Regions Financial Corporation — 2020 Form 10-K
Reporting period: Fiscal year ended December 31, 2020; comparative results are primarily for 2019. The fourth quarter is discussed where noted. Regions is a regional bank holding company operating mainly in the South, Midwest and Texas, with commercial, consumer and wealth-management businesses.
Financial performance and condition
| Metric | 2020 | 2019 | Change / context |
|---|---|---|---|
| Net interest income | $3.894 billion | $3.745 billion | Up 4%; taxable-equivalent net interest margin fell to 3.21% from 3.45%. |
| Provision for credit losses | $1.330 billion | $387 million | Higher amid CECL adoption, pandemic-related economic uncertainty and increased charge-offs. |
| Non-interest income | $2.393 billion | $2.116 billion | Up 13%; mortgage and capital-markets income increased, while deposit service charges and card fees declined. |
| Non-interest expense | $3.643 billion | $3.489 billion | Up 4%, including higher compensation, technology spending and debt-extinguishment costs. |
| Net income from continuing operations | $1.094 billion | $1.582 billion | Down 31%; diluted EPS was $1.03 versus $1.50. |
| Efficiency ratio | 57.50% | 58.99% | Improved; adjusted non-GAAP ratio was 56.62% versus 58.03%. |
| Loans, period-end | $85.3 billion | $83.0 billion | Up 2.8%; included $3.6 billion of PPP loans. |
| Deposits, period-end | $122.5 billion | $97.5 billion | Up $25.0 billion, driven by customer liquidity and stimulus-related balances. |
| Allowance for credit losses | $2.293 billion | $914 million | Allowance-to-loans ratio rose to 2.69% from 1.10%; excluding PPP loans, 2.81%. |
| Net charge-offs | $512 million; 0.58% of average loans | $358 million; 0.43% | Increase was driven largely by commercial and industrial losses. |
| Long-term borrowings | $3.569 billion | $7.879 billion | Declined through debt redemptions and repayment of FHLB advances. |
At year-end, total assets were $147.4 billion and shareholders’ equity was $18.1 billion. Estimated regulatory ratios were CET1 9.84%, Tier 1 11.39%, total capital 13.56% and leverage 8.71%; Regions and Regions Bank were classified as well-capitalized. Cash and cash equivalents were $18.0 billion, including $16.4 billion deposited at the Federal Reserve. The bank’s loan-to-deposit ratio was 70%. Parent-company cash was $1.5 billion, with additional borrowing capacity of $12.8 billion at the Federal Reserve and $16.2 billion at the FHLB.
Cash flows: Operating activities provided $2.324 billion; investing activities used $4.853 billion; financing activities provided $16.371 billion. Cash and cash equivalents increased $13.842 billion to $17.956 billion, principally reflecting deposit growth. These are bank cash-flow statement figures, not a measure of freely distributable cash.
Fourth quarter: Net income was $616 million and diluted EPS was $0.61. Net interest income was $1.006 billion; the provision for credit losses was a $38 million benefit. Non-interest income was $680 million, excluding no securities gains or losses, and non-interest expense was $987 million.
Material changes and notable items
- CECL was adopted January 1, 2020, increasing the allowance by $501 million at adoption and reducing retained earnings by $377 million. The year-end allowance further reflected pandemic forecasts, portfolio risks and acquisition-related balances.
- Regions acquired equipment-finance company Ascentium on April 1, adding approximately $1.9 billion of loans and leases. The transaction added $345 million of goodwill and $47 million of other intangible assets.
- Revenue benefited from mortgage production, capital-markets activity, lower deposit costs and interest-rate hedges. The hedging strategy contributed approximately $260 million to 2020 net interest income. Low rates, elevated liquidity and asset repricing weighed on margin.
- Non-interest income included a $50 million unrealized equity-investment valuation gain and a $25 million gain associated with a bank-owned life insurance policy exchange. The investment position was sold in January 2021, generating an additional immaterial gain.
- Accumulated other comprehensive income improved by $1.405 billion, primarily due to unrealized gains on securities and hedging derivatives. The company issued $346 million of Series D preferred stock.
- Regions made no common-share repurchases in 2020. The Federal Reserve restricted capital distributions during the pandemic; the first-quarter 2021 common dividend was declared at $0.155 per share.
Outlook, risks and contingencies
Management’s 2021 expectations were: adjusted total revenue down modestly, depending on PPP forgiveness; adjusted non-interest expense relatively stable to down modestly; adjusted ending loans up low single digits; adjusted average loans down low single digits; net charge-offs of 55–65 basis points of average loans; and an effective tax rate of 20%–22%. Revenue assumptions included short-term rates near zero and the 10-year Treasury yield between 1.0% and 1.25%. These are forward-looking, non-GAAP expectations, not guarantees.
Management expected U.S. GDP to grow 4.8% in 2021 and 4.4% in 2022, while emphasizing substantial uncertainty around the pandemic, vaccines, government support and the pace of recovery. Regions expected consumer service charges to improve from 2020 but remain approximately 10%–15% below 2019 levels in 2021.
- Credit and pandemic exposure: The filing identifies energy, healthcare, consumer services and travel, retail, restaurants and hotels as high-risk sectors. Approximately $5.2 billion of commercial and investor-real-estate loans were identified as pandemic high-risk or at-risk. Deferrals declined; more than 95% of loan balances previously in deferral were current or less than 30 days past due at year-end.
- Credit estimates: Non-performing loans excluding held-for-sale loans rose to $745 million from $507 million. Management estimated $135 million–$225 million of commercial and investor-real-estate loans could migrate to non-accrual in the next quarter. Results remain sensitive to unemployment, borrower performance and forecast assumptions.
- Capital and distributions: Regions’ initial stress capital buffer was 3.0%. Dividend and repurchase capacity remained subject to regulatory limits and pandemic-related restrictions, then extended through first-quarter 2021.
- Legal matters: Regions estimated reasonably possible losses in excess of accrued amounts of up to approximately $20 million, while noting that no excess loss was also possible. It was cooperating with a CFPB investigation into certain overdraft practices; the ultimate outcome was uncertain.
- Other risks: The filing highlights interest-rate and prepayment risk, liquidity and deposit behavior, regional economic concentration, cyber and third-party operational risks, regulatory changes, and the transition away from LIBOR. Regions reported no goodwill impairment in 2020 despite pandemic-triggered testing.
Investor verification points
- Review the allowance’s assumptions and subsequent credit performance, especially in pandemic-sensitive commercial sectors and consumer portfolios.
- Track PPP forgiveness timing and its effects on reported and adjusted loan balances, revenue and margin.
- Verify 2021 guidance against actual results, including its non-GAAP definitions and interest-rate assumptions.
- Monitor CET1 and other capital ratios, stress-buffer requirements, and any changes to dividend or repurchase restrictions.
- Assess whether the unusually large deposit and cash balances persist, and how their deployment affects net interest margin and liquidity.
- Review the CFPB overdraft inquiry, other legal contingencies, and material regulatory or cybersecurity developments.
The filing reports an unqualified audit opinion on the consolidated financial statements and an unqualified opinion that internal control over financial reporting was effective as of December 31, 2020.