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, 2022, 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, 2023 compared to the three and nine months ended September 30, 2022 for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be on the balances as of September 30, 2023 compared to December 31, 2022.
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, 2023, Regions operated 1,272 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, equipment and software expense, 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.
THIRD QUARTER OVERVIEW
Third Quarter Operating Environment
In the first half of 2023, the banking industry was impacted by the failure of three U.S depository institutions. Outside of the U.S., an international bank also suffered a crisis in confidence. The circumstances surrounding these events were largely driven by a sudden decline in deposits and lack of available liquidity to replace the deposit declines at the institutions. In March 2023, the BTFP was created by the Federal Reserve to support American businesses and households by making additional funding available to eligible depository institutions to help assure banks have the ability to meet the needs of all their depositors, as an additional source of secured funding backed by high-quality securities, eliminating an institution’s need to quickly sell those securities in times of stress. In addition to the uncertainty brought by these events, in the first nine months of
2023 the Federal Reserve delivered four additional 25 basis-point rate hikes as inflation continued to stay above target levels. Accordingly, there is now heightened focus on the banking industry as a whole. Regions believes that its deposits are diversified across categories and are granular in nature which lessens the probability of sudden declines in deposits. Additionally, Regions maintains a variety of liquidity sources to fund its obligations and performs various evaluations to determine appropriate levels of available liquidity. See the discussion below and within the "Debt Securities", "Deposits", "Market Risk-Interest Rate Risk" and "Liquidity" sections for further information.
Economic Environment in Regions' Banking Markets
Regions' baseline forecast anticipates full-year real GDP growth of 2.3 percent in 2023 followed by growth of 1.3 percent in 2024 and 1.7 percent in 2025. Despite the cumulative effects of elevated inflation and higher interest rates, the economy remained resilient through the summer months, with the U.S Bureau of Economic Analysis' initial estimate of real GDP growth at an annualized rate of 4.9 percent in the third quarter. The pace of economic activity is, however, expected to slow sharply in the fourth quarter and remain somewhat subdued through the first half of 2024 before picking up in the second half of 2024 and into 2025. Interest-sensitive segments of the economy, including housing, business fixed investment, and consumer durable goods, are expected to soften further in the months ahead.
Spending on discretionary services such as travel, tourism, recreation, entertainment, and dining out was a key driver of growth in consumer spending over the summer months but is showing signs of fading. Regions expects sluggish growth in total inflation-adjusted consumer spending over the next few quarters. While there is still a considerable pool of excess savings on household balance sheets, those balances are being run off as the cumulative effects of higher inflation and higher interest rates continue to stress household budgets. Monthly debt service burdens remain below pre-pandemic levels due to the preponderance of fixed-rate debt on household balance sheets.
Measurement issues and strike activity have injected a high degree of noise into estimates of monthly job growth, but the underlying trend rate of job growth is slowing. At the same time, job growth has been less broadly based across private sector industry groups and hours worked are well off the cycle high. Slowing job growth has thus far been strictly a function of a slowing hiring rate, as the rate at which workers are being laid off remains slightly below pre-pandemic norms. Still, Regions' baseline forecast anticipates further deceleration in job growth to push the unemployment rate higher over coming quarters.
While inflation has slowed, it remains well above the FOMC’s target rate. While this may not prompt the FOMC to raise the Fed funds rate further, it suggests rate cuts may be later in coming than market participants are generally expecting. Higher interest rates and tighter financial conditions are impacting inflation and, as such, may substitute for additional funds rate hikes. Higher interest rates will contribute to a slowing pace of economic activity and further deceleration in inflation, which management believes will keep the FOMC from raising the funds rate further. Either way, once the FOMC reaches a stopping point, Regions expects them to hold the funds rate steady at the terminal rate for some time to come. The economic data and the financial markets remain quite volatile, and there are lingering concerns that credit conditions could tighten to the point the economy slips into recession. These factors are contributing to considerable uncertainty around the near-term economic outlook.
Patterns of economic activity within the Regions footprint are expected to be broadly similar to those seen for the U.S. as a whole. A number of in-footprint states have seen heightened flows of domestic in-migration since the onset of the pandemic, which has resulted in more rapid rates of job growth and more rapid growth in housing costs. If, as Regions anticipates, the broader economy slows and labor market conditions loosen, it could be that migration patterns will shift over coming quarters. Job growth for the Company's footprint as a whole is expected to be faster than that for the U.S. as a whole. Some of the metro areas which had, prior to the increase in mortgage interest rates, seen the largest increases in house prices could experience price declines in excess of the national average, but continued robust population growth in these markets will help stem the extent of any declines in house prices.
The continued economic uncertainty, as described above, impacted Regions' forecast utilized in calculating the ACL as of September 30, 2023. See the "Allowance" section for further information.
Third Quarter Results
Regions reported net income available to common shareholders of $465 million or $0.49 per diluted share in the third quarter of 2023 which increased $61 million compared to net income available to common shareholders of $404 million or $0.43 per diluted share in the third quarter of 2022.
Net interest income (taxable-equivalent basis) totaled $1.3 billion in the third quarter of 2023 which increased $30 million compared to the third quarter of 2022. The net interest margin (taxable-equivalent basis) was 3.73 percent in the third quarter of 2023, reflecting a 20 basis point increase from the same period in 2022. The increases in net interest income and net interest margin were primarily driven by a significant increase in market interest rates and average loan growth. Funding cost normalization, which includes the impact of deposit remixing contributing to higher deposit costs which is expected in a rising rate environment, partially offset the increases in net interest income.
The provision for credit losses totaled $145 million in the third quarter of 2023 compared to $135 million in the third quarter of 2022. The current quarter provision reflects continued normalization of asset quality and a build for incremental risk in certain portfolios. Net charge-offs totaled $101 million, or 0.40 percent of average loans, in the third quarter of 2023, compared to $110 million, or 0.46 percent in the third quarter of 2022. Third quarter 2022 includes charge-offs associated with the sale of certain unsecured consumer loans. See Table 18 "GAAP to Non-GAAP Reconciliations" for further details. Excluding these amounts, charge-offs increased reflecting an increase in commercial net charge-offs. The allowance as a percent of total loans, net, increased to 1.70 percent at September 30, 2023, compared to 1.63 percent at December 31, 2022. Refer to the "Allowance for Credit Losses" section for further detail.
Non-interest income was $566 million in the third quarter of 2023 compared to $605 million in third quarter of 2022. The decrease was primarily driven by decreases in capital markets income, service charges on deposit accounts, and mortgage income. The declines were partially offset by improvements in market valuation adjustments on employee benefit assets. See Table 24 "Non-Interest Income" for further details.
Non-interest expense was $1.1 billion in the third quarter of 2023 compared to $1.2 billion in third quarter of 2022. The decrease was driven by a decline in professional, legal and regulatory expenses due to the third quarter 2022 settlement of a previously disclosed matter that did not repeat. Offsetting the decrease were increases across several categories, with the largest related to operational losses due to an increase in check-related fraud. See Table 25 "Non-Interest Expense" for further details.
Regions' effective tax rate was 20.9 percent in the third quarter of 2023 compared to 23.7 percent in the third quarter of 2022. See the "Income Taxes" section for further details.
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. At September 30, 2023, Regions’ CET1 ratio was estimated to be 10.29 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 (Loss)" to the consolidated financial statements for further details.
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. In the first nine months of 2023, the Company did not repurchase any common stock.
Expectations
| 2023 Expectations (1) | ||||||||
| Category | Expectation | |||||||
| Total Adjusted Revenue(2)(3) | Up 5-6% | |||||||
| Adjusted Non-Interest Expense | Up ~9.5% | |||||||
| Ending Loans | grow low-single digits | |||||||
| Ending Deposits | stable to modestly lower in the fourth quarter of 2023 | |||||||
| Adjusted Net Charge-Offs / Average Loans(4) | slightly above 35 bps | |||||||
| Effective Tax Rate | 21-22% |
(1)Expectation for CET1 is to continue to manage at approximately 10 percent over the near term.
(2)Expectation for net interest income, which utilizes the market implied forward interest rate curve as of September 30, as a component of adjusted total revenue is full-year 2023 growth of approximately 11 percent.
(3)Expectation for non-interest revenue as a component of adjusted total revenue includes full-year 2023 service charges of approximately $590 million.
(4)Expectation excludes the sale of a consumer exit portfolio, which sold subsequent to September 30, 2023.
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. For more information related to the Company's 2023 expectations, refer to the related sub-sections discussed in more detail 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 $2.2 billion from year-end 2022 to September 30, 2023 resulting from a decrease in cash balances on deposit with the FRB. In the first nine months of 2023, the decline in cash was driven by an expected decline in deposits and growth in loans, partially offset by an increase in borrowed funds. See the "Loans", "Liquidity", "Deposits", and "Borrowed Funds" 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, 2023 | December 31, 2022 | ||||||||||||||||
| (In millions) | |||||||||||||||||
| U.S. Treasury securities | $ | 1,186 | $ | 1,187 | |||||||||||||
| Federal agency securities | 1,004 | 836 | |||||||||||||||
| Obligations of states and political subdivisions | 2 | 2 | |||||||||||||||
| Mortgage-backed securities: | |||||||||||||||||
| Residential agency | 15,987 | 17,233 | |||||||||||||||
| Residential non-agency | — | 1 | |||||||||||||||
| Commercial agency | 7,674 | 8,135 | |||||||||||||||
| Commercial non-agency | 78 | 186 | |||||||||||||||
| Corporate and other debt securities | 1,060 | 1,154 | |||||||||||||||
| $ | 26,991 | $ | 28,734 | ||||||||||||||
Debt securities available for sale, comprising 19 percent of earning assets, constitute approximately 97 percent of the securities portfolio. They are an important tool used to manage interest rate sensitivity and provide a primary source of liquidity for the Company, as much of the portfolio is highly liquid. Additionally, some of the securities portfolio is eligible to be used as collateral for funding of various types of borrowings. See the "Liquidity" section for more information on these arrangements. Regions maintains a highly-rated securities portfolio consisting primarily of agency MBS. See Note 2 "Debt Securities" to the consolidated financial statements for additional information. Also see the "Market Risk-Interest Rate Risk" section for more information.
The average life of the debt securities portfolio at September 30, 2023 was estimated to be 5.5 years, with a duration of approximately 4.5 years. These metrics compare with an estimated average life of 5.8 years and a duration of approximately 4.8 years for the portfolio at December 31, 2022.
Debt securities decreased $1.7 billion from December 31, 2022 to September 30, 2023 primarily driven by decreases in residential agency securities and commercial agency securities. In the first nine months of 2023, Regions reinvested only a portion of principal paydowns and maturities. Additionally, market value adjustments were negatively impacted by rising rates.
LOANS HELD FOR SALE
The following table presents Regions’ loans held for sale by type:
Table 2—Loans Held for Sale
| September 30, 2023 | December 31, 2022 | ||||||||||
| (In millions) | |||||||||||
| Residential first mortgage | $ | 195 | $ | 160 | |||||||
| Commercial | 242 | 153 | |||||||||
| Consumer and other performing | 20 | 38 | |||||||||
| Non-performing | 2 | 3 | |||||||||
| $ | 459 | $ | 354 |
The levels of residential first mortgage loans held for sale that are part of the Company's mortgage originations fluctuate depending on the timing of origination and sale to third parties. Commercial loans held for sale include commercial mortgage loans originated for sale to third parties and commercial loans originally recorded as held for investment when management has the intent to sell. Levels of commercial loans held for sale fluctuate based on timing of sale to third parties.
LOANS
Loans, net of unearned income, represented 73 percent of interest-earning assets as of September 30, 2023. The following table presents the distribution of Regions’ loan portfolio by portfolio segment and class, net of unearned income:
Table 3—Loan Portfolio
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||
| (In millions, net of unearned income) | ||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 51,604 | $ | 50,905 | ||||||||||||||||||||||||||||||||||
| Commercial real estate mortgage—owner-occupied | 4,833 | 5,103 | ||||||||||||||||||||||||||||||||||||
| Commercial real estate construction—owner-occupied | 270 | 298 | ||||||||||||||||||||||||||||||||||||
| Total commercial | 56,707 | 56,306 | ||||||||||||||||||||||||||||||||||||
| Commercial investor real estate mortgage | 6,436 | 6,393 | ||||||||||||||||||||||||||||||||||||
| Commercial investor real estate construction | 2,301 | 1,986 | ||||||||||||||||||||||||||||||||||||
| Total investor real estate | 8,737 | 8,379 | ||||||||||||||||||||||||||||||||||||
| Residential first mortgage | 20,059 | 18,810 | ||||||||||||||||||||||||||||||||||||
| Home equity lines | 3,240 | 3,510 | ||||||||||||||||||||||||||||||||||||
| Home equity loans | 2,428 | 2,489 | ||||||||||||||||||||||||||||||||||||
| Consumer credit card | 1,261 | 1,248 | ||||||||||||||||||||||||||||||||||||
| Other consumer—exit portfolios | 356 | 570 | ||||||||||||||||||||||||||||||||||||
| Other consumer | 6,154 | 5,697 | ||||||||||||||||||||||||||||||||||||
| Total consumer | 33,498 | 32,324 | ||||||||||||||||||||||||||||||||||||
| $ | 98,942 | $ | 97,009 |
PORTFOLIO CHARACTERISTICS
The following sections describe the composition of the portfolio segments and classes disclosed in Table 3 , explain changes in balances from year-end 2022 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. See Note 3 "Loans and the Allowance for Credit Losses" to the consolidated financial statements for additional discussion.
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. During 2023, commercial and industrial loans increased $401 million, primarily occurring in the first half of the year, and driven by an increase in line commitments and utilization. In the first nine months of 2023, commercial and industrial loan growth was broad-based as shown in Table 4 .
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 4—Commercial Industry Exposure
| September 30, 2023 | |||||||||||||||||
| Loans | Unfunded Commitments | Total Exposure | |||||||||||||||
| (In millions) | |||||||||||||||||
| Administrative, support, waste and repair | $ | 1,616 | $ | 871 | $ | 2,487 | |||||||||||
| Agriculture | 295 | 220 | 515 | ||||||||||||||
| Educational services | 3,369 | 611 | 3,980 | ||||||||||||||
| Energy | 1,668 | 3,248 | 4,916 | ||||||||||||||
| Financial services | 7,392 | 8,422 | 15,814 | ||||||||||||||
| Government and public sector | 3,226 | 424 | 3,650 | ||||||||||||||
| Healthcare | 3,256 | 2,442 | 5,698 | ||||||||||||||
| Information | 2,887 | 1,311 | 4,198 | ||||||||||||||
| Manufacturing | 4,754 | 5,189 | 9,943 | ||||||||||||||
| Professional, scientific and technical services | 2,528 | 1,840 | 4,368 | ||||||||||||||
| Real estate (1) | 9,289 | 9,165 | 18,454 | ||||||||||||||
| Religious, leisure, personal and non-profit services | 1,592 | 624 | 2,216 | ||||||||||||||
| Restaurant, accommodation and lodging | 1,419 | 312 | 1,731 | ||||||||||||||
| Retail trade | 2,726 | 2,182 | 4,908 | ||||||||||||||
| Transportation and warehousing | 3,491 | 1,740 | 5,231 | ||||||||||||||
| Utilities | 3,031 | 2,975 | 6,006 | ||||||||||||||
| Wholesale goods | 4,240 | 3,623 | 7,863 | ||||||||||||||
| Other (2) | (72) | 2,099 | 2,027 | ||||||||||||||
| Total commercial | $ | 56,707 | $ | 47,298 | $ | 104,005 |
| December 31, 2022 (3) | |||||||||||||||||
| Loans | Unfunded Commitments | Total Exposure | |||||||||||||||
| (In millions) | |||||||||||||||||
| Administrative, support, waste and repair | $ | 1,531 | $ | 930 | $ | 2,461 | |||||||||||
| Agriculture | 332 | 251 | 583 | ||||||||||||||
| Educational services | 3,311 | 978 | 4,289 | ||||||||||||||
| Energy | 1,559 | 3,132 | 4,691 | ||||||||||||||
| Financial services | 6,923 | 7,681 | 14,604 | ||||||||||||||
| Government and public sector | 3,196 | 456 | 3,652 | ||||||||||||||
| Healthcare | 3,650 | 2,359 | 6,009 | ||||||||||||||
| Information | 2,767 | 1,470 | 4,237 | ||||||||||||||
| Manufacturing | 5,323 | 4,941 | 10,264 | ||||||||||||||
| Professional, scientific and technical services | 2,604 | 1,626 | 4,230 | ||||||||||||||
| Real estate (1) | 9,097 | 8,809 | 17,906 | ||||||||||||||
| Religious, leisure, personal and non-profit services | 1,611 | 648 | 2,259 | ||||||||||||||
| Restaurant, accommodation and lodging | 1,360 | 356 | 1,716 | ||||||||||||||
| Retail trade | 2,501 | 2,297 | 4,798 | ||||||||||||||
| Transportation and warehousing | 3,303 | 1,832 | 5,135 | ||||||||||||||
| Utilities | 2,510 | 2,793 | 5,303 | ||||||||||||||
| Wholesale goods | 4,394 | 3,876 | 8,270 | ||||||||||||||
| Other (2) | 334 | 2,201 | 2,535 | ||||||||||||||
| Total commercial | $ | 56,306 | $ | 46,636 | $ | 102,942 |
(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, year over year 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 (and other multi-family properties), office and industrial buildings, and retail shopping centers. Total investor real estate loans increased $358 million in comparison to year-end 2022 balances.
The Company's total non-owner-occupied commercial real estate lending consists of both unsecured commercial and industrial loans that are real estate related (including REITs) and investor real estate loans and are considered to be well diversified across property types. The following table provides detail of these loans:
Table 5— Unsecured Commercial Real Estate and Investor Real Estate Exposure
| September 30, 2023 | |||||||||||
| Loan Balance | Percent of Total (2) | ||||||||||
| (In millions) | |||||||||||
| Residential homebuilders | $ | 1,018 | 6.5 | % | |||||||
| Apartments | 3,850 | 24.6 | % | ||||||||
| Industrial | 2,185 | 14.0 | % | ||||||||
| Condominium | 16 | 0.1 | % | ||||||||
| Data Center | 347 | 2.2 | % | ||||||||
| Diversified | 2,260 | 14.4 | % | ||||||||
| Business offices | 1,640 | 10.5 | % | ||||||||
| Residential land | 70 | 0.4 | % | ||||||||
| Retail | 1,402 | 9.0 | % | ||||||||
| Healthcare | 1,337 | 8.5 | % | ||||||||
| Hotel | 761 | 4.9 | % | ||||||||
| Other | 744 | 4.8 | % | ||||||||
| Commercial land | 19 | 0.1 | % | ||||||||
| Total (1) | $ | 15,649 | 100 | % |
(1)Owner-occupied commercial real estate is not included as the principal source of repayment is individual businesses, which more closely aligns with the commercial portfolio credit performance.
(2)Amounts calculated based on whole dollar values.
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 $1.2 billion in comparison to year-end 2022 balances, driven by approximately $2.3 billion in new loan originations retained on the balance sheet through the first nine months of 2023.
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 $270 million in comparison to year-end 2022 balances, as payoffs and paydowns continue to outpace 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, 2023. The balances presented are based on maturity date for lines with a balloon payment and draw period expiration date for lines that convert to a repayment period.
Table 6—Home Equity Lines of Credit - Future Principal Payment Resets
| First Lien | % of Total | Second Lien | % of Total | Total | |||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||
| 2023 | $ | 20 | 0.62 | % | $ | 14 | 0.42 | % | $ | 34 | |||||||||||||||||||
| 2024 | 90 | 2.76 | % | 61 | 1.89 | % | 151 | ||||||||||||||||||||||
| 2025 | 88 | 2.73 | % | 91 | 2.81 | % | 179 | ||||||||||||||||||||||
| 2026 | 120 | 3.72 | % | 129 | 3.97 | % | 249 | ||||||||||||||||||||||
| 2027 | 304 | 9.40 | % | 251 | 7.75 | % | 555 | ||||||||||||||||||||||
| 2028-2032 | 860 | 26.54 | % | 867 | 26.76 | % | 1,727 | ||||||||||||||||||||||
| 2033-2037 | 89 | 2.74 | % | 170 | 5.25 | % | 259 | ||||||||||||||||||||||
| Thereafter | 5 | 0.15 | % | 4 | 0.12 | % | 9 | ||||||||||||||||||||||
| Revolving Loans Converted to Amortizing | 45 | 1.39 | % | 32 | 0.98 | % | 77 | ||||||||||||||||||||||
| Total | $ | 1,621 | 50.05 | % | $ | 1,619 | 49.95 | % | $ | 3,240 |
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.
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 7—Estimated Current Loan to Value Ranges
| September 30, 2023 | |||||||||||||||||||||||||||||
| 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% | $ | 41 | $ | 2 | $ | — | $ | 2 | $ | — | |||||||||||||||||||
| Above 80% - 100% | 1,792 | 2 | 2 | 5 | 6 | ||||||||||||||||||||||||
| 80% and below | 17,883 | 1,601 | 1,604 | 2,084 | 327 | ||||||||||||||||||||||||
| Data not available | 343 | 16 | 13 | 3 | 1 | ||||||||||||||||||||||||
| $ | 20,059 | $ | 1,621 | $ | 1,619 | $ | 2,094 | $ | 334 |
| December 31, 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% | $ | 64 | $ | 2 | $ | — | $ | 2 | $ | 1 | |||||||||||||||||||
| Above 80% - 100% | 1,456 | 3 | 3 | 9 | 8 | ||||||||||||||||||||||||
| 80% and below | 17,015 | 1,830 | 1,627 | 2,205 | 233 | ||||||||||||||||||||||||
| Data not available | 275 | 20 | 25 | 28 | 3 | ||||||||||||||||||||||||
| $ | 18,810 | $ | 1,855 | $ | 1,655 | $ | 2,244 | $ | 245 |
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 $214 million from year-end 2022.
On October 19, 2023, the Company sold substantially all of a portfolio of a third party relationship which totaled approximately $300 million in loans.
Other Consumer
Other consumer loans primarily include indirect and direct consumer loans, overdrafts and other revolving loans. Other consumer loans increased $457 million from year-end 2022 primarily driven by increases in consumer home improvement loans.
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 most 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 $1.7 billion as of September 30, 2023 compared to $1.6 billion at December 31, 2022, 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 8 below. While many of these items overlap regarding impact, they are included in the category most relevant.
Table 8— Allowance Changes
| Allowance for Credit Losses | |||||
| (In millions) | |||||
| Allowance for credit losses, December 31, 2022 | $ | 1,582 | |||
| Cumulative change in accounting guidance (1) | (38) | ||||
| Allowance for credit losses, January 1, 2023 | $ | 1,544 | |||
| Net charge-offs | (83) | ||||
| Provision over net charge-offs: | |||||
| Economic/Qualitative | 19 | ||||
| Other portfolio changes (2) | 116 | ||||
| Total provision over net charge-offs | 52 | ||||
| Allowance for credit losses, March 31, 2023 | $ | 1,596 | |||
| Allowance for credit losses, April 1, 2023 | $ | 1,596 | |||
| Net charge-offs | (81) | ||||
| Provision over net charge-offs: | |||||
| Economic/Qualitative | 30 | ||||
| Other portfolio changes (2) | 88 | ||||
| Total provision over net charge-offs | 37 | ||||
| Allowance for credit losses, June 30, 2023 | $ | 1,633 | |||
| Allowance for credit losses, July 1, 2023 | $ | 1,633 | |||
| Net charge-offs | (101) | ||||
| Provision over net charge-offs: | |||||
| Economic/Qualitative | 15 | ||||
| Other portfolio changes (2) | 130 | ||||
| Total provision over net charge-offs | 44 | ||||
| Allowance for credit losses, September 30, 2023 | $ | 1,677 | |||
(1)See Note 1 for additional information.
(2)This line item includes the net impact of portfolio growth, portfolio run-off, pay-downs, changes in the mix of total outstanding loans, changes to specific reserves and credit quality changes.
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, 2023. The unemployment rate is the most significant macroeconomic factor among the allowance models and continues to be at a normalized level with forecasted periods expected to remain relatively consistent.
Table 9— Macroeconomic Factors in the Forecast
| Pre-R&S Period | Base R&S Forecast | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| September 30, 2023 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 3Q2023 | 4Q2023 | 1Q2024 | 2Q2024 | 3Q2024 | 4Q2024 | 1Q2025 | 2Q2025 | 3Q2025 | |||||||||||||||||||||||||||||||||||||||||||||
| Real GDP, annualized % change | 3.6 | % | 0.4 | % | 1.0 | % | 0.9 | % | 1.3 | % | 1.7 | % | 1.8 | % | 1.9 | % | 1.9 | % | |||||||||||||||||||||||||||||||||||
| Unemployment rate | 3.7 | % | 3.7 | % | 3.9 | % | 4.0 | % | 4.2 | % | 4.3 | % | 4.3 | % | 4.2 | % | 4.2 | % | |||||||||||||||||||||||||||||||||||
| HPI, year-over-year % change | 2.7 | % | 1.6 | % | (0.5) | % | (2.7) | % | (3.0) | % | (1.9) | % | (0.5) | % | 1.3 | % | 1.7 | % | |||||||||||||||||||||||||||||||||||
| CPI, year-over-year % change | 3.6 | % | 3.7 | % | 3.5 | % | 3.5 | % | 3.2 | % | 2.6 | % | 2.4 | % | 2.3 | % | 2.3 | % |
In deriving any forecast, Regions benchmarks its internal forecast with external forecasts and external data available. Regions' September 2023 baseline forecast indicated modest changes compared to the June 2023 forecast. Strong consumer spend supported by elevated levels of saving and strong growth in labor earnings pushed real GDP growth higher than previously experienced. As business investments in equipment and machinery slows, intellectual property products remain the key drivers of growth in overall business investment. A slowdown in job growth is anticipated, as well as a low labor force participation rate that will limit any increase in the unemployment rate over the forecast horizon. As measured by CPI, inflation is expected to slow further but remain above the FOMC's 2.0 percent target into 2024. Further disruptions in global supply chains, excessive monetary policy tightening, and heightened financial volatility provide significant downside uncertainty over the near-term forecast. See the Economic Environment in Regions' Banking Markets discussion in the "Third Quarter Overview" section for additional information.
Credit metrics are monitored throughout each 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 2023, asset quality continued to normalize, as expected. Total net charge-offs increased by $20 million compared to the second quarter of 2023. Commercial and investor real estate criticized balances increased approximately $128 million, which included an increase in classified balances of $296 million compared to the second quarter of 2023. Non-performing loans, excluding held for sale, and non-performing assets increased approximately $150 million and $151 million, respectively, compared to the second quarter of 2023. See Table 12 for more details regarding non-performing assets.
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. In the third quarter of 2023, the general imprecision remained stable.
Based upon the factors discussed above, the September 30, 2023 allowance increased compared to the second quarter of 2023 due to adverse risk migration and continued credit normalization, as well as a build in qualitative adjustments for incremental risk in certain portfolios, including office, multi-family in select markets and EnerBank. Based on the overall analysis performed, management deemed an allowance of $1.7 billion to be appropriate to absorb expected credit losses in the loan and credit commitment portfolios as of September 30, 2023.
Details regarding the allowance and net charge-offs, including an analysis of activity from previous years' totals, are included in Table 10 "Allowance for Credit Losses". Net charge-offs for the nine months ended September 30, 2023 increased $71 million compared to the same period in 2022, primarily driven by an increase in commercial and industrial net charge-offs. Additionally, net charge-offs for the nine months ended 2022 include $63 million in net charge-offs in the other consumer portfolio due to the sale of unsecured consumer loans. See Table 18 "GAAP to Non-GAAP Reconciliations" for further details. 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 2023 and beyond. See the "Third Quarter Overview" section for details on expectations for net charge-offs in 2023.
Table 10—Allowance for Credit Losses
| Nine Months Ended September 30 | ||||||||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||
| Allowance for loan losses at January 1 | $ | 1,464 | $ | 1,479 | ||||||||||||||||||||||||||||
| Cumulative effect from change in accounting guidance (1) | (38) | — | ||||||||||||||||||||||||||||||
| Allowance for loan losses, January 1 (as adjusted for change in accounting guidance) (1) | 1,426 | 1,479 | ||||||||||||||||||||||||||||||
| Loans charged-off: | ||||||||||||||||||||||||||||||||
| Commercial and industrial | 154 | 64 | ||||||||||||||||||||||||||||||
| Commercial real estate mortgage—owner-occupied | 1 | 4 | ||||||||||||||||||||||||||||||
| Residential first mortgage | 1 | 1 | ||||||||||||||||||||||||||||||
| Home equity lines | 3 | 4 | ||||||||||||||||||||||||||||||
| Home equity loans | 1 | 1 | ||||||||||||||||||||||||||||||
| Consumer credit card | 38 | 29 | ||||||||||||||||||||||||||||||
| Other consumer—exit portfolios | 11 | 14 | ||||||||||||||||||||||||||||||
| Other consumer | 132 | 165 | ||||||||||||||||||||||||||||||
| 341 | 282 | |||||||||||||||||||||||||||||||
| Recoveries of loans previously charged-off: | ||||||||||||||||||||||||||||||||
| Commercial and industrial | 43 | 37 | ||||||||||||||||||||||||||||||
| Commercial real estate mortgage—owner-occupied | 1 | 2 | ||||||||||||||||||||||||||||||
| Commercial investor real estate mortgage | — | 1 | ||||||||||||||||||||||||||||||
| Residential first mortgage | 1 | 4 | ||||||||||||||||||||||||||||||
| Home equity lines | 6 | 9 | ||||||||||||||||||||||||||||||
| Home equity loans | 1 | 2 | ||||||||||||||||||||||||||||||
| Consumer credit card | 6 | 6 | ||||||||||||||||||||||||||||||
| Other consumer—exit portfolios | 2 | 4 | ||||||||||||||||||||||||||||||
| Other consumer | 16 | 23 | ||||||||||||||||||||||||||||||
| 76 | 88 | |||||||||||||||||||||||||||||||
| Nine Months Ended September 30 | ||||||||||||||||||||||||||||||||
| 2023 | 2022 | |||||||||||||||||||||||||||||||
| Net charge-offs (recoveries): | ||||||||||||||||||||||||||||||||
| Commercial and industrial | 111 | 27 | ||||||||||||||||||||||||||||||
| Commercial real estate mortgage—owner-occupied | — | 2 | ||||||||||||||||||||||||||||||
| Commercial investor real estate mortgage | — | (1) | ||||||||||||||||||||||||||||||
| Residential first mortgage | — | (3) | ||||||||||||||||||||||||||||||
| Home equity lines | (3) | (5) | ||||||||||||||||||||||||||||||
| Home equity loans | — | (1) | ||||||||||||||||||||||||||||||
| Consumer credit card | 32 | 23 | ||||||||||||||||||||||||||||||
| Other consumer—exit portfolios | 9 | 10 | ||||||||||||||||||||||||||||||
| Other consumer | 116 | 142 | ||||||||||||||||||||||||||||||
| 265 | 194 | |||||||||||||||||||||||||||||||
| Provision for loan losses | 386 | 133 | ||||||||||||||||||||||||||||||
| Allowance for loan losses at September 30 | 1,547 | 1,418 | ||||||||||||||||||||||||||||||
| Reserve for unfunded credit commitments at January 1 | 118 | 95 | ||||||||||||||||||||||||||||||
| Provision for (benefit from) unfunded credit losses | 12 | 26 | ||||||||||||||||||||||||||||||
| Reserve for unfunded credit commitments at September 30 | 130 | 121 | ||||||||||||||||||||||||||||||
| Allowance for credit losses at September 30 | $ | 1,677 | $ | 1,539 | ||||||||||||||||||||||||||||
| Loans, net of unearned income, outstanding at end of period | $ | 98,942 | $ | 94,711 | ||||||||||||||||||||||||||||
| Average loans, net of unearned income, outstanding for the period | $ | 98,220 | $ | 91,112 | ||||||||||||||||||||||||||||
| Net loan charge-offs (recoveries) as a % of average loans, annualized (2): | ||||||||||||||||||||||||||||||||
| Commercial and industrial | 0.29 | % | 0.08 | % | ||||||||||||||||||||||||||||
| Commercial real estate mortgage—owner-occupied | 0.01 | % | 0.06 | % | ||||||||||||||||||||||||||||
| Commercial real estate construction—owner-occupied | (0.11) | % | (0.04) | % | ||||||||||||||||||||||||||||
| Total commercial | 0.26 | % | 0.08 | % | ||||||||||||||||||||||||||||
| Commercial investor real estate mortgage | — | % | (0.02) | % | ||||||||||||||||||||||||||||
| Commercial investor real estate construction | (0.01) | % | — | % | ||||||||||||||||||||||||||||
| Total investor real estate | (0.01) | % | (0.02) | % | ||||||||||||||||||||||||||||
| Residential first mortgage | — | % | (0.02) | % | ||||||||||||||||||||||||||||
| Home equity lines | (0.12) | % | (0.19) | % | ||||||||||||||||||||||||||||
| Home equity loans | (0.01) | % | (0.07) | % | ||||||||||||||||||||||||||||
| Consumer credit card | 3.44 | % | 2.64 | % | ||||||||||||||||||||||||||||
| Other consumer—exit portfolios | 2.78 | % | 1.58 | % | ||||||||||||||||||||||||||||
| Other consumer | 2.61 | % | 3.29 | % | ||||||||||||||||||||||||||||
| Total consumer | 0.63 | % | 0.70 | % | ||||||||||||||||||||||||||||
| Total | 0.36 | % | 0.28 | % | ||||||||||||||||||||||||||||
| Ratios (2): | ||||||||||||||||||||||||||||||||
| Allowance for credit losses at end of period to loans, net of unearned income | 1.70 | % | 1.63 | % | ||||||||||||||||||||||||||||
| Allowance for loan losses to loans, net of unearned income | 1.56 | % | 1.50 | % | ||||||||||||||||||||||||||||
| Allowance for credit losses at end of period to non-performing loans, excluding loans held for sale | 261 | % | 311 | % | ||||||||||||||||||||||||||||
| Allowance for loan losses to non-performing loans, excluding loans held for sale | 241 | % | 287 | % | ||||||||||||||||||||||||||||
(1)See Note 1 for additional information.
(2)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 11—Allowance Allocation
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||||||||
| Loan Balance | Allowance Allocation | Allowance to Loans %****(1) | Loan Balance | Allowance Allocation | Allowance to Loans %****(1) | |||||||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 51,604 | $ | 664 | 1.29 | % | $ | 50,905 | $ | 628 | 1.23 | % | ||||||||||||||||||||||||||
| Commercial real estate mortgage—owner-occupied | 4,833 | 111 | 2.30 | 5,103 | 102 | 2.00 | ||||||||||||||||||||||||||||||||
| Commercial real estate construction—owner-occupied | 270 | 7 | 2.47 | 298 | 7 | 2.29 | ||||||||||||||||||||||||||||||||
| Total commercial | 56,707 | 782 | 1.38 | 56,306 | 737 | 1.31 | ||||||||||||||||||||||||||||||||
| Commercial investor real estate mortgage | 6,436 | 144 | 2.23 | 6,393 | 114 | 1.78 | ||||||||||||||||||||||||||||||||
| Commercial investor real estate construction | 2,301 | 43 | 1.90 | 1,986 | 28 | 1.38 | ||||||||||||||||||||||||||||||||
| Total investor real estate | 8,737 | 187 | 2.15 | 8,379 | 142 | 1.69 | ||||||||||||||||||||||||||||||||
| Residential first mortgage | 20,059 | 104 | 0.52 | 18,810 | 124 | 0.66 | ||||||||||||||||||||||||||||||||
| Home equity lines | 3,240 | 79 | 2.42 | 3,510 | 77 | 2.18 | ||||||||||||||||||||||||||||||||
| Home equity loans | 2,428 | 24 | 0.99 | 2,489 | 29 | 1.17 | ||||||||||||||||||||||||||||||||
| Consumer credit card | 1,261 | 130 | 10.33 | 1,248 | 134 | 10.75 | ||||||||||||||||||||||||||||||||
| Other consumer—exit portfolios | 356 | 30 | 8.29 | 570 | 39 | 6.84 | ||||||||||||||||||||||||||||||||
| Other consumer | 6,154 | 341 | 5.54 | 5,697 | 300 | 5.27 | ||||||||||||||||||||||||||||||||
| Total consumer | 33,498 | 708 | 2.11 | 32,324 | 703 | 2.18 | ||||||||||||||||||||||||||||||||
| Total | $ | 98,942 | $ | 1,677 | 1.70 | % | $ | 97,009 | $ | 1,582 | 1.63 | % | ||||||||||||||||||||||||||
(1)Amounts have been calculated using whole dollar values.
NON-PERFORMING ASSETS
The following table presents non-performing assets as of September 30, 2023 and December 31, 2022:
Table 12—Non-Performing Assets
| September 30, 2023 | December 31, 2022 | |||||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||
| Non-performing loans: | ||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 361 | $ | 347 | ||||||||||||||||||||||||||||
| Commercial real estate mortgage—owner-occupied | 43 | 29 | ||||||||||||||||||||||||||||||
| Commercial real estate construction—owner-occupied | 10 | 6 | ||||||||||||||||||||||||||||||
| Total commercial | 414 | 382 | ||||||||||||||||||||||||||||||
| Commercial investor real estate mortgage | 169 | 53 | ||||||||||||||||||||||||||||||
| Total investor real estate | 169 | 53 | ||||||||||||||||||||||||||||||
| Residential first mortgage | 24 | 31 | ||||||||||||||||||||||||||||||
| Home equity lines | 29 | 28 | ||||||||||||||||||||||||||||||
| Home equity loans | 6 | 6 | ||||||||||||||||||||||||||||||
| Total consumer | 59 | 65 | ||||||||||||||||||||||||||||||
| Total non-performing loans, excluding loans held for sale | 642 | 500 | ||||||||||||||||||||||||||||||
| Non-performing loans held for sale | 2 | 3 | ||||||||||||||||||||||||||||||
| Total non-performing loans(1) | 644 | 503 | ||||||||||||||||||||||||||||||
| Foreclosed properties | 15 | 13 | ||||||||||||||||||||||||||||||
| Total non-performing assets(1) | $ | 659 | $ | 516 | ||||||||||||||||||||||||||||
| Accruing loans 90+ days past due: | ||||||||||||||||||||||||||||||||
| Commercial and industrial | $ | 13 | $ | 30 | ||||||||||||||||||||||||||||
| Commercial real estate mortgage—owner-occupied | 1 | 1 | ||||||||||||||||||||||||||||||
| Total commercial | 14 | 31 | ||||||||||||||||||||||||||||||
| Commercial investor real estate mortgage | — | 40 | ||||||||||||||||||||||||||||||
| Total investor real estate | — | 40 | ||||||||||||||||||||||||||||||
| Residential first mortgage(2) | 58 | 47 | ||||||||||||||||||||||||||||||
| Home equity lines | 16 | 15 | ||||||||||||||||||||||||||||||
| Home equity loans | 7 | 8 | ||||||||||||||||||||||||||||||
| Consumer credit card | 17 | 15 | ||||||||||||||||||||||||||||||
| Other consumer—exit portfolios | 1 | 1 | ||||||||||||||||||||||||||||||
| Other consumer | 27 | 17 | ||||||||||||||||||||||||||||||
| Total consumer | 126 | 103 | ||||||||||||||||||||||||||||||
| Total accruing loans 90+ days past due | $ | 140 | $ | 174 | ||||||||||||||||||||||||||||
| Non-performing loans(1) to loans and non-performing loans held for sale | 0.65 | % | 0.52 | % | ||||||||||||||||||||||||||||
| Non-performing loans, excluding loans held for sale(1) to loans | 0.65 | % | 0.52 | % | ||||||||||||||||||||||||||||
| Non-performing assets(1) to loans, foreclosed properties and non-performing loans held for sale | 0.67 | % | 0.53 | % |
(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 $23 million at September 30, 2023 and $34 million at December 31, 2022.
Non-performing loans at September 30, 2023 increased $141 million as compared to year-end 2022 levels primarily due to one collateralized information credit and two senior housing facilities. Non-performing loans increased as a result of of continued asset quality normalization and a large collateralized information credit becoming non-performing in the third quarter of 2023. The same economic trends that impact net charge-offs, as discussed above, 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, 2023 | |||||||||||||||||||||||
| Commercial | Investor Real Estate | Consumer**(1)** | Total | ||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||
| Balance at beginning of period | $ | 382 | $ | 53 | $ | 65 | $ | 500 | |||||||||||||||
| Additions | 400 | 123 | 1 | 524 | |||||||||||||||||||
| Net payments/other activity | (111) | (7) | (7) | (125) | |||||||||||||||||||
| Return to accrual | (104) | — | — | (104) | |||||||||||||||||||
| Charge-offs on non-accrual loans(2) | (148) | — | — | (148) | |||||||||||||||||||
| Transfers to held for sale(3) | (5) | — | — | (5) | |||||||||||||||||||
| Balance at end of period | $ | 414 | $ | 169 | $ | 59 | $ | 642 |
| 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 |
(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, 2023 and December 31, 2022. 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, 2022 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, 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 and by segment:
Table 14—Deposits by Category and by Segment
| September 30, 2023 | December 31, 2022 | ||||||||||||||||||||||||||||
| (In millions) | |||||||||||||||||||||||||||||
| Non-interest-bearing demand | $ | 44,640 | $ | 51,348 | |||||||||||||||||||||||||
| Interest-bearing checking | 22,428 | 25,676 | |||||||||||||||||||||||||||
| Savings | 13,292 | 15,662 | |||||||||||||||||||||||||||
| Money market—domestic | 32,646 | 33,285 | |||||||||||||||||||||||||||
| Time deposits | 13,193 | 5,772 | |||||||||||||||||||||||||||
| $ | 126,199 | $ | 131,743 | ||||||||||||||||||||||||||
| Consumer Bank segment | $ | 80,980 | $ | 83,487 | |||||||||||||||||||||||||
| Corporate Bank segment | 34,650 | 37,145 | |||||||||||||||||||||||||||
| Wealth Management segment | 7,791 | 9,111 | |||||||||||||||||||||||||||
| Other (1)(2) | 2,778 | 2,000 | |||||||||||||||||||||||||||
| $ | 126,199 | $ | 131,743 |
____`
(1) Other deposits represent non-customer balances primarily consisting of wholesale funding (for example, Eurodollar trade deposits, selected deposits and brokered time deposits).
(2) Includes brokered deposits totaling $1.9 billion at September 30, 2023 and $1.2 billion at December 31, 2022.
Total deposits at September 30, 2023 decreased approximately $5.5 billion compared to year-end 2022 levels, largely in line with expectations. Consistent with a high interest rate environment, deposits across all categories and segments were impacted by remixing as customers exhibited rate-seeking behavior. As of September 30, 2023 non-interest bearing products represented 35 percent of total deposits. Non-interest-bearing and most interest-bearing deposit categories decreased, partially offset by an increase in time deposits. To a lesser degree, deposit outflows were impacted by corporate customers using off-balance sheet funding solutions. Deposit balances also reflect additional brokered deposits in the Other segment entered into in the second quarter to maintain diversified funding sources.
Regions' deposits are granular and diversified including insured and collateralized deposits, with consumer deposits making up more than 60 percent of the total deposit base. Furthermore, corporate deposits include those that are operational in nature (where the primary use is certain operational services such as clearing, custody, payments or other cash management activities). A significant amount of the Company's deposit base is insured by the FDIC or collateralized, with approximately $7.7 billion in deposits collateralized in public funds or in trusts at September 30, 2023. The amount of estimated uninsured deposits totaled $46.7 billion at September 30, 2023, therefore over 60 percent of total deposits are insured by the FDIC. The Company's deposits are also granular in nature as evidenced by an average deposit account balance of approximately $18 thousand at September 30, 2023. The estimates of uninsured deposits and average account size were based on methodologies used in the Company's Call Report, which is prepared on an unconsolidated bank basis.
See the "Third Quarter Overview" section for details on expectations for deposits in 2023. See also the "Liquidity" and "Market Risk-Interest Rate Risk" sections for further discussion.
BORROWED FUNDS
Short-Term Borrowings
Short-term borrowings, which consist of FHLB advances, were $2.0 billion at September 30, 2023, and there were no short-term borrowings outstanding at December 31, 2022. The levels of these borrowings can fluctuate depending on the Company's funding needs and the sources utilized.
Short and long-term funding from the FHLB and FRB are secured by pledged assets, primarily certain loan portfolios which are also subject to blanket lien arrangements with the FHLB and FRB. As of September 30, 2023, Regions' blanket lien arrangements with these entities covered a total loan balance of approximately $93.6 billion and included loans from various loan portfolios. However, borrowing capacity with the FHLB and FRB is contingent on a subset of the blanket lien portfolios which are eligible and pledged according to the parameters for each counterparty.
Short-term secured borrowings, such as securities sold under agreements to repurchase and FHLB advances, are a portion of Regions' funding strategy. See the "Liquidity" section for further detail of Regions' borrowing capacity with the FHLB.
Table 15—Long-Term Borrowings
| September 30, 2023 | December 31, 2022 | ||||||||||
| (In millions) | |||||||||||
| Regions Financial Corporation (Parent): | |||||||||||
| 2.25% senior notes due May 2025 | $ | 747 | $ | 747 | |||||||
| 1.80% senior notes due August 2028 | 646 | 646 | |||||||||
| 7.75% subordinated notes due September 2024 | 100 | 100 | |||||||||
| 6.75% subordinated debentures due November 2025 | 153 | 153 | |||||||||
| 7.375% subordinated notes due December 2037 | 298 | 298 | |||||||||
| Valuation adjustments on hedged long-term debt | (152) | (158) | |||||||||
| 1,792 | 1,786 | ||||||||||
| Regions Bank: | |||||||||||
| FHLB advances | 2,000 | — | |||||||||
| 6.45% subordinated notes due June 2037 | 496 | 496 | |||||||||
| Other long-term debt | 2 | 2 | |||||||||
| 2,498 | 498 | ||||||||||
| Total consolidated | $ | 4,290 | $ | 2,284 |
Long-term borrowings increased by approximately $2.0 billion from year-end 2022 as the Company utilized FHLB advances beginning in the second quarter of 2023. See the "Liquidity" section for further detail of Regions' borrowing capacity with the FHLB.
REGULATORY REQUIREMENTS
CAPITAL RULES
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, 2023, the net impact of the addback on CET1 was approximately $204 million or approximately 16 basis points. The add-back amount will decrease by approximately $100 million each year, or approximately 8 basis points, in the first quarters of 2024 and 2025.
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 following table summarizes the applicable holding company and bank regulatory requirements:
Table 16—Regulatory Capital Requirements
| September 30, 2023 Ratio**(1)** | December 31, 2022 Ratio | Minimum Requirement | Minimum Requirement plus SCB (2) | To Be Well Capitalized | |||||||||||||||||||||||||
| Common equity Tier 1 capital: | |||||||||||||||||||||||||||||
| Regions Financial Corporation | 10.29 | % | 9.60 | % | 4.50 | % | 7.00 | % | N/A | ||||||||||||||||||||
| Regions Bank | 10.82 | 10.77 | 4.50 | 7.00 | 6.50 | % | |||||||||||||||||||||||
| Tier 1 capital: | |||||||||||||||||||||||||||||
| Regions Financial Corporation | 11.60 | % | 10.91 | % | 6.00 | % | 8.50 | % | 6.00 | % | |||||||||||||||||||
| Regions Bank | 10.82 | 10.77 | 6.00 | 8.50 | 8.00 | ||||||||||||||||||||||||
| Total capital: | |||||||||||||||||||||||||||||
| Regions Financial Corporation | 13.37 | % | 12.54 | % | 8.00 | % | 10.50 | % | 10.00 | % | |||||||||||||||||||
| Regions Bank | 12.32 | 12.10 | 8.00 | 10.50 | 10.00 | ||||||||||||||||||||||||
| Leverage capital: | |||||||||||||||||||||||||||||
| Regions Financial Corporation | 9.68 | % | 8.90 | % | 4.00 | % | 4.00 | % | N/A | ||||||||||||||||||||
| Regions Bank | 9.05 | 8.80 | 4.00 | 4.00 | 5.00 |
(1) The current quarter Basel III CET1 capital, Tier 1 capital, Total capital, and Leverage capital ratios are estimated.
(2) Reflects Regions' SCB of 2.50 percent. SCB does not apply to leverage capital ratios.
See the "Third Quarter Overview" section for details on expectations for CET1.
On August 29, 2023, U.S. federal banking regulators issued a proposal for long-term debt requirements that, if finalized, would require the Company to maintain minimum long-term debt requirements. If the proposal becomes effective, banks would be allowed a three-year phase-in period. The Company is studying the proposal and evaluating its impact.
Proposed new rules for U.S. implementation of capital requirements under Basel IV rules, more recently referred to as the Basel III "Endgame", were issued on July 27, 2023. These proposed rules include broad-based changes to the risk-weighting framework for various credit exposures and operational risk capital requirements. The Company is studying the proposals and evaluating their impacts. Additional discussion of the current 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 2022 Annual Report on Form 10-K and the "Regulatory Requirements" section of Management's Discussion and Analysis in the 2022 Annual Report on Form 10-K. Additional discussion and is also included in Note 12 "Regulatory Capital Requirements and Restrictions" to the consolidated financial statements in the 2022 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 Requirements” subsection of the “Business” section, the "Risk Factors" section and the "Liquidity" section in the 2022 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 S&P, Moody’s, Fitch and DBRS" as of September 30, 2023.
Table 17—Credit Ratings
| As of September 30, 2023 | ||||||||||||||
| S&P | Moody’s | Fitch | DBRS | |||||||||||
| Regions Financial Corporation | ||||||||||||||
| Senior unsecured debt | BBB+ | Baa1 | A- | A | ||||||||||
| Subordinated debt | BBB | Baa1 | BBB+ | AL | ||||||||||
| Regions Bank | ||||||||||||||
| Short-term | A-2 | P-1 | F1 | R-1M | ||||||||||
| Long-term bank deposits | N/A | A1 | A | AH | ||||||||||
| Senior unsecured debt | A- | Baa1 | A- | AH | ||||||||||
| Subordinated debt | BBB+ | Baa1 | BBB+ | A | ||||||||||
| Outlook | Stable | Negative | Stable | Stable |
As part of an industry-wide evaluation, on August 7, 2023, Moody's affirmed all long-term and short-term ratings and updated the outlook to negative from stable reflecting several sources of strain on the U.S. banking sector.
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 2022 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.
SHAREHOLDERS' AND TOTAL EQUITY
Shareholders’ equity was $16.1 billion at September 30, 2023 as compared to $15.9 billion at December 31, 2022. During the nine months ended September 30, 2023, net income increased shareholders' equity by $1.7 billion, cash dividends on common stock reduced shareholders' equity by $599 million, and cash dividends on preferred stock reduced shareholders' equity by $74 million. Changes in AOCI decreased shareholders' equity by $893 million, primarily due to available for sale securities and derivative instruments as a result of changes in market interest rates during the nine months ended September 30, 2023. The cumulative effect from the adoption of new accounting guidance that eliminated TDRs and created modifications to troubled borrowers increased shareholders' equity by $28 million.
Subsequent to September 30, 2023 through November 6, 2023, the Company repurchased 9.6 million shares of common stock for which reduced shareholders' equity by $140 million. All of these shares were immediately retired upon repurchase and therefore were not included in treasury stock.
Total equity includes noncontrolling interest of $25 million and $4 million at September 30, 2023 and December 31, 2022, respectively. The noncontrolling interest represents the unowned portion of a low income housing tax credit fund syndication, of which Regions held the majority interest at September 30, 2023 and December 31, 2022.
See Note 5 "Shareholders' Equity and Accumulated Other Comprehensive Income (Loss)" section for additional information.
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", and "adjusted total revenue, taxable-equivalent basis". 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).
Non-GAAP financial measures have inherent limitations, are not required to be uniformly applied and are not audited. Although these non-GAAP financial measures are frequently used by stakeholders in the evaluation of a company, they have limitations as analytical tools, and should not be considered in isolation, or as a substitute for analyses of results as reported under GAAP. In particular, a measure of earnings that excludes selected items does not represent the amount that effectively accrues directly to shareholders.
The following table provides: 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), and 6) a computation of adjusted total revenue on a taxable-equivalent basis (non-GAAP).
Table 18—GAAP to Non-GAAP Reconciliations
| Nine Months Ended September 30 | |||||||||||
| 2023 | 2022 | ||||||||||
| (Dollars in millions) | |||||||||||
| ADJUSTED NET CHARGE-OFFS AND RATIO | |||||||||||
| Net loan charge-offs (GAAP) | $ | 265 | $ | 194 | |||||||
| Less: charge-offs associated with the sale of unsecured consumer loans (1) | — | 63 | |||||||||
| Adjusted net loan charge-offs (non-GAAP) | $ | 265 | $ | 131 | |||||||
| Average loans, net of unearned income, outstanding for the period (GAAP) | $ | 98,220 | $ | 91,112 | |||||||
| Net loan charge-offs as a percentage of average loans, annualized | 0.36 | % | 0.28 | % | |||||||
| Adjusted net loan charge-offs as a percentage of average loans, annualized (non-GAAP) (2) | 0.36 | % | 0.19 | % | |||||||
| Three Months Ended September 30 | Nine Months Ended September 30 | |||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | 2023 | 2022 | |||||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||||||||||||||
| ADJUSTED REVENUES | ||||||||||||||||||||||||||||||||||||||||||||
| Non-interest expense (GAAP) | A | $ | 1,093 | $ | 1,170 | $ | 3,231 | $ | 3,051 | |||||||||||||||||||||||||||||||||||
| Adjustments: | ||||||||||||||||||||||||||||||||||||||||||||
| Professional, legal and regulatory expenses (1) | — | (179) | — | (179) | ||||||||||||||||||||||||||||||||||||||||
| Branch consolidation, property and equipment charges | (1) | (3) | (4) | 2 | ||||||||||||||||||||||||||||||||||||||||
| Salaries and employee benefits—severance charges | (3) | (3) | — | |||||||||||||||||||||||||||||||||||||||||
| Adjusted non-interest expense (non-GAAP) | B | $ | 1,089 | $ | 988 | $ | 3,224 | $ | 2,874 | |||||||||||||||||||||||||||||||||||
| Net interest income (GAAP) | C | $ | 1,291 | $ | 1,262 | $ | 4,089 | $ | 3,385 | |||||||||||||||||||||||||||||||||||
| Taxable-equivalent adjustment (GAAP) | 13 | 12 | 38 | 34 | ||||||||||||||||||||||||||||||||||||||||
| Net interest income, taxable-equivalent basis (GAAP) | D | $ | 1,304 | $ | 1,274 | $ | 4,127 | $ | 3,419 | |||||||||||||||||||||||||||||||||||
| Non-interest income (GAAP) | E | $ | 566 | $ | 605 | $ | 1,676 | $ | 1,829 | |||||||||||||||||||||||||||||||||||
| Adjustments: | ||||||||||||||||||||||||||||||||||||||||||||
| Securities (gains) losses, net | 1 | 1 | 3 | 1 | ||||||||||||||||||||||||||||||||||||||||
| Leveraged lease termination gains | — | — | (1) | (1) | ||||||||||||||||||||||||||||||||||||||||
| Adjusted non-interest income (non-GAAP) | F | $ | 567 | $ | 606 | $ | 1,678 | $ | 1,829 | |||||||||||||||||||||||||||||||||||
| Total revenue (GAAP) | C+E=G | $ | 1,857 | $ | 1,867 | $ | 5,765 | $ | 5,214 | |||||||||||||||||||||||||||||||||||
| Adjusted total revenue (non-GAAP) | C+F=H | $ | 1,858 | $ | 1,868 | $ | 5,767 | $ | 5,214 | |||||||||||||||||||||||||||||||||||
| Total revenue, taxable-equivalent basis (GAAP) | D+E=I | $ | 1,870 | $ | 1,879 | $ | 5,803 | $ | 5,248 | |||||||||||||||||||||||||||||||||||
| Adjusted total revenue, taxable-equivalent basis (non-GAAP) | D+F=J | $ | 1,871 | $ | 1,880 | $ | 5,805 | $ | 5,248 | |||||||||||||||||||||||||||||||||||
(1)In the third quarter of 2022, the Company incurred settlement expenses related to a previously disclosed matter with the CFPB.
Table 19 "Consolidated Average Daily Balances and Yield/Rate Analysis" presents a detail of net interest income (on a taxable-equivalent basis), the net interest margin, and the net interest spread.
Table 19—Consolidated Average Daily Balances and Yield/Rate Analysis
| Three Months Ended September 30 | |||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||
| 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 | $ | — | 5.32 | % | $ | 1 | $ | — | 2.43 | % | |||||||||||||||||||||||
| Debt securities (2) | 31,106 | 185 | 2.38 | 32,101 | 171 | 2.12 | |||||||||||||||||||||||||||||
| Loans held for sale | 910 | 14 | 5.99 | 539 | 8 | 6.09 | |||||||||||||||||||||||||||||
| Loans, net of unearned income (3)(4) | 98,785 | 1,475 | 5.91 | 94,684 | 1,084 | 4.53 | |||||||||||||||||||||||||||||
| Interest-bearing deposits in other banks | 6,374 | 90 | 5.56 | 14,353 | 81 | 2.25 | |||||||||||||||||||||||||||||
| Other earning assets | 1,465 | 15 | 4.09 | 1,379 | 11 | 3.34 | |||||||||||||||||||||||||||||
| Total earning assets | 138,641 | 1,779 | 5.08 | 143,057 | 1,355 | 3.76 | |||||||||||||||||||||||||||||
| Unrealized gains/(losses) on securities available for sale, net (2) | (3,626) | (2,389) | |||||||||||||||||||||||||||||||||
| Allowance for loan losses | (1,526) | (1,432) | |||||||||||||||||||||||||||||||||
| Cash and due from banks | 2,165 | 2,291 | |||||||||||||||||||||||||||||||||
| Other non-earning assets | 17,830 | 16,895 | |||||||||||||||||||||||||||||||||
| $ | 153,484 | $ | 158,422 | ||||||||||||||||||||||||||||||||
| Liabilities and Shareholders’ Equity | |||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||
| Savings | $ | 13,715 | 4 | 0.12 | $ | 16,176 | 5 | 0.11 | |||||||||||||||||||||||||||
| Interest-bearing checking | 22,499 | 74 | 1.31 | 26,665 | 22 | 0.33 | |||||||||||||||||||||||||||||
| Money market | 32,146 | 179 | 2.20 | 31,520 | 17 | 0.22 | |||||||||||||||||||||||||||||
| Time deposits | 12,112 | 110 | 3.59 | 5,351 | 6 | 0.45 | |||||||||||||||||||||||||||||
| Total interest-bearing deposits (5) | 80,472 | 367 | 1.81 | 79,712 | 50 | 0.25 | |||||||||||||||||||||||||||||
| Federal funds purchased and securities sold under agreements to repurchase | 8 | — | 5.46 | — | — | — | |||||||||||||||||||||||||||||
| Short-term borrowings | 2,794 | 39 | 5.48 | 30 | — | 0.23 | |||||||||||||||||||||||||||||
| Long-term borrowings | 4,295 | 69 | 6.31 | 2,319 | 31 | 5.39 | |||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 87,569 | 475 | 2.15 | 82,061 | 81 | 0.39 | |||||||||||||||||||||||||||||
| Non-interest-bearing deposits (5) | 44,748 | — | — | 55,806 | — | — | |||||||||||||||||||||||||||||
| Total funding sources | 132,317 | 475 | 1.42 | 137,867 | 81 | 0.23 | |||||||||||||||||||||||||||||
| Net interest spread (2) | 2.93 | 3.36 | |||||||||||||||||||||||||||||||||
| Other liabilities | 4,677 | 4,082 | |||||||||||||||||||||||||||||||||
| Shareholders’ equity | 16,468 | 16,473 | |||||||||||||||||||||||||||||||||
| Noncontrolling interest | 22 | — | |||||||||||||||||||||||||||||||||
| $ | 153,484 | $ | 158,422 | ||||||||||||||||||||||||||||||||
| Net interest income /margin on a taxable-equivalent basis (6) | $ | 1,304 | 3.73 | % | $ | 1,274 | 3.53 | % |
(1)Amounts have been calculated using whole dollar values.
(2)Debt securities are included on an amortized cost basis with yield and net interest margin calculated accordingly.
(3)Loans, net of unearned income include non-accrual loans for all periods presented.
(4)Interest income on loans, net of unearned income, includes hedging expense of $82 million and hedging income of zero for the three months ended September 30, 2023 and 2022, respectively. Interest income on loans, net of unearned income, also includes net loan fees of $31 million and $28 million for the three months ended September 30, 2023 and 2022, respectively.
(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 equaled 1.16% and 0.15% for the three months ended September 30, 2023 and 2022, 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 | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| 2023 | 2022 | ||||||||||||||||||||||||||||||||||||||||||||||||||||
| 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 | % | |||||||||||||||||||||||||||||||||||||||||
| Debt securities (2) | 31,576 | 557 | 2.35 | 30,968 | 466 | 2.00 | |||||||||||||||||||||||||||||||||||||||||||||||
| Loans held for sale | 615 | 31 | 6.58 | 674 | 27 | 5.39 | |||||||||||||||||||||||||||||||||||||||||||||||
| Loans, net of unearned income (3)(4) | 98,220 | 4,314 | 5.84 | 91,112 | 2,914 | 4.26 | |||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing deposits in other banks | 6,330 | 241 | 5.08 | 21,023 | 139 | 0.89 | |||||||||||||||||||||||||||||||||||||||||||||||
| Other earning assets | 1,406 | 41 | 3.94 | 1,378 | 38 | 3.67 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total earning assets | 138,147 | 5,184 | 4.99 | 145,156 | 3,584 | 3.29 | |||||||||||||||||||||||||||||||||||||||||||||||
| Unrealized gains/(losses) on securities available for sale, net (2) | (3,259) | (1,689) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Allowance for loan losses | (1,483) | (1,441) | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Cash and due from banks | 2,281 | 2,293 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Other non-earning assets | 17,762 | 16,328 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 153,448 | $ | 160,647 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Liabilities and Shareholders’ Equity | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing liabilities: | |||||||||||||||||||||||||||||||||||||||||||||||||||||
| Savings | $ | 14,605 | 13 | 0.12 | $ | 15,974 | 15 | 0.12 | |||||||||||||||||||||||||||||||||||||||||||||
| Interest-bearing checking | 23,383 | 191 | 1.09 | 27,319 | 30 | 0.15 | |||||||||||||||||||||||||||||||||||||||||||||||
| Money market | 32,077 | 400 | 1.67 | 31,423 | 23 | 0.10 | |||||||||||||||||||||||||||||||||||||||||||||||
| Time deposits | 9,366 | 202 | 2.88 | 5,617 | 15 | 0.36 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing deposits (5) | 79,431 | 806 | 1.36 | 80,333 | 83 | 0.14 | |||||||||||||||||||||||||||||||||||||||||||||||
| Federal funds purchased and securities sold under agreements to repurchase | 8 | — | 5.30 | — | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Short-term borrowings | 2,154 | 86 | 5.23 | 16 | — | 0.34 | |||||||||||||||||||||||||||||||||||||||||||||||
| Long-term borrowings | 3,374 | 165 | 6.48 | 2,345 | 82 | 4.66 | |||||||||||||||||||||||||||||||||||||||||||||||
| Total interest-bearing liabilities | 84,967 | 1,057 | 1.66 | 82,694 | 165 | 0.27 | |||||||||||||||||||||||||||||||||||||||||||||||
| Non-interest-bearing deposits(5) | 47,155 | — | — | 57,603 | — | — | |||||||||||||||||||||||||||||||||||||||||||||||
| Total funding sources | 132,122 | 1,057 | 1.07 | 140,297 | 165 | 0.16 | |||||||||||||||||||||||||||||||||||||||||||||||
| Net interest spread (2) | 3.33 | 3.02 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Other liabilities | 4,705 | 3,490 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Shareholders’ equity | 16,606 | 16,860 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| Noncontrolling interest | 15 | — | |||||||||||||||||||||||||||||||||||||||||||||||||||
| $ | 153,448 | $ | 160,647 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net interest income/margin on a taxable-equivalent basis (6) | $ | 4,127 | 3.99 | % | $ | 3,419 | 3.15 | % |
(1)Amounts have been calculated using whole dollar values.
(2)Debt securities are included on an amortized cost basis with yield and net interest margin calculated accordingly.
(3)Loans, net of unearned income include non-accrual loans for all periods presented.
(4)Interest income on loans, net of unearned income, includes hedging expense of $129 million and hedging income $188 million for the nine months ended September 30, 2023 and 2022, respectively. Interest income on loans, net of unearned income, also includes net loan fees of $93 million and $76 million for the nine months ended September 30, 2023 and 2022, respectively.
(5)Total deposit costs may be calculated by dividing total interest expense on deposits by the sum of interest-bearing deposits and non-interest-bearing deposits. The rates for total deposit costs equaled 0.85% and 0.08% for the nine months ended September 30, 2023 and 2022, 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 2023, the FOMC increased the Fed funds rate by 100 basis points. See the "Third Quarter Overview" for a discussion of recent FOMC activity.
Net interest income (taxable-equivalent basis) and net interest margin increased in both the third quarter and first nine months of 2023 compared to the same periods in 2022. The increases were driven primarily by significantly higher short-term and long-term interest rates and higher average loan balances. Due to the rising rate environment, deposit and funding cost normalization which includes the impact of deposit remixing, partially offset the increases in net interest income and net interest margin. Additionally, offsetting the increase in the third quarter of 2023, approximately $6 billion of hedges became active which reduce net interest income in the current rate environment.
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. As its primary tool to analyze 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.
In addition to net interest income simulations, Regions also utilizes an EVE analysis as a measurement tool to estimate risk exposure over a longer-term horizon. EVE measures the extent to which the economic value of assets, liabilities and off-balance sheet instruments may change in response to fluctuations in interest rates. Importantly, EVE values only the current balance sheet, does not incorporate the balance sheet growth assumptions used in the net interest income sensitivity analyses, and results are highly dependent on imprecise assumptions for products with embedded prepay optionality and indeterminate maturities. The imprecise assumptions in preparing an EVE analysis limit its efficacy.
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 magnitude of interest rate movements, the slope of the yield curve, and the changing composition of the balance sheet that results from both strategic plans and 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, Regions compares a set of alternative interest rate scenarios to the results of a base case scenario derived using “market forward rates.” See the "Third Quarter Overview" section for details on expectations for net interest income in 2023. The set of alternative interest rate scenarios includes instantaneous parallel rate shifts of various magnitudes. In addition to parallel rate 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—Regions' balance sheet is naturally asset sensitive, with net interest income increasing with higher interest rates, and decreasing with lower interest rates. This is the result of approximately half of the loan portfolio floating contractually with market rate indices, and funding from a large, mostly stable retail deposit portfolio. Importantly, the stability and rate sensitivity of Regions' deposit portfolio has been proven over multiple interest rate cycles. With this natural balance sheet profile, the ability to utilize discretionary asset duration strategies within the investment portfolio and through cash flow hedges is critical to mitigate the Bank’s naturally asset sensitive position.
As of September 30, 2023, Regions evidenced a mostly balanced asset/liability position, with an asset duration of approximately 2.6 years and a liability duration of approximately 2.6 years, using historically-informed approximations. The securities portfolio duration was approximately 4.5 years and is appropriate for Regions' risk profile in order to offset the long-duration deposit liabilities. While the available for sale securities and cash flow hedging portfolios are recorded on the balance sheet including current unrealized losses, deposit value increases have more than offset these losses through the rising rate environment. The additional value of deposits in a higher rate environment is realized in the form of lower-cost funding when compared with wholesale sources. While balance sheet analysis, particularly EVE analysis, does contemplate the economic value of deposits, the estimated fair value of deposits is equal to their carrying value for certain financial statement footnote disclosures, consistent with industry practices. See Note 9 "Fair Value Measurements" to the consolidated financial statements for additional information.
As of September 30, 2023, Regions' net interest income profile was mostly neutral to both gradual and instantaneous parallel yield curve shifts as compared to the base case for the 12-month measurement horizon ending September 2024. The estimated exposure associated with the rising and falling rate scenarios in Table 20 below reflects the combined impacts of movements in short-term and long-term interest rates. An increase or reduction in short-term interest rates (such as the Fed Funds rate, the rate of Interest on Excess Reserves, 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 mostly offset the change in asset yields.
Net interest income remains exposed to intermediate and long-term yield curve tenors. While this was a headwind to net interest income during a low rate environment, it represents a tailwind to net interest income growth as the yield curve rises and remains elevated. An increase in intermediate and long-term interest rates (such as intermediate to longer-term U.S. Treasuries, swaps 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 tightening monetary policy on industry liquidity levels and the cost of that liquidity, management evaluates the impacts from these key assumptions through sensitivity analysis. Sensitivity calculations are hypothetical and should not be considered predictive of future results.
The Company’s baseline balance sheet assumptions include management's best estimate for balance sheet changes in the coming 12 months. In the first nine months of 2023, Regions experienced a decline in deposit balances, both from the normalization of balances acquired from stimulative policies, as well as from late-cycle rate seeking behavior by higher-balance customers, yet those declines slowed during the third quarter. The baseline projects deposit balances to be stable to modestly lower over the forecast horizon. Assuming runoff mimics the expected total deposit mix, an additional deposit outflow of $1 billion would reduce net interest income by $22 million over 12 months in the parallel +100 basis point scenario in Table 20. Conversely, if an additional $1 billion are retained a positive benefit of $22 million would be expected over 12 months in the parallel +100 basis point scenario in Table 20.
While the base case estimates stabilizing deposit balances in aggregate, additional remixing of approximately $3 billion to $5 billion out of low-cost deposit categories and into high-cost deposit categories is anticipated through mid-2024. In rising rate scenarios only, management assumes that the mix of legacy deposits will further change versus the base case as informed by analyses of prior rate cycles. Importantly, much of the anticipated mix shift has already occurred or is expected to occur within the baseline scenario. The magnitude of the remixing shift is rate dependent and equates to approximately $1.5 billion over 12 months in the parallel +100 basis point scenario in Table 20. Furthermore, over the 12 month horizon, an increase of $1 billion in deposit remixing would decrease net interest income by approximately $28 million, and a decrease of $1 billion in deposit remixing would increase net interest income by $28 million.
The deposit beta is calibrated using the experience from prior rate cycles and is dynamic across both interest rate level and time. In the base case scenario, management expects an approximate 40 percent full cycle interest-bearing deposit beta by year-end 2023. The parallel +100 basis point shock scenario in Table 20 also incorporates an incremental beta of approximately 45 percent above the base case scenario. Incremental deposit pricing outperformance or underperformance of 5 percent in the parallel +100 basis point shock would increase or decrease net interest income by approximately $40 million.
The table below summarizes Regions' positioning over the next 12 months in various parallel yield curve shifts (i.e., including all yield curve tenors). The scenarios are inclusive of all interest rate hedging activities. More information regarding hedges is disclosed in Table 21 and its accompanying description.
Table 20—Interest Rate Sensitivity
| Estimated Annual Change in Net Interest Income September 30, 2023**(1)(2)** | |||||
| (in millions) | |||||
| Gradual Change in Interest Rates | |||||
| + 200 basis points | $ | 31 | |||
| + 100 basis points | 19 | ||||
| - 100 basis points | (65) | ||||
| - 200 basis points | (112) | ||||
| Instantaneous Change in Interest Rates | |||||
| + 200 basis points | $ | (3) | |||
| + 100 basis points | 10 | ||||
| - 100 basis points | (61) | ||||
| - 200 basis points | (136) |
(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)All active cash flow hedges, including forward starting hedges, are reflected within the measurement horizon. See Table 22 for additional information regarding hedge start and maturity dates.
Regions' comprehensive interest rate risk management approach uses derivatives, as discussed further below, and debt securities to manage its interest rate risk position.
During the third quarter of 2023, the Company added $1.5 billion of 3 year maturity, forward starting swaps, of which $1.25 billion become active in 2026 and $250 million become active in January 2027. The receive fixed rates on these cash flow hedges averaged 3.46 percent, paying overnight SOFR. The Company also added $500 million of 4 year maturity forward starting interest rate options, which will become active in 2025. These options were constructed with net purchased interest rate floors at a weighted-average strike of 2.00 percent. To completely offset the cost of these floors, the strategy includes sold interest rate caps with a weighted-average strike of 6.20 percent.
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, forward sale commitments, futures contracts, interest rate swaps, interest rate options (caps, floors and collars), and contracts with a combination of these instruments.
Forward rate contracts are commitments to buy or sell financial instruments at a future date at a specified price or yield. 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 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 options 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, 2023 | |||||||||||||||||||||||||||||||||||||||||
| Notional Amount | Weighted-Average | ||||||||||||||||||||||||||||||||||||||||
| Maturity (Years) | Receive Rate | Pay Rate | |||||||||||||||||||||||||||||||||||||||
| (Dollars in millions) | |||||||||||||||||||||||||||||||||||||||||
| Derivatives in fair value hedging relationships: | |||||||||||||||||||||||||||||||||||||||||
| Receive variable/pay fixed swaps - debt securities available for sale(1)(2)(3) | $ | 123 | 4.1 | 5.0 | % | 4.3 | % | ||||||||||||||||||||||||||||||||||
| Receive fixed/pay variable swaps - borrowed funds(3) | 1,400 | 3.0 | 0.6 | % | 5.4 | % | |||||||||||||||||||||||||||||||||||
| Derivatives in cash flow hedging relationships: | |||||||||||||||||||||||||||||||||||||||||
| Receive fixed/pay variable swaps - floating-rate loans(1)(2)(3) | $ | 29,300 | 3.3 | 3.0 | % | 5.0 | % | ||||||||||||||||||||||||||||||||||
| Interest rate options(4) | 2,000 | 4.8 | |||||||||||||||||||||||||||||||||||||||
| Total derivatives designated as hedging instruments | $ | 32,823 | |||||||||||||||||||||||||||||||||||||||
(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)Floating rates include the static spread associated with SOFR conversion.
(4)Interest rate options have an average cap strike of 6.22% and a floor of 1.86%.
The following table presents the average asset hedge notional amounts that are active during each of the remaining quarterly and annual periods. Asset hedge notional amounts mature prior to the end of 2032, 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 | Years Ended | ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| 12/31/2023 | 2024 | 2025 | 2026 | 2027 | 2028 | 2029 | 2030 | 2031 | |||||||||||||||||||||||||||||||||||||||||||||||||||
| (in millions) | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Asset Hedging Relationships: | |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
| Receive fixed/pay variable swaps | $ | 18,018 | $ | 20,411 | $ | 18,989 | $ | 16,653 | $ | 12,205 | $ | 6,362 | $ | 386 | $ | 2 | $ | — | |||||||||||||||||||||||||||||||||||||||||
| Receive variable/pay fixed swaps | 99 | 100 | 100 | 83 | 15 | 23 | 23 | 23 | 23 | ||||||||||||||||||||||||||||||||||||||||||||||||||
| Net receive fixed/pay variable swaps | $ | 17,919 | $ | 20,311 | $ | 18,889 | $ | 16,570 | $ | 12,190 | $ | 6,339 | $ | 363 | $ | (21) | $ | (23) | |||||||||||||||||||||||||||||||||||||||||
| Interest rate options | $ | — | $ | 1,001 | $ | 1,999 | $ | 2,000 | $ | 2,000 | $ | 999 | $ | 1 | $ | — | $ | — | |||||||||||||||||||||||||||||||||||||||||
(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’ year-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. Further, on March 15, 2022, the LIBOR Act was signed into law with the purpose of establishing a clear and uniform process for replacing LIBOR in existing contracts upon the formal cessation of USD LIBOR. 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 allowed certain clients to fallback to SOFR upon the cessation of LIBOR, consistent with the guidelines in the legislation.
The Company successfully transitioned from LIBOR to alternative reference rates by June 30, 2023. Impacted instruments were transitioned in accordance with the LIBOR Act with certain instruments transitioning on applicable reset dates through June 30, 2024. As part of this transition, the Company applied certain optional expedients and exceptions allowed in previously adopted accounting relief for hedges.
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 diverse 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. See also Note 11 "Commitments, Contingencies and Guarantees" to the consolidated financial statements for additional discussion of the Company’s funding requirements. 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.
Cash reserves, liquid assets and secured borrowing capabilities 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. As part of its normal management practice, Regions maintains collateral and operational readiness to utilize secured funding sources such as FHLB, FRB or BTFP on a same-day basis (subject to any practical constraints affecting these market participants). While the securities portfolio is a primary source of liquidity, the secured borrowing capabilities, in addition to cash reserves on hand, assist in alleviating the Company's need to sell securities for funding purposes. 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 following table summarizes the Company's available sources of liquidity as of September 30, 2023:
Table 23—Liquidity Sources
| Availability as of September 30, 2023 | |||||
| (in billions) | |||||
| Cash at the FRB(1) | $ | 7.5 | |||
| Liquid securities free to use, including at BTFP(2) | 18.9 | ||||
| Liquid corporate bonds | 0.6 | ||||
| Other unencumbered securities | 0.1 | ||||
| FHLB borrowing availability | 11.4 | ||||
| FRB borrowing availability through the discount window | 18.2 | ||||
| Total liquidity sources | $ | 56.7 |
(1) Includes small in transit items that may not yet be reflected in the Fed master account closing balance.
(2) Securities pledged under the BTFP are measured at par value, as provided in the program, resulting in additional collateral of approximately $2.3 billion at
September 30, 2023.
The balance with the FRB is the primary component of the balance sheet line item “interest-bearing deposits in other banks.” At September 30, 2023, Regions had approximately $7.5 billion in cash on deposit with the FRB and other depository institutions, a decrease from approximately $9.2 billion at December 31, 2022, partially driven by the expected decline in deposits during the period. Refer to the "Cash and Cash Equivalents" and "Deposits" sections for more information.
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 available for sale securities portfolio (for example, the agency guaranteed MBS portfolio) can be readily used as a source of cash through various secured borrowing arrangements, including the BTFP. In March 2023, the Federal Reserve created the BTFP as an additional liquidity source, under which securities may be pledged at their par value for a lending arrangement up to one year in length. Regions' securities portfolio consists of U.S. Treasury securities, federal agency securities, MBS and corporate and other debt. In evaluating the liquidity within the securities portfolio, "liquid securities free to use" are primarily comprised of U.S Treasury securities and agency MBS. These highly liquid securities include free to pledge securities as well as the incremental borrowing availability under the BTFP, which is based on collateral values being measured at par value under the program. Additionally, certain corporate bonds are considered to be highly liquid. Other unencumbered securities, primarily non-agency commercial MBS, also serve as a source of liquidity.
Regions’ financing arrangement with the FHLB adds additional flexibility in managing the Company's liquidity position. As of September 30, 2023, Regions had $2.0 billion in short-term FHLB borrowings, $2.0 billion in long-term FHLB borrowings and had additional borrowing capacity from the FHLB, as shown in Table 23. FHLB borrowing capacity was determined based on eligible securities and loan amounts, as of September 30, 2023, that can be pledged as collateral for 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 has additional borrowing availability with the FRB through the discount window as shown in Table 23. FRB borrowing capacity is determined based on eligible loan amounts that can be used as collateral for future borrowing capacity.
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 2022 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 (Loss)" 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 $2.4 billion at September 30, 2023. 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 in the "Management Process" section in Management's Discussion and Analysis included in Regions' Annual Report on Form 10-K for the year ended December 31, 2022. 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 found earlier in this report for further information regarding the risk characteristics of each loan type. See further discussion of the current U.S. economic environment in the "Economic Environment in Regions' Banking Markets" section.
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 Regions and the Company's 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, 2022 for further discussion of Regions' information security risk.
PROVISION FOR CREDIT LOSSES
The provision for 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 $145 million during the third quarter of 2023 compared to $135 million during the third quarter 2022. The provision for credit losses totaled $398 million for the first nine months of 2023 compared to $159 million for the first nine months of 2022. Refer to the "Allowance" section for further detail.
NON-INTEREST INCOME
Table 24—Non-Interest Income
| Three Months Ended September 30 | Quarter-to-Date Change 9/30/2023 vs. 9/30/2022 | |||||||||||||||||||||||||||||||
| 2023 | 2022 | Amount | Percent | |||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||
| Service charges on deposit accounts | $ | 142 | $ | 156 | $ | (14) | (9.0) | % | ||||||||||||||||||||||||
| Card and ATM fees | 126 | 126 | — | — | % | |||||||||||||||||||||||||||
| Capital markets income | 64 | 93 | (29) | (31.2) | % | |||||||||||||||||||||||||||
| Investment management and trust fee income | 79 | 74 | 5 | 6.8 | % | |||||||||||||||||||||||||||
| Mortgage income | 28 | 37 | (9) | (24.3) | % | |||||||||||||||||||||||||||
| Investment services fee income | 33 | 34 | (1) | (2.9) | % | |||||||||||||||||||||||||||
| Commercial credit fee income | 24 | 26 | (2) | (7.7) | % | |||||||||||||||||||||||||||
| Bank-owned life insurance | 20 | 15 | 5 | 33.3 | % | |||||||||||||||||||||||||||
| Market value adjustments on employee benefit assets | 4 | (5) | 9 | 180.0 | % | |||||||||||||||||||||||||||
| Securities gains (losses), net | (1) | (1) | — | — | % | |||||||||||||||||||||||||||
| Other miscellaneous income | 47 | 50 | (3) | (6.0) | % | |||||||||||||||||||||||||||
| $ | 566 | $ | 605 | $ | (39) | (6.4) | % |
| Nine Months Ended September 30 | Year-to-Date Change 9/30/2023 vs. 9/30/2022 | |||||||||||||||||||||||||||||||
| 2023 | 2022 | Amount | Percent | |||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||
| Service charges on deposit accounts | $ | 449 | $ | 489 | $ | (40) | (8.2) | % | ||||||||||||||||||||||||
| Card and ATM fees | 377 | 383 | (6) | (1.6) | % | |||||||||||||||||||||||||||
| Capital markets income | 174 | 278 | (104) | (37.4) | % | |||||||||||||||||||||||||||
| Investment management and trust fee income | 232 | 221 | 11 | 5.0 | % | |||||||||||||||||||||||||||
| Mortgage income | 78 | 132 | (54) | (40.9) | % | |||||||||||||||||||||||||||
| Investment services fee income | 102 | 90 | 12 | 13.3 | % | |||||||||||||||||||||||||||
| Commercial credit fee income | 78 | 71 | 7 | 9.9 | % | |||||||||||||||||||||||||||
| Bank-owned life insurance | 56 | 45 | 11 | 24.4 | % | |||||||||||||||||||||||||||
| Market valuation adjustments on employee benefit assets | 3 | (36) | 39 | 108.3 | % | |||||||||||||||||||||||||||
| Securities gains (losses), net | (3) | (1) | (2) | 200.0 | % | |||||||||||||||||||||||||||
| Other miscellaneous income | 130 | 157 | (27) | (17.2) | % | |||||||||||||||||||||||||||
| $ | 1,676 | $ | 1,829 | $ | (153) | (8.4) | % |
Service Charges on Deposit Accounts
Service charges on deposit accounts include overdraft fees, treasury management fees and other customer transaction-related service charges, and, prior to mid-2022, non-sufficient fund fees. During the third quarter and nine months ended September 30, 2023, service charges decreased compared to the same periods in 2022, primarily as a result of overdraft-related policy enhancements that eliminated non-sufficient fund fees in mid-June 2022. Additionally, in the second quarter of 2023, the Company added an overdraft grace feature, which compliments the overdraft-related policy enhancements. An increase in fees from treasury management services partially offset the overall decline in service charges.
On October 25, 2023, the Federal Reserve Board issued a proposal for public comment that, if finalized, would lower the maximum interchange fee that a large debit card issuer can receive for a debit card transaction. Under the proposed rule the maximum interchange fee would be subject to adjustments every other year based upon issuer cost data. The Company is studying the proposal and evaluating its impact.
Capital Markets Income
Capital markets income primarily relates to capital raising activities that include securities underwriting and placement, loan syndication, as well as foreign exchange, derivatives, merger and acquisition and other advisory services. Capital markets income decreased in the third quarter and nine months ended September 30, 2023 compared to the same periods in 2022, driven primarily by negative credit/debit valuation adjustments in 2023 due to rate and spread movements. To a lesser degree, capital markets income was negatively impacted by declines in syndication revenue. Partially offsetting these decreases were increases
in securities underwriting and placement fees and real estate capital markets revenue in the third quarter and first nine months of 2023 compared to the same periods in 2022.
Mortgage Income
Mortgage income is generated through the origination and servicing of residential mortgage loans for long-term investors and sales of residential mortgage loans in the secondary market. The decrease in mortgage income in the third quarter and nine months ended September 30, 2023 compared to the same periods in 2022 was due primarily to lower mortgage production and sales as a result of higher market interest rates. In the nine months ended September 30, 2023, the decrease was also a result of a decline in the valuation of mortgage servicing rights and related hedges. Additionally, mortgage income for the nine months ended September 30, 2022 included approximately $12 million in gains associated with the re-securitization and sale of Ginnie Mae loans previously repurchased from their pools. Partially offsetting the declines was an increase in servicing income associated with a bulk purchase of the rights to service $6.2 billion of residential mortgage loans in the third quarter of 2023.
Investment Services Fee Income
Investment services fee income represents income earned from investment advisory services. Investment services fee income increased during the nine months ended September 30, 2023 compared to the same period in 2022 due primarily to the rising interest rate environment, which has driven increases in fixed annuity rates and the related investment income. Also contributing were increases in assets under management due to additional 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 income increased during the nine months ended September 30, 2023 compared to the same period in 2022 driven primarily by improvement in underlying crediting rates as a result of an overall increase in interest rates.
Market Value Adjustments on Employee Benefit Assets
Market value adjustments on employee benefit assets are the reflection of market value variations related to assets held for certain employee benefits. The adjustments are offset in salaries and benefits and other non-interest expense.
Other Miscellaneous Income
Other miscellaneous income includes net revenue from affordable housing, valuation adjustments to equity investments, 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 nine months ended September 30, 2023 compared to the same periods in 2022 primarily due to a decline in commercial loan and leasing related fee income and a customer's bankruptcy-related distribution in the second quarter of 2022 that did not repeat.
NON-INTEREST EXPENSE
Table 25—Non-Interest Expense
| Three Months Ended September 30 | Quarter-to-Date Change 9/30/2023 vs. 9/30/2022 | |||||||||||||||||||||||||||||||
| 2023 | 2022 | Amount | Percent | |||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||
| Salaries and employee benefits | $ | 589 | $ | 593 | $ | (4) | (0.7) | % | ||||||||||||||||||||||||
| Equipment and software expense | 107 | 98 | 9 | 9.2 | % | |||||||||||||||||||||||||||
| Net occupancy expense | 72 | 76 | (4) | (5.3) | % | |||||||||||||||||||||||||||
| Outside services | 39 | 40 | (1) | (2.5) | % | |||||||||||||||||||||||||||
| Marketing | 26 | 29 | (3) | (10.3) | % | |||||||||||||||||||||||||||
| Professional, legal and regulatory expenses | 27 | 199 | (172) | (86.4) | % | |||||||||||||||||||||||||||
| Credit/checkcard expenses | 16 | 13 | 3 | 23.1 | % | |||||||||||||||||||||||||||
| FDIC insurance assessments | 27 | 16 | 11 | 68.8 | % | |||||||||||||||||||||||||||
| Visa class B shares expense | 5 | 3 | 2 | 66.7 | % | |||||||||||||||||||||||||||
| Operational losses | 75 | 13 | 62 | 476.9 | % | |||||||||||||||||||||||||||
| Branch consolidation, property and equipment charges | 1 | 3 | (2) | (66.7) | % | |||||||||||||||||||||||||||
| Other miscellaneous expenses | 109 | 87 | 22 | 25.3 | % | |||||||||||||||||||||||||||
| $ | 1,093 | $ | 1,170 | $ | (77) | (6.6) | % |
| Nine Months Ended September 30 | Year-to-Date Change 9/30/2023 vs. 9/30/2022 | |||||||||||||||||||||||||||||||
| 2023 | 2022 | Amount | Percent | |||||||||||||||||||||||||||||
| (Dollars in millions) | ||||||||||||||||||||||||||||||||
| Salaries and employee benefits | $ | 1,808 | $ | 1,714 | $ | 94 | 5.5 | % | ||||||||||||||||||||||||
| Equipment and software expense | 310 | 290 | 20 | 6.9 | % | |||||||||||||||||||||||||||
| Net occupancy expense | 218 | 226 | (8) | (3.5) | % | |||||||||||||||||||||||||||
| Outside services | 120 | 116 | 4 | 3.4 | % | |||||||||||||||||||||||||||
| Marketing | 79 | 75 | 4 | 5.3 | % | |||||||||||||||||||||||||||
| Professional, legal and regulatory expenses | 66 | 240 | (174) | (72.5) | % | |||||||||||||||||||||||||||
| Credit/checkcard expenses | 45 | 52 | (7) | (13.5) | % | |||||||||||||||||||||||||||
| FDIC insurance assessments | 81 | 43 | 38 | 88.4 | % | |||||||||||||||||||||||||||
| Visa class B shares expense | 22 | 17 | 5 | 29.4 | % | |||||||||||||||||||||||||||
| Operational losses | 183 | 38 | 145 | 381.6 | % | |||||||||||||||||||||||||||
| Branch consolidation, property and equipment charges | 4 | (2) | 6 | 300.0 | % | |||||||||||||||||||||||||||
| Other miscellaneous expenses | 295 | 242 | 53 | 21.9 | % | |||||||||||||||||||||||||||
| $ | 3,231 | $ | 3,051 | $ | 180 | 5.9 | % |
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. Salaries and employee benefits increased in the first nine months of 2023 compared to the same period in 2022 primarily due to increases in base salaries and higher benefit expenses offset by a decline in incentive compensation. Full-time equivalent headcount increased to 20,257 at September 30, 2023 from 19,950 at September 30, 2022 further contributing to the increase in salaries and employee benefits.
Professional, legal and regulatory expenses
Professional, legal, and regulatory expenses consist of amounts related to legal, consulting, other professional fees and regulatory charges. Professional, legal, and regulatory expenses decreased in the third quarter and first nine months of 2023 compared to the same periods in 2022 primarily due to a settlement reached with the CFPB in the third quarter of 2022 related to a previously disclosed matter. See Note 23 "Commitments, Contingencies and Guarantees" in the Annual Report on Form 10-K for the year ended December 31, 2022 for more detail.
Credit/checkcard Expenses
Credit/checkcard expenses include credit and checkcard fraud and expenses. Credit/checkcard expenses decreased in the first nine months of 2023 compared to the same period in 2022 due to a debit card accrual increase in the first quarter of 2022 related to a previous matter that did not repeat.
FDIC Insurance Assessments
FDIC insurance assessments increased in the third quarter and first nine months of 2023 compared to the same periods in 2022 primarily resulting from a two basis point increase in the quarterly assessment rate schedules charged to all financial institutions effective for the first quarter of 2023. To a lesser degree, changes in other factors including continued credit normalization and declining cash balances contributed to the increase.
The FDIC has estimated losses resulting from recent large regional institution failures, including the portion attributable to protection of uninsured depositors under the Systemic Risk Exception. Federal law requires that any losses to the FDIC’s Deposit Insurance Fund related to this action be repaid by a special assessment on banks. In the second quarter of 2023, the FDIC released a proposal for the special assessment related to the two March 2023 bank failures, estimated at $15.8 billion. The assessment to cover these losses is proposed to be paid at an annual rate of approximately 12.5 basis points over eight quarterly assessment periods beginning in the first quarter of 2024. If the proposal is finalized as drafted, Regions would pay approximately $111 million. The full amount would be accrued concurrent with the finalization of the rule. Regions expects the special assessment to be deductible for income taxes.
Operational Losses
Operational losses include losses related to fraud, execution, delivery and process management, and damage to physical assets. Operational losses increased in the third quarter and first nine months of 2023 compared to the same periods in 2022 due to elevated check-related fraud losses from two fraud schemes. The Company has adjusted its countermeasures to identify potential fraud instances more effectively and the volume of new fraud claims has slowed.
Other Miscellaneous Expenses
Other miscellaneous expenses include expenses related to communications, postage, supplies, certain credit-related costs, foreclosed property expenses, mortgage repurchase costs, and other costs (benefits) related to employee benefit plans. Other miscellaneous expenses increased in the third quarter of 2023 and first nine months of 2023 compared to the same periods in 2022 primarily due to higher non-service based pension-related expenses and, to a lesser degree, higher fees associated with licenses and taxes.
INCOME TAXES
The Company’s income tax expense for the three months ended September 30, 2023 was $129 million compared to $133 million for the three months ended September 30, 2022, resulting in effective tax rates of 20.9 percent and 23.7 percent, respectively. The decrease in effective tax rate for the three months ended September 30, 2023 compared to the same period in 2022 is primarily due to the nondeductible nature of a portion of the previously disclosed settlement reached with the CFPB in the third quarter of 2022. See Note 23 "Commitments, Contingencies and Guarantees" in the Annual Report on Form 10-K for the year ended December 31, 2022 for further details. The Company’s income tax expense for the nine months ended September 30, 2023 was $453 million compared to $444 million for the nine months ended September 30, 2022, resulting in effective tax rates of 21.2 percent and 22.2 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, 2023, the Company reported a net deferred tax asset of $1.2 billion compared to $943 million at December 31, 2022. The change in the net deferred tax position was due primarily to the deferred tax impact of increases in unrealized losses on securities for sale and derivative instruments arising during the period.
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