Regions Financial Corporation — 2022 Form 10-K
Business context and reporting period
Regions Financial Corporation is a bank holding company headquartered in Birmingham, Alabama, serving customers primarily across the South, Midwest and Texas. It reported for the year ended December 31, 2022; comparisons below are primarily with 2021. At year-end, Regions had $155.2 billion in assets, $131.7 billion in deposits and $15.9 billion in shareholders’ equity.
Financial performance and condition
| Metric | 2022 | 2021 |
|---|---|---|
| Net interest income, taxable-equivalent | $4.833 billion | $3.958 billion |
| Net interest margin, taxable-equivalent | 3.36% | 2.85% |
| Non-interest income | $2.429 billion | $2.524 billion |
| Non-interest expense | $4.068 billion | $3.747 billion |
| Provision for (benefit from) credit losses | $271 million expense | $524 million benefit |
| Net income | $2.245 billion | $2.521 billion |
| Net income available to common shareholders | $2.146 billion | $2.400 billion |
| Diluted earnings per share | $2.28 | $2.49 |
Net interest income rose mainly from higher market rates, loan growth and a larger average securities portfolio; the margin increased 51 basis points. The increase in credit-loss provision, higher compensation and professional/legal/regulatory costs, and lower mortgage income contributed to lower earnings. The 2022 effective tax rate was 22.0%, versus 21.6%.
Total loans rose 10.5% to $97.0 billion, led by commercial lending. Deposits fell $7.3 billion to $131.7 billion, including a $7.0 billion decline in non-interest-bearing demand deposits. Net charge-offs were $263 million, or 0.29% of average loans, versus $204 million, or 0.24%, in 2021. The allowance for credit losses ended at $1.582 billion, 1.63% of loans, compared with $1.574 billion and 1.79% a year earlier. Non-performing loans excluding loans held for sale rose to $500 million from $451 million.
Cash and cash equivalents fell to $11.2 billion from $29.4 billion, as cash funded loan growth and securities purchases amid deposit runoff. Operating cash flow was $3.1 billion; investing cash outflow was $12.9 billion and financing cash outflow was $8.3 billion. Regions Bank held $9.2 billion at the Federal Reserve; parent-company cash was $1.6 billion. Additional year-end borrowing capacity was $13.2 billion at the Federal Reserve and $14.5 billion at the FHLB, based on available collateral. The loan-to-deposit ratio was 74% and Regions reported compliance with internal liquidity requirements.
Long-term borrowings were $2.284 billion, down from $2.407 billion; no debt was issued or redeemed in 2022. Regulatory capital ratios were estimated at 9.60% CET1, 10.91% Tier 1 and 12.54% total capital. Regions and Regions Bank were classified as well-capitalized. Shareholders’ equity declined to $15.9 billion, principally reflecting a $3.6 billion reduction in accumulated other comprehensive income, largely from unrealized securities and derivative losses as rates rose.
Material changes versus 2021
- Net interest income increased $875 million, while net income available to common shareholders declined $254 million.
- Credit-loss expense shifted from a $524 million benefit to a $271 million provision as credit conditions normalized and loans grew.
- Non-interest expense increased 8.6%; professional, legal and regulatory costs rose to $263 million from $98 million, largely related to the CFPB matter.
- Non-interest income declined 3.8%, primarily because mortgage income fell 35.5% to $156 million. Deposit service charges were also affected by overdraft policy changes and the mid-2022 elimination of non-sufficient-funds fees.
- Cash and deposits contracted materially, while loans increased. The fair value of available-for-sale securities was $27.9 billion versus $28.5 billion in 2021, with $3.435 billion of gross unrealized losses at year-end 2022.
Outlook, commentary, risks and unusual items
Management’s 2023 expectations, based on the December 31, 2022 forward interest-rate curve, were adjusted revenue growth of 8–10%, adjusted non-interest expense growth of 4.5–5.5% (with first-half expense expected to exceed second-half expense), adjusted operating leverage of approximately 4%, and ending loan growth of approximately 4%. Management expected deposits to decline $3–$5 billion in the first half, then be stable to modestly higher in the second half; net charge-offs of 25–35 basis points; and an effective tax rate of 22–23%. The stated CET1 objective was to manage near the upper end of a 9.25–9.75% operating range.
Management described substantial uncertainty around economic forecasts, inflation, interest rates and regional conditions. It expected slower economic growth and labor demand in 2023, inflation above the Federal Reserve’s 2% target into year-end, and no Fed rate cuts during 2023. Regions was asset-sensitive at year-end: its modeled 12-month net interest income change was +$101 million for a gradual 100-basis-point increase and −$147 million for a gradual 100-basis-point decrease. These are scenario estimates, not forecasts, and depend on deposit pricing, deposit mix and balance-sheet assumptions.
In September 2022, Regions entered a CFPB consent order concerning historical overdraft practices. The order included a $50 million non-tax-deductible civil penalty and approximately $141 million of customer redress. The company recorded $50 million of insurance proceeds in the fourth quarter. The filing states that legal proceedings are routinely possible; management considered reasonably possible aggregate losses above accruals immaterial and did not expect pending or threatened matters, as a whole, to have a material effect, while noting outcomes remain uncertain.
Key risks include deposit competition and funding costs, sensitivity to interest rates and securities valuations, credit deterioration from economic weakness or falling collateral values, commercial and residential real-estate exposure, cybersecurity and third-party disruptions, regulatory change, and the effects of inflation and regional economic concentration. The company also identified LIBOR transition exposure, including approximately $13.5 billion of commercial and investor real-estate loans and $82.9 billion of derivative notional referencing LIBOR at year-end; relevant U.S. dollar LIBOR settings were scheduled to cease or become non-representative after June 30, 2023.
Important facts for investors to verify
- Whether deposit outflows, account repricing and deposit betas track management’s 2023 assumptions, and how they affect net interest margin and liquidity.
- Whether credit normalization accelerates, especially in criticized commercial and investor real-estate exposures, consumer lending, and the allowance estimate.
- How much of reported revenue growth and operating leverage is adjusted, and the reconciliation of those non-GAAP measures to GAAP results.
- The realized impact of rate changes on net interest income, securities values, accumulated other comprehensive income and capital ratios.
- Whether CFPB consent-order obligations, related insurance recoveries and other legal contingencies are fully reflected in results and disclosures.
- Progress in remediating LIBOR-linked contracts and the terms applied to remaining exposures.