupied 273 8 2.8 % 264 9 3.5 %
Total commercial 51,097 672 1.3 % 49,309 740 1.5 %
Commercial investor real estate mortgage 5,557 74 1.3 % 5,441 77 1.4 %
Commercial investor real estate construction 1,607 9 0.6 % 1,586 10 0.6 %
Total investor real estate 7,164 83 1.2 % 7,027 87 1.2 %
Residential first mortgage 17,373 119 0.7 % 17,512 122 0.7 %
Home equity lines 3,602 75 2.1 % 3,744 83 2.2 %
Home equity loans 2,500 27 1.1 % 2,510 28 1.1 %
Consumer credit card 1,133 122 10.8 % 1,184 120 10.2 %
Other consumer-exit portfolios 909 61 6.7 % 1,071 64 6.0 %
Other consumer 5,557 333 6.0 % 5,427 330 6.1 %
Total consumer 31,074 737 2.4 % 31,448 747 2.4 %
Total $ 89,335 $ 1,492 1.7 % $ 87,784 $ 1,574 1.8 %
_______
(1)Amounts have been calculated using whole dollar values.
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TROUBLED DEBT RESTRUCTURINGS (TDRs)
TDRs are modified loans in which a concession is provided to a borrower experiencing financial difficulty. Residential first mortgage, home equity, consumer credit card and other consumer TDRs are consumer loans modified under the CAP. Commercial and investor real estate loan modifications are not the result of a formal program, but represent situations where modifications were offered as a workout alternative. Renewals of classified commercial and investor real estate loans are considered to be TDRs, even if no reduction in interest rate is offered, if the existing terms are considered to be below market. Insignificant modifications are not considered TDRs. More detailed information is included in Note 3 "Loans and the Allowance for Credit Losses" to the consolidated financial statements. As provided initially in the CARES Act and subsequently extended through the Consolidated Appropriations Act, certain loan modifications related to the COVID-19 pandemic beginningMarch 1, 2020 throughJanuary 1, 2022 were eligible for relief from TDR classification. Regions elected this provision of both Acts; therefore, modified loans that met the required guidelines for relief were not considered TDRs and are excluded from theDecember 31, 2021 disclosures below. The following table summarizes the loan balance and related allowance for accruing and non-accruing TDRs for the periods presented:
Table 10-Troubled Debt Restructurings
March 31, 2022 December 31, 2021
Loan Allowance for Credit Loan Allowance for Credit
Balance Losses Balance Losses
(In millions)
Accruing:
Commercial $ 84 $ 4 $ 81 $ 4
Investor real estate 9 1 1 -
Residential first mortgage 249 31 220 31
Home equity lines 28 4 28 3
Home equity loans 54 8 58 8
Consumer credit card - - - -
Other consumer 4 - 4 -
428 48 392 46
Non-accrual status or 90 days past due and
still accruing:
Commercial 71 14 87 14
Residential first mortgage 30 4 31 5
Home equity lines 2 - 2 -
Home equity loans 6 1 6 1
109 19 126 20
Total TDRs - Loans $ 537 $ 67 $ 518 $ 66
The following table provides an analysis of the changes in commercial and
investor real estate TDRs. TDRs with subsequent restructurings that meet the
definition of a TDR are only reported as TDR additions in the period they were
first modified. Other than resolutions such as charge-offs, foreclosures,
payments, sales and transfers to held for sale, Regions may remove loans from
TDR classification if the following conditions are met: the borrower's financial
condition improves such that the borrower is no longer in financial difficulty,
the loan has not had any forgiveness of principal or interest, the loan has not
been restructured as an "A" note/"B" note, the loan has been reported as a TDR
over one fiscal year-end and the loan is subsequently refinanced or restructured
at market terms such that it qualifies as a new loan.
For the consumer portfolio, changes in TDRs are primarily due to additions from
CAP modifications and outflows from payments and charge-offs. Given the types of
concessions currently being granted under the CAP as detailed in Note 3 "Loans
and the Allowance for Credit Losses" to the consolidated financial statements,
Regions does not expect that the market interest rate condition will be widely
achieved. Therefore, Regions expects consumer loans modified through CAP to
continue to be identified as TDRs for the remaining term of the loan.
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Table 11-Analysis of Changes in Commercial and Investor Real Estate TDRs
Three Months Ended March 31, 2022 Three Months Ended March 31, 2021
Investor Investor
Commercial Real Estate Commercial Real Estate
(In millions)
Balance, beginning of period $ 168 $ 1 $ 201 $ 44
Additions 44 8 20 5
Charge-offs (3) - (1) -
Other activity, inclusive of payments and
removals (1) (54) - (18) (37)
Balance, end of period $ 155 $ 9 $ 202 $ 12
________
(1)The majority of this category consists of payments and sales. It also
includes normal amortization/accretion of loan basis adjustments, loans
transferred to held for sale, removals and reclassifications between portfolio
segments and commercial and investor real estate loans refinanced or
restructured as new loans and removed from the TDR classification.
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Table of Contents NON-PERFORMING ASSETS
The following table presents non-performing assets as of
Table 12-Non-Performing Assets
(Dollars in millions)
Non-performing loans:
Commercial and industrial $ 216 $ 305
Commercial real estate mortgage-owner-occupied 32 52
Commercial real estate construction-owner-occupied 10 11
Total commercial 258 368
Commercial investor real estate mortgage 2 3
Total investor real estate 2 3
Residential first mortgage 31 33
Home equity lines 37 40
Home equity loans 7 7
Total consumer 75 80
Total non-performing loans, excluding loans held for sale 335 451
Non-performing loans held for sale 7 13
Total non-performing loans(1) 342 464
Foreclosed properties 9 10
Total non-performing assets(1) $ 351 $ 474
Accruing loans 90 days past due:
Commercial and industrial $ 5 $ 5
Commercial real estate mortgage-owner-occupied 1 1
Total commercial 6 6
Residential first mortgage(2) 61 74
Home equity lines 19 21
Home equity loans 11 12
Consumer credit card 12 12
Other consumer-exit portfolios 2 2
Other consumer 14 13
Total consumer 119 134
$ 125 $ 140
Non-performing loans(1) to loans and non-performing loans held for sale
0.38 % 0.53 % Non-performing assets(1) to loans, foreclosed properties, and non-performing loans held for sale 0.39 % 0.54 % _________ (1)Excludes accruing loans 90 days past due. (2)Excludes residential first mortgage loans that are 100% guaranteed by the FHA and all guaranteed loans sold toGinnie Mae where Regions has the right but not the obligation to repurchase. Total 90 days or more past due guaranteed loans excluded were$37 million atMarch 31, 2022 and$49 million atDecember 31, 2021 .
Non-performing loans at
primarily driven by improvements in retail, restaurant, accommodation and
lodging, energy, administrative, support, and waste and repair, as well as,
manufacturing industries.
Economic trends such as interest rates, unemployment, volatility in commodity
prices, and collateral valuations will impact the future level of non-performing
assets. Circumstances related to individually large credits could also result in
volatility.
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The following table provides an analysis of non-accrual loans (excluding loans
held for sale) by portfolio segment:
Table 13- Analysis of Non-Accrual Loans
Non-Accrual Loans, Excluding Loans Held for Sale
Three Months Ended
Investor
Commercial Real Estate Consumer(1) Total
(In millions)
Balance at beginning of period $ 368 $ 3 $ 80 $ 451
Additions 50 - - 50
Net payments/other activity (54) (1) (5) (60)
Return to accrual (76) - - (76)
Charge-offs on non-accrual loans(2) (23) - - (23)
Transfers to held for sale(3) (7) - - (7)
Balance at end of period $ 258 $ 2 $ 75 $ 335
Non-Accrual Loans, Excluding Loans Held for Sale
Three Months Ended March 31, 2021
Investor
Commercial Real Estate Consumer(1) Total
(In millions)
Balance at beginning of period $ 524 $ 114 $ 107 $ 745
Additions 134 2 - 136
Net payments/other activity (64) - 3 (61)
Return to accrual (18) - - (18)
Charge-offs on non-accrual loans(2) (42) (15) -
(57)
Transfers to held for sale(3) (4) (1) -
(5)
Transfers to real estate owned (2) - - (2) Balance at end of period $ 528$ 100 $ 110 $ 738 ________ (1)All net activity within the consumer portfolio segment other than sales and transfers to held for sale (including related charge-offs) is included as a single net number within the net payments/other activity line. (2)Includes charge-offs on loans on non-accrual status and charge-offs taken upon sale and transfer of non-accrual loans to held for sale. (3)Transfers to held for sale are shown net of charge-offs recorded upon transfer.
Refer to Note 1 “Summary of Significant Accounting Policies” and Note 9
“Intangible Assets” to the consolidated financial statements included in the
Annual Report on Form 10-K for the year ended
methodologies and assumptions used in the goodwill impairment analysis.
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Table of Contents DEPOSITS Regions competes with other banking and financial services companies for a share of the deposit market. Regions' ability to compete in the deposit market depends heavily on the pricing of its deposits and how effectively the Company meets customers' needs. Regions employs various means to meet those needs and enhance competitiveness, such as providing a high level of customer service and competitive pricing and convenient branch locations for its customers. Regions also serves customers through providing centralized, high-quality banking services through the Company's digital channels and contact center.
The following table summarizes deposits by category:
Table 14-Deposits
March 31, 2022 December 31, 2021
(In millions)
Non-interest-bearing demand $ 59,590 $ 58,369
Interest-bearing checking 28,001 28,018
Savings 16,101 15,134
Money market-domestic 31,677 31,408
Time deposits 5,653 6,143
Total deposits $ 141,022 $ 139,072
Total deposits at March 31, 2022 increased approximately $2.0 billion compared
to year-end 2021 levels, driven by non-interest bearing demand, savings and
money market. These increases were offset by a decline in time deposits while
interest-bearing checking remained stable. Although the pace of deposit growth
has slowed compared to 2021 activity, increases across those categories were
primarily driven by seasonality resulting in increased consumer deposit
balances. Time deposits decreased due to maturities, including maturities of
time deposits acquired through EnerBank as these deposits are not being replaced
when they mature, and, to a lesser degree, continued lower interest rates
resulting in a decrease in the utilization of time deposit accounts.
LONG-TERM BORROWINGS
Table 15-Long-Term Borrowings
March 31, 2022
(In
millions)
2.25% senior notes due May 2025 $ 746 $
746
1.80% senior notes dueAugust 2028 645
645
7.75% subordinated notes dueSeptember 2024 100
100
6.75% subordinated debentures dueNovember 2025 154
154
7.375% subordinated notes dueDecember 2037 298
298
Valuation adjustments on hedged long-term debt (98) (34)
1,845 1,909
Regions Bank :
6.45% subordinated notes due June 2037 496 496
Other long-term debt 2 2
498 498
Total consolidated $ 2,343 $ 2,407
Long-term borrowings decreased by approximately $64 million since year-end 2021
due entirely to valuation adjustments. See the "Liquidity" section for further
detail of Regions' borrowing capacity with the FHLB, which is currently not
being utilized.
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Table of Contents SHAREHOLDERS' EQUITY Shareholders' equity was$17.0 billion atMarch 31, 2022 as compared to$18.3 billion atDecember 31, 2021 . During the first three months of 2022, net income increased shareholders' equity by$548 million , cash dividends on common stock reduced shareholders' equity by$159 million , and cash dividends on preferred stock reduced shareholders' equity by$24 million . Changes in AOCI decreased shareholders' equity by$1.5 billion , primarily due to the net change in unrealized gains (losses) on securities available for sale and derivative instruments as a result of significant changes in market interest rates during the three months endedMarch 31, 2022 . Common stock repurchased during the first three months of 2022 reduced shareholders' equity$215 million . These shares were immediately retired and therefore are not included in treasury stock.
See Note 5 “Shareholders’ Equity and Accumulated Other Comprehensive Income”
section for additional information.
REGULATORY REQUIREMENTS
Regions and Regions Bank are required to comply with regulatory capital requirements established by Federal and State banking agencies. These regulatory capital requirements involve quantitative measures of the Company's assets, liabilities and selected off-balance sheet items, and also qualitative judgments by the regulators. Failure to meet minimum capital requirements can subject the Company to a series of increasingly restrictive regulatory actions. Under the Basel III Rules, Regions is designated as a standardized approach bank. Regions is a "Category IV" institution under the FRB's rules for tailoring enhanced prudential standards. Federal banking agencies allowed a phase-in of the impact of CECL on regulatory capital. AtDecember 31, 2021 , the add-back to regulatory capital was calculated as the impact of initial adoption, adjusted for 25 percent of subsequent changes in the allowance. The amount is phased-in over a three-year period beginning in 2022. AtMarch 31, 2022 , the net impact of the add-back on CET1 was approximately$306 million , or approximately 26 basis points. The add-back amount will decrease by approximately$100 million or 10 basis points in both 2023 and 2024.
The following table summarizes the applicable holding company and bank
regulatory requirements:
Table 16-Basel III Regulatory Capital Requirements
March 31, 2022 December 31, 2021 Minimum To Be Well
Ratio (1) Ratio Requirement Capitalized
Common equity Tier 1 capital:
Regions Financial Corporation 9.39 % 9.57 % 4.50 % N/A
Regions Bank 11.19 11.05 4.50 6.50 %
Tier 1 capital:
Regions Financial Corporation 10.82 % 11.03 % 6.00 % 6.00 %
Regions Bank 11.19 11.05 6.00 8.00
Total capital:
Regions Financial Corporation 12.54 % 12.74 % 8.00 % 10.00 %
Regions Bank 12.54 12.38 8.00 10.00
Leverage capital:
Regions Financial Corporation 8.00 % 8.08 % 4.00 % N/A
Regions Bank 8.28 8.09 4.00 5.00 %
_______
(1)The current quarter Basel III CET1 capital, Tier 1 capital, Total capital,
and Leverage capital ratios are estimated.
The Company’s stress capital buffer is floored at 2.5 percent through the third
quarter of 2022.
See the “First Quarter Overview” section for details on expectations of a range
for CET1 during 2022.
Additional discussion of the Basel III Rules, their applicability to Regions, recent proposals and final rules issued by the federal banking agencies and recent laws enacted that impact regulatory requirements is included in the "Supervision and Regulation" subsection of the "Business" section in the 2021 Annual Report on Form 10-K and the "Regulatory Requirements" section of Management's Discussion and Analysis in the 2021 Annual Report on Form 10-K. Additional discussion is also included in Note 12 "Regulatory Capital Requirements and Restrictions" to the consolidated financial statements in the 2021 Annual Report on Form 10-K.
LIQUIDITY
Regions maintains a robust liquidity management framework designed to
effectively manage liquidity risk in accordance with sound risk management
principals and regulatory expectations. The framework establishes sustainable
processes and tools to effectively identify, measure, mitigate, monitor, and
report liquidity risks beginning with Regions' Liquidity Management
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Policy and the Liquidity Risk Appetite Statements approved by the Board. Processes within the liquidity management framework include, but are not limited to, liquidity risk governance, cash management, liquidity stress testing, liquidity risk limits, contingency funding plans, and collateral management. While the framework is designed to comply with liquidity regulations, the processes are further tailored to be commensurate with Regions' operating model and risk profile. See the "Liquidity" section for more information. Also, see the "Supervision and Regulation-Liquidity Regulation" subsection of the "Business" section, the "Risk Factors" section and the "Liquidity" section in the 2021 Annual Report on Form 10-K for additional information.
NON-GAAP MEASURES
The table below presents computations of earnings and certain other financial measures, which exclude certain items that are included in the financial results presented in accordance with GAAP. These non-GAAP financial measures include "adjusted non-interest expense", "adjusted non-interest income", "adjusted total revenue", "adjusted total revenue, taxable-equivalent basis", and "adjusted operating leverage ratio". Regions believes that excluding certain items provides a meaningful base for period-to-period comparisons. which management believes will assist investors in analyzing the operating results of the Company and predicting future performance. These non-GAAP financial measures are also used by management to assess the performance of Regions' business because management does not consider the activities related to the adjustments to be indications of ongoing operations. Regions believes that presentation of these non-GAAP financial measures will permit investors to assess the performance of the Company on the same basis as that applied by management. Management and the Board utilize these non-GAAP financial measures as follows:
•Preparation of Regions’ operating budgets
•Monthly financial performance reporting
•Monthly close-out reporting of consolidated results
•Presentations to investors of Company performance
•Metrics for incentive compensation
Non-interest expense (GAAP) is presented excluding adjustments to arrive at
adjusted non-interest expense (non-GAAP). Net interest income (GAAP) is
presented with taxable-equivalent adjustments to arrive at net interest income
on a taxable-equivalent basis (GAAP). Non-interest income (GAAP) is presented
excluding adjustments to arrive at adjusted non-interest income (non-GAAP). Net
interest income (GAAP) and adjusted non-interest income (non-GAAP) are added
together to arrive at adjusted total revenue (non-GAAP). Net interest income on
a taxable-equivalent basis (GAAP) and adjusted non-interest income (non-GAAP)
are added together to arrive at adjusted total revenue on a taxable-equivalent
basis (non-GAAP). The adjusted operating leverage ratio (non-GAAP), which is a
measure of productivity, is generally calculated as the year over year
percentage change in adjusted total revenue on a taxable-equivalent basis less
the year over year percentage change in adjusted total non-interest expense.
Management uses this ratio to monitor performance and believes it provides
meaningful information to investors.
Non-GAAP financial measures have inherent limitations, are not required to be
uniformly applied and are not audited. Although these non-GAAP financial
measures are frequently used by stakeholders in the evaluation of a company,
they have limitations as analytical tools, and should not be considered in
isolation, or as a substitute for analyses of results as reported under GAAP. In
particular, a measure of earnings that excludes selected items does not
represent the amount that effectively accrues directly to shareholders.
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The following tables provide: 1) a reconciliation of non-interest expense (GAAP) to adjusted non-interest expense (non-GAAP), 2) a reconciliation of non-interest income (GAAP) to adjusted non-interest income (non-GAAP), 3) a computation of adjusted total revenue (non-GAAP), 4) a computation of adjusted total revenue on a taxable-equivalent basis (non-GAAP) and 5) presentation of the operating leverage ratio (GAAP) and the adjusted operating leverage ratio (non-GAAP).
Table 17-GAAP to Non-GAAP Reconciliations
Three Months Ended March 31
2022 2021
(Dollars in millions)
ADJUSTED OPERATING LEVERAGE RATIOS
Non-interest expense (GAAP) A $ 933 $ 928
Adjustments:
Contribution to Regions' Financial Corporation foundation - (2) Branch consolidation, property and equipment charges (1) (5) Salary and employee benefits-severance charges - (3) Adjusted non-interest expense (non-GAAP) B $ 932$ 918 Net interest income (GAAP) C$ 1,015 $ 967 Taxable-equivalent adjustment (GAAP) 11 11 Net interest income, taxable-equivalent basis (GAAP) D$ 1,026 $ 978 Non-interest income (GAAP) E $ 584$ 641 Adjustments: Securities (gains) losses, net - (1) Gain on equity investment - (3) Leveraged lease termination gains (1) - Adjusted non-interest income (non-GAAP) F $ 583$ 637 Total revenue C+E=G$ 1,599 $ 1,608 Adjusted total revenue (non-GAAP) C+F=H$ 1,598 $ 1,604 Total revenue, taxable-equivalent basis (GAAP) D+E=I$ 1,610 $ 1,619 Adjusted total revenue, taxable-equivalent basis (non-GAAP) D+F=J$ 1,609 $ 1,615 Operating leverage ratio (GAAP) (1) (1.08) % 2.58 % Adjusted operating leverage ratio (non-GAAP) (1) (1.86) % 2.05 % _______
(1)Amounts have been calculated using whole dollar values.
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Table of Contents OPERATING RESULTS
NET INTEREST INCOME AND MARGIN
Table 18-Consolidated Average Daily Balances and Yield/Rate Analysis
Three Months Ended March 31
2022 2021
Average Income/ Yield/ Average Income/ Yield/
Balance Expense Rate (1) Balance Expense Rate (1)
(Dollars in millions; yields on taxable-equivalent basis)
Assets
Earning assets:
Federal funds sold and securities purchased
under agreements to resell $ 2 $ - 0.18 % $ - $ - - %
Debt securities (2) 29,342 138 1.88 27,180 133 1.96
Loans held for sale 782 9 4.89 1,603 12 3.10
Loans, net of unearned income (3)(4) 87,814 887 4.07 84,755 865
4.11
Interest-bearing deposits in other banks 26,606 13 0.20 16,509 4 0.10
Other earning assets 1,306 16 5.02 1,279 10 3.27
Total earning assets 145,852 1,063 2.93 131,326 1,024 3.14
Unrealized gains/(losses) on securities
available for sale, net (2) (549) 867
Allowance for loan losses (1,472) (2,139)
Cash and due from banks 2,200 1,931
Other non-earning assets 15,697 14,569
$ 161,728 $ 146,554
Liabilities and Shareholders' Equity
Interest-bearing liabilities:
Savings $ 15,539 5 0.13 $ 12,340 5 0.15
Interest-bearing checking 27,771 2 0.03 24,171 2 0.04
Money market 31,402 2 0.02 29,425 3 0.04
Time deposits 5,905 4 0.30 5,158 9 0.74
Other deposits - - - 4 - 1.81
Total interest-bearing deposits (5) 80,617 13 0.07 71,098 19 0.11
Other short-term borrowings 9 - 0.16 - - -
Long-term borrowings 2,390 24 4.06 3,192 27 3.42
Total interest-bearing liabilities 83,016 37 0.18 74,290 46
0.25
Non-interest-bearing deposits (5) 58,117 - - 51,839 - -
Total funding sources 141,133 37 0.11 126,129 46 0.15
Net interest spread (2) 2.75 2.89
Other liabilities 2,878 2,387
Shareholders' equity 17,717 18,038
$ 161,728 $ 146,554
Net interest income /margin on a
taxable-equivalent basis (6) $ 1,026 2.85 % $ 978 3.02 %
________
(1)Amounts have been calculated using whole dollar values.
(2)Debt securities are included on an amortized cost basis with yield and net
interest margin calculated accordingly.
(3)Loans, net of unearned income include non-accrual loans for all periods
presented.
(4)Interest income includes net loan fees of $18 million and $34 million for the
three months ended March 31, 2022 and 2021, respectively.
(5)Total deposit costs may be calculated by dividing total interest expense on
deposits by the sum of interest-bearing deposits and non-interest-bearing
deposits. The rates for total deposit costs equal 0.04% and 0.06% for the three
months ended March 31, 2022 and 2021, respectively.
(6)The computation of taxable-equivalent net interest income is based on the
statutory federal income tax rate of 21% for both March 31, 2022 and 2021
adjusted for applicable state income taxes net of the related federal tax
benefit.
Net interest income is Regions' principal source of income and is one of the
most important elements of Regions' ability to meet its overall performance
goals. Both net interest income and net interest margin are influenced by market
interest rates, and in the first quarter of 2022, the FOMC increased the Fed
funds rate by 25 basis points, with additional rate increases expected in 2022.
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Net interest income (taxable-equivalent basis) increased for the first three months of 2022 compared to the same period in 2021. The increase in net interest income was driven primarily by average loan growth and rising interest rates. Also contributing to the increase was slightly higher hedge-related income, lower funding costs, and a larger securities portfolio. These increases were partially offset by a decline in PPP forgiveness income when compared to first quarter of 2021. Net interest margin was equal to 2.85 percent and 3.02 percent for the first three months of 2022 and 2021, respectively. The decline was primarily driven by continued elevated liquidity as indicated by higher cash balances.
See the “First Quarter Overview” section for the Company’s expectations for
interest income as a component of total revenue. See also the “Market
Risk-Interest Rate Risk” section below for additional information.
MARKET RISK-INTEREST RATE RISK
Regions' primary market risk is interest rate risk. This includes uncertainty with respect to absolute interest rate levels as well as relative interest rate levels, which are impacted by both the shape and the slope of the various yield curves that affect the financial products and services that the Company offers. To quantify this risk, Regions measures the change in its net interest income in various interest rate scenarios compared to a base case scenario. Net interest income sensitivity to market rate movements is a useful short-term indicator of Regions' interest rate risk. Sensitivity Measurement-Financial simulation models are Regions' primary tools used to measure interest rate exposure. Using a wide range of sophisticated simulation techniques provides management with extensive information on the potential impact to net interest income caused by changes in interest rates. Models are structured to simulate cash flows and accrual characteristics of Regions' balance sheet. Assumptions are made about the direction and volatility of interest rates, the slope of the yield curve, and the changing composition of the balance sheet that results from both strategic plans and from customer behavior. Among the assumptions are expectations of balance sheet growth and composition, the pricing and maturity characteristics of existing business and the characteristics of future business. Interest rate-related risks are expressly considered, such as pricing spreads, the pricing of deposit accounts, prepayments and other option risks. Regions considers these factors, as well as the degree of certainty or uncertainty surrounding their future behavior. The primary objective of asset/liability management at Regions is to coordinate balance sheet composition with interest rate risk management to sustain reasonable and stable net interest income throughout various interest rate cycles. In computing interest rate sensitivity for measurement, Regions compares a set of alternative interest rate scenarios to the results of a base case scenario derived using "market forward rates." The standard set of interest rate scenarios includes the traditional instantaneous parallel rate shifts of plus 100 and 200 basis points. Given low market rates by historical standards, the Company focuses on a falling rate shock scenario where all rates fall to levels consistent with historical 12-month average rate minimums. In addition to parallel curve shifts, multiple curve steepening and flattening scenarios are contemplated. Regions includes simulations of gradual interest rate movements phased in over a six-month period that may more realistically mimic the speed of potential interest rate movements.
Exposure to Interest Rate Movements-As of
sensitive to both gradual and instantaneous parallel yield curve shifts as
compared to the base case for the 12-month measurement horizon ending
2023
The first quarter of 2022 continued the trend of balance sheet growth in low-cost deposits observed throughout 2021. Retention of these balance sheet liquidity inflows is uncertain and some amount of the recent deposit growth may be more rate sensitive under a rising rate scenario. Therefore, additional sensitivity analysis focused on pandemic-related "surge" deposit pricing behavior and retention is outlined in Table 19. The estimated exposure associated with the rising and falling rate scenarios in the table below reflects the combined impacts of movements in short-term and long-term interest rates. Currently, net interest income is projected to benefit from rising short-term interest rates (i.e. asset sensitive profile). An increase or reduction in short-term interest rates (such as the Fed Funds rate, the rate of Interest on Excess Reserves, 1-month LIBOR, SOFR and BSBY) will drive the yield on assets and liabilities contractually tied to such rates higher or lower. Under either environment, it is expected that changes in funding costs and balance sheet hedging income will only somewhat offset the change in asset yields. Importantly, the potential to retain "surge" deposits with lower than expected repricing behavior represents an opportunity for further net interest income growth in the increasing rate scenario as well. Net interest income remains exposed to intermediate yield curve tenors. While this was a headwind to net interest income during the pandemic, it represents a tailwind to net interest income growth as the yield curve rises. An increase in intermediate and long-term interest rates (such as intermediate to longer-termU.S. Treasuries, swap and mortgage rates) will drive yields higher on certain fixed rate, newly originated or renewed loans, increase prospective yields on certain investment portfolio purchases, and reduce amortization of premium expense on existing securities in the investment portfolio. The opposite is true in an environment where intermediate and long-term interest rates fall. Approximately 70 percent of fixed rate asset production is at the 5-year tenor point or shorter. 67
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The interest rate sensitivity analysis presented below in Table 19 is informed by a variety of assumptions and estimates regarding the progression of the balance sheet in both the baseline scenario as well as the scenarios of instantaneous and gradual shifts in the yield curve. Though there are many assumptions which affect the estimates for net interest income, those pertaining to deposit pricing, deposit mix and overall balance sheet composition are particularly impactful. Given the uncertainties associated with the prolonged period of low interest rates and industry liquidity, management evaluates the impact to its sensitivity analysis of these key assumptions. Sensitivity calculations are hypothetical and should not be considered to be predictive of future results. The Company's baseline balance sheet assumptions include management's best estimate for balance sheet growth in the coming 12 months. However, the behavior of pandemic-related "surge" deposits under a rising rate scenario is uncertain. Since year-end 2019, the last period-end free from the effects of COVID-19, deposit balances have increased by approximately$42 billion , exclusive of deposits acquired in the EnerBank acquisition, and approximately$27 billion of the increase was determined to be attributable to pandemic-related surge deposits. Therefore, Table 19 includes two balance sheet scenarios to help inform a potential range of outcomes. The first is an opportunity scenario, and assumes that these deposits behave more like stable, legacy balances, which is consistent with historical disclosures. The second scenario assumes that these depositors will be more sensitive to rate, requiring a higher interest rate in order to hold their balances with the bank. These deposits, including non-interest bearing products, are attributed with an approximate 70 percent repricing beta in rising rate scenarios. Importantly, the impact to net interest income under a changing rate environment is the same whether the "surge" deposit balances are held at a higher beta or the balances attrite and the funding is replaced with wholesale sources. Given the evolving nature of the environment, estimates have been conservatively derived. Should the balances remain with the Company longer or demonstrate less sensitivity to interest rates, there is potential for upside (e.g. the opportunity scenario). The disclosure in Table 19 does not prescribe a view as to the longevity of surge deposits on the balance sheet. The behavior of deposit pricing in response to changes in interest rate levels is largely informed by analyses of prior rate cycles. In the base case scenario in Table 19, interest-bearing deposits reprice using an approximately 30 percent beta. The deposit beta model is dynamic across both interest rate level and time. Currently, the Scenario One gradual +100 basis point shock outlined in the table below includes an approximate 25 percent to 30 percent interest-bearing deposit beta for legacy deposits. Again, the "surge" deposit interest-bearing deposit beta is bookended in each scenario, assuming legacy betas and a 70 percent beta, respectively. Deposit pricing outperformance or underperformance of 5 percent in that scenario would increase or decrease net interest income by approximately$31 million , respectively. In rising rate scenarios only, management assumes that the mix of legacy deposits will change versus the base case as informed by analyses of prior rate cycles. Management assumes that in rising rate scenarios, some shift from non-interest bearing to interest-bearing products will occur. The magnitude of the shift is rate dependent and equates to approximately$3 billion over 12 months in the gradual +100 basis point scenario in Table 19. 68
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The table below summarizes Regions' positioning over the next 12 months in various parallel yield curve shifts (i.e., including all yield curve tenors). The scenarios are inclusive of all interest rate hedging activities. More information regarding hedges is disclosed in Table 20 and its accompanying description. Importantly, outstanding receive-fixed cash flow hedges begin to mature inSeptember 2022 .
Table 19-Interest Rate Sensitivity
Scenario Two:
Scenario One: Estimated Annual Change Estimated Annual Change
in Net Interest Income in Net Interest Income
March 31, 2022(1)(2)(3) March 31, 2022 (1)(2)(4)
(In millions)
Gradual Change in Interest Rates
+ 200 basis points $417 $207
+ 100 basis points 221 116
- 100 basis points (floored)(5) (260) (260)
Instantaneous Change in Interest Rates
+ 200 basis points $484 $226
+ 100 basis points 271 142
- 100 basis points (floored)(5) (332) (332)
_________
(1)Disclosed interest rate sensitivity levels represent the 12-month forward looking net interest income changes as compared to market forward rate cases and include expected balance sheet growth and remixing. (2)Active cash flow hedges reflected within the measurement horizon (See Table 21 for additional information regarding hedge start and maturity dates). (3)Scenario One assumes all deposits (including "surge" deposits) perform consistently with historical experiences. (4)Scenario Two accounts for uncertainty in "surge" deposit balances. Assumes an approximate 70% beta on "surge" balances (approximately$27 billion projected "surge" deposit balance). (5)The -100 basis point (floored) scenario represents a rate shock where all rates are floored at 12-month average historical lows. Regions has established scenarios by which yield curve tenors will fall to a consistent level. The shock magnitude for each tenor, when compared to market forward rates, equates to the lesser of the shock scenario amount, or a rate equal to the historical 12-month average minimum. For example, the 10-yearTreasury yield falls to 81 basis points. The falling rate scenarios in Table 19 above quantify the expected impact for both gradual and instantaneous shocks under this environment.
Interest rate movements may also have an impact on the value of Regions’
securities portfolio, which can directly impact the carrying value of
shareholders’ equity.
Regions' comprehensive interest rate risk management approach uses derivatives and debt securities to manage its interest rate risk position. At the end of the first quarter of 2022, as part of its current hedging strategy, the Company executed$4.2 billion of notional value cash flow hedging derivative trades (included in Table 20 below) and purchased$1.5 billion in debt securities available for sale. The cash flow hedging relationships are forward starting receive fixed/pay variable interest rate swaps, of which$1.2 billion will begin in the fourth quarter of 2023 and the remainder in the first quarter of 2024. The receive fixed rates on these cash flow hedges ranged from 2.1 to 2.6 percent. The purchased debt securities available for sale consisted primarily of federal agency and residential agency securities. The Company continued to add cash flow hedging derivatives and debt securities available for sale subsequent toMarch 31, 2022 , as part of its hedging strategy. FromApril 1, 2022 throughMay 4, 2022 , Regions entered into approximately$3.5 billion of notional value forward starting cash flow hedges that have start dates in the third quarter of 2023 and mature within three to four years of their start dates. The receive fixed rates on these cash flow hedges ranged from 2.8 to 3.1 percent. In that same time period, Regions also purchased approximately$700 million of debt securities available for sale consisting primarily of federal agency and residential agency securities.
See further discussion below regarding hedging derivatives executed during first
quarter of 2022.
Derivatives-Regions uses financial derivative instruments for management of interest rate sensitivity. ALCO, which consists of members of Regions' senior management team, in its oversight role for the management of interest rate sensitivity, approves the use of derivatives in balance sheet hedging strategies. Derivatives are also used to offset the risks associated with customer derivatives, which include interest rate, credit and foreign exchange risks. The most common derivatives Regions employs are forward rate contracts, Eurodollar futures contracts, interest rate swaps, options on interest rate swaps, interest rate caps and floors, and forward sale commitments.
Forward rate contracts are commitments to buy or sell financial instruments at a
future date at a specified price or yield. A
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Eurodollar futures contract is a future on a Eurodollar deposit. Eurodollar futures contracts subject Regions to market risk associated with changes in interest rates. Because futures contracts are cash settled daily, there is minimal credit risk associated with Eurodollar futures. Interest rate swaps are contractual agreements typically entered into to exchange fixed for variable (or vice versa) streams of interest payments. The notional principal is not exchanged but is used as a reference for the size of interest settlements. Interest rate options are contracts that allow the buyer to purchase or sell a financial instrument at a predetermined price and time. Forward sale commitments are contractual obligations to sell market instruments at a future date for an already agreed-upon price. Foreign currency contracts involve the exchange of one currency for another on a specified date and at a specified rate. These contracts are executed on behalf of the Company's customers and are used by customers to manage fluctuations in foreign exchange rates. The Company is subject to the credit risk that another party will fail to perform. Regions has made use of interest rate swaps and floors in balance sheet hedging strategies to effectively convert a portion of its fixed-rate funding position to a variable-rate position, to effectively convert a portion of its fixed-rate debt securities available for sale portfolio to a variable-rate position, and to effectively convert a portion of its floating-rate loan portfolios to fixed-rate. Regions also uses derivatives to economically manage interest rate and pricing risk associated with its mortgage origination business. In the period of time that elapses between the origination and sale of mortgage loans, changes in interest rates have the potential to cause a decline in the value of the loans in this held-for-sale portfolio. Futures contracts and forward sale commitments are used to protect the value of the loan pipeline and loans held for sale from changes in interest rates and pricing.
The following table presents additional information about hedging interest rate
derivatives used by Regions to manage interest rate risk:
Table 20-Hedging Derivatives by Interest Rate Risk Management Strategy
March 31, 2022
Weighted-Average
Notional
Amount Maturity (Years) Receive Rate(1) Pay Rate(1)
(Dollars in millions)
Derivatives in fair value hedging relationships:
Receive variable/pay fixed - debt securities
available for sale 6,500 0.7 2.2 0.8
Receive fixed/pay variable - borrowed funds 1,400 4.5 0.6 0.4
Derivatives in cash flow hedging relationships:
Receive fixed/pay variable - floating-rate loans(1) $ 24,850 2.3 1.1 % 0.9 %
Total derivatives designated as hedging instruments
_________
(1)Variable rate indexes on hedge contracts reference a combination of
short-term benchmarks, primarily 1-month LIBOR with approximately
of new hedges pay SOFR.
The following table presents the average asset hedge notional amounts that are active during each of the remaining quarterly periods in 2022 and later annual periods. All asset hedge notional amounts mature prior to the end of 2029.
Table 21-Schedule of Notional for Cash Flow Hedging Derivatives
Average Active Notional Amount
Quarters Ended (1) Years Ended
6/30/2022 9/30/2022 12/31/2022 2023 2024 2025 2026 2027 2028 2029
(in millions)
Asset Hedging
Relationship:
Receive fixed/pay
variable swaps $ 20,650 $ 20,650 $ 16,988 $ 9,644 $ 10,676 $ 5,645 $ 4,200 $ 3,951 $ 1,654 $ 4
Receive variable/pay
fixed swaps - 1,130 5,299 - - - - - - -
Net receive fixed/pay
variable swaps $ 20,650 $ 19,520 $ 11,689 $ 9,644 $ 10,676 $ 5,645 $ 4,200 $ 3,951 $ 1,654 $ 4
_________
(1)All cash flow hedges are reflected within the 12-month measurement horizon
and included in income sensitivity levels as disclosed in Table 19.
Regions manages the credit risk of these instruments in much the same way as it
manages credit risk of the loan portfolios by establishing credit limits for
each counterparty and through collateral agreements for dealer transactions. For
non-dealer
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transactions, the need for collateral is evaluated on an individual transaction basis and is primarily dependent on the financial strength of the counterparty. Credit risk is also reduced significantly by entering into legally enforceable master netting agreements. When there is more than one transaction with a counterparty and there is a legally enforceable master netting agreement in place, the exposure represents the net of the gain and loss positions with and collateral received from and/or posted to that counterparty. Most hedging interest rate swap derivatives traded by Regions are subject to mandatory clearing. The counterparty risk for cleared trades effectively moves from the executing broker to the clearinghouse allowing Regions to benefit from the risk mitigation controls in place at the respective clearinghouse. The "Credit Risk" section in this report contains more information on the management of credit risk. Regions also uses derivatives to meet the needs of its customers. Interest rate swaps, interest rate options and foreign exchange forwards are the most common derivatives sold to customers. Other derivative instruments with similar characteristics are used to hedge market risk and minimize volatility associated with this portfolio. Instruments used to service customers are held in the trading account, with changes in value recorded in the consolidated statements of income. The primary objective of Regions' hedging strategies is to mitigate the impact of interest rate changes, from an economic perspective, on net interest income and other financing income and the net present value of its balance sheet. The overall effectiveness of these hedging strategies is subject to market conditions, the quality of Regions' execution, the accuracy of its valuation assumptions, counterparty credit risk and changes in interest rates.
See Note 8 “Derivative Financial Instruments and Hedging Activities” to the
consolidated financial statements for a tabular summary of Regions’ quarter-end
derivatives positions and further discussion.
Regions accounts for residential MSRs at fair market value with any changes to fair value being recorded within mortgage income. Regions enters into derivative transactions to economically mitigate the impact of market value fluctuations related to residential MSRs. Derivative instruments entered into in the future could be materially different from the current risk profile of Regions' current portfolio. LIBOR TRANSITION OnMarch 5, 2021 , theFCA announced that LIBOR will not be available for use afterDecember 31, 2021 . Further, existing contracts referencing 1-week or 2-month USD LIBOR settings must be remediated no later thanDecember 31, 2021 . Regions successfully remediated contracts referencing 1-week or 2-month USD LIBOR prior toDecember 31, 2021 . Additionally, Regions ceased origination of all new LIBOR-based lending prior toDecember 31, 2021 . Existing contracts referencing all other USD LIBOR settings must be remediated no later thanJune 30, 2023 . Regions holds instruments that may be impacted by the discontinuance of LIBOR, including loans, investments, derivative products, floating-rate obligations, and other financial instruments that use LIBOR as a benchmark rate. However, Regions' LIBOR exposure is primarily in settings other than 1-week or 2-month USD LIBOR. The Company has established a LIBOR Transition Program, which includes dedicated leadership and staff, with all relevant business lines and support groups engaged. As part of this program, the Company continues to identify, assess, and monitor risks associated with the discontinuation of LIBOR. Steps to mitigate risks associated with the transition are being overseen by Regions'Executive LIBOR Steering Committee . Regions is following industry efforts to develop alternative reference rates and is operationally ready to offer new benchmarks as they are adopted by regulatory agencies and industry groups.
Regions has taken proactive steps to facilitate the transition on behalf of
customers, which include:
•The adoption and ongoing implementation of fallback provisions that provide for
the determination of replacement rates for LIBOR-linked financial products.
•The adoption of new products linked to alternative reference rates, such as
adjustable-rate mortgages, consistent with guidance provided by the US
regulators, ARRC, and GSEs.
•The discontinuation of LIBOR-based commercial lending prior toDecember 31, 2021 , consistent with regulatory guidelines. The Company is providing multiple alternative rates based on market competition and demand, including SOFR, BSBY, and AMERIBOR. Regions continues to evaluate its financial and operational infrastructure in its effort to transition all financial and strategic processes, systems, and models to reference rates other than LIBOR. Regions has also implemented processes to educate all client-facing associates and coordinate communications with customers regarding the transition.
Regions has exposure to LIBOR-based products throughout several lines of
business. As of
reference LIBOR:
•Approximately
estate loans and approximately
•Securities within the investment portfolio of approximately
•Notional amount of interest rate derivatives totaling approximately
billion
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•Series B and C preferred stock with total carrying values of$433 million and$490 million , respectively that reference LIBOR when their dividend rate begins to float after 2023. OnMarch 15, 2022 , the Adjustable Interest Rate Act was signed into law with the purpose of establishing a clear and uniform process for replacing LIBOR in existing contracts. Among the provisions of this legislation, contracts may be transitioned to SOFR to gain a legal safe harbor. The Company has assessed the impact of this legislation and expects to allow certain clients to fallback to SOFR upon the cessation of LIBOR, consistent with the guidelines in the legislation. In the third quarter of 2020, Regions adopted temporary accounting relief for affected transactions that reference LIBOR. See Note 1 "Summary of Significant Accounting Policies" in Regions' Annual Report on Form 10-K for the year endedDecember 31, 2020 for details.
LIQUIDITY
Liquidity is an important factor in the financial condition of Regions and affects Regions' ability to meet the needs of the Company and its customers. Regions' goal in liquidity management is to maintain liquidity sources and reserves sufficient to satisfy the cash flow requirements of depositors and borrowers, under normal and stressed conditions. Accordingly, Regions maintains a variety of liquidity sources to fund its obligations, as further described below. Furthermore, Regions performs specific procedures, including scenario analyses and stress testing to evaluate and maintain appropriate levels of available liquidity in alignment with liquidity risk. Regions' operation of its business provides a generally balanced liquidity base which is comprised of customer assets, consisting principally of loans, and funding provided by customer deposits and borrowed funds. Maturities in the loan portfolio provide a steady flow of funds, and are supplemented by Regions' relatively steady deposit base. The securities portfolio also serves as a primary source and storehouse of liquidity. Proceeds from maturities and principal and interest payments of securities provide a continual flow of funds available for cash needs (see Note 2 "Debt Securities " to the consolidated financial statements). Furthermore, the highly liquid nature of the portfolio (for example, the agency guaranteed MBS portfolio) can be readily used as a source of cash through various secured borrowing arrangements. Cash reserves, liquid assets and secured borrowing capabilities (including borrowing capacity at the FHLB, as discussed below) aid in the management of liquidity in normal and stressed conditions, and/or meeting the need of contingent events such as obligations related to potential litigation. See Note 11 "Commitments, Contingencies and Guarantees" to the consolidated financial statements for additional discussion of the Company's funding requirements. Liquidity needs can also be met by borrowing funds in national money markets, though Regions does maintain limits on short-term unsecured funding due to the volatility that can affect such markets. The balance with the FRB is the primary component of the balance sheet line item, "interest-bearing deposits in other banks." AtMarch 31, 2022 , Regions had approximately$25.7 billion in cash on deposit with the FRB and other depository institutions, a decrease from approximately$28.1 billion atDecember 31, 2021 , due to the use of active cash management strategies used to deploy increases in deposit balances. The average balance held with the FRB was approximately$26.6 billion and$16.5 billion for the three months endedMarch 31, 2022 and 2021, respectively. Refer to the "Cash and Cash Equivalents" section for more information.
Regions’ borrowing availability with the FRB as of
assets pledged as collateral on that date, was
Regions' financing arrangement with the FHLB adds additional flexibility in managing the Company's liquidity position. As ofMarch 31, 2022 , Regions had no FHLB borrowings and its total borrowing capacity from the FHLB totaled approximately$16.3 billion . FHLB borrowing capacity is contingent on the amount of collateral pledged to the FHLB.Regions Bank pledged certain eligible securities and loans as collateral for the outstanding FHLB advances. Additionally, investment in FHLB stock is required in relation to the level of outstanding borrowings. The FHLB has been and is expected to continue to be a reliable and economical source of funding.
Regions maintains a shelf registration statement with the
utilized by Regions to issue various debt and/or equity securities.
Additionally, Regions’ Board has authorized
billion
time. Refer to Note 11 “Borrowed Funds” to the consolidated financial statements
in the 2021 Annual Report on Form 10-K for additional information.
Regions may, from time to time, consider opportunistically retiring outstanding issued securities, including subordinated debt in privately negotiated or open market transactions for cash or common shares. Regulatory approval would be required for retirement of some instruments. See Note 5 "Shareholders' Equity and Accumulated Other Comprehensive Income" to the consolidated financial statements for additional information. Regions' liquidity policy requires the holding company to maintain cash sufficient to cover the greater of (1) 18 months of debt service and other cash needs or (2) a minimum cash balance of$500 million . Cash and cash equivalents at the holding company totaled$1.1 billion atMarch 31, 2022 . Overall liquidity risk limits are established by the Board through its Risk 72
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Appetite Statement and Liquidity Policy. The Company’s Board, LROC and ALCO
regularly review compliance with the established limits.
CREDIT RISK
Regions' objective regarding credit risk is to maintain a credit portfolio that provides for stable credit costs with acceptable volatility through an economic cycle. Regions has various processes to manage credit risk as described below. In order to assess the risk profile of the loan portfolio, Regions considers risk factors within the loan portfolio segments and classes, the currentU.S. economic environment and that of its primary banking markets, as well as counterparty risk. See the "Portfolio Characteristics" section of the Annual Report on Form 10-K for the year endedDecember 31, 2021 for a discussion of risk characteristics of each loan type.
INFORMATION SECURITY RISK
Regions faces information security risks, such as evolving and adaptive cyber attacks that are conducted regularly against financial institutions in attempts to compromise or disable information systems. Such attempts have increased in recent years, and the trend is expected to continue for a number of reasons, including increases in technology-based products and services used by us and our customers, the growing use of mobile, cloud, and other emerging technologies, and the increasing sophistication and activities of organized crime, hackers, terrorists, nation-states, activists and other external parties or fraud on the part of employees. As a result of the COVID-19 pandemic, Regions has experienced a modest increase in cyber events, such as phishing attempts and malicious traffic from outside theU.S. However, the Company's layered control environment has effectively detected and prevented any material impact related to these events. Even when Regions successfully prevents cyber attacks to its own network, the Company may still incur losses that result from customers' account information being obtained through breaches of retailers' networks that enable customer transactions. The related fraud losses, as well as the costs of re-issuing new cards, may impact Regions' financial results. In addition, Regions also relies on some vendors to provide certain business infrastructure components, and although Regions actively assesses and monitors the information security capabilities of these vendors, Regions' reliance on them may also increase exposure to information security risk. In the event of a cyber attack or other data breach, Regions may be required to incur significant expenses, including with respect to remediation costs, costs of implementing additional preventative measures, addressing any reputational harm and addressing any related regulatory inquiries or civil litigation arising from the event. Refer to the "Information Security Risk" section in Management's Discussion and Analysis included in the Annual Report on Form 10-K for the year endedDecember 31, 2021 for further discussion of Regions' information security risk.
PROVISION FOR (BENEFIT FROM) CREDIT LOSSES
The provision for (benefit from) credit losses is used to maintain the allowance for loan losses and the reserve for unfunded credit losses at a level that in management's judgment is appropriate to absorb expected credit losses over the contractual life of the loan and credit commitment portfolio at the balance sheet date. The benefit from credit losses totaled$36 million in the first quarter of 2022 compared to a benefit from credit losses of$142 million during the first quarter of 2021. Refer to the "Allowance" section for further detail. 73
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NON-INTEREST INCOME
Table 22-Non-Interest Income
Three Months Ended March 31 Quarter-to-Date Change 3/31/2022 vs. 3/31/2021
2022 2021 Amount Percent
(Dollars in millions)
Service charges on deposit accounts $ 168 $ 157 $ 11 7.0 %
Card and ATM fees 124 115 9 7.8 %
Capital markets income 73 100 (27) (27.0) %
Investment management and trust fee income 75 66 9 13.6 %
Mortgage income 48 90 (42) (46.7) %
Investment services fee income 26 25 1 4.0 %
Commercial credit fee income 22 22 - - %
Bank-owned life insurance 14 17 (3) (17.6) %
Market value adjustments on employee
benefit assets - other (14) 7 (21) (300.0) %
Gain on equity investment - 3 (3) (100.0) %
Securities gains (losses), net - 1 (1) (100.0) %
Other miscellaneous income 48 38 10 26.3 %
$ 584 $ 641 $ (57) (8.9) %
Service charges on deposit accounts-Service charges on deposit accounts include
non-sufficient fund and overdraft fees, corporate analysis service charges,
overdraft protection fees and other customer transaction-related service
charges.
Capital markets income-Capital markets income primarily relates to capital raising activities that include securities underwriting and placement, loan syndication, as well as foreign exchange, derivatives, merger and acquisition and other advisory services. Capital markets income decreased in the first quarter of 2022 compared to the same period in 2021 due primarily to decreases in securities underwriting and placement, M&A advisory fees, and commercial swap income. M&A advisory fees were impacted by timing of transactions. Additionally, debt and real estate capital markets were impacted by uncertainty surrounding interest rates, geopolitical tensions and volatility in credit spreads. The declines were partially offset by an increase in loan syndication revenue. Investment management and trust fee income-Investment management and trust fee income represents income from asset management services provided to individuals, businesses and institutions. Investment management and trust fee income increased due primarily to increased production and sales, and positive market-related impacts on asset values in the first quarter of 2022. Mortgage income-Mortgage income is generated through the origination and servicing of residential mortgage loans for long-term investors and sales of residential mortgage loans in the secondary market. The decrease in mortgage income in the first quarter of 2022 compared to the same period in 2021 was due primarily to lower mortgage production as a result of higher interest rates. Additionally, mortgage income was impacted by reductions in the valuation of mortgage servicing rights and related hedges. Mortgage income in the first quarter of 2022 also included approximately$12 million in gains associated with the re-securitization and sale ofGinnie Mae loans previously repurchased from their pools. Market value adjustments on employee benefit assets-Market value adjustments on employee benefit assets are the reflection of market value variations related to assets held for certain employee benefits. Market value adjustments on employee benefit assets decreased in the first quarter of 2022 compared to the same period in 2021 due to market volatility. The adjustments are offset in salaries and benefits.
Securities gains (losses), net-Net securities gains (losses) primarily result
from the Company’s asset/liability management process. See Table 1 “
Securities
Other miscellaneous income-Other miscellaneous income includes net revenue from affordable housing, valuation adjustments to equity investments (other than the item shown separately above), fees from safe deposit boxes, check fees and other miscellaneous income. Net revenue from affordable housing includes actual gains and losses resulting from the sale of affordable housing investments, cash distributions from the investments and any related impairment charges. Other miscellaneous income increased in the first quarter of 2022 compared to the same period of 2021 primarily due to an increase in commercial loan and leasing related fee income generated fromAscentium and an increase in other consumer income. 74
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NON-INTEREST EXPENSE
Table 23-Non-Interest Expense
Three Months Ended March 31 Quarter-to-Date Change 3/31/2022 vs. 3/31/2021
2022 2021 Amount Percent
(Dollars in millions)
Salaries and employee benefits $ 546 $ 546 $ - - %
Equipment and software expense 95 90 5 5.6 %
Net occupancy expense 75 77 (2) (2.6) %
Outside services 38 38 - - %
Marketing 24 22 2 9.1 %
Professional, legal and regulatory expenses 17 29 (12) (41.4) %
Credit/checkcard expenses 26 14 12 85.7 %
FDIC insurance assessments 14 10 4 40.0 %
Visa class B shares expense 5 4 1 25.0 %
Branch consolidation, property and equipment
charges 1 5 (4) (80.0) %
Other miscellaneous expenses 92 93 (1) (1.1) %
$ 933 $ 928 $ 5 0.5 %
Salaries and employee benefits-Salaries and employee benefits consist of
salaries, incentive compensation, long-term incentives, payroll taxes, and other
employee benefits such as 401(k), pension, and medical, life and disability
insurance, as well as, expenses from liabilities held for employee benefit
purposes. Full-time equivalent headcount increased to 19,723 at March 31, 2022
from 18,926 at March 31, 2021 , reflecting the additional associates from
acquisitions in the fourth quarter of 2021. While headcount increased, salaries
and employee benefits expense remained stable primarily due to lower incentive
compensation during the first quarter of 2022.
Professional, legal and regulatory expenses-Professional, legal, and regulatory
expenses consist of amounts related to legal, consulting, other professional
fees and regulatory charges. Professional, legal, and regulatory expenses
decreased in the first quarter of 2022 compared to the same period in 2021
primarily due to a decline in legal fees.
Credit/Checkcard expenses-Credit/Checkcard expenses include credit and checkcard
fraud and expenses. Credit/checkcard increased in the first quarter of 2022
compared to the same period in 2021 primarily due to an accrual increase
associated with a previous debit card matter.
Branch consolidation, property and equipment charges-Branch consolidation, property and equipment charges include valuation adjustments related to owned branches when the decision to close them is made. Accelerated depreciation and lease write-off charges are recorded for leased branches through and at the actual branch close date. Branch consolidation, property and equipment charges also include costs related to occupancy optimization initiatives.
INCOME TAXES
The Company's income tax expense for the three months endedMarch 31, 2022 was$154 million compared to$180 million for the three months endedMarch 31, 2021 , resulting in effective tax rates of 21.9 percent for both periods. See the "First Quarter Overview" for the Company's near-term expectations for future tax rates. The effective tax rate is affected by many factors including, but not limited to, the level of pre-tax income, the mix of income between various tax jurisdictions with differing tax rates, enacted tax legislation, net tax benefits related to affordable housing investments, bank-owned life insurance income, tax-exempt interest and nondeductible expenses. In addition, the effective tax rate is affected by items that may occur in any given period but are not consistent from period-to-period, such as the termination of certain leveraged leases, share-based payments, valuation allowance changes and changes to unrecognized tax benefits. Accordingly, the comparability of the effective tax rate between periods may be impacted. AtMarch 31, 2022 , the Company reported a net deferred tax asset of$136 million compared to a net deferred tax liability of$306 million atDecember 31, 2021 . The change in the net deferred tax position was due primarily to the deferred tax impact of unrealized losses on securities available for sale and derivative instruments arising during the period. 75
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Table of Contents ACQUISITIONS EnerBank OnOctober 1, 2021 , Regions completed its acquisition of home improvement lender EnerBank. The acquisition of EnerBank allows Regions to provide customers with home improvement financing solutions using EnerBank's loan programs and digital solutions to support a wide range of home improvement needs.
As a result of the acquisition, Regions recorded approximately
assets of which
consumer loan portfolio. Regions also assumed
consisting almost entirely of time deposits that the Company expects will
attrite over time. The premiums recorded related to the acquired assets and
assumed liabilities were immaterial.
Fair value estimates are considered preliminary as ofMarch 31, 2022 . Fair value estimates, including loans, intangible assets and goodwill, are subject to change for up to one year after the acquisition date as additional information becomes available.
Regions recorded PCD loans of
Regions recorded an immaterial ALLL related to these loans, which was included
in the total acquired asset value as part of the acquisition.
In conjunction with the acquisition, Regions recognized initial goodwill of$361 million and other intangible assets of$176 million . The other intangible assets were primarily comprised of customer relationship intangibles and will be amortized over the expected useful life of each recognized asset.
Sabal
OnDecember 1, 2021 , Regions completed its acquisition of Sabal, a financial services firm that leverages technology to facilitate off-balance-sheet lending in the small balance commercial real estate market. As a result of the acquisition, Regions recorded approximately$360 million of assets, which included loans held for sale totaling$82 million , as well as a commercial mortgage servicing asset and securities that were immaterial. Regions also assumed$114 million of liabilities, consisting primarily of borrowings that were paid off following closing.
In conjunction with the acquisition, Regions recognized initial goodwill of
million
Fair value estimates are considered preliminary as ofMarch 31, 2022 . Fair value estimates, including acquired assets and goodwill, are subject to change for up to one year after the acquisition date as additional information becomes available.
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