Regions Financial Corporation (NYSE:RF) Q1 2024 Earnings Call Transcript

Regions Financial Corporation (NYSE:RF) Q1 2024 Earnings Call Transcript April 19, 2024

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Operator: Good morning, and welcome to the Regions Financial Corporation’s quarterly earnings call. My name is Christine, and I will be your operator for today’s call. [Operator Instructions]. I will now turn the call over to Dana Nolan to begin.

Dana Nolan: Thank you, Christine. Welcome to Regions First Quarter 2024 Earnings Call. John and David will provide high-level commentary regarding our results. The earning documents include a forward-looking statement disclaimer and non-GAAP information are available in the Investor Relations section of our website. These disclosures cover our presentation materials, prepared comments and Q&A. I will now turn the call over to John.

John Turner: Thank you, Dana, and good morning, everyone. We appreciate you joining our call today. This morning, we reported first quarter earnings of $343 million, resulting in earnings per share of $0.37. However, adjusted items reconciled within our earnings supplement and press release, representing an approximate $0.07 negative impact on our reported results. For the first quarter, total revenue was $1.7 billion on a reported basis and $1.8 billion on an adjusted basis as both net interest income and fee revenue demonstrated resiliency in the face of lingering macroeconomic and political uncertainty. Adjusted noninterest expenses increased quarter-over-quarter and is expected to represent the high watermark for the year as seasonal impacts offset our ongoing expense management actions.

Average loans were lower quarter-over-quarter, reflecting limited client demand, client selectivity, paydowns and an increase in debt capital markets activities. Average and ending deposits continued to grow during the quarter, consistent with seasonal patterns. Credit continues to perform in line with our expectations. While pressure remains within pockets of business lending, our consumers remain strong and healthy. We anticipate overall asset quality will perform consistent with historical levels experienced prior to the pandemic. In closing, we feel good about the successful execution of our strategic plan as evidenced by our solid top line revenue, which allows us to continue delivering consistent, sustainable long-term performance while focused on soundness, profitability and growth.

Now David will provide some highlights regarding the quarter.

David Turner: Thank you, John. Let’s start with the balance sheet. Average and ending loans decreased modestly on a sequential quarter basis. Within the business portfolio, average loans declined 1% as modest increases associated with funding previously approved in investor real estate construction loans were offset by declines in C&I lending. Approximately $870 million of C&I loans were refinanced off of balance sheet through the debt capital markets during the quarter. Average consumer loans remained relatively stable as growth in residential mortgage, EnerBank and consumer credit card were offset by declines in home equity and run-off portfolios. We expect 2024 average loans to be stable to down modestly compared to 2023.

From a deposit standpoint, deposits increased on average and ending basis, which is typical for the first quarter tax refund season. In the second quarter, we expect to see declines in overall balances, reflecting the impact of tax payments. The mix of deposits continue to shift from noninterest-bearing to interest-bearing products, though the pace of remixing has continued to slow. Our analysis of the trends and overall customer spending behavior gives us confidence that by midyear, we’ll have a noninterest-bearing mix in the low 30% area which corresponds to approximately $1 billion to $2 billion of potential further decline in low interest savings and checking balances. So let’s shift to net interest income. As expected, net interest income declined by approximately 4% linked quarter, and the net interest margin declined 5 basis points.

Deposit, remixing and cost increases continue to pressure net interest income. The full rising rate cycle interest-bearing deposit beta is now 43%, and we continue to expect to peak in the mid-40% range. Offsetting this pressure, asset yields continue to benefit from higher rates through the maturity and replacement of lower-yielding fixed-rate loans and securities. We expect net interest income to reach a bottom in the second quarter followed by growth over the second half of the year as deposit trends continue to improve and the benefits of fixed rate asset turnover persist. The narrow 2024 net interest income range between $4.7 billion and $4.8 billion portrays a well-protected profile under a wide array of possible economic outcomes. Performance in the range will be driven mostly by our ability to reprice deposits.

A relatively small portion of interest-bearing deposit balances is responsible for the majority of the deposit cost increase this cycle, mostly index deposits and CDs. We have taken steps to increase flexibility such as shortening promotional CD maturities and reducing promotional rates. If the Fed remains on hold, net interest income likely falls in the lower half of the range, assuming modest incremental funding cost pressure. So let’s take a look at fee revenue, which experienced strong performance this quarter. Adjusted noninterest income increased 6% during the quarter as most categories experienced growth, particularly capital markets. Improvement in capital markets was driven by increased real estate, debt capital markets and M&A activity.

A portion of both real estate and M&A activities were pushed into the first quarter from year-end as clients delayed transactions. Late in the first quarter, we also closed on the bulk purchase of the rights to service $8 billion of residential mortgage loans. We have a low-cost servicing model. So you’ll see us continue to look for additional opportunities. We continue to expect full year 2024 adjusted noninterest income to be between $2.3 billion and $2.4 billion. Let’s move on to noninterest expense. Adjusted noninterest expense increased 6% compared to the prior quarter, driven primarily by seasonal HR-related expenses and production-based incentive payments. Operational losses also ticked up during the quarter. The increase is attributable to check-related warranty claims from deposits that occurred last year.

Despite this increase, current activity has normalized to expected levels, and we continue to expect full year 2024 operational losses to be approximately $100 million. We remain committed to prudently managing expenses to fund investments in our business. We will continue focusing on our largest expense categories, which include salaries and benefits, occupancy and vendor spend. We continue to expect full year 2024 adjusted noninterest expenses to be approximately $4.1 billion with first quarter representing the high watermark for the year. From an asset quality standpoint, overall credit performance continues to normalize as expected. Adjusted net charge-offs increased 11 basis points driven primarily by a large legacy restaurant credit and one commercial manufacturing credit.

As a reminder, we exited our fast casual restaurant vertical in 2019 and the remaining portfolio is relatively small. Total nonperforming loans and business services criticized loans increased during the quarter and continue to normalize towards historical averages, while total delinquencies improved 11%. Nonperforming loans as a percentage of total loans increased to 94 basis points due primarily to downgrades within industries previously identified as under stress. We expect NPLs to continue to normalize towards historical averages. Provision expense was $152 million or $31 million in excess of net charge-offs, resulting in a 6 basis point increase in the allowance for credit loss ratio to 1.79%. The increase to our allowance was primarily due to adverse risk migration and continued credit quality normalization, and incrementally higher qualitative adjustments for risk in certain portfolios previously identified as under stress.

We continue to expect our full year 2024 net charge-off ratio to be between 40 and 50 basis points. Let’s turn to capital and liquidity. We expect to maintain our common equity Tier 1 ratio consistent with current levels over the near term. This level will provide sufficient flexibility to meet proposed changes along with the implementation timeline while supporting strategic growth objectives and allowing us to continue to increase the dividend commensurate with earnings. We ended the quarter with an estimated common equity Tier 1 ratio of 10.3%, while executing $102 million in share repurchases and $220 million in common dividends during the quarter. With that, we’ll move to the Q&A portion of the call.

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Q&A Session

Operator: [Operator Instructions]. Our first question comes from the line of Ebrahim Poonawala with Bank of America.

Ebrahim Poonawala: David, just following up on your comments around noninterest-bearing deposits sitting mid — I guess, low 30% by mid-2024. Just give us a sense of if we don’t get any rate cuts, do you see that dipping below 30% based on what you’re seeing in terms of customer behavior and just use of balances as I’m assuming there’s some attrition on consumer balances that’s at play here? So like where do you see that mix bottoming out? And what’s the latest that you are seeing in terms of pricing competition across the markets?

David Turner: Yes. So from a balance standpoint, we still feel pretty confident based on flows that we have seen and expect that we’d be in that low 30% range. We continue to look to grow noninterest-bearing balances through new checking accounts, new operating accounts. That’s what’s important to us. That’s what fuels our profitability. And so being in the favorable places, in particular, in the Southeast where there’s migration of businesses, people give us some comfort that we can grow there. We talked about deposits bottoming out this first half of the year and then maybe growing a little bit from there. So I think that low 30% range is a good — still a good level. With regards to competition on pricing, I think at the end of the day, we haven’t seen, across the industry, a lot of loan growth.

And as a result of that, competition for deposits is not as strong as it could have been had we had a lot of loan demand. We always have competition. We have to be fair and balanced with our customers and making sure that we are creating value. And so we look at what our competitors are doing from a price standpoint, and we adjust accordingly. But there’s nothing unusual that’s happening there. And I think the biggest driver of that is because of the lack of loan growth.

Ebrahim Poonawala: That’s helpful. And just a separate question. As we think about capital deployment that you outlined on Slide 10, is there more to go in terms of just the appetite for securities repositioning? And how much should we expect in terms of what you did in 1Q with regards to the lift in the second quarter to bond yields?

David Turner: Yes. So we consistently challenge ourselves on what’s the best use of our capital that we generate. Obviously, we’re at a robust 10.3% common equity Tier 1. We think we’re close enough to be in striking distance on whatever the regime changes with regards to capital. And again, with loan growth being muted in the industry, we want to pay a fair dividend. So we’re generating capital that needs to be put to work. We either buy the shares back or we do things like securities repositioning. We did the $50 million in the first quarter. We’ll continue to look for opportunities. I would say that proof is not as close to the ground as it was because we want to keep our payback less than 3 years and frankly closer to 2.5 if we can get it. Our payback in this last trade was about 2.1. And so we think that was a great use of capital for us. And so we’ll look to do that, but we’re not committing to it.

Operator: Our next question comes from the line of Scott Siefers with Piper Sandler.

Robert Siefers: I was hoping you could please flesh out some of the rationale behind the softened loan growth outlook. I certainly understand it, given the backdrop and what we’re seeing in the H8 data. But it in ways contrast with some peers who might be expecting more of an acceleration in the second half. So just curious to hear your updated thoughts on customer demand and how they’re thinking.

David Turner: Well, on the consumer side, as we mentioned, we did a pretty good job growing mortgage, growing EnerBank, growing card, but it was offset by declines in the home equity which made consumers flat. Consumers are actually in really good shape. Now we feel good about that, we just don’t see a lot of loan growth — net-net loan growth. Relative to commercial, depending on the industry, some industries are blowing and going, and others are being careful at this point. We’ve had nice production, but we’ve had payoffs and pay downs. And of course, this past quarter, we had $870 million of debt placements through our M&A group that helped us from an NIR standpoint, but obviously hurt us from a balance standpoint. If we start seeing rates actually decline, that activity will pick up.

And so net-net, it’s going to be hard to grow meaningfully through all of that activity. And we’re fine with that. We don’t need to push. In this environment, there’s still uncertainty. We don’t need to push for loan growth. We need to be careful on client selectivity. John has talked about that numerous times. And we want to be careful. We clearly have the capital and liquidity to do so. And if we see opportunities, we’ll grow, but we’re not going to force it.

Robert Siefers: Okay. Perfect. And then separately, I was hoping you could discuss the additional operational losses. it was definitely glad to see no change to the full year expectation, though they were elevated in the first quarter. Maybe just an additional color. Were there new instances of the issues that have cropped up last year? Or were these just sort of true-ups? And what gives you confidence that all the issues are still resolved and everything?