(EDGAR Online via COMTEX) -- Item 2. Management's Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis is part of Regions Financial Corporation's ("Regions" or the "Company") Quarterly Report on Form 10-Q filed with the SEC and updates Regions' Annual Report on Form 10-K for the year ended December 31, 2021, which was previously filed with the SEC. This financial information is presented to aid in understanding Regions' financial position and results of operations and should be read together with the financial information contained in Regions' Annual Report on Form 10-K. See Note 1 "Basis of Presentation" and Note 12 "Recent Accounting Pronouncements" to the consolidated financial statements for further detail. The emphasis of this discussion will be on the three months ended March 31, 2022 compared to the three months ended March 31, 2021 for the consolidated statements of income. For the consolidated balance sheets, the emphasis of this discussion will be the balances as of March 31, 2022 compared to December 31, 2021.
This discussion and analysis contains statements that may be considered "forward-looking statements" as defined in the Private Securities Litigation Reform Act of 1995. See pages 7 through 9 for additional information regarding forward-looking statements.
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 March 31, 2022, Regions operated 1,294 total branch outlets. Regions carries out its strategies and derives its profitability from three reportable business segments: Corporate Bank, Consumer Bank, and Wealth Management, with the remainder in Other. See Note 10 "Business Segment Information" to the consolidated financial statements for more information regarding Regions' segment reporting structure.
Regions' business strategy is focused on providing a competitive mix of products and services, delivering quality customer service, and continuing to develop and optimize distribution channels that include a branch distribution network with offices in convenient locations, as well as electronic and mobile banking.
Regions' profitability, like that of many other financial institutions, is dependent on its ability to generate revenue from net interest income as well as non-interest income sources. Net interest income is primarily the difference between the interest income Regions receives on interest-earning assets, such as loans and securities, and the interest expense Regions pays on interest-bearing liabilities, principally deposits and borrowings. Regions' net interest income is impacted by the size and mix of its balance sheet components and the interest rate spread between interest earned on its assets and interest paid on its liabilities. Non-interest income includes fees from service charges on deposit accounts, card and ATM fees, mortgage servicing and secondary marketing, investment management and trust activities, capital markets and other customer services which Regions provides. Results of operations are also affected by the provision for credit losses and non-interest expenses such as salaries and employee benefits, occupancy, professional, legal and regulatory expenses, FDIC insurance assessments, and other operating expenses, as well as income taxes.
Economic conditions, competition, new legislation and related rules impacting regulation of the financial services industry and the monetary and fiscal policies of the Federal government significantly affect most, if not all, financial institutions, including Regions. Lending and deposit activities and fee income generation are influenced by levels of business spending and investment, consumer income, consumer spending and savings, capital market activities, and competition among financial institutions, as well as customer preferences, interest rate conditions and prevailing market rates on competing products in Regions' market areas.
On December 17, 2021, Regions entered into an agreement to acquire Clearsight Advisors, Inc., a leading-edge mergers and acquisitions firm headquartered in McLean, Virginia. The transaction closed on December 31, 2021.
On October 4, 2021, Regions entered into an agreement to acquire Sabal Capital Partners, LLC, a diversified financial services firm that facilitates lending in the small-balance commercial real estate market headquartered in Irvine, California. The transaction closed on December 1, 2021. Refer to the "Acquisitions" section for more detail.
On June 8, 2021, Regions entered into an agreement to acquire EnerBank, a consumer lending institution specializing in home improvement lending headquartered in Salt Lake City, Utah. The transaction closed on October 1, 2021, and resulted in the addition of approximately $3.1 billion in loans to consumers. Refer to the "Acquisitions" section for more detail.
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FIRST QUARTER OVERVIEW
First Quarter Results
Regions reported net income available to common shareholders of $524 million, or $0.55 per diluted share, in the first quarter of 2022 compared to $614 million, or $0.63 per diluted share, in the first quarter of 2021. The primary drivers of the decrease in net income from the prior year period were a smaller benefit from credit losses and lower non-interest income, partially offset by higher net interest income.
For the first quarter of 2022, net interest income (taxable-equivalent basis) totaled $1.0 billion, up $48 million compared to the first quarter of 2021. The net interest margin (taxable-equivalent basis) was 2.85 percent for the first quarter of 2022 and 3.02 percent in the first quarter of 2021. The increase in net interest income was primarily driven by increases in average loan balances and average debt securities balances, as well as lower funding costs. Net interest margin was negatively impacted by continued elevated liquidity as evidenced by higher average cash balances held at the Federal Reserve. Refer to Table 18 "Consolidated Average Daily Balances and Yield/Rate Analysis" for further details.
The benefit for credit losses totaled $36 million in the first quarter of 2022, as compared to a benefit of $142 million during the first quarter of 2021. The current quarter benefit was primarily due to positive asset quality and waning pandemic concerns partially offset by loan growth and heightened economic volatility. Refer to the "Allowance for Credit Losses" section for further detail.
Net charge-offs totaled $46 million, or an annualized 0.21 percent of average loans, in the first quarter of 2022, compared to $83 million, or an annualized 0.40 percent for the first quarter of 2021. The decrease was primarily driven by broad-based improvements across most portfolios. Refer to the "Allowance for Credit Losses" section for further detail.
The allowance was 1.67 percent of total loans, net of unearned income at March 31, 2022 compared to 1.79 percent at December 31, 2021. The decrease was a result of the factors discussed above. The allowance was 446 percent of total non-performing loans at March 31, 2022 compared to 349 percent at December 31, 2021. Refer to the "Allowance for Credit Losses" section for further detail.
Non-interest income was $584 million for the first quarter of 2022, a $57 million decrease from the first quarter of 2021. The decrease was primarily driven by declines in mortgage income, capital markets income, and market value adjustments on employee benefit assets. These decreases were partially offset by increases in service charges, card and ATM fees, and other non-interest income. See Table 22 "Non-Interest Income" for more detail.
Total non-interest expense was $933 million in the first quarter of 2022, a $5 million increase from the first quarter of 2021. See Table 23 "Non-Interest Expense" for more detail.
Income tax expense for the three months ended March 31, 2022 was $154 million compared to $180 million for the same period in 2021. See "Income Taxes" toward the end of the Management's Discussion and Analysis section of this report for more detail.
Regions and Regions Bank are required to comply with regulatory capital requirements established by Federal and State banking agencies, which include quantitative requirements including the CET1 ratio. The CET1 ratio at March 31, 2022 was estimated at 9.39 percent. For additional information on Regions' regulatory capital requirements see the "Regulatory Requirements" section.
In the second quarter of 2021, Regions received the results of the Company's voluntary participation in 2021 CCAR. The FRB communicated that the Company exceeded all minimum capital levels under the supervisory stress test and the Company's stress capital buffer for the fourth quarter of 2021 through the third quarter of 2022 will be floored at 2.5 percent.
As part of the Company's capital plan, on April 21, 2021, the Board authorized the repurchase of up to $2.5 billion of the Company's common stock, permitting purchases from the second quarter of 2021 through the first quarter of 2022.
On April 20, 2022, the Company declared a cash dividend for the second quarter of 2022 of $0.17 per share of common stock. Also on April 20, 2022, the Board authorized the repurchase of up to $2.5 billion of the Company's common stock, permitting purchases from the second quarter of 2022 through the fourth quarter of 2024. As of May 4, 2022, Regions had repurchased approximately 725 thousand shares of common stock at a total cost of $15 million under this plan. All of these shares were immediately retired upon repurchase and therefore will not be included in treasury stock.
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Expectations 2022 Expectations Category Expectation Total Adjusted Revenue (1) Up 4.5-5.5% Adjusted Non-Interest Expense Up 3-4% Adjusted Operating Leverage Positive Average Loans Up 4-5% Net Charge-Offs / Average Loans Approximately 20-30 basis points Effective Tax Rate (2) 21-23% Near the mid-point of a 9.25-9.75% operating CET1 range _____
Regions believes that expressing certain expectations as non-GAAP measures will assist investors in analyzing the operating results of the Company and predicting future performance on the same basis as that applied by management. The reconciliation with respect to these forward-looking non-GAAP measures is expected to be consistent with the actual non-GAAP reconciliations within Management's Discussion and Analysis of this Form 10-Q.
BALANCE SHEET ANALYSIS
The following sections provide expanded discussion of significant changes in certain line items in asset, liability, and shareholders' equity categories.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents decreased approximately $1.5 billion from year-end 2021 to March 31, 2022, due primarily to a decrease in cash on deposit with the FRB. While deposit balances increased in the first quarter of 2022 due to seasonality, Regions has an active cash management strategy in which the Company has deployed some excess liquidity from deposit growth as opportunities exist given market interest rates, primarily through securities purchases. See the "Debt Securities", "Liquidity", and "Deposits" sections for more information.
DEBT SECURITIES The following table details the carrying values of debt securities, including both available for sale and held to maturity: Table 1-Debt Securities March 31, 2022 December 31, 2021 (In millions) U.S. Treasury securities $ 1,030 $ 1,132 Federal agency securities 700 92 Obligations of states and political subdivisions 3 4 Mortgage-backed securities: Residential agency 20,423 19,319 Residential non-agency 1 1 Commercial agency 6,307 6,915 Commercial non-agency 464 536 Corporate and other debt securities 1,320 1,381 $ 30,248 $ 29,380
Debt securities available for sale, which constitute the majority of the securities portfolio, are an important tool used to manage interest rate sensitivity and provide a primary source of liquidity for the Company. Regions maintains a highly rated securities portfolio consisting primarily of agency mortgage-backed securities. See Note 2 "Debt Securities" to the consolidated financial statements for additional information. Also see the "Market Risk-Interest Rate Risk" and "Liquidity" sections for more information.
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Debt securities increased $868 million from December 31, 2021 to March 31, 2022 driven by increases in federal agency securities and residential agency securities. In the first quarter of 2022, Regions made purchases of debt securities available for sale, excluding normal reinvestment of maturities, totaling approximately $2.1 billion consisting primarily of federal agency and residential agency securities. Approximately $1.5 billion of the purchases related to a hedging strategy with the remaining purchases related to active cash management strategies. Partially offsetting the first quarter purchases were declines in market valuations driven by an increase in market interest rates.
See the "Market Risk-Interest Rate Risk" section for more information regarding purchases of debt securities available for sale subsequent to March 31, 2022.
LOANS HELD FOR SALE
Loans held for sale totaled $694 million at March 31, 2022, consisting of $479 million of residential real estate mortgage loans, $168 million of commercial loans, $40 million of consumer and other performing loans, and $7 million of non-performing loans. At December 31, 2021, loans held for sale totaled $1.0 billion, consisting of $680 million of residential real estate mortgage loans, $257 million of commercial loans, $53 million of consumer and other performing loans, and $13 million of non-performing loans. The levels of residential real estate mortgage loans held for sale that are part of the Company's mortgage originations fluctuate depending on the timing of origination and sale to third parties. Commercial loans held for sale include commercial mortgage loans originated for sale to third parties and commercial loans originally recorded as held for investment when management has the intent to sell. Levels of commercial loans held for sale fluctuate based on timing of sale to third parties.
LOANS Loans, net of unearned income, represented approximately 61 percent of Regions' interest-earning assets as of March 31, 2022. The following table presents the distribution of Regions' loan portfolio by portfolio segment and class, net of unearned income: Table 2-Loan Portfolio March 31, 2022 December 31, 2021 (In millions, net of unearned income) Commercial and industrial $ 45,643 $ 43,758 Commercial real estate mortgage-owner-occupied (1) 5,181 5,287 Commercial real estate construction-owner-occupied (1) 273 264 Total commercial 51,097 49,309 Commercial investor real estate mortgage 5,557 5,441 Commercial investor real estate construction 1,607 1,586 Total investor real estate 7,164 7,027 Residential first mortgage 17,373 17,512 Home equity lines 3,602 3,744 Home equity loans 2,500 2,510 Consumer credit card 1,133 1,184 Other consumer-exit portfolios 909 1,071 Other consumer 5,557 5,427 Total consumer 31,074 31,448 $ 89,335 $ 87,784 __________ (1)Collectively referred to as CRE. 49 --------------------------------------------------------------------------------
The following sections describe the composition of the portfolio segments and classes disclosed in Table 2, explain changes in balances from 2021 year-end, and highlight the related risk characteristics. Regions believes that its loan portfolio is well diversified by product, client, and geography throughout its footprint. However, the loan portfolio may be exposed to certain concentrations of credit risk which exist in relation to individual borrowers or groups of borrowers, certain types of collateral, certain types of industries, certain loan products, or certain regions of the country. Refer to Note 5 "Allowance for Credit Losses" to the Annual Report on Form 10-K for the year ended December 31, 2021 for additional information regarding Regions' portfolio segments and related classes, as well as the risks specific to each.
The commercial portfolio also includes owner-occupied commercial real estate mortgage loans to operating businesses, which are loans for long-term financing on land and buildings, and are repaid by cash generated by business operations. Owner-occupied commercial real estate construction loans are made to commercial businesses for the development of land or construction of a building where the repayment is derived from revenues generated from the business of the borrower.
Over half of the Company's total loans are included in the commercial portfolio segment. These balances are spread across numerous industries as noted in the table below. The Company manages the related risks to this portfolio by setting certain lending limits for each significant industry.
The following tables provide detail of Regions' commercial lending balances in selected industries.
Table 3-Commercial Industry Exposure March 31, 2022 Unfunded Loans Commitments Total Exposure (In millions) Administrative, support, waste and repair $ 1,498 $ 1,119 $ 2,617 Agriculture 341 274 615 Educational services 3,218 1,013 4,231 Energy 1,422 2,741 4,163 Financial services 5,579 6,388 11,967 Government and public sector 2,873 444 3,317 Healthcare 3,788 2,320 6,108 Information 2,265 1,296 3,561 Manufacturing 4,979 4,139 9,118 Professional, scientific and technical services 2,287 1,337 3,624 Real estate (1) 7,658 7,398 15,056 Religious, leisure, personal and non-profit services 1,673 661 2,334 Restaurant, accommodation and lodging 1,527 430 1,957 Retail trade 2,412 2,264 4,676 Transportation and warehousing 3,044 1,566 4,610 Utilities 2,215 2,929 5,144 Wholesale goods 4,095 3,069 7,164 Other (2) 223 3,335 3,558 Total commercial $ 51,097 $ 42,723 $ 93,820
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December 31, 2021 (3) Unfunded Loans Commitments Total Exposure (In millions) Administrative, support, waste and repair $ 1,489 $ 1,141 $ 2,630 Agriculture 336 253 589 Educational services 2,975 948 3,923 Energy 1,361 2,678 4,039 Financial services 5,582 5,933 11,515 Government and public sector 2,845 526 3,371 Healthcare 3,918 2,270 6,188 Information 1,929 1,233 3,162 Manufacturing 4,629 4,270 8,899 Professional, scientific and technical services 2,235 1,409 3,644 Real estate (1) 7,343 7,720 15,063 Religious, leisure, personal and non-profit services 1,733 730 2,463 Restaurant, accommodation and lodging 1,658 433 2,091 Retail trade 2,247 2,307 4,554 Transportation and warehousing 3,030 1,538 4,568 Utilities 2,131 2,895 5,026 Wholesale goods 3,756 3,189 6,945 Other (2) 112 2,425 2,537 Total commercial $ 49,309 $ 41,898 $ 91,207 ________
May 06, 2022
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