Regions Financial Corporation — FY2021 Form 10-K
Business context and reporting period. Regions Financial Corporation is a bank holding and financial holding company headquartered in Birmingham, Alabama, with banking operations concentrated in the South, Midwest and Texas. It provides consumer, commercial, mortgage, wealth and specialty financial services. This 10-K covers the fiscal year ended December 31, 2021; financial comparisons are primarily with FY2020.
Financial results and condition
| Metric | FY2021 / year-end | FY2020 / comparison |
|---|---|---|
| Net income available to common shareholders | $2.400 billion; diluted EPS $2.49 | $991 million; diluted EPS $1.03 |
| Total revenue, GAAP | $6.438 billion | $6.287 billion |
| Net interest income, taxable-equivalent | $3.958 billion; net interest margin 2.85% | $3.942 billion; margin 3.21% |
| Non-interest income | $2.524 billion | $2.393 billion |
| Non-interest expense | $3.747 billion | $3.643 billion |
| Provision for (benefit from) credit losses | Benefit of $524 million | Provision of $1.330 billion |
| Net charge-offs | $204 million; 0.24% of average loans | $512 million; 0.58% |
| Total assets / deposits / shareholders’ equity | $162.9 billion / $139.1 billion / $18.3 billion | $147.4 billion / $122.5 billion / $18.1 billion |
| Cash and cash equivalents | $29.4 billion | $18.0 billion |
| Long-term borrowings | $2.407 billion | $3.569 billion |
Net income rose substantially, principally because the credit-loss provision swung to a benefit as the economic outlook and credit performance improved. The $524 million benefit was $728 million less than net charge-offs. Revenue increased about 2%; non-interest expense rose about 3%. Adjusted non-GAAP operating leverage was negative 1.23%, compared with positive 2.56% in 2020. The filing does not provide a single overall profit-margin figure.
Net interest income increased only modestly while net interest margin contracted 36 basis points. Lower funding costs, hedge income, EnerBank and PPP-related income supported net interest income, but elevated cash balances and repricing of fixed-rate assets weighed on margin. The interest-rate hedging program contributed $426 million of interest income in 2021, versus $260 million in 2020.
Operating cash flow was $3.030 billion, investing cash flow was negative $2.865 billion and financing cash flow was positive $11.290 billion. Cash increased by $11.455 billion during the year. These cash-flow amounts reflect banking activities, including deposit changes, loan transactions and securities activity.
At year-end, Regions Bank held $28.1 billion on deposit with the Federal Reserve; the loan-to-deposit ratio was 63%. The parent company held $1.5 billion in cash and cash equivalents. Available borrowing capacity, subject to collateral, was $13.3 billion at the Federal Reserve and $16.2 billion at the FHLB. Regions reported compliance with internal liquidity requirements.
Estimated regulatory capital ratios at December 31, 2021 were 9.57% CET1, 11.03% Tier 1 and 12.74% total capital for Regions Financial Corporation; both the company and the bank were categorized as well-capitalized. The allowance for credit losses was $1.574 billion, or 1.79% of loans, versus $2.293 billion, or 2.69%, a year earlier. Non-performing loans excluding loans held for sale were $451 million, down from $745 million; allowance coverage of those loans was 349%.
Material changes and notable items
- Total loans increased $2.5 billion, or 3%, to $87.8 billion. Consumer loans grew largely due to EnerBank; commercial growth overcame a $2.9 billion decline in PPP balances.
- Deposits increased $16.6 billion, largely reflecting pandemic-related customer liquidity and new account growth. The company attributed elevated cash balances to these inflows.
- Mortgage income fell 27% to $242 million as refinancing and sale activity declined from 2020’s record levels. Capital markets income rose 20% to $331 million.
- Regions acquired EnerBank in October, adding approximately $3.1 billion of consumer loans and $2.8 billion of deposits; Sabal closed in December and Clearsight closed on December 31. Preliminary acquisition fair values may be revised during the measurement period.
- Regions repurchased approximately 20.8 million common shares for $467 million in 2021. The Board raised the quarterly common dividend from $0.155 to $0.17 per share; a $0.17 dividend for first-quarter 2022 was declared.
- Accumulated other comprehensive income declined by $1.026 billion, primarily due to changes in unrealized values of securities and derivatives. Regions issued $390 million of Series E preferred stock and redeemed $500 million of Series A preferred stock.
Outlook, risks and contingencies
2022 management expectations: adjusted revenue growth of 4–5%; adjusted non-interest expense growth of 3–4%; positive adjusted operating leverage; average loan growth of 4–5%; net charge-offs of approximately 25–35 basis points of average loans; an effective tax rate of 21–23%; and CET1 near the midpoint of a 9.25–9.75% operating range. Revenue expectations include quarterly capital markets income of $90–110 million, with the first half expected near the lower end as acquisitions are integrated. Management expects 2022 service charges of approximately $600 million following announced overdraft and non-sufficient-funds policy changes, and lower mortgage income.
Management described uncertainty from COVID-19 and variants, inflation, labor constraints, supply-chain bottlenecks, and changing interest rates. Its stated economic outlook anticipated continued growth in 2022, but forecasts and credit estimates remain sensitive to these conditions. Regions reported an asset-sensitive interest-rate profile; modeled 12-month net interest income sensitivity varied materially depending on how pandemic-related “surge” deposits reprice and remain with the bank.
- Credit and economic risk: deterioration in borrower performance, real-estate collateral values, unemployment or commodity prices could increase losses and required reserves. The allowance estimate depends on forecasts and management judgments.
- Regulatory and legal matters: Regions is cooperating with a CFPB investigation into certain overdraft practices. The company considers a loss reasonably possible, but says the amount cannot currently be estimated. Separately, it estimated possible litigation losses in excess of accrued amounts of up to approximately $20 million, while noting that no excess loss is also possible.
- Funding and capital: dividend capacity depends substantially on distributions from Regions Bank and is subject to regulatory limits. Capital distributions may be constrained if applicable requirements or buffers are not met.
- Operational and market risks: the filing highlights cybersecurity, third-party service provider, fraud, competition, climate and severe-weather, and reputational risks. It reports a modest increase in cyber events during the pandemic, with no material impact to date.
- LIBOR transition: Regions had $34.2 billion of commercial and investor real-estate loans, $930 million of consumer loans and $317 million of securities referencing LIBOR at year-end, as well as certain preferred stock whose rates reference LIBOR after 2023. The company said it had ceased new LIBOR-based commercial lending and was transitioning affected contracts and systems.
The independent auditor issued unqualified opinions on the financial statements and internal control over financial reporting. Management and the auditor excluded EnerBank and Sabal from the internal-control assessment following their 2021 acquisitions.
Important facts for investors to verify
- How much of the earnings improvement persists when the $524 million credit-loss benefit is no longer a contributor, and how credit costs develop against 2022 guidance.
- Whether revenue and loan-growth guidance is achieved after accounting for expected lower service charges and mortgage income, acquisition integration, and runoff of exit portfolios.
- Deposit retention and pricing, and the resulting effect of elevated liquidity, cash deployment and rising rates on net interest margin.
- Credit performance in the acquired EnerBank portfolio, integration costs and realization of expected acquisition benefits.
- The status and potential financial or operational effects of the CFPB overdraft investigation and other legal contingencies.
- Capital and liquidity headroom after planned repurchases, dividends and the phase-in of CECL’s regulatory capital impact; also verify the effect of unrealized AOCI changes.
- Progress on LIBOR contract remediation and the transition to replacement benchmarks.