Regions Financial Corp. Q3 FY2024 earnings call

Revenue and Income Growth

• Total revenue grew on a reported and adjusted basis, with net interest income and fee revenue improving quarter-over-quarter, and almost all fee revenue categories experienced growth.

Loans and Deposits

• Average loans remained stable while ending loans declined slightly, reflecting modest customer demand and focus on client selectivity. Average deposits declined slightly while ending deposits remained stable, with deposit remixing trends stabilized.

Net Interest Income

• Net interest income increased 3% quarter-over-quarter, driven by stability in deposit trends and asset yield expansion. $3.6 billion of securities were repositioned year-to-date. The proceeds of a $1 billion September debt issuance were used to purchase securities to maintain a neutral balance sheet and bolster liquidity. Interest-bearing deposit costs have peaked.

Noninterest Expense

• Adjusted noninterest expense increased 4% quarter-over-quarter, primarily due to a 6% increase in salaries and benefits. The company remains committed to prudently managing expenses.

Asset Quality

• Overall credit performance stabilized, with provision expense $4 million less than net charge-offs. Nonperforming loans as a percentage of total loans declined, and business services criticized loans decreased.

Capital and Liquidity

• The company ended the quarter with an estimated common equity Tier 1 ratio of 10.6%, and $2.5 billion of available-for-sale securities were transferred to held to maturity to reduce AOCI volatility.

Hurricane Response

• The company's teams are responding to help communities affected by hurricanes Helene and Milton, continuing the company's history of supporting community recovery.

In the third quarter, Regions reported strong earnings of $446 million with earnings per share of $0.49. Total revenue grew on a reported and adjusted basis, with net interest income and fee revenue improving quarter-over-quarter. Almost every category within fee revenue experienced growth. Adjusted noninterest expense increased modestly quarter-over-quarter. Average loans remained stable while ending loans declined slightly. Average deposits declined slightly while ending deposits remained stable. Net interest income increased 3% quarter-over-quarter, reflecting stability in deposit trends and asset yield expansion. Year-to-date, $3.6 billion of securities were repositioned, realizing $175 million of pretax losses. Adjusted noninterest income increased 9% driven by improvement in almost every category, with service charges up 5%, capital markets up 35%, and wealth management up 5% to a new quarterly record. Adjusted noninterest expense increased 4% quarter-over-quarter, primarily due to a 6% increase in salaries and benefits. Asset quality stabilized with provision expense $4 million less than net charge-offs at $113 million, and the allowance for credit loss ratio increased one basis point to 1.79%. Nonperforming loans as a percentage of total loans declined 2 basis points to 85 basis points. The company ended the quarter with an estimated common equity Tier 1 ratio of 10.6%, and $2.5 billion of available-for-sale securities were transferred to held to maturity.

• Expected full-year 2024 adjusted noninterest income to be in the range of $2.45 billion to $2.5 billion.
• Expected full-year 2024 adjusted noninterest expenses to be approximately $4.25 billion.
• Expected full-year 2024 net charge-offs to be towards the upper end of the 40 basis point to 50 basis point range, attributable to a few large credits, but losses substantially reserved for.
• Expect NII to grow in the fourth quarter and beyond, with the margin有望 approaching 3.60% in 2025, benefiting from front and back book and deposit cost control.

• Customers are hesitant to make capital expenditures due to uncertainty from the election and economic/geopolitical conditions.
• Interest rate changes may impact deposit costs and net interest income.
• Certain portfolios within the corporate bank continue to experience stress, posing credit risks.
• Uncertainty regarding debit card interchange reform may affect fee revenue.

Q: Scott Siefers asked about NII momentum nuance and if the fourth quarter would knock off the track for the 3.60% target.

A: David Turner responded that they're still intact with the 3.60% target, expecting to be in the lower 3.50s in the fourth quarter but to grow NII going into 2025, benefiting from front and back book and deposit cost control.

Q: John Pancari inquired about loan demand.

A: John Turner said customers are cautiously optimistic, with some growth in middle market commercial, energy portfolio, and asset-based lending offset by declines in real estate, expecting modest loan growth in 2025 as uncertainty dissipates. David Turner added expected real GDP in the 2%+ range in 2025.

Q: John Pancari asked about expense confidence and operating leverage in 2025.

A: David Turner said expense estimate is tight with no major risks affecting it, and they'll generate positive operating leverage in 2025. John Turner noted the largest expense is salaries and benefits, controllable with ongoing technology projects on track.

Q: Ebrahim Poonawala asked about credit charge-offs.

A: John Turner said charge-offs are expected to remain in the 40-50 basis point range based on historical performance and portfolio composition.

Q: Ebrahim Poonawala inquired about deposit pricing.

A: David Turner said deposit costs will continue to decline in the fourth quarter, with benefit from maturing CDs and reinvestment yields on the asset side.

Q: Erika Najarian asked about deposit repricing cadence and neutral rate deposit spread.

A: David Turner responded about deposit maturities in the fourth quarter, deposit migration decline, and total deposit costs expected in the 1% range at 3% Fed funds.

Q: Erika Najarian asked about expenses relative to revenue in 2025.

A: John Turner said 2025 is expected to have positive operating leverage, calibrated based on revenue generation. David Turner added they'll find ways to eliminate expenses to finance business investments in areas like treasury management, wealth management, and capital markets.

Q: Matt O'Connor asked about cards and ATM fee line.

A: David Turner said it's a volume and mix issue, with opportunity to grow as customers are gained, and debit interchange reform risk has eased but monitored.

Q: Betsy Graseck asked about deposit growth impact and capital markets investment.

A: David Turner said they have opportunity to grow deposits by investing in people, and John Turner noted they're following private credit developments but have no specific investment inclination in capital markets yet, focusing on optimizing existing investments.