Regions Financial(RF) - 2022 Q4 - Annual Report

PART I Business Overview Regions Financial Corporation, a financial holding company, provides diverse banking, wealth management, and capital markets services across the South, Midwest, and Texas, managing approximately $155.2 billion in assets Key Financial Metrics (as of Dec 31, 2022) | Metric | Value (approx.) | | :--- | :--- | | Total Consolidated Assets | $155.2 billion | | Total Consolidated Deposits | $131.7 billion | | Total Consolidated Shareholders' Equity | $15.9 billion | - Regions operates 1,286 branch outlets and 2,039 ATMs, with the highest concentration of branches in Florida, Tennessee, and Alabama[20][21] - The company provides specialized financial services through various subsidiaries, including equipment financing, commercial real estate lending, M&A advisory, and investment management[22][23] Supervision and Regulation Regions Financial Corporation operates as a Financial Holding Company (FHC) under extensive Federal Reserve regulation, subject to enhanced prudential standards as a Category IV institution, including biennial stress testing and capital adequacy rules - As a Category IV firm, Regions undergoes biennial supervisory capital stress testing and is not subject to LCR or NSFR liquidity requirements[27][32] - Regions' Stress Capital Buffer (SCB) for Q4 2022 through Q3 2023 is set at the regulatory minimum of 2.5%[30] - The holding company's principal cash flow source is dividends from Regions Bank, subject to Federal Reserve and Alabama state limitations[37] - Regions Bank's deposits are FDIC-insured up to $250,000, with an increased base deposit insurance assessment rate effective Q1 2023[43] Competition Regions operates in a highly competitive financial services industry, facing traditional and non-traditional entities like fintechs, driven by convenience, service quality, pricing, and technology - The company faces intense competition from a wide range of financial institutions and non-bank entities, including fintechs and technology companies that are increasingly offering bank-like products[57][58] - Key competitive differentiators include customer convenience, quality of service, pricing, personal contacts, and the quality of digital technology offerings[58] Human Capital As of December 31, 2022, Regions employed 20,073 full-time equivalent employees, focusing on attracting, retaining, and developing a diverse workforce through talent management, DEI, and professional development programs - As of year-end 2022, Regions had 20,073 full-time equivalent employees, with approximately 62% women and 36% self-identified as part of a minority demographic[59] - The company emphasizes professional development, recently partnering with Guild Education to offer a tuition-free educational program for associates[60] - Compensation includes annually benchmarked base salaries, a pay-for-performance incentive structure, and long-term stock-based incentives for leadership[60] Risk Factors The company faces diverse risks including market, credit, liquidity, technology, strategic, operational, reputational, legal, and regulatory factors, alongside challenges in talent management and accounting estimates Market Risks Regions' profitability is significantly influenced by financial market and economic conditions, particularly interest rate fluctuations, and the ongoing transition away from LIBOR poses additional risks - Profitability is highly dependent on net interest income, which is sensitive to changes in market interest rates, with the Federal Reserve increasing the federal funds rate by 425 basis points in 2022[73][74] - The company is managing the transition from LIBOR, which will cease publication after June 30, 2023, for its financial products and contracts[75] Credit Risks The company is exposed to credit risk from potential loan losses, where the allowance for credit losses may be inadequate, and credit rating downgrades could increase funding costs and limit business activities - Credit losses are inherent in lending, and the allowance for credit losses, based on management's estimates, may not adequately cover all eventual losses, especially in adverse economic conditions[76] - Potential downgrades in credit ratings could increase funding costs, limit access to capital markets, and necessitate posting additional collateral for certain counterparty contracts[76][77] Technology Risks Regions faces significant technology risks, including systems failures and cybersecurity incidents, which could disrupt business, cause financial loss, and damage reputation, while also navigating complex and evolving privacy laws - The company is at risk from sophisticated cyber-attacks, including denial-of-service attacks, which have previously impacted the performance of its website[83] - Compliance with evolving federal and state privacy laws, such as the Gramm-Leach-Bliley Act (GLBA) and the California Consumer Privacy Act (CCPA), presents significant operational and financial challenges[84][85] Strategic Risks Strategic risks include intense industry competition from traditional and fintech entities, geographic concentration in the South, Midwest, and Texas, and potential negative impacts from weaknesses in residential and commercial real estate markets - Operations are primarily concentrated in the South, Midwest, and Texas, making the company's financial results highly dependent on the economic conditions of these regions[89] - As of December 31, 2022, consumer residential real estate loans represented approximately 25.6% of the total loan portfolio, and investor real estate loans comprised about 8.6%[90][91] Legal, Regulatory and Compliance Risks Regions is subject to extensive governmental regulation and supervision, facing risks from litigation, investigations, and enforcement actions, with dividend payments dependent on subsidiary distributions and constrained by capital and liquidity requirements - The company is subject to extensive state and federal regulation governing capital, liquidity, dividends, and business operations, which can change and affect business in unpredictable ways[102] - As a holding company, Regions depends on dividends from its main subsidiary, Regions Bank, to pay its own dividends and service debt, with these subsidiary dividends subject to statutory and regulatory limitations[110] - Unfavorable Federal Reserve stress test results could adversely affect the company's ability to retain customers, compete for business, or make capital distributions like dividends and share repurchases[108] Unresolved Staff Comments The company reports no unresolved staff comments from the Securities and Exchange Commission - None[126] Properties Regions' corporate headquarters is in Birmingham, Alabama, and as of December 31, 2022, its banking subsidiary operated 1,286 banking offices with no significant encumbrances - As of December 31, 2022, Regions Bank operated 1,286 banking offices[126] Legal Proceedings Information regarding legal proceedings is incorporated by reference from Note 23, "Commitments, Contingencies and Guarantees," in the Notes to the Consolidated Financial Statements - Details on legal proceedings are provided in Note 23 of the financial statements[127] Mine Safety Disclosures This item is not applicable to the company - Not applicable[128] PART II Market for Registrant's Common Equity, Related Shareholder Matters and Issuer Purchases of Equity Securities Regions' common stock trades on the NYSE under RF, with a new $2.5 billion share repurchase program authorized in April 2022, under which $15 million in shares were repurchased by year-end 2022 - The company's common stock is listed on the NYSE under the symbol RF[133] - A share repurchase program of up to $2.5 billion was authorized in April 2022, running through Q4 2024, with $15 million worth of shares repurchased by year-end 2022 under this plan[134] Management's Discussion and Analysis of Financial Condition and Results of Operations Management's discussion provides an overview of the economic environment, 2022 financial results, and 2023 expectations, detailing critical accounting policies, non-GAAP measures, and analysis of the balance sheet, capital, liquidity, and risk management Executive Overview The executive overview summarizes 2022 financial performance, including a net income decrease to $2.1 billion due to credit loss provisions, significant net interest income growth, and outlines 2023 expectations for revenue and loan growth amid a slower economic outlook 2022 Financial Results Summary | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Income (Common Shareholders) | $2.1 billion | $2.4 billion | | Diluted EPS | $2.28 | $2.49 | | Net Interest Income (taxable-equivalent) | $4.8 billion | $4.0 billion | | Net Interest Margin (taxable-equivalent) | 3.36% | 2.85% | | Provision for (Benefit from) Credit Losses | $271 million | ($524 million) | | Non-Interest Income | $2.4 billion | $2.5 billion | | Non-Interest Expense | $4.1 billion | $3.7 billion | 2023 Company Expectations | Category | Expectation | | :--- | :--- | | Total Adjusted Revenue | Up 8-10% | | Adjusted Non-Interest Expense | Up 4.5-5.5% | | Adjusted Operating Leverage | ~4% | | Ending Loans | Up ~4% | | Ending Deposits | Down $3-$5 billion in H1; stable to modest growth in H2 | | Net Charge-Offs / Average Loans | 25-35 bps | | Effective Tax Rate | 22-23% | - The company's CET1 ratio was 9.60% at year-end 2022, and it expects to manage this near the upper end of a 9.25-9.75% operating range[143][145] Operating Results In 2022, net interest income (taxable-equivalent) increased by $875 million to $4.8 billion with a 3.36% net interest margin, while a $271 million provision for credit losses replaced a prior benefit, non-interest income slightly decreased, and non-interest expense rose to $4.1 billion due to salaries and a $179 million legal/regulatory expense Net Interest Income Analysis (Taxable-Equivalent) | Metric | 2022 | 2021 | | :--- | :--- | :--- | | Net Interest Income | $4,833 million | $3,958 million | | Net Interest Margin | 3.36% | 2.85% | | Average Earning Assets | $144.0 billion | $138.7 billion | Non-Interest Income Breakdown (2022 vs 2021) | Category | 2022 | 2021 | | :--- | :--- | :--- | | Service charges on deposit accounts | $641M | $648M | | Card and ATM fees | $513M | $499M | | Capital markets income | $339M | $331M | | Mortgage income | $156M | $242M | | Insurance proceeds | $50M | $0M | | Total Non-Interest Income | $2,429M | $2,524M | Non-Interest Expense Breakdown (2022 vs 2021) | Category | 2022 | 2021 | | :--- | :--- | :--- | | Salaries and employee benefits | $2,318M | $2,205M | | Professional, legal and regulatory | $263M | $98M | | FDIC insurance assessments | $61M | $45M | | Total Non-Interest Expense | $4,068M | $3,747M | Balance Sheet Analysis As of December 31, 2022, total assets decreased to $155.2 billion due to lower cash, while total loans grew by $9.2 billion to $97.0 billion, deposits decreased to $131.7 billion, and shareholders' equity declined to $15.9 billion primarily from AOCI losses on securities Loan Portfolio Composition (End of Period) | Loan Category | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Commercial | $56.3B | $49.3B | | Investor Real Estate | $8.4B | $7.0B | | Consumer | $32.3B | $31.4B | | Total Loans | $97.0B | $87.8B | Deposit Composition (End of Period) | Deposit Category | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Non-interest-bearing demand | $51.3B | $58.4B | | Interest-bearing checking | $25.7B | $28.0B | | Money market—domestic | $33.3B | $31.4B | | Savings | $15.7B | $15.1B | | Time deposits | $5.8B | $6.1B | | Total Deposits | $131.7B | $139.1B | Allowance for Credit Losses (ACL) Metrics | Metric | Dec 31, 2022 | Dec 31, 2021 | | :--- | :--- | :--- | | Total ACL | $1.58B | $1.57B | | ACL as % of Total Loans | 1.63% | 1.79% | | Net Charge-offs (2022 vs 2021) | $263M | $204M | | Non-performing Loans (ex. HFS) | $500M | $451M | Risk Management Regions employs a comprehensive risk management framework, including a Three Lines of Defense model, to manage market, liquidity, credit, operational, legal, compliance, reputational, and strategic risks, with a primary focus on interest rate risk and the LIBOR transition - The company's primary market risk is interest rate risk, with a 100 basis point gradual rate increase projected to increase net interest income by $101 million over 12 months, indicating asset sensitivity as of December 31, 2022[245][248] - Regions uses interest rate swaps and other derivatives to manage interest rate risk, holding $30.6 billion in notional cash flow hedges at year-end 2022[250] - The company is actively managing the transition from LIBOR, which will cease after June 30, 2023, with approximately $12.0 billion in commercial and investor real estate loans maturing after this date[253] Financial Statements and Supplementary Data This section presents the company's consolidated financial statements for 2022, including management's assertion of effective internal controls and an unqualified audit opinion from Ernst & Young LLP, with the Allowance for Credit Losses identified as a critical audit matter - Management asserts that the company's internal control over financial reporting was effective as of December 31, 2022, based on the COSO 2013 framework[270] - The independent auditor, Ernst & Young LLP, issued an unqualified opinion on both the consolidated financial statements and the effectiveness of internal control over financial reporting[273][277] - The critical audit matter identified was the Allowance for Credit Losses (ACL), due to the complexity and subjectivity involved in evaluating the expected loss forecasting models, economic forecasts, and qualitative factors[281] PART III Directors, Executive Officers and Corporate Governance Information regarding directors, director nominees, the audit committee, and the company's code of ethics is incorporated by reference from Regions' 2023 Proxy Statement - This section incorporates by reference information from the company's 2023 Proxy Statement regarding its directors, corporate governance, and code of ethics[542] Executive Compensation All information related to executive and director compensation, including the Compensation Discussion and Analysis and the Compensation and Human Resources Committee Report, is incorporated by reference from the 2023 Proxy Statement - This section incorporates by reference information from the company's 2023 Proxy Statement regarding executive compensation[544] Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters Information regarding security ownership of certain beneficial owners and management is incorporated by reference from the 2023 Proxy Statement, with 27,767,251 securities remaining available for future issuance under equity compensation plans as of December 31, 2022 Equity Compensation Plan Information (as of Dec 31, 2022) | Plan Category | Securities to be Issued Upon Exercise | Securities Remaining Available for Future Issuance | | :--- | :--- | :--- | | Approved by Stockholders | — | 27,767,251 | | Not Approved by Stockholders | — | — | | Total | — | 27,767,251 | Certain Relationships and Related Transactions, and Director Independence Information concerning related party transactions and director independence is incorporated by reference from the 2023 Proxy Statement - This section incorporates by reference information from the company's 2023 Proxy Statement regarding related transactions and director independence[547] Principal Accountant Fees and Services Information regarding principal accountant fees and services is incorporated by reference from the 2023 Proxy Statement under the proposal for the ratification of the independent registered public accounting firm - This section incorporates by reference information from the company's 2023 Proxy Statement regarding auditor fees and services[548] PART IV Exhibits and Financial Statement Schedules This section lists the financial statements, financial statement schedules, and exhibits filed as part of the Form 10-K, with consolidated financial statements in Item 8 and a comprehensive list of exhibits provided - The consolidated financial statements are included in Item 8 of the report[550] - A list of exhibits filed with the report is provided, including certifications from the CEO and CFO pursuant to the Sarbanes-Oxley Act of 2002[551][556] Form 10-K Summary This item is not applicable to the company - Not applicable[557]