Regions Financial Corporation (NYSE: RF) — 2019 Form 10-K
Reporting period: Fiscal year ended December 31, 2019. The filing also reports fourth-quarter results; figures below are U.S. dollars unless noted.
Business context
Regions is a regional bank holding company headquartered in Birmingham, Alabama, serving the South, Midwest and Texas. Its businesses include commercial, consumer and mortgage banking, wealth management and other financial services. At year-end, it reported $126.2 billion in assets, $97.5 billion in deposits and $16.3 billion in stockholders’ equity.
Financial performance and condition
- Earnings: Continuing-operations income available to common shareholders was $1.503 billion, essentially unchanged from $1.504 billion in 2018. Diluted continuing-operations EPS increased to $1.50 from $1.36. Total net income was $1.582 billion versus $1.759 billion in 2018, which included $191 million of after-tax discontinued-operations income from the insurance business sale.
- Fourth quarter: Continuing-operations income was $389 million and continuing-operations diluted EPS was $0.38. Income available to common shareholders from continuing operations was $366 million.
- Revenue and margin: Net interest income and other financing income was $3.745 billion, up slightly from $3.735 billion; taxable-equivalent net interest income was $3.798 billion versus $3.786 billion. Net interest margin was 3.45%, down from 3.48%, as funding costs rose faster than asset yields. Non-interest income grew 4.8% to $2.116 billion; non-interest expense declined 2.3% to $3.489 billion. The efficiency ratio improved to 58.99% from 61.50%.
- Credit costs: Provision for loan losses rose to $387 million from $229 million. Net charge-offs increased to $358 million, or 0.43% of average loans, from $323 million, or 0.40%. The allowance for loan losses was $869 million, equal to 1.05% of loans, compared with $840 million and 1.01% a year earlier.
- Balance sheet and liquidity: Loans were $83.0 billion, down $189 million year over year; deposits rose $3.0 billion to $97.5 billion. The year-end loan-to-deposit ratio was 85%. Regions Bank held $2.5 billion on deposit at the Federal Reserve; parent-company cash was $1.9 billion. Reported borrowing capacity was $16.9 billion at the Federal Reserve and $17.5 billion at the FHLB.
- Debt and capital: Long-term debt declined to $7.9 billion from $12.4 billion; total borrowed funds were $9.9 billion. Estimated holding-company CET1, Tier 1 and total capital ratios were 9.68%, 10.91% and 12.68%, respectively. Regions and Regions Bank were classified as well-capitalized.
- Cash flow: Operating activities provided $2.581 billion, investing activities provided $509 million, and financing activities used $2.514 billion. Cash and cash equivalents increased $576 million to $4.114 billion.
Material changes versus 2018
- Net interest income was broadly stable, but margin declined as deposit and borrowing costs increased. Average earning-asset yield rose 20 basis points while interest-bearing liability cost rose 31 basis points.
- Provision expense increased, driven by higher average loan balances, charge-offs and classified loans. Non-performing assets were $578 million versus $566 million; non-performing loans were 0.63% of loans versus 0.61%.
- Loan mix shifted: Regions discontinued indirect auto originations in 2019, contributing to a $1.2 billion decline in that portfolio; home equity balances also fell. Commercial and industrial loans increased.
- Regions repurchased approximately 47.5 million shares for $721.5 million under a $1.37 billion authorization and raised the quarterly common dividend from $0.14 to $0.155 per share beginning in the third quarter. It issued $490 million of Series C preferred stock.
- Other notable items included a $16 million pre-tax charge to extinguish debt early and a $28 million net loss on securities, primarily associated with portfolio repositioning. Non-interest expense benefited from lower personnel, occupancy, legal/professional and FDIC assessment costs.
Outlook, risks and contingencies
- 2020 expectations: Management projected low-single-digit adjusted average loan growth, positive adjusted operating leverage, net charge-offs of 45–55 basis points and an effective tax rate of 20%–22%. It expected moderate economic growth, with Regions forecasting U.S. real GDP growth of about 2.0%.
- CECL: The standard took effect January 1, 2020. Regions estimated an approximately $500 million increase in the allowance at adoption, primarily in consumer lending; the estimated transition impact was a $375 million reduction to retained earnings and a $125 million increase to deferred tax assets. Regions planned to use the regulatory capital phase-in. Management cautioned that CECL could increase earnings volatility as forecasts and credit conditions change.
- Interest-rate exposure: Regions described itself as modestly asset-sensitive at year-end. Its modeled 12-month net interest income impact ranged from a $76 million increase under a gradual +200-basis-point shift to a $106 million decrease under a gradual, floored -200-basis-point shift. These are scenario estimates, not forecasts; hedges were expected to reduce sensitivity during 2020.
- Key risks: Credit deterioration, regional economic or real-estate weakness, energy and other commodity exposures, deposit repricing or outflows, interest-rate and prepayment changes, competition, cyber and third-party risks, regulation, and the transition away from LIBOR. Regions identified the Southeastern U.S. as its principal geographic concentration.
- Legal and other contingencies: Regions was cooperating with a U.S. Attorney’s Office investigation concerning a former customer and related accounts, including aspects of its anti-money-laundering and Bank Secrecy Act program. Management estimated reasonably possible losses above accruals of up to approximately $20 million in aggregate, while noting that outcomes could be material in a particular period. Its Morgan Keegan sale indemnification obligation was immaterial at year-end, but actual claims could exceed reserves. The Fannie Mae DUS loss-share guarantee had a stated maximum quantifiable exposure of about $1.3 billion; its recorded fair-value liability was approximately $4 million.
Important facts for investors to verify
- Actual CECL allowance, capital and earnings effects after adoption, compared with the estimated $500 million day-one allowance increase.
- Whether net charge-offs and classified or non-performing loans continue to rise, and how the 2020 credit outlook compares with results.
- Deposit pricing, funding costs and net interest margin trends following 2019 rate cuts and the deployment of forward-starting hedges.
- Completion of the authorized repurchases and dividend actions, subject to regulatory capital-plan requirements.
- Developments in the anti-money-laundering investigation, other legal matters and any changes to estimated exposures or reserves.
- Progress and financial effects of transitioning LIBOR-linked contracts to replacement benchmarks.