filings.toolsItem 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
INTRODUCTION
The following discussion and analysis is part of Regions Financial Corporation’s (“Regions” or the “Company”) Quarterly Report on Form 10-Q filed with the SEC and updates Regions’ Annual Report on Form 10-K for the year ended December 31, 2021, which was previously filed with the SEC. 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 and nine months ended September 30, 2022 compared to the three and nine months ended September 30, 2021 for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as of September 30, 2022 compared to December 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 6 through 8 for additional information regarding forward-looking statements.
CORPORATE PROFILE
Regions is a financial holding company headquartered in Birmingham, Alabama, that operates in the South, Midwest and Texas. In addition, Regions operates several offices delivering specialty capabilities in New 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 through Regions Bank, an Alabama state-chartered commercial bank that is a member of the Federal Reserve System. At September 30, 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.
On December 17, 2021, Regions entered into an agreement to acquire Clearsight Advisors, Inc., a leading-edge mergers and acquisitions firm headquartered in McLean, Virginia. The transaction closed on December 31, 2021.
On October 4, 2021, Regions entered into an agreement to acquire Sabal Capital Partners, LLC, a diversified financial services firm that facilitates lending in the small-balance commercial real estate market headquartered in Irvine, California. The transaction closed on December 1, 2021. Refer to the "Acquisitions" section for more detail.
On June 8, 2021, Regions entered into an agreement to acquire EnerBank, a consumer lending institution specializing in home improvement lending headquartered in Salt Lake City, Utah. The transaction closed on October 1, 2021, and resulted in the addition of approximately $3.1 billion in loans to consumers. Refer to the "Acquisitions" section for more detail.
THIRD QUARTER OVERVIEW
Third Quarter Results
Regions reported net income available to common shareholders of $404 million, or $0.43 per diluted share, in the third quarter of 2022 compared to $624 million, or $0.65 per diluted share, in the third quarter of 2021. The primary drivers of the decrease in net income from the prior year period were a provision for credit losses compared to a benefit from credit losses in the prior period and higher non-interest expense partially offset by higher net interest income.
For the third quarter of 2022, net interest income (taxable-equivalent basis) totaled $1.3 billion, up $298 million compared to the third quarter of 2021. Net interest margin (taxable-equivalent basis) was 3.53 percent for the third quarter of 2022 and 2.76 percent in the third quarter of 2021. The increases in net interest income and net interest margin were primarily driven by higher interest rates combined with increases in average loan balances and average debt securities balances. In the third quarter of 2022, while cash balances declined, net interest margin continued to be negatively impacted by elevated liquidity. Refer to Table 19 "Consolidated Average Daily Balances and Yield/Rate Analysis" for further details.
The provision for credit losses totaled $135 million in the third quarter of 2022, as compared to a benefit of $155 million during the third quarter of 2021. The current quarter provision reflects loan growth and broadly stable, albeit normalizing, asset quality. Refer to the "Allowance for Credit Losses" section for further detail.
Net charge-offs totaled $110 million, or an annualized 0.46 percent of average loans, in the third quarter of 2022, compared to $30 million, or an annualized 0.14 percent for the third quarter of 2021. The increase is primarily driven by charge-offs associated with the sale of unsecured consumer loans at the end of the quarter. Refer to Table 18 "GAAP to Non-GAAP Reconciliations" for details of the charge-offs related to the unsecured consumer loan sale and to the "Allowance for Credit Losses" section for further detail.
The allowance was 1.63 percent of total loans, net of unearned income at September 30, 2022 compared to 1.79 percent at December 31, 2021. The decrease was a result of the factors discussed above. The allowance was 311 percent of total non-performing loans at September 30, 2022 compared to 349 percent at December 31, 2021. Refer to the "Allowance for Credit Losses" section for further detail.
Non-interest income was $605 million for the third quarter of 2022, a $44 million decrease from the third quarter of 2021. The decrease was primarily driven by a decline in other miscellaneous income, mortgage income and unfavorable market valuation adjustments on employee benefit assets. These decreases were partially offset by increases in capital markets income, investment management and trust fee income, and investment services fee income. See Table 23 "Non-Interest Income" for more detail.
Total non-interest expense was $1.2 billion in the third quarter of 2022, a $232 million increase from the third quarter of 2021. The increase was primarily driven by an increase in professional, legal and regulatory expenses as a result of a settlement reached with the CFPB in the third quarter of 2022, as well as an increase in salaries and employee benefits. The increases were partially offset by a loss on early extinguishment of debt in the third quarter of 2021 that did not repeat. See Table 24 "Non-Interest Expense" and Note 11 "Commitments, Contingencies and Guarantees" for more detail.
Income tax expense for the three months ended September 30, 2022 was $133 million compared to $180 million for the same period in 2021. See the "Income Taxes" section for more detail.
At the end of the third quarter of 2022, Hurricane Ian made landfall in the Southeastern United States, impacting states within the Company's footprint, especially Florida and South Carolina. Due to the proximity of the hurricane to quarter-end, Regions is still assessing all aspects of the impact to business operations and customers. At this time the impact to business operations and Regions' premises is expected to be immaterial. A full evaluation of the storm-related impacts to customers may take several months. The allowance for credit losses as of September 30, 2022 includes a $20 million reserve related to Hurricane Ian and the availability of additional information in hurricane-impacted areas could cause the allowance to be increased or decreased in future periods. Refer to the "Allowance for Credit Losses" section for further detail.
Capital
Regions 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 at September 30, 2022 was estimated at 9.29 percent. For additional information on Regions' regulatory capital requirements see the "Regulatory Requirements" section.
Regions participates in supervisory stress testing conducted by the Federal Reserve and its SCB is currently floored at 2.5 percent. See Note 5 "Shareholders' Equity and Accumulated Other Comprehensive Income" to the consolidated financial statements for further details regarding CCAR results.
The Board authorized, on April 20, 2022, 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.
Expectations
| 2022 Expectations (1) | ||||||||
| Category | Expectation | |||||||
| Total Adjusted Revenue (2)(3) | Up 11-12% | |||||||
| Adjusted Non-Interest Expense | Up 4.5-5.5% | |||||||
| Adjusted Operating Leverage | ~6% | |||||||
| Average Loans | Up ~9% | |||||||
| Adjusted Net Charge-Offs / Average Loans | ~20 bps | |||||||
| Effective Tax Rate | 22-23% | |||||||
| Ending Deposits | Down $5 to $10 billion |
(1)Expectation for CET1 is to manage near the mid-to-upper end of a 9.25-9.75% operating range over time.
(2)Expectation utilizes the September 30, 2022 forward interest rate curve.
(3)Expectation reflects previously announced overdraft policy changes implemented within the year and the related impact on service charges revenue; 2022 full year service charges revenue expectation is approximately $630 million.
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 $13.7 billion from year-end 2021 to September 30, 2022, due primarily to a decrease in cash on deposit with the FRB partially offset by an increase in cash due from other banks. In the first nine months of 2022, the Company used cash balances to fund loan growth combined with a decline in deposits. Also contributing to the decline in cash balances is securities purchases, as a part of hedging and active cash management strategies. See the "Debt Securities", "Loans", "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—Debt Securities
| September 30, 2022 | December 31, 2021 | |||||||||||||||||||
| (In millions) | ||||||||||||||||||||
| U.S. Treasury securities | $ | 1,201 | $ | 1,132 | ||||||||||||||||
| Federal agency securities | 738 | 92 | ||||||||||||||||||
| Obligations of states and political subdivisions | 2 | 4 | ||||||||||||||||||
| Mortgage-backed securities: | ||||||||||||||||||||
| Residential agency | 17,586 | 19,319 | ||||||||||||||||||
| Residential non-agency | 1 | 1 | ||||||||||||||||||
| Commercial agency | 8,007 | 6,915 | ||||||||||||||||||
| Commercial non-agency | 257 | 536 | ||||||||||||||||||
| Corporate and other debt securities | 1,151 | 1,381 | ||||||||||||||||||
| $ | 28,943 | $ | 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.
Debt securities decreased $437 million from December 31, 2021 to September 30, 2022 driven by declines in market valuations due to an increase in market interest rates. Partially offsetting the valuation declines, Regions made purchases of debt securities available for sale, excluding normal reinvestment of maturities and paydowns, totaling approximately $2.8 billion consisting primarily of U.S. Treasury, federal agency, residential agency, and commercial agency securities in the first nine
months of 2022. Approximately $2.5 billion of the purchases relate to the Company's hedging strategy with the remaining purchases related to reinvestment of proceeds from loan sales.
LOANS HELD FOR SALE
Loans held for sale totaled $720 million at September 30, 2022, consisting of $245 million of residential real estate mortgage loans, $457 million of commercial loans, $16 million of consumer and other performing loans, and $2 million of non-performing loans. At December 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 production and retention levels, as well as 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 68 percent of Regions' interest-earning assets as of September 30, 2022. The following table presents the distribution of Regions’ loan portfolio by portfolio segment and class, net of unearned income:
Table 2—Loan Portfolio
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In millions, net of unearned income) | |||||||||||
| Commercial and industrial | $ | 49,591 | $ | 43,758 | |||||||
| Commercial real estate mortgage—owner-occupied | 5,167 | 5,287 | |||||||||
| Commercial real estate construction—owner-occupied | 282 | 264 | |||||||||
| Total commercial | 55,040 | 49,309 | |||||||||
| Commercial investor real estate mortgage | 6,295 | 5,441 | |||||||||
| Commercial investor real estate construction | 1,824 | 1,586 | |||||||||
| Total investor real estate | 8,119 | 7,027 | |||||||||
| Residential first mortgage | 18,399 | 17,512 | |||||||||
| Home equity lines | 3,521 | 3,744 | |||||||||
| Home equity loans | 2,515 | 2,510 | |||||||||
| Consumer credit card | 1,186 | 1,184 | |||||||||
| Other consumer—exit portfolios | 662 | 1,071 | |||||||||
| Other consumer | 5,269 | 5,427 | |||||||||
| Total consumer | 31,552 | 31,448 | |||||||||
| $ | 94,711 | $ | 87,784 |
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 ended December 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 $5.8 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 use. In the first nine months of 2022, commercial and industrial loan growth was broad-based and included increases in the financial services, information, manufacturing, real estate, retail trade and wholesale goods industries. The September 30, 2022 commercial and industrial loan balance also included $177 million of PPP loans, a decrease of $571 million compared to December 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
| September 30, 2022 | |||||||||||||||||
| Loans | Unfunded Commitments | Total Exposure | |||||||||||||||
| (In millions) | |||||||||||||||||
| Administrative, support, waste and repair | $ | 1,539 | $ | 965 | $ | 2,504 | |||||||||||
| Agriculture | 350 | 215 | 565 | ||||||||||||||
| Educational services | 3,319 | 856 | 4,175 | ||||||||||||||
| Energy | 1,574 | 3,240 | 4,814 | ||||||||||||||
| Financial services | 6,519 | 7,634 | 14,153 | ||||||||||||||
| Government and public sector | 3,164 | 456 | 3,620 | ||||||||||||||
| Healthcare | 3,721 | 2,430 | 6,151 | ||||||||||||||
| Information | 2,425 | 1,350 | 3,775 | ||||||||||||||
| Manufacturing | 5,262 | 4,697 | 9,959 | ||||||||||||||
| Professional, scientific and technical services | 2,466 | 1,565 | 4,031 | ||||||||||||||
| Real estate (1) | 8,815 | 8,839 | 17,654 | ||||||||||||||
| Religious, leisure, personal and non-profit services | 1,595 | 643 | 2,238 | ||||||||||||||
| Restaurant, accommodation and lodging | 1,353 | 290 | 1,643 | ||||||||||||||
| Retail trade | 2,690 | 2,226 | 4,916 | ||||||||||||||
| Transportation and warehousing | 3,335 | 1,750 | 5,085 | ||||||||||||||
| Utilities | 2,374 | 3,079 | 5,453 | ||||||||||||||
| Wholesale goods | 4,319 | 3,621 | 7,940 | ||||||||||||||
| Other (2) | 220 | 2,775 | 2,995 | ||||||||||||||
| Total commercial | $ | 55,040 | $ | 46,631 | $ | 101,671 |
| December 31, 2021 (3) | |||||||||||||||||
| Loans | Unfunded 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.
Investor Real Estate
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 $1.1 billion in comparison to 2021 year-end balances. The increase was primarily driven by growth in term lending commitments and fundings on previously committed construction facilities.
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 increased $887 million in comparison to 2021 year-end balances. The increase is primarily due to a decline in prepayment rate and an increase in ARM production retained on the balance sheet, partially offset by the sale of approximately $285 million of Ginnie Mae loans in the first quarter of 2022, which had been previously repurchased from their pools. Approximately $3.3 billion in new loan originations were retained on the balance sheet through the first nine 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 $223 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 in December 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. From May 2009 to December 2016, home equity lines of credit had a 10-year draw period and a 10-year repayment term. Prior to 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 of September 30, 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. Home equity lines that are in repayment are reflected as revolving loans converted to amortizing.
Table 4—Home Equity Lines of Credit - Future Principal Payment Resets
| First Lien | % of Total | Second Lien | % of Total | Total | |||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| 2022 | $ | 17 | 0.50 | % | $ | 16 | 0.45 | % | $ | 33 | |||||||||||||||||||
| 2023 | 72 | 2.04 | % | 53 | 1.52 | % | 125 | ||||||||||||||||||||||
| 2024 | 114 | 3.23 | % | 75 | 2.14 | % | 189 | ||||||||||||||||||||||
| 2025 | 108 | 3.06 | % | 115 | 3.28 | % | 223 | ||||||||||||||||||||||
| 2026 | 152 | 4.31 | % | 155 | 4.41 | % | 307 | ||||||||||||||||||||||
| 2027-2032 | 1,236 | 35.11 | % | 946 | 26.85 | % | 2,182 | ||||||||||||||||||||||
| 2032-2036 | 144 | 4.09 | % | 225 | 6.38 | % | 369 | ||||||||||||||||||||||
| Thereafter | 5 | 0.15 | % | 4 | 0.11 | % | 9 | ||||||||||||||||||||||
| Revolving Loans Converted to Amortizing | 48 | 1.37 | % | 36 | 1.00 | % | 84 | ||||||||||||||||||||||
| Total | $ | 1,896 | 53.86 | % | $ | 1,625 | 46.14 | % | $ | 3,521 |
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.
Table 5—Estimated Current Loan to Value Ranges
| September 30, 2022 | |||||||||||||||||||||||||||||
| Residential First Mortgage | Home Equity Lines of Credit | Home Equity Loans | |||||||||||||||||||||||||||
| 1st Lien | 2nd Lien | 1st Lien | 2nd Lien | ||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||
| Estimated current LTV: | |||||||||||||||||||||||||||||
| Above 100% | $ | 3 | $ | — | $ | 1 | $ | 2 | $ | 1 | |||||||||||||||||||
| Above 80% - 100% | 1,282 | 2 | 1 | 8 | 6 | ||||||||||||||||||||||||
| 80% and below | 16,835 | 1,870 | 1,573 | 2,270 | 211 | ||||||||||||||||||||||||
| Data not available | 279 | 24 | 50 | 14 | 3 | ||||||||||||||||||||||||
| $ | 18,399 | $ | 1,896 | $ | 1,625 | $ | 2,294 | $ | 221 |
| December 31, 2021 | |||||||||||||||||||||||||||||
| Residential First Mortgage | Home Equity Lines of Credit | Home Equity Loans | |||||||||||||||||||||||||||
| 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.
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 $409 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 decreased $158 million from year-end 2021 primarily driven by the sale of $1.2 billion of unsecured consumer loans at the end of the third quarter of 2022 largely offset by increases in consumer home improvement loans 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" .
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 of September 30, 2022 compared to $1.6 billion at December 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
| Allowance for Credit Losses | |||||
| (In millions) | |||||
| Allowance for credit losses, January 1, 2022 | $ | 1,574 | |||
| Net charge-offs | (46) | ||||
| Provision over (less than) net charge-offs: | |||||
| Economic/Qualitative | (54) | ||||
| Other portfolio changes (1) | 18 | ||||
| Total provision over (less than) net charge-offs | (82) | ||||
| Allowance for credit losses, March 31, 2022 | $ | 1,492 | |||
| Allowance for credit losses, April 1, 2022 | $ | 1,492 | |||
| Net charge-offs | (38) | ||||
| Provision over (less than) net charge-offs: | |||||
| Economic/Qualitative (2) | (2) | ||||
| Other portfolio changes (1) | 62 | ||||
| Total provision over (less than) net charge-offs | 22 | ||||
| Allowance for credit losses, June 30, 2022 | $ | 1,514 | |||
| Allowance for credit losses, July 1, 2022 | $ | 1,514 | |||
| Net charge-offs | (110) | ||||
| Provision over (less than) net charge-offs: | |||||
| Economic/Qualitative (3) | 40 | ||||
| Net provision benefit from the sale of unsecured consumer loans (4) | (31) | ||||
| Other portfolio changes (1) | 126 | ||||
| Total provision over (less than) net charge-offs | 25 | ||||
| Allowance for credit losses, September 30, 2022 | $ | 1,539 |
(1)This line item includes the net impact of portfolio growth, portfolio run-off, pay-downs, changes in the mix of total outstanding loans, and credit quality changes. This line item excludes the impact of PPP loans of $177 million as of September 30, 2022, $254 million as of June 30, 2022 and $437 million as of March 31, 2022, which are fully backed by the U.S. government and have an immaterial associated allowance.
(2)Includes pandemic-related qualitative adjustments.
(3)Includes an incremental provision for estimated hurricane-related loan losses of $20 million for the third quarter of 2022.
(4)At the end of the third quarter of 2022, the Company sold certain unsecured consumer loans with an associated allowance of $94 million at the time of the sale. There was a $63 million fair value mark recorded through charge-offs in conjunction with the sale, which resulted in a net provision benefit of $31 million associated with the sale.
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. In the third quarter of 2022 asset quality remained broadly stable, with some metric normalization. Total net charge-offs increased 29 basis points to 0.46 percent of annualized loans, however, excluding the impact of the consumer loan sale, adjusted net charge-offs (non-GAAP) increased by 2 basis points. See Table 18 "GAAP to Non-GAAP Reconciliations" for further details. Commercial and investor real estate criticized balances increased approximately $461 million and classified balances increased by $243 million compared to the second quarter of 2022. Non-performing loans, excluding held for sale, and non-performing assets also increased by $126 million and $128 million, respectively, compared to the second quarter of 2022.
Regions' September 2022 baseline forecast deteriorated slightly compared to the June 2022 forecast driven by a small decline in real GDP growth. The September 2022 baseline forecast continues to anticipate 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 infrastructure spending to support long-term business investment. While the baseline forecast continues to
anticipate a strong HPI, quarter over quarter growth is expected to decelerate in the fourth quarter of 2022 and into 2023 compared to double-digit levels experienced in recent quarters. As measured by CPI, inflation is expected to remain above the FOMC's 2.0 percent target for the remainder of 2022 and into 2024. Furthermore, ongoing disruptions in supply chains and shipping networks, further increases in elevated inflation, and heightened financial volatility 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 the U.S. as a whole. In deriving its September 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 of September 30, 2022. The unemployment rate is the most significant macroeconomic factor among the allowance models. The unemployment rate in the third quarter continued to be lower than pre-pandemic levels with forecasted periods expected to remain relatively consistent.
Table 7— Macroeconomic Factors in the Forecast
| Pre-R&S Period | Base R&S Forecast | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2022 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3Q2022 | 4Q2022 | 1Q2023 | 2Q2023 | 3Q2023 | 4Q2023 | 1Q2024 | 2Q2024 | 3Q2024 | |||||||||||||||||||||||||||||||||||||||||||||
| Real GDP, annualized % change | 1.8 | % | 1.0 | % | 1.2 | % | 1.2 | % | 1.4 | % | 1.5 | % | 1.6 | % | 1.9 | % | 1.9 | % | |||||||||||||||||||||||||||||||||||
| Unemployment rate | 3.6 | % | 3.6 | % | 3.6 | % | 3.7 | % | 3.9 | % | 4.0 | % | 4.1 | % | 4.2 | % | 4.2 | % | |||||||||||||||||||||||||||||||||||
| HPI, year-over-year % change | 12.6 | % | 7.6 | % | 2.4 | % | (0.9) | % | (0.7) | % | 0.2 | % | 0.7 | % | 1.4 | % | 2.2 | % | |||||||||||||||||||||||||||||||||||
| S&P 500 | 4,018 | 4,098 | 4,109 | 4,168 | 4,249 | 4,330 | 4,417 | 4,515 | 4,607 | ||||||||||||||||||||||||||||||||||||||||||||
| CPI, year-over-year % change | 8.3 | % | 7.5 | % | 6.6 | % | 5.0 | % | 4.3 | % | 3.7 | % | 2.8 | % | 2.3 | % | 2.1 | % |
In the third quarter of 2022, asset quality remained broadly stable; however, select sectors of the business portfolio began to show softness or normalization. This normalization combined with loan growth, partially offset by a net reserve release due to the sale of unsecured consumer loans, resulted in a modest increase to the modeled results in the allowance for credit losses.
Adjustments to modeled results include a $20 million reserve for Hurricane Ian. At the end of the third quarter of 2022, Hurricane Ian impacted states within Regions' footprint, especially Florida and South Carolina. The hurricane caused significant flood and wind damage, resulting in loss of life, property and power. Due to the proximity of the hurricane to quarter-end, Regions is still assessing all aspects of the impact to customers. A full evaluation of the storm-related impact may take several months. As such, the availability of additional or different information affecting customers in the hurricane-impacted areas could cause the allowance to be increased or decreased in future periods.
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. The September 30, 2022 general imprecision allowance remained relatively flat compared to the second quarter of 2022 and reflects continued uncertainty in the economic environment, heightened financial volatility and supply chain issues.
Based on the overall analysis performed, management deemed an allowance of $1.5 billion to be appropriate to absorb expected credit losses in the loan and credit commitment portfolios as of September 30, 2022.
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 increased $34 million year-over-year, primarily driven by an increase in net charge-offs in the other consumer portfolio due to the sale of unsecured consumer loans at the end of the third quarter of 2022. See Table 18 "GAAP to Non-GAAP Reconciliations" for further details. Also contributing to the increase in other consumer net charge offs is $27 million in net charge-offs from the addition of the EnerBank portfolio during the first nine months of 2022. Partially offsetting the year-over-year increase in consumer net charge-offs are declines in the commercial and industrial and commercial investor real estate mortgage portfolios. 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
| Nine Months Ended September 30 | |||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Allowance for loan losses at January 1 | $ | 1,479 | $ | 2,167 | |||||||||||||
| Loans charged-off: | |||||||||||||||||
| Commercial and industrial | 64 | 101 | |||||||||||||||
| Commercial real estate mortgage—owner-occupied | 4 | 3 | |||||||||||||||
| Commercial real estate construction—owner-occupied | — | 1 | |||||||||||||||
| Commercial investor real estate mortgage | — | 19 | |||||||||||||||
| Residential first mortgage | 1 | 1 | |||||||||||||||
| Home equity lines | 4 | 5 | |||||||||||||||
| Home equity loans | 1 | 1 | |||||||||||||||
| Consumer credit card | 29 | 33 | |||||||||||||||
| Other consumer—exit portfolios | 14 | 25 | |||||||||||||||
| Other consumer | 165 | 67 | |||||||||||||||
| 282 | 256 | ||||||||||||||||
| Recoveries of loans previously charged-off: | |||||||||||||||||
| Commercial and industrial | 37 | 44 | |||||||||||||||
| Commercial real estate mortgage—owner-occupied | 2 | 3 | |||||||||||||||
| Commercial real estate construction—owner-occupied | — | — | |||||||||||||||
| Commercial investor real estate mortgage | 1 | 3 | |||||||||||||||
| Residential first mortgage | 4 | 3 | |||||||||||||||
| Home equity lines | 9 | 11 | |||||||||||||||
| Home equity loans | 2 | 3 | |||||||||||||||
| Consumer credit card | 6 | 8 | |||||||||||||||
| Other consumer—exit portfolios | 4 | 5 | |||||||||||||||
| Other consumer | 23 | 16 | |||||||||||||||
| 88 | 96 | ||||||||||||||||
| Net charge-offs (recoveries): | |||||||||||||||||
| Commercial and industrial | 27 | 57 | |||||||||||||||
| Commercial real estate mortgage—owner-occupied | 2 | — | |||||||||||||||
| Commercial real estate construction—owner-occupied | — | 1 | |||||||||||||||
| Commercial investor real estate mortgage | (1) | 16 | |||||||||||||||
| Residential first mortgage | (3) | (2) | |||||||||||||||
| Home equity lines | (5) | (6) | |||||||||||||||
| Home equity loans | (1) | (2) | |||||||||||||||
| Consumer credit card | 23 | 25 | |||||||||||||||
| Other consumer—exit portfolios | 10 | 20 | |||||||||||||||
| Other consumer | 142 | 51 | |||||||||||||||
| 194 | 160 | ||||||||||||||||
| Provision for (benefit from) loan losses | 133 | (579) | |||||||||||||||
| Allowance for loan losses at September 30 | 1,418 | 1,428 | |||||||||||||||
| Reserve for unfunded credit commitments at January 1 | 95 | 126 | |||||||||||||||
| Provision for (benefit from) unfunded credit losses | 26 | (55) | |||||||||||||||
| Reserve for unfunded credit commitments at September 30 | 121 | 71 | |||||||||||||||
| Allowance for credit losses at September 30 | $ | 1,539 | $ | 1,499 | |||||||||||||
| Loans, net of unearned income, outstanding at end of period | $ | 94,711 | $ | 83,270 | |||||||||||||
| Average loans, net of unearned income, outstanding for the period | $ | 91,112 | $ | 84,214 | |||||||||||||
| Nine Months Ended September 30 | |||||||||||||||||
| 2022 | 2021 | ||||||||||||||||
| (Dollars in millions) | |||||||||||||||||
| Net loan charge-offs (recoveries) as a % of average loans, annualized (1): | |||||||||||||||||
| Commercial and industrial | 0.08 | % | 0.18 | % | |||||||||||||
| Commercial real estate mortgage—owner-occupied | 0.06 | % | — | % | |||||||||||||
| Commercial real estate construction—owner-occupied | (0.04) | % | 0.50 | % | |||||||||||||
| Total commercial | 0.08 | % | 0.16 | % | |||||||||||||
| Commercial investor real estate mortgage | (0.02) | % | 0.40 | % | |||||||||||||
| Total investor real estate | (0.02) | % | 0.30 | % | |||||||||||||
| Residential first mortgage | (0.02) | % | (0.02) | % | |||||||||||||
| Home equity—lines of credit | (0.19) | % | (0.20) | % | |||||||||||||
| Home equity—closed-end | (0.07) | % | (0.09) | % | |||||||||||||
| Consumer credit card | 2.64 | % | 2.97 | % | |||||||||||||
| Other consumer—exit portfolios | 1.58 | % | 1.71 | % | |||||||||||||
| Other consumer | 3.29 | % | 3.00 | % | |||||||||||||
| Total consumer | 0.70 | % | 0.40 | % | |||||||||||||
| Total | 0.28 | % | 0.25 | % | |||||||||||||
| Ratios: | |||||||||||||||||
| Allowance for credit losses at end of period to loans, net of unearned income | 1.63 | % | 1.80 | % | |||||||||||||
| Allowance for loan losses at end of period to loans, net of unearned income | 1.50 | % | 1.71 | % | |||||||||||||
| Allowance for credit losses at end of period to non-performing loans, excluding loans held for sale | 311 | % | 283 | % | |||||||||||||
| Allowance for loan losses at end of period to non-performing loans, excluding loans held for sale | 287 | % | 269 | % | |||||||||||||
(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
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||||||||||||||
| Loan Balance | Allowance Allocation | Allowance to Loans % (1) | Loan Balance | Allowance Allocation | Allowance to Loans % (1) | ||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 49,591 | $ | 622 | 1.3 | % | $ | 43,758 | $ | 613 | 1.4 | % | |||||||||||||||||||||||
| Commercial real estate mortgage—owner-occupied | 5,167 | 107 | 2.1 | % | 5,287 | 118 | 2.2 | % | |||||||||||||||||||||||||||
| Commercial real estate construction—owner-occupied | 282 | 6 | 2.3 | % | 264 | 9 | 3.5 | % | |||||||||||||||||||||||||||
| Total commercial | 55,040 | 735 | 1.3 | % | 49,309 | 740 | 1.5 | % | |||||||||||||||||||||||||||
| Commercial investor real estate mortgage | 6,295 | 98 | 1.6 | % | 5,441 | 77 | 1.4 | % | |||||||||||||||||||||||||||
| Commercial investor real estate construction | 1,824 | 18 | 1.0 | % | 1,586 | 10 | 0.6 | % | |||||||||||||||||||||||||||
| Total investor real estate | 8,119 | 116 | 1.4 | % | 7,027 | 87 | 1.2 | % | |||||||||||||||||||||||||||
| Residential first mortgage | 18,399 | 123 | 0.7 | % | 17,512 | 122 | 0.7 | % | |||||||||||||||||||||||||||
| Home equity lines | 3,521 | 73 | 2.1 | % | 3,744 | 83 | 2.2 | % | |||||||||||||||||||||||||||
| Home equity loans | 2,515 | 27 | 1.1 | % | 2,510 | 28 | 1.1 | % | |||||||||||||||||||||||||||
| Consumer credit card | 1,186 | 130 | 10.9 | % | 1,184 | 120 | 10.2 | % | |||||||||||||||||||||||||||
| Other consumer—exit portfolios | 662 | 43 | 6.4 | % | 1,071 | 64 | 6.0 | % | |||||||||||||||||||||||||||
| Other consumer | 5,269 | 292 | 5.5 | % | 5,427 | 330 | 6.1 | % | |||||||||||||||||||||||||||
| Total consumer | 31,552 | 688 | 2.2 | % | 31,448 | 747 | 2.4 | % | |||||||||||||||||||||||||||
| Total | $ | 94,711 | $ | 1,539 | 1.6 | % | $ | 87,784 | $ | 1,574 | 1.8 | % | |||||||||||||||||||||||
(1)Amounts have been calculated using whole dollar values.
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 beginning March 1, 2020 through January 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 the December 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
| September 30, 2022 | December 31, 2021 | ||||||||||||||||||||||
| Loan Balance | Allowance for Credit Losses | Loan Balance | Allowance for Credit Losses | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Accruing: | |||||||||||||||||||||||
| Commercial | $ | 60 | $ | 4 | $ | 81 | $ | 4 | |||||||||||||||
| Investor real estate | 27 | 1 | 1 | — | |||||||||||||||||||
| Residential first mortgage | 291 | 31 | 220 | 31 | |||||||||||||||||||
| Home equity lines | 26 | 4 | 28 | 3 | |||||||||||||||||||
| Home equity loans | 53 | 8 | 58 | 8 | |||||||||||||||||||
| Other consumer | 2 | — | 4 | — | |||||||||||||||||||
| 459 | 48 | 392 | 46 | ||||||||||||||||||||
| Non-accrual status or 90 days past due and still accruing: | |||||||||||||||||||||||
| Commercial | 87 | 12 | 87 | 14 | |||||||||||||||||||
| Residential first mortgage | 30 | 4 | 31 | 5 | |||||||||||||||||||
| Home equity lines | 3 | — | 2 | — | |||||||||||||||||||
| Home equity loans | 5 | 1 | 6 | 1 | |||||||||||||||||||
| 125 | 17 | 126 | 20 | ||||||||||||||||||||
| Total TDRs - Loans | $ | 584 | $ | 65 | $ | 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.
Table 11—Analysis of Changes in Commercial and Investor Real Estate TDRs
| Nine Months Ended September 30, 2022 | Nine Months Ended September 30, 2021 | ||||||||||||||||||||||
| Commercial | Investor Real Estate | Commercial | Investor Real Estate | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Balance, beginning of period | $ | 168 | $ | 1 | $ | 201 | $ | 44 | |||||||||||||||
| Additions | 94 | 35 | 53 | 71 | |||||||||||||||||||
| Charge-offs | (5) | — | (9) | — | |||||||||||||||||||
| Foreclosure | (1) | — | — | — | |||||||||||||||||||
| Other activity, inclusive of payments and removals (1) | (109) | (9) | (85) | (87) | |||||||||||||||||||
| Balance, end of period | $ | 147 | $ | 27 | $ | 160 | $ | 28 |
(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.
NON-PERFORMING ASSETS
The following table presents non-performing assets as of September 30, 2022 and December 31, 2021:
Table 12—Non-Performing Assets
| September 30, 2022 | December 31, 2021 | |||||||||||||
| (Dollars in millions) | ||||||||||||||
| Non-performing loans: | ||||||||||||||
| Commercial and industrial | $ | 333 | $ | 305 | ||||||||||
| Commercial real estate mortgage—owner-occupied | 29 | 52 | ||||||||||||
| Commercial real estate construction—owner-occupied | 6 | 11 | ||||||||||||
| Total commercial | 368 | 368 | ||||||||||||
| Commercial investor real estate mortgage | 59 | 3 | ||||||||||||
| Total investor real estate | 59 | 3 | ||||||||||||
| Residential first mortgage | 29 | 33 | ||||||||||||
| Home equity lines | 32 | 40 | ||||||||||||
| Home equity loans | 7 | 7 | ||||||||||||
| Total consumer | 68 | 80 | ||||||||||||
| Total non-performing loans, excluding loans held for sale | 495 | 451 | ||||||||||||
| Non-performing loans held for sale | 2 | 13 | ||||||||||||
| Total non-performing loans(1) | 497 | 464 | ||||||||||||
| Foreclosed properties | 14 | 10 | ||||||||||||
| Total non-performing assets(1) | $ | 511 | $ | 474 | ||||||||||
| Accruing loans 90 days past due: | ||||||||||||||
| Commercial and industrial | $ | 4 | $ | 5 | ||||||||||
| Commercial real estate mortgage—owner-occupied | — | 1 | ||||||||||||
| Total commercial | 4 | 6 | ||||||||||||
| Residential first mortgage(2) | 50 | 74 | ||||||||||||
| Home equity lines | 17 | 21 | ||||||||||||
| Home equity loans | 8 | 12 | ||||||||||||
| Consumer credit card | 13 | 12 | ||||||||||||
| Other consumer-exit portfolios | 1 | 2 | ||||||||||||
| Other consumer | 12 | 13 | ||||||||||||
| Total consumer | 101 | 134 | ||||||||||||
| $ | 105 | $ | 140 | |||||||||||
| Non-performing loans(1) to loans and non-performing loans held for sale | 0.52 | % | 0.53 | % | ||||||||||
| Non-performing assets(1) to loans, foreclosed properties, and non-performing loans held for sale | 0.54 | % | 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 to Ginnie Mae where Regions has the right but not the obligation to repurchase. Total 90 days or more past due guaranteed loans excluded were $26 million at September 30, 2022 and $49 million at December 31, 2021.
Non-performing loans at September 30, 2022 increased compared to year-end levels, primarily driven by increases in certain commercial segments exhibiting signs of stress including administrative, support, waste and repair, agriculture, business offices, healthcare, and manufacturing. The increases were partially offset by improvements in the energy, restaurant, accommodation and lodging, and utilities industry segments.
Economic trends such as interest rates, unemployment, volatility in commodity prices, collateral valuations, and further analysis of hurricane exposures will impact the future level of non-performing assets. Circumstances related to individually large credits could also result in volatility.
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 Nine Months Ended September 30, 2022 | |||||||||||||||||||||||
| Commercial | Investor Real Estate | Consumer**(1)** | Total | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Balance at beginning of period | $ | 368 | $ | 3 | $ | 80 | $ | 451 | |||||||||||||||
| Additions | 326 | 58 | — | 384 | |||||||||||||||||||
| Net payments/other activity | (102) | — | (12) | (114) | |||||||||||||||||||
| Return to accrual | (148) | — | — | (148) | |||||||||||||||||||
| Charge-offs on non-accrual loans(2) | (61) | — | — | (61) | |||||||||||||||||||
| Transfers to held for sale(3) | (12) | — | — | (12) | |||||||||||||||||||
| Transfers to real estate owned | (3) | — | — | (3) | |||||||||||||||||||
| Sales | — | (2) | — | (2) | |||||||||||||||||||
| Balance at end of period | $ | 368 | $ | 59 | $ | 68 | $ | 495 |
| Non-Accrual Loans, Excluding Loans Held for Sale Nine Months Ended September 30, 2021 | |||||||||||||||||||||||
| Commercial | Investor Real Estate | Consumer**(1)** | Total | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Balance at beginning of period | $ | 524 | $ | 114 | $ | 107 | $ | 745 | |||||||||||||||
| Additions | 379 | 4 | — | 383 | |||||||||||||||||||
| Net payments/other activity | (242) | (1) | (19) | (262) | |||||||||||||||||||
| Return to accrual | (116) | — | — | (116) | |||||||||||||||||||
| Charge-offs on non-accrual loans(2) | (92) | (19) | — | (111) | |||||||||||||||||||
| Transfers to held for sale(3) | (13) | (94) | — | (107) | |||||||||||||||||||
| Transfers to real estate owned | (2) | — | — | (2) | |||||||||||||||||||
| Balance at end of period | $ | 438 | $ | 4 | $ | 88 | $ | 530 |
(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.
GOODWILL
Goodwill totaled $5.7 billion at both September 30, 2022 and December 31, 2021. 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 December 31, 2021 for the methodologies and assumptions used in the goodwill impairment analysis.
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
| September 30, 2022 | December 31, 2021 | ||||||||||||||||
| (In millions) | |||||||||||||||||
| Non-interest-bearing demand | $ | 54,996 | $ | 58,369 | |||||||||||||
| Interest-bearing checking | 26,500 | 28,018 | |||||||||||||||
| Savings | 16,083 | 15,134 | |||||||||||||||
| Money market—domestic | 32,444 | 31,408 | |||||||||||||||
| Time deposits | 5,355 | 6,143 | |||||||||||||||
| Total deposits | $ | 135,378 | $ | 139,072 | |||||||||||||
Total deposits at September 30, 2022 decreased approximately $3.7 billion compared to year-end 2021 levels, as trends have largely returned to the seasonal deposit patterns observed prior to the pandemic. The declines in non-interest bearing demand and interest-bearing checking accounts were primarily driven by corporate and wealth management customers continuing to reduce excess balances accumulated over the past two years. With recent increases in market interest rates, corporate customers have experienced some remixing into higher-yielding deposit accounts which contributed to the increases in savings and money market accounts. Consumer balances have increased across all account types due to seasonality, which partially offset the declines in non-interest-bearing demand and interest-bearing checking accounts and further contributed to the increases in savings and money market accounts. The decrease in time deposits was driven by a decline in accounts acquired through EnerBank as these deposits are not being replaced when they mature.
LONG-TERM BORROWINGS
Table 15—Long-Term Borrowings
| September 30, 2022 | December 31, 2021 | ||||||||||
| (In millions) | |||||||||||
| Regions Financial Corporation (Parent): | |||||||||||
| 2.25% senior notes due May 2025 | $ | 747 | $ | 746 | |||||||
| 1.80% senior notes due August 2028 | 645 | 645 | |||||||||
| 7.75% subordinated notes due September 2024 | 100 | 100 | |||||||||
| 6.75% subordinated debentures due November 2025 | 154 | 154 | |||||||||
| 7.375% subordinated notes due December 2037 | 298 | 298 | |||||||||
| Valuation adjustments on hedged long-term debt | (168) | (34) | |||||||||
| 1,776 | 1,909 | ||||||||||
| Regions Bank: | |||||||||||
| 6.45% subordinated notes due June 2037 | 496 | 496 | |||||||||
| Other long-term debt | 2 | 2 | |||||||||
| 498 | 498 | ||||||||||
| Total consolidated | $ | 2,274 | $ | 2,407 |
Long-term borrowings decreased by approximately $133 million since year-end 2021 due to valuation adjustments. See the "Liquidity" section for further detail of Regions' borrowing capacity with the FHLB, which is currently not being utilized.
SHAREHOLDERS’ EQUITY
Shareholders’ equity was $15.2 billion at September 30, 2022 compared to $18.3 billion at December 31, 2021. During the first nine months of 2022, net income increased shareholders' equity by $1.6 billion, cash dividends on common stock reduced shareholders' equity by $505 million, and cash dividends on preferred stock reduced shareholders' equity by $74 million. Changes in AOCI decreased shareholders' equity by $3.9 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 nine months ended September 30, 2022. Common stock repurchased during the first nine months of 2022 decreased shareholders' equity $230 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. At December 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. At September 30, 2022, the net impact of the add-back on CET1 was approximately $306 million, or approximately 25 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
| September 30, 2022 Ratio (1) | December 31, 2021 Ratio | Minimum Requirement | To Be Well Capitalized | ||||||||||||||||||||
| Common equity Tier 1 capital: | |||||||||||||||||||||||
| Regions Financial Corporation | 9.29 | % | 9.57 | % | 4.50 | % | N/A | ||||||||||||||||
| Regions Bank | 10.66 | 11.05 | 4.50 | 6.50 | % | ||||||||||||||||||
| Tier 1 capital: | |||||||||||||||||||||||
| Regions Financial Corporation | 10.62 | % | 11.03 | % | 6.00 | % | 6.00 | % | |||||||||||||||
| Regions Bank | 10.66 | 11.05 | 6.00 | 8.00 | |||||||||||||||||||
| Total capital: | |||||||||||||||||||||||
| Regions Financial Corporation | 12.25 | % | 12.74 | % | 8.00 | % | 10.00 | % | |||||||||||||||
| Regions Bank | 11.96 | 12.38 | 8.00 | 10.00 | |||||||||||||||||||
| Leverage capital: | |||||||||||||||||||||||
| Regions Financial Corporation | 8.48 | % | 8.08 | % | 4.00 | % | N/A | ||||||||||||||||
| Regions Bank | 8.52 | 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.
Regions participates in supervisory stress testing conducted by the Federal Reserve and its SCB is currently floored at 2.5 percent. See Note 5 "Shareholders' Equity and Accumulated Other Comprehensive Income" to the consolidated financial statements for further details regarding CCAR results.
See the "Third Quarter Overview" section for details on expectations of a range for CET1.
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 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.
RATINGS
Table 17 "Credit Ratings" reflects the debt ratings information of Regions Financial Corporation and Regions Bank by Standard and Poor's ("S&P"), Moody’s, Fitch and Dominion Bond Rating Service ("DBRS").
Table 17—Credit Ratings
| As of September 30, 2022 | ||||||||||||||
| S&P | Moody’s | Fitch | DBRS | |||||||||||
| Regions Financial Corporation | ||||||||||||||
| Senior unsecured debt | BBB+ | Baa1 | BBB+ | AL | ||||||||||
| Subordinated debt | BBB | Baa1 | BBB | BBBH | ||||||||||
| Regions Bank | ||||||||||||||
| Short-term | A-2 | P-1 | F1 | R-IL | ||||||||||
| Long-term bank deposits | N/A | A1 | A- | A | ||||||||||
| Senior unsecured debt | A- | Baa1 | BBB+ | A | ||||||||||
| Subordinated debt | BBB+ | Baa1 | BBB | AL | ||||||||||
| Outlook | Stable | Stable | Positive | Positive |
N/A - Not applicable.
On October 14, 2022, Fitch upgraded Regions' long-term issuer default rating and senior unsecured debt ratings to A- from BBB+, subordinated debt rating to BBB+ from BBB, and changed the Outlook to Stable from Positive citing the Company's strong earnings power and improved risk profile. Additionally, Regions Bank's senior unsecured debt rating was upgraded to A- from BBB+, the long-term bank deposits rating was upgraded to A from A-, and the subordinated debt rating was upgraded to BBB+ from BBB.
In general, ratings agencies base their ratings on many quantitative and qualitative factors, including capital adequacy, liquidity, asset quality, business mix, probability of government support, and level and quality of earnings. Any downgrade in credit ratings by one or more ratings agencies may impact Regions in several ways, including, but not limited to, Regions’ access to the capital markets or short-term funding, borrowing cost and capacity, collateral requirements, and acceptability of its letters of credit, thereby potentially adversely impacting Regions’ financial condition and liquidity. See the “Risk Factors” section in the 2021 Annual Report on Form 10-K for more information.
A security rating is not a recommendation to buy, sell or hold securities, and the ratings are subject to revision or withdrawal at any time by the assigning rating agency. Each rating should be evaluated independently of any other rating. Additional information on the credit rating ranking within the overall classification system is located on the website of each credit rating agency.
NON-GAAP MEASURES
The table below presents computations of earnings and certain other financial measures, which excludes certain adjustments that are included in the financial results presented in accordance with GAAP. These non-GAAP financial measures include "adjusted net loan charge-offs", "adjusted net loan charge-offs as a percent of average loans, annualized", “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 comparison, 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
Net loan charge-offs (GAAP) are presented excluding adjustments to arrive at adjusted net loan-charge offs (non-GAAP). Adjusted net loan charge-offs as a percentage of average loans (non-GAAP) are calculated as adjusted net loan charge-offs (non-GAAP) divided by average loans (GAAP) and annualized. 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 calculated as the year over year percentage change in adjusted total revenue on a taxable-equivalent basis (non-GAAP) less the year over year percentage change in adjusted total non-interest expense (non-GAAP). 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 certain adjustments does not represent the amount that effectively accrues directly to shareholders.
The following tables provide: 1) a reconciliation of net loan charge-offs (GAAP) to adjusted net loan charge-offs (non-GAAP), 2) a computation of adjusted net loan charge-offs as a percentage of average loans, annualized (non-GAAP), 3) a reconciliation of non-interest expense (GAAP) to adjusted non-interest expense (non-GAAP), 4) a reconciliation of non-interest income (GAAP) to adjusted non-interest income (non-GAAP), 5) a computation of adjusted total revenue (non-GAAP), 6) a computation of adjusted total revenue on a taxable-equivalent basis (non-GAAP) and 7) presentation of the operating leverage ratio (GAAP) and the adjusted operating leverage ratio (non-GAAP).
Table 18—GAAP to Non-GAAP Reconciliations
| Nine Months Ended September 30 | |||||||||||
| 2022 | 2021 | ||||||||||
| (Dollars in millions) | |||||||||||
| ADJUSTED NET CHARGE-OFFS AND RATIO | |||||||||||
| Net loan charge-offs (GAAP) | $ | 194 | $ | 160 | |||||||
| Less: charge-offs associated with the sale of unsecured consumer loans (1) | 63 | — | |||||||||
| Adjusted net loan charge-offs (non-GAAP) | $ | 131 | $ | 160 | |||||||
| Average loans, net of unearned income, outstanding for the period (GAAP) | $ | 91,112 | $ | 84,214 | |||||||
| Adjusted net loan charge-offs as a percentage of average loans, annualized (non-GAAP) (2) | 0.19 | % | 0.25 | % |
(1)At the end of the third quarter of 2022, the Company made the strategic decision to sell certain unsecured consumer loans. These loans were marked down to fair value through net charge-offs.
(2)Amounts have been calculated using whole dollar values.
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||
| 2022 | 2021 | 2022 | 2021 | |||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||
| ADJUSTED REVENUE AND OPERATING LEVERAGE RATIOS | ||||||||||||||||||||||||||
| Non-interest expense (GAAP) | A | $ | 1,170 | $ | 938 | $ | 3,051 | $ | 2,764 | |||||||||||||||||
| Adjustments: | ||||||||||||||||||||||||||
| Contribution to Regions' Financial Corporation foundation | — | — | — | (3) | ||||||||||||||||||||||
| Branch consolidation, property and equipment charges | (3) | — | 2 | (5) | ||||||||||||||||||||||
| Salary and employee benefits—severance charges | — | — | — | (5) | ||||||||||||||||||||||
| Loss on early extinguishment of debt | — | (20) | — | (20) | ||||||||||||||||||||||
| Professional, legal and regulatory expenses (1) | (179) | — | (179) | — | ||||||||||||||||||||||
| Adjusted non-interest expense (non-GAAP) | B | $ | 988 | $ | 918 | $ | 2,874 | $ | 2,731 | |||||||||||||||||
| Net interest income (GAAP) | C | $ | 1,262 | $ | 965 | $ | 3,385 | $ | 2,895 | |||||||||||||||||
| Taxable-equivalent adjustment (GAAP) | 12 | 11 | 34 | 34 | ||||||||||||||||||||||
| Net interest income, taxable-equivalent basis (GAAP) | D | $ | 1,274 | $ | 976 | $ | 3,419 | $ | 2,929 | |||||||||||||||||
| Non-interest income (GAAP) | E | $ | 605 | $ | 649 | $ | 1,829 | $ | 1,909 | |||||||||||||||||
| Adjustments: | ||||||||||||||||||||||||||
| Securities (gains) losses, net | 1 | (1) | 1 | (3) | ||||||||||||||||||||||
| Gain on equity investment | — | — | — | (3) | ||||||||||||||||||||||
| Leveraged lease termination gains | — | (2) | (1) | (2) | ||||||||||||||||||||||
| Bank owned life insurance (2) | — | — | — | (18) | ||||||||||||||||||||||
| Adjusted non-interest income (non-GAAP) | F | $ | 606 | $ | 646 | $ | 1,829 | $ | 1,883 | |||||||||||||||||
| Total revenue | C+E=G | $ | 1,867 | $ | 1,614 | $ | 5,214 | $ | 4,804 | |||||||||||||||||
| Adjusted total revenue (non-GAAP) | C+F=H | $ | 1,868 | $ | 1,611 | $ | 5,214 | $ | 4,778 | |||||||||||||||||
| Total revenue, taxable-equivalent basis (GAAP) | D+E=I | $ | 1,879 | $ | 1,625 | $ | 5,248 | $ | 4,838 | |||||||||||||||||
| Adjusted total revenue, taxable-equivalent basis (non-GAAP) | D+F=J | $ | 1,880 | $ | 1,622 | $ | 5,248 | $ | 4,812 | |||||||||||||||||
| Operating leverage ratio (GAAP) (3) | (1.9) | % | 0.2 | % | ||||||||||||||||||||||
| Adjusted operating leverage ratio (non-GAAP) (3) | 3.9 | % | 0.3 | % |
(1)In the third quarter of 2022, the Company incurred settlement expenses related to a previously disclosed matter with the CFPB.
(2)During the second quarter of 2021, the Company recognized an individual BOLI claim benefit, which is a tax-fee gain.
(3)Amounts have been calculated using whole dollar values.
OPERATING RESULTS
NET INTEREST INCOME AND MARGIN
Table 19—Consolidated Average Daily Balances and Yield/Rate Analysis
| Three Months Ended September 30 | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| Average Balance | Income/ Expense | Yield/ Rate (1) | Average Balance | Income/ Expense | Yield/ Rate (1) | ||||||||||||||||||||||||||||||
| (Dollars in millions; yields on taxable-equivalent basis) | |||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||
| Earning assets: | |||||||||||||||||||||||||||||||||||
| Federal funds sold and securities purchased under agreements to resell | $ | 1 | $ | — | 2.43 | % | $ | 2 | $ | — | 0.18 | % | |||||||||||||||||||||||
| Debt securities (2) | 32,101 | 171 | 2.12 | 29,308 | 135 | 1.85 | |||||||||||||||||||||||||||||
| Loans held for sale | 539 | 8 | 6.09 | 1,044 | 7 | 2.64 | |||||||||||||||||||||||||||||
| Loans, net of unearned income (3)(4) | 94,684 | 1,084 | 4.53 | 83,350 | 858 | 4.07 | |||||||||||||||||||||||||||||
| Interest-bearing deposits in other banks | 14,353 | 81 | 2.25 | 25,144 | 9 | 0.15 | |||||||||||||||||||||||||||||
| Other earning assets | 1,379 | 11 | 3.34 | 1,303 | 8 | 2.06 | |||||||||||||||||||||||||||||
| Total earning assets | 143,057 | 1,355 | 3.76 | 140,151 | 1,017 | 2.88 | |||||||||||||||||||||||||||||
| Unrealized gains/(losses) on securities available for sale, net (2) | (2,389) | 674 | |||||||||||||||||||||||||||||||||
| Allowance for loan losses | (1,432) | (1,581) | |||||||||||||||||||||||||||||||||
| Cash and due from banks | 2,291 | 1,937 | |||||||||||||||||||||||||||||||||
| Other non-earning assets | 16,895 | 14,449 | |||||||||||||||||||||||||||||||||
| $ | 158,422 | $ | 155,630 | ||||||||||||||||||||||||||||||||
| Liabilities and Shareholders’ Equity | |||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Savings | $ | 16,176 | 5 | 0.11 | $ | 14,328 | 4 | 0.13 | |||||||||||||||||||||||||||
| Interest-bearing checking | 26,665 | 22 | 0.33 | 25,277 | 2 | 0.03 | |||||||||||||||||||||||||||||
| Money market | 31,520 | 17 | 0.22 | 30,765 | 2 | 0.02 | |||||||||||||||||||||||||||||
| Time deposits | 5,351 | 6 | 0.45 | 4,527 | 7 | 0.55 | |||||||||||||||||||||||||||||
| Other deposits | — | — | — | 1 | — | 1.50 | |||||||||||||||||||||||||||||
| Total interest-bearing deposits (5) | 79,712 | 50 | 0.25 | 74,898 | 15 | 0.08 | |||||||||||||||||||||||||||||
| Other short-term borrowings | 30 | — | 0.23 | — | — | — | |||||||||||||||||||||||||||||
| Long-term borrowings | 2,319 | 31 | 5.39 | 2,774 | 26 | 3.65 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 82,061 | 81 | 0.39 | 77,672 | 41 | 0.20 | |||||||||||||||||||||||||||||
| Non-interest-bearing deposits (5) | 55,806 | — | — | 56,999 | — | — | |||||||||||||||||||||||||||||
| Total funding sources | 137,867 | 81 | 0.23 | 134,671 | 41 | 0.12 | |||||||||||||||||||||||||||||
| Net interest spread (2) | 3.36 | 2.67 | |||||||||||||||||||||||||||||||||
| Other liabilities | 4,082 | 2,506 | |||||||||||||||||||||||||||||||||
| Shareholders’ equity | 16,473 | 18,453 | |||||||||||||||||||||||||||||||||
| $ | 158,422 | $ | 155,630 | ||||||||||||||||||||||||||||||||
| Net interest income /margin on a taxable-equivalent basis (6) | $ | 1,274 | 3.53 | % | $ | 976 | 2.76 | % | |||||||||||||||||||||||||||
(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)Interest income on loans, net of unearned income, includes hedging income of zero for the three months ended September 30, 2022 and $108 million for the three months ended September 30, 2021. Interest income on loans, net of unearned income, also includes net loan fees of $15 million and $34 million for the three months ended September 30, 2022 and 2021, respectively.
(4)Loans, net of unearned income include non-accrual loans for all periods presented.
(5)Total deposit costs are 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 0.15% and 0.04% for the three months ended September 30, 2022 and 2021, respectively.
(6)The computation of taxable-equivalent net interest income is based on the statutory federal income tax rate of 21% adjusted for applicable state income taxes net of the related federal tax benefit.
| Nine Months Ended September 30 | |||||||||||||||||||||||||||||||||||
| 2022 | 2021 | ||||||||||||||||||||||||||||||||||
| Average Balance | Income/ Expense | Yield/ Rate (1) | Average Balance | Income/ Expense | Yield/ Rate (1) | ||||||||||||||||||||||||||||||
| (Dollars in millions; yields on taxable-equivalent basis) | |||||||||||||||||||||||||||||||||||
| Assets | |||||||||||||||||||||||||||||||||||
| Earning assets: | |||||||||||||||||||||||||||||||||||
| Federal funds sold and securities purchased under agreements to resell | $ | 1 | $ | — | 1.08 | % | $ | 4 | $ | — | 0.14 | % | |||||||||||||||||||||||
| Debt securities (2) | 30,968 | 466 | 2.00 | 28,381 | 399 | 1.88 | |||||||||||||||||||||||||||||
| Loans held for sale | 674 | 27 | 5.39 | 1,341 | 31 | 3.07 | |||||||||||||||||||||||||||||
| Loans, net of unearned income (3)(4) | 91,112 | 2,914 | 4.26 | 84,214 | 2,584 | 4.08 | |||||||||||||||||||||||||||||
| Interest-bearing deposits in other banks | 21,023 | 139 | 0.89 | 21,695 | 20 | 0.13 | |||||||||||||||||||||||||||||
| Other earning assets (5) | 1,378 | 38 | 3.67 | 1,293 | 25 | 2.51 | |||||||||||||||||||||||||||||
| Total earning assets | 145,156 | 3,584 | 3.29 | 136,928 | 3,059 | 2.97 | |||||||||||||||||||||||||||||
| Unrealized gains (losses) on securities available for sale, net (2) | (1,689) | 722 | |||||||||||||||||||||||||||||||||
| Allowance for loan losses | (1,441) | (1,870) | |||||||||||||||||||||||||||||||||
| Cash and due from banks | 2,293 | 1,987 | |||||||||||||||||||||||||||||||||
| Other non-earning assets | 16,328 | 14,553 | |||||||||||||||||||||||||||||||||
| $ | 160,647 | $ | 152,320 | ||||||||||||||||||||||||||||||||
| Liabilities and Stockholders’ Equity | |||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Savings | $ | 15,974 | 15 | 0.12 | $ | 13,535 | 14 | 0.14 | |||||||||||||||||||||||||||
| Interest-bearing checking | 27,319 | 30 | 0.15 | 24,835 | 6 | 0.03 | |||||||||||||||||||||||||||||
| Money market | 31,423 | 23 | 0.10 | 30,322 | 7 | 0.03 | |||||||||||||||||||||||||||||
| Time deposits | 5,617 | 15 | 0.36 | 4,830 | 24 | 0.65 | |||||||||||||||||||||||||||||
| Other deposits | — | — | — | 3 | — | 1.20 | |||||||||||||||||||||||||||||
| Total interest-bearing deposits (5) | 80,333 | 83 | 0.14 | 73,525 | 51 | 0.09 | |||||||||||||||||||||||||||||
| Other short-term borrowings | 16 | — | 0.34 | — | — | — | |||||||||||||||||||||||||||||
| Long-term borrowings | 2,345 | 82 | 4.66 | 2,954 | 79 | 3.55 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 82,694 | 165 | 0.27 | 76,479 | 130 | 0.23 | |||||||||||||||||||||||||||||
| Non-interest-bearing deposits (5) | 57,603 | — | — | 55,163 | — | — | |||||||||||||||||||||||||||||
| Total funding sources | 140,297 | 165 | 0.16 | 131,642 | 130 | 0.13 | |||||||||||||||||||||||||||||
| Net interest spread (2) | 3.02 | 2.75 | |||||||||||||||||||||||||||||||||
| Other liabilities | 3,490 | 2,513 | |||||||||||||||||||||||||||||||||
| Shareholders’ equity | 16,860 | 18,165 | |||||||||||||||||||||||||||||||||
| $ | 160,647 | $ | 152,320 | ||||||||||||||||||||||||||||||||
| Net interest income /margin on a taxable-equivalent basis (6) | $ | 3,419 | 3.15 | % | $ | 2,929 | 2.86 | % |
(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)Interest income on loans, net of unearned income, includes hedging income of $188 million and $314 million for the nine months ended September 30, 2022 and 2021, respectively. Interest income on loans, net of unearned income, also includes $49 million and $108 million in net loan fees for the nine months ended September 30, 2022 and 2021,
(4)Loans, net of unearned income include non-accrual loans for all periods presented.
(5)Total deposit costs are 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 0.08% and 0.05% for the nine months ended September 30, 2022 and 2021, respectively.
(6)The computation of taxable-equivalent net interest income is based on the statutory federal income tax rate of 21% 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 nine months of 2022, the FOMC increased the Fed funds rate by 300 basis points with the potential for additional rate increases in the remaining quarter of 2022.
Net interest income (taxable-equivalent basis) increased in the third quarter and first nine months of 2022 compared to the same periods in 2021. The increases in net interest income were driven primarily by higher interest rates and continued average loan growth, which included consumer home improvement loans from the fourth quarter 2021 acquisition of EnerBank. Also contributing to the increases were larger securities portfolio balances. Increases in average deposit balances and costs, as well as a decline in PPP forgiveness income in the third quarter and the first nine months of 2022 partially offset the increases to net interest income.
Net interest margin also increased in the third quarter and first nine months of 2022 compared to the same periods in 2021, driven primarily by higher market interest rates and the addition of higher-yielding consumer home improvement loans from the acquisition of EnerBank in the fourth quarter of 2021. Also contributing to the increases were declining cash balances, and contractual loan and cash repricing outpacing the increase in deposit costs.
See the "Third 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 and minus 100 and 200 basis points. 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 September 30, 2022, Regions was asset sensitive to both gradual and instantaneous parallel yield curve shifts as compared to the base case for the 12-month measurement horizon ending September 2023.
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.
In the third quarter of 2022, Regions experienced a slight decline in low-cost deposits acquired through the pandemic. Retention of these deposits remains uncertain and some amount may be more rate sensitive in a rising rate environment. Therefore, additional sensitivity analysis focused on pandemic-related "surge" deposit pricing behavior and retention is outlined in Table 20.
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-term U.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.
The interest rate sensitivity analysis presented below in Table 20 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 monetary policy tightening on the pace of interest rate movement and industry liquidity levels, management evaluates the impact to its sensitivity analysis from 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. 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 the pandemic, deposit balances have increased by approximately $37 billion, exclusive of deposits acquired in the EnerBank acquisition, and approximately $22 billion of the increase was determined to be attributable to pandemic-related "surge" deposits. Therefore, Table 20 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 but assumes an accelerated attrition profile. 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 20 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 both the base case and the Scenario One gradual +100 basis point shock scenarios in Table 20, interest-bearing deposits reprice using an approximately 30 to 40 percent cumulative beta. The deposit beta model is dynamic across both interest rate level and time. 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 $39 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 20.
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. Some forward-starting swaps have starting dates beyond the next 12 months. Therefore, while the impact of hedges on reported exposure is limited, they will meaningfully reduce the net interest income sensitivity to changes in market interest rates over the coming year as they enter the measurement window. More information regarding hedges is disclosed in Table 21 and its accompanying description.
Table 20—Interest Rate Sensitivity
| Scenario One: Estimated Annual Change in Net Interest Income September 30, 2022**(1)(2)(3)** | Scenario Two: Estimated Annual Change in Net Interest Income September 30, 2022 (1)(2)(4) | ||||||||||
| (In millions) | |||||||||||
| Gradual Change in Interest Rates | |||||||||||
| + 200 basis points | $346 | $183 | |||||||||
| + 100 basis points | 182 | 100 | |||||||||
| - 100 basis points | (214) | (214) | |||||||||
| - 200 basis points | (433) | (433) | |||||||||
| Instantaneous Change in Interest Rates | |||||||||||
| + 200 basis points | $395 | $169 | |||||||||
| + 100 basis points | 219 | 106 | |||||||||
| - 100 basis points | (294) | (294) | |||||||||
| - 200 basis points | (609) | (609) | |||||||||
(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 22 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 (approximately $22 billion as of 9/30/2022) by assuming an accelerated attrition profile and and an approximate 70% beta on a declining amount of surge deposits.
Regions' comprehensive interest rate risk management approach uses derivatives, as discussed further below, and debt securities to manage its interest rate risk position.
As a result of the following transactions executed during the third quarter of 2022, the Company was able to add incremental asset sensitivity in the near-term and extend incremental downside rate protection over a longer horizon.
At the beginning of the third quarter, the Company terminated $2.5 billion in notional originally scheduled to mature at quarter end. Also, during the quarter, the Company repositioned existing cash flow swaps by unwinding and replacing $5 billion of notional to extend interest rate protection by lengthening the weighted average maturity by eight months.
In addition to the repositioning, the Company entered into additional forward-starting cash flow hedges to add protection during periods of time when the balance sheet is more exposed to interest rate declines, which included $500 million in forward-starting cash flow swaps that begin in January 2023 with six month maturities and $2 billion in forward-starting cash flow swaps that begin in 2025 with three year maturities. These additional hedges have a weighted average receive-fixed rate of 3.68 percent, paying overnight SOFR.
Subsequent to September 30, 2022, the Company continued to add cash flow hedges as a part of its hedging strategy. Regions entered into $1 billion in forward-starting cash flow swaps that begin in 2023 with six month maturities, and also entered into $1.5 billion in forward-starting cash flow swaps that begin in 2025 with three year maturities. The weighted average, receive-fixed rates on these cash flow hedges was 3.80 percent, paying overnight SOFR.
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.
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 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 21—Hedging Derivatives by Interest Rate Risk Management Strategy
| September 30, 2022 | |||||||||||||||||||||||||||||
| Weighted-Average | |||||||||||||||||||||||||||||
| Notional Amount | Maturity (Years) | Receive Rate**(3)(4)** | Pay Rate**(3)** | ||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| Derivatives in fair value hedging relationships: | |||||||||||||||||||||||||||||
| Receive variable/pay fixed - debt securities available for sale(1)(2) | $ | 6,523 | 0.2 | 3.3 | % | 0.8 | % | ||||||||||||||||||||||
| Receive fixed/pay variable - borrowed funds | 1,400 | 4.0 | 0.6 | 2.9 | |||||||||||||||||||||||||
| Derivatives in cash flow hedging relationships: | |||||||||||||||||||||||||||||
| Receive fixed/pay variable - floating-rate loans(1)(2)(3)(4) | 33,100 | 2.7 | 2.2 | 3.8 | |||||||||||||||||||||||||
| Total derivatives designated as hedging instruments | $ | 41,023 |
(1)Floating rates represent the most recent fixing for active derivatives and the first forward fixing for future starting derivatives.
(2)Includes forward starting notional. For more information on notional by year, see Table 22.
(3)Variable rate indexes on hedge contracts reference a combination of short-term benchmarks, primarily 1-month LIBOR with approximately $11.0 billion of hedges paying SOFR.
(4)$20.0 billion of the cash flow swaps were transacted in 2022 with a receive rate of 3.09%, mostly paying overnight SOFR; 3.20% LIBOR equivalent.
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. Asset hedge notional amounts mature prior to the end of 2031, with an immaterial amount of notional maturing in early 2032.
Table 22—Schedule of Notional for Asset Hedging Derivatives
| Average Active Notional Amount | ||||||||||||||||||||||||||||||||||||||
| Quarter Ended (1) | Years Ended | |||||||||||||||||||||||||||||||||||||
| 12/31/2022 | 2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |||||||||||||||||||||||||||||
| (in millions) | ||||||||||||||||||||||||||||||||||||||
| Asset Hedging Relationships: | ||||||||||||||||||||||||||||||||||||||
| Receive fixed/pay variable swaps | $ | 11,988 | $ | 13,542 | $ | 20,535 | $ | 17,437 | $ | 10,784 | $ | 5,958 | $ | 1,660 | $ | 4 | $ | — | $ | — | ||||||||||||||||||
| Receive variable/pay fixed swaps | 5,299 | — | — | — | — | 15 | 23 | 23 | 23 | 23 | ||||||||||||||||||||||||||||
| Net receive fixed/pay variable swaps | $ | 6,689 | $ | 13,542 | $ | 20,535 | $ | 17,437 | $ | 10,784 | $ | 5,943 | $ | 1,637 | $ | (19) | $ | (23) | $ | (23) |
(1)All cash flow hedges are reflected within the 12-month measurement horizon and included in income sensitivity levels as disclosed in Table 20.
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 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
On March 5, 2021, the FCA announced that LIBOR would not be available for use after December 31, 2021 and would not be published after June 30, 2023. Regions ceased origination of all new LIBOR-based lending on December 31, 2021. Existing contracts referencing USD LIBOR settings must be remediated no later than June 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. 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 has been offering 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 on December 31, 2021, consistent with regulatory guidelines.
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 September 30, 2022, Regions had the following exposures that reference LIBOR:
-
Approximately $18.4 billion of total commercial and investor real estate loans, of which approximately $15.9 billion mature after June 30, 2023;
-
Approximately $732 million of total consumer loans, all of which mature after June 30, 2023;
-
Securities within the investment portfolio of approximately $245 million, all of which mature after June 30, 2023;
-
Notional amount of interest rate derivatives totaling approximately $100.0 billion, of which approximately $74.2 billion mature after June 30, 2023;
-
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 LIBOR is no longer published.
On March 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 ended December 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' 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.” At September 30, 2022, Regions had approximately $13.5 billion in cash on deposit with the FRB and other depository institutions, a decrease from approximately $28.1 billion at December 31, 2021, as cash balances have been used to fund loan growth and for securities purchases in the first nine months of 2022. The average balance held with the FRB was approximately $14.4 billion and $25.1 billion for the three months ended September 30, 2022 and 2021, respectively. Refer to the "Cash and Cash Equivalents" section for more information.
Regions’ borrowing availability with the FRB as of September 30, 2022, based on assets pledged as collateral on that date, was $14.1 billion.
Regions’ financing arrangement with the FHLB adds additional flexibility in managing the Company's liquidity position. As of September 30, 2022, Regions had no FHLB borrowings and its total borrowing capacity from the FHLB totaled approximately $15.6 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 FHLB advances and future borrowing capacity. 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 SEC that can be utilized by Regions to issue various debt and/or equity securities. Additionally, Regions' Board has authorized Regions Bank to issue up to $10 billion in aggregate principal amount of bank notes outstanding at any one 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 $1.4 billion at September 30, 2022. Overall liquidity risk limits are established by the Board through its Risk 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 current U.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 ended December 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.
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 ended December 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 provision for credit losses totaled $135 million in the third quarter of 2022 compared to a benefit from credit losses of $155 million during the third quarter of 2021. The provision for credit losses totaled $159 million for the first nine months of 2022 compared to a benefit from credit losses of $634 million for the first nine months of 2021. Refer to the "Allowance" section for further detail.
NON-INTEREST INCOME
Table 23—Non-Interest Income
| Three Months Ended September 30 | Quarter-to-Date Change 9/30/2022 vs. 9/30/2021 | |||||||||||||||||||||||||
| 2022 | 2021 | Amount | Percent | |||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||
| Service charges on deposit accounts | $ | 156 | $ | 162 | $ | (6) | (3.7) | % | ||||||||||||||||||
| Card and ATM fees | 126 | 129 | (3) | (2.3) | % | |||||||||||||||||||||
| Capital markets income | 93 | 87 | 6 | 6.9 | % | |||||||||||||||||||||
| Investment management and trust fee income | 74 | 69 | 5 | 7.2 | % | |||||||||||||||||||||
| Mortgage income | 37 | 50 | (13) | (26.0) | % | |||||||||||||||||||||
| Investment services fee income | 34 | 26 | 8 | 30.8 | % | |||||||||||||||||||||
| Commercial credit fee income | 26 | 23 | 3 | 13.0 | % | |||||||||||||||||||||
| Bank-owned life insurance | 15 | 18 | (3) | (16.7) | % | |||||||||||||||||||||
| Market value adjustments on employee benefit assets - other | (5) | 5 | (10) | (200.0) | % | |||||||||||||||||||||
| Securities gains (losses), net | (1) | 1 | (2) | (200.0) | % | |||||||||||||||||||||
| Other miscellaneous income | 50 | 79 | (29) | (36.7) | % | |||||||||||||||||||||
| $ | 605 | $ | 649 | $ | (44) | (6.8) | % |
| Nine Months Ended September 30 | Year-to-Date Change 9/30/2022 vs. 9/30/2021 | |||||||||||||||||||||||||
| 2022 | 2021 | Amount | Percent | |||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||
| Service charges on deposit accounts | $ | 489 | $ | 482 | $ | 7 | 1.5 | % | ||||||||||||||||||
| Card and ATM fees | 383 | 372 | 11 | 3.0 | % | |||||||||||||||||||||
| Capital markets income | 278 | 248 | 30 | 12.1 | % | |||||||||||||||||||||
| Investment management and trust fee income | 221 | 204 | 17 | 8.3 | % | |||||||||||||||||||||
| Mortgage income | 132 | 193 | (61) | (31.6) | % | |||||||||||||||||||||
| Investment services fee income | 90 | 78 | 12 | 15.4 | % | |||||||||||||||||||||
| Commercial credit fee income | 71 | 68 | 3 | 4.4 | % | |||||||||||||||||||||
| Bank-owned life insurance | 45 | 68 | (23) | (33.8) | % | |||||||||||||||||||||
| Market value adjustments on employee benefit assets - other | (36) | 20 | (56) | (280.0) | % | |||||||||||||||||||||
| Gain on equity investment | — | 3 | (3) | (100.0) | % | |||||||||||||||||||||
| Securities gains (losses), net | (1) | 3 | (4) | (133.3) | % | |||||||||||||||||||||
| Other miscellaneous income | 157 | 170 | (13) | (7.6) | % | |||||||||||||||||||||
| $ | 1,829 | $ | 1,909 | $ | (80) | (4.2) | % |
*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. Service charges for the third quarter of 2022 have been impacted by overdraft-related policy enhancements implemented in mid-June 2022. See the "Third Quarter Overview" section for the Company's 2022 expectations for 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 increased in the nine months ended September 30, 2022 compared to the same period
in 2021 driven primarily by increases in commercial swap income and real estate capital markets revenue. The increase in commercial swap income benefited from positive credit/debit valuation adjustments due to rate and spread movements. Also of note, for the nine months ended September 30, 2022, capital markets income includes revenue from the fourth quarter 2021 acquisition of Sabal. These increases were partially offset by declines in securities underwriting and placement fees and M&A advisory fees. M&A advisory fees were impacted by timing delays due to market volatility.
*Investment management and trust fee income—*Investment management and trust fee income represents income from asset management services provided to individuals, businesses and institutions.
*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 decreases in mortgage income in the third quarter of 2022 and nine months ended September 30, 2022 compared to the same periods in 2021 were due primarily to lower mortgage production as a result of higher interest rates. The decline in production and sales was partially offset by an increase in servicing income and improvement in the valuation of mortgage servicing rights and related hedges. Mortgage income for the nine months ended September 30, 2022 also includes approximately $12 million in gains associated with the re-securitization and sale of Ginnie Mae loans previously repurchased from their pools in the first quarter of 2022.
Investment services fee income—Investment services fee income represents income earned from investment advisory services. Investment services fee income increased in the third quarter of 2022 and the first nine months of 2022 compared to the same periods in 2021 due primarily to the rising interest rate environment, which has driven increases in fixed annuity rates and the related investment income. Also contributing was a slight increase in the number of financial advisors.
*Bank-owned life insurance—*Bank-owned life insurance income primarily represents income earned from the appreciation of the cash surrender value of insurance contracts held and the proceeds of insurance benefits. Bank-owned life insurance decreased in the nine months ended September 30, 2022 compared to the same period in 2021 primarily due to an $18 million individual BOLI claim benefit recognized in the second quarter of 2021.
*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 and director benefits. Market value adjustments on employee benefit assets decreased in the third quarter of 2022 and nine months ended September 30, 2022 compared to the same periods in 2021 due to market volatility. The adjustments are offset in salaries and benefits and other non-interest expense.
*Securities gains (losses), net—*Net securities gains (losses) primarily result from the Company's asset/liability management process. See Table 1 "Debt Securities" section for additional information.
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 decreased in the third quarter of 2022 compared to the same period in 2021 primarily due to a decline in commercial loan and leasing related fee income, SBIC income, and adjustments to increase the values of other equity investments in the third quarter of 2021.
NON-INTEREST EXPENSE
Table 24—Non-Interest Expense
| Three Months Ended September 30 | Quarter-to-Date Change 9/30/2022 vs. 9/30/2021 | |||||||||||||||||||||||||
| 2022 | 2021 | Amount | Percent | |||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||
| Salaries and employee benefits | $ | 593 | $ | 552 | $ | 41 | 7.4 | % | ||||||||||||||||||
| Equipment and software expense | 98 | 90 | 8 | 8.9 | % | |||||||||||||||||||||
| Net occupancy expense | 76 | 75 | 1 | 1.3 | % | |||||||||||||||||||||
| Outside services | 40 | 38 | 2 | 5.3 | % | |||||||||||||||||||||
| Marketing | 29 | 23 | 6 | 26.1 | % | |||||||||||||||||||||
| Professional, legal and regulatory expenses | 199 | 21 | 178 | NM | ||||||||||||||||||||||
| Credit/checkcard expenses | 13 | 16 | (3) | (18.8) | % | |||||||||||||||||||||
| FDIC insurance assessments | 16 | 11 | 5 | 45.5 | % | |||||||||||||||||||||
| Visa class B shares expense | 3 | 4 | (1) | (25.0) | % | |||||||||||||||||||||
| Loss on early extinguishment of debt | — | 20 | (20) | (100.0) | % | |||||||||||||||||||||
| Branch consolidation, property and equipment charges | 3 | — | 3 | NM | ||||||||||||||||||||||
| Other miscellaneous expenses | 100 | 88 | 12 | 13.6 | % | |||||||||||||||||||||
| $ | 1,170 | $ | 938 | $ | 232 | 24.7 | % |
| Nine Months Ended September 30 | Year-to-Date Change 9/30/2022 vs. 9/30/2021 | |||||||||||||||||||||||||
| 2022 | 2021 | Amount | Percent | |||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||
| Salaries and employee benefits | $ | 1,714 | $ | 1,630 | $ | 84 | 5.2 | % | ||||||||||||||||||
| Equipment and software expense | 290 | 269 | 21 | 7.8 | % | |||||||||||||||||||||
| Net occupancy expense | 226 | 227 | (1) | (0.4) | % | |||||||||||||||||||||
| Outside services | 116 | 115 | 1 | 0.9 | % | |||||||||||||||||||||
| Marketing | 75 | 74 | 1 | 1.4 | % | |||||||||||||||||||||
| Professional, legal and regulatory expenses | 240 | 65 | 175 | 269.2 | % | |||||||||||||||||||||
| Credit/checkcard expenses | 52 | 47 | 5 | 10.6 | % | |||||||||||||||||||||
| FDIC insurance assessments | 43 | 32 | 11 | 34.4 | % | |||||||||||||||||||||
| Visa class B shares expense | 17 | 14 | 3 | 21.4 | % | |||||||||||||||||||||
| Loss on early extinguishment of debt | — | 20 | (20) | (100.0) | % | |||||||||||||||||||||
| Branch consolidation, property and equipment charges | (2) | 5 | (7) | (140.0) | % | |||||||||||||||||||||
| Other miscellaneous expenses | 280 | 266 | 14 | 5.3 | % | |||||||||||||||||||||
| $ | 3,051 | $ | 2,764 | $ | 287 | 10.4 | % |
NM - Not Meaningful
*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 19,950 at September 30, 2022 from 18,963 at September 30, 2021, primarily due to the additional 620 associates from acquisitions in the fourth quarter of 2021. Salaries and employee benefits expense increased in the third quarter of 2022 and the first nine months of 2022 compared to the same periods in 2021 also due to annual merit increases that occurred early in the second quarter of 2022. These increases were partially offset by a decline in benefits expenses.
*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 increased in the third quarter and the first nine months of 2022 compared to the same periods in 2021 primarily due to a settlement reached with the CFPB in the third quarter of 2022 related to a previously disclosed matter. See Note 11 "Commitments, Contingencies and Guarantees" for more detail.
Marketing—Marketing consists of advertising, market research, and public relations expenses. Marketing increased during the third quarter compared to the same period in 2021 due to the timing of marketing campaigns.
Loss on early extinguishment of debt—During the third quarter of 2021, Regions redeemed its 3.80% senior bank notes and incurred related early extinguishment pre-tax charges totaling $20 million.
*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. Branch consolidation, property and
equipment charges in the nine months ended 2022 include gains recognized on the disposition of branch properties in the second quarter of 2022.
Other miscellaneous expenses—Other miscellaneous expenses include expenses related to communications, postage, supplies, certain credit-related costs, foreclosed property expenses, mortgage repurchase costs, operational losses and other costs (benefits) related to employee benefit plans. Other miscellaneous expense increased in the third quarter of 2022 compared to the same period in 2021 primarily due to increases in intangible asset amortization related to the fourth quarter 2021 acquisitions, travel related expenses and other miscellaneous expenses. These increases were partially offset by a decrease in pension-related expenses.
INCOME TAXES
The Company’s income tax expense for the three months ended September 30, 2022 was $133 million compared to $180 million for the three months ended September 30, 2021, resulting in effective tax rates of 23.7 percent and 21.7 percent, respectively. The increase in effective tax rate for the three months ended September 30, 2022 compared to the same period in 2021 is primarily due to the nondeductible nature of a portion of the settlement reached in the third quarter of 2022. See Note 11 "Commitments, Contingencies and Guarantees" to the consolidated financial statements for further details. The income tax expense for nine months ended September 30, 2022 was $444 million compared to $591 million for the nine months ended September 30, 2021, resulting in effective tax rates of 22.2 percent and 22.1 percent, respectively. See the "Third 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.
At September 30, 2022, the Company reported a net deferred tax asset of $1.0 billion compared to a net deferred tax liability of $306 million at December 31, 2021. The change in the net deferred tax position was due primarily to the deferred tax impact of increases in unrealized losses on securities available for sale and derivative instruments arising during the period.
ACQUISITIONS
EnerBank
On October 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 $3.3 billion of assets of which $3.1 billion were loans that are included in Regions' other consumer loan portfolio. Regions also assumed $2.8 billion of liabilities, 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.
Regions recorded PCD loans of $198 million as a result of the acquisition. 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
On December 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 $146 million and other intangible assets that were immaterial.
Fair value estimates are considered preliminary as of September 30, 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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