Regions Financial Corp Q4 2024 Earnings Call Summary

The following is excerpted from the question-and-answer section of the transcript.

Question: Ryan Nash - Goldman Sachs & Company, Inc. - Analyst : Maybe to start off with the outlook on expenses, the 1% to 3% growth inclusive of investments. David, maybe just talk about where you're getting efficiencies from to create capacity to make these investments? And then second, just given the investments that you're making combined with the comments you made about expectations for C&I loan growth to pick up, what do you think that means for your ability to generate incremental positive operating leverage over time? And I have a follow-up. David Turner - Regions Financial Corp - Chief Financial Officer, Senior Executive Vice President of the Company and the Bank Yes. So from an expense standpoint, we mentioned kind of the key categories, 60% of our expense base are salaries and benefits. So we watch our head count very carefully, making sure that we deploy the right number of the right people in the right places. And I think we've done a pretty good job of that. That never ends. We continue to look for opportunities to streamline processes and leverage technology, which I think we do okay, but there's more opportunity there. So managing that head count is important. Occupancy cost for us is one of our largest categories, and we've done a pretty good job of reducing square footage over time, both in the branch footprint, but more so in the office footprint, and that's helped us quite a bit. And the third is we have a pretty good effort on our vendors, making sure that we use vendors appropriately, whether it's third-party consultants or software vendors or whatever, to make sure that we're getting what we paid for and only getting what we need to have to run the business. So that's allowed us to make investments in other parts of technology. We're in the middle of putting in a new deposit system and loan system, and so we've been able to pay for that. And we're going to make investments in people, as John mentioned in his comments. So if we do all that, we do -- we're going to generate positive operating leverage. Where we end up on that, Ryan, we'll just have to see. REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 17, 2025 / 3:00PM, RF.N - Q4 2024 Regions Financial Corp Earnings Call

Question: Scott Siefers - Piper Sandler & Co. - Analyst : David, I was hoping to get your thoughts on how you see deposit pricing evolving. I know that you're sort of full through the cycle, beta expectations are on the way down. But just curious about any updated thoughts if we, indeed, sort of stay higher for a while? And then maybe just sort of within the context of the pros and cons that you hopefully listed on slide 8 there. Just given that a good chunk of your NII momentum this year is kind of programmatic, where are you most focused if you were to sort of stack rank sensitivity to either rates or the shape of the curve versus things like deposit pricing, stuff like that? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 17, 2025 / 3:00PM, RF.N - Q4 2024 Regions Financial Corp Earnings Call David Turner - Regions Financial Corp - Chief Financial Officer, Senior Executive Vice President of the Company and the Bank Yes. So I'm glad you referenced page 8, that's our good guide in terms of how we're thinking about our base case and what could drive NII up or down. Deposit pricing is very important to us. A couple of things there. One, we want to be competitive. We want to be fair to our customers and make sure we're giving them a fair price on their deposits. We want to continue to grow deposits. That's why we're making investments in priority markets where we can grow checking accounts, noninterest-bearing checking accounts for operating accounts of the business. And so as we do that, we'll continue to lower our deposit costs. Our base case is a 35%, call it, 35% down beta, which is about where we are. Now others had more of a move on that because they had a higher beta on a cumulative basis through the cycle, so ours is necessarily going to be lower, but we also have our hedging that's in place to help protect us. We do have some high-cost CDs that are maturing that will help us from a deposit standpoint. But we do continue to have promotional rates out there in some markets where we're looking to grow, and we think that's going to benefit our deposit growth over time. So it's really a combination of primarily you're really watching your deposit costs and the shape of the yield curve does help us just a bit, too. So a steeper yield curve is better.

Question: John Pancari - Evercore ISI Institutional Equities - Analyst : Just on -- if I go to the loan commentary a little bit again, and you mentioned the loan growth about 1% expectation as you look at 2025. And I know that, that's relatively conservative. It looks like relatively low. And you did cite that you're considering risk-adjusted returns in that outlook? Where are you seeing pressure on returns today that are influencing the pace of growth? Is it like I should look at it by loan type or by geography? Where are you seeing the pressure on returns?

Question: John Pancari - Evercore ISI Institutional Equities - Analyst : Got it. Okay. Great. That's helpful. And then on the expense guide of 1% to 3%. Can you -- does that incorporate an increase in your IT budget? I believe it's currently 9% to 11%, but you had signaled that it might be moving higher. So does that up 1% to 3% incorporate an upward revision to that budget? David Turner - Regions Financial Corp - Chief Financial Officer, Senior Executive Vice President of the Company and the Bank It does. We've continued to make investments, as you know, maybe better than most. We are investing in a new deposit system and loan system. Loan system will go in, call it, the second, third quarter of this year and deposit systems, a couple of years away. But we're -- we've been spending money on that. We're going to continue to invest there. And over time, we do believe that that 9% to 11% range will be higher. We haven't committed to a given percentage right now, but the guide that we have does contemplate those investments already. Those are the things that I'm talking about earlier when I said we would have to make investments to grow, to continue to have best-in-class technology, and we have to figure out how to pay for that. And we have to look at salaries and benefits and occupancy and vendor spend as a way to get there.

Question: Peter Winter - D.A. Davidson & Co. (Research) - Analyst : Just sort of follow-up on expenses. Just if I think about, John, in your opening comments, you outlined a series of investments you plan to make in terms of bankers and future revenue growth. The expense guidance is 1% to 3%. So the question is, would you pull back on these investments if revenue growth comes in a little bit weaker than expected given this focus on positive operating leverage? REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 17, 2025 / 3:00PM, RF.N - Q4 2024 Regions Financial Corp Earnings Call

Question: Peter Winter - D.A. Davidson & Co. (Research) - Analyst : Got it. That's helpful, really helpful. And then just on credit. You mentioned net charge-offs will be elevated in the first half of the year and then down and lower in the second half. Do you think net charge-offs come in above the upper end of that 40 to 50 basis points in the first half? I understand that it's reserved for. And then secondly, would you expect the ACL ratio to drift lower from 1.79%, which has been pretty consistent in '24?

Question: Matt O'Connor - Deutsche Bank - Analyst : I was hoping to get some details, sorry if you covered it earlier, but just on some of the other fee categories besides capital market. I don't know if there's seasonality or unusually strong 3Q levels, but service charges, cards, investment management were all down? And just any thoughts on what's further 4Q and then the outlook on some of those categories. David Turner - Regions Financial Corp - Chief Financial Officer, Senior Executive Vice President of the Company and the Bank Yes. I think what's baked in -- to see some numbers that are baked in for next year that others have, we have this HR asset where we adjust benefits for certain individuals, and we have a trust that funds that. So as the assets in the trust go up, NIR goes up and so do expenses. And that's why we have this little bit of noise in our numbers. That's about $15 million. If you look at page 14 in our supplement, you can see it quarter-to-quarter. It's about $15 million. We think people put in our run rate that really distorts NIR of that. As you get to the fourth quarter, the things that are a little bit more episodic are capital markets, as you mentioned. So M&A Advisory had a good finish for the year. It depends on what's in the pipeline in any given quarter. So you're not going to get a nice, smooth quarterly run rate on that cash on a loan, which is why we -- while we finished at $97 million, $98 million in the quarter for total capital markets, we're signaling more $80 million to $90 million, which should be baked into expectations. If we close more deals, it will be higher than that. If we don't close many, we'll be at the lower end. So M&A is a bit, like I said, episodic. You have swap income, swapping, people just aren't entering into interest rate protection right now given the rate environment. So that's not much of a contributor. Syndication revenue was up in the quarter. That has been a little bit episodic, but it had a good finish to the year. And then we have real estate capital markets, that's really been our strongest, a more steady contributor. But it can be even better than it was in the fourth quarter depending on rates. If we get rates coming down just a little bit, it actually could have even a better quarter. So net-net capital markets, I think, $80 million to $90 million for the time being, and we're going to work to get it to $100 million, but we need a little help from the rate environment. Service charges are fairly predictable. There is no real noise in anything. Wealth management continues to grow at double digits, partly due to markets, but partly due to just growth in customers and balances. And we're making investments in wealth advisers to continue on that path. So we're happy with that. Probably the biggest negative would be in the card and ATM fee line. That's where we have our rewards liability. We started identifying to our customers real time what the rewards liability was when you log on because we thought that was helpful to them, and we believe it's helpful. But as a result of that, people are using the rewards more. So we had to adjust our reward liability, and that was a little bit of a deduct in NIR for the fourth quarter that shouldn't repeat as we go forward into 2025.

Question: Erika Najarian - UBS Securities LLC - Analyst : Just going back to slide 8, David, thank you for all the color on beta in different mix scenarios. I'm just wondering, it's been such a long time since investors have seen a neutral rate that wasn't 0. And as we think about your experience as Regions, given your deposit base, how should we think about sort of what you've seen in different rate environment with regard to DDA growth? And I guess I'm wondering how we -- it seems like we've completely lapped REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 17, 2025 / 3:00PM, RF.N - Q4 2024 Regions Financial Corp Earnings Call the impact of excess COVID liquidity in terms of pressure on deposits. And just I guess, wondering what is the environment where Regions can see itself growing DDA again? David Turner - Regions Financial Corp - Chief Financial Officer, Senior Executive Vice President of the Company and the Bank Yes. I think it's a great question and a very important one because DDAs, consumer DDA and operating accounts of a business are the fuel that make our engine work. And we've done a pretty good job of continuing to grow checking accounts. But we're doubling down on investments on our consumer side, our branch small business and our small business in the commercial side and reinforcing to our relationship managers to grow new logos so that we can get the operating account. It's not about making the loan, it's about getting the relationship, which is evidenced by an operating account of a business. And if we'll continue to do that, we will continue to have more than 30% of our total deposits in noninterest-bearing, which is very valuable to us from a margin standpoint. So it's not really the rate environment that's the driver of that. It's about us just getting out boots on the ground and getting after it. And that's kind of the challenge that John has put to the businesses, and we're looking forward to seeing what we could do by making the investments at our priority markets that we listed in our material.

Question: Gerard Cassidy - RBC Capital Markets Wealth Management - Analyst : John, you started your presentation with some very impressive economic data and population data and demographics in your core footprint. And at the same time, you and your peers continue to struggle to really achieve good loan growth. Good loan growth, I guess, you could define as the rate of growth of nominal GDP in the area in which you operate. What is it going to take do you think, REFINITIV STREETEVENTS | www.refinitiv.com | Contact Us consent of Refinitiv. 'Refinitiv' and the Refinitiv logo are registered trademarks of Refinitiv and its affiliated companies. JANUARY 17, 2025 / 3:00PM, RF.N - Q4 2024 Regions Financial Corp Earnings Call because I know you guys have been talking about modest loan growth for some time, particularly on the commercial side. What do you think it's going to take to bring loan growth into, let's say, mid-single digits for you folks over the next couple of years?

Question: Gerard Cassidy - RBC Capital Markets Wealth Management - Analyst : And John, just tying into those comments. Can you give us any color, or maybe David, the acquisitions you guys did a couple of years ago on EnerBank and Ascentium. How are they doing in terms of growing their loan books relative to when you bought them and what you expected they were going to produce?

Question: Gerard Cassidy - RBC Capital Markets Wealth Management - Analyst : Very good. I appreciate that. And then, David, you guys, obviously, you and Dana put together some really good slides for your earnings call, and we all appreciate that. And I found in slides 20 and 21, very interesting about your securities portfolio and the information that's provided there. On the held-to-maturity section of the securities portfolio, you show it represents about 14%. And if we assume that -- and we all don't know all of the details of the Basel III end game when it is finalized, hopefully, later this year. But assuming that the available for sale unrealized losses will go through regulatory capital, as you alluded to in your comments, where do you think the HTM portfolio goes to? Or are you comfortable just keeping it at the current level? David Turner - Regions Financial Corp - Chief Financial Officer, Senior Executive Vice President of the Company and the Bank Yes. So Gerard, you saw that over -- this past year, we've increased that quite a bit. We were at about 3%, I think, at the beginning of the year. We're at 14% today. We have an interim plan to get to about 25%. We realize that's lower than the peer median, still. But we do think that to the extent AOCI does become part of the regime that reducing the volatility of capital relative to changes in interest rates is important for us. So we think 25% is comfortable enough. You start getting into higher percentages, you really have to think about the interplay with LCR and liquidity risk management. So you don't want to hamstring yourself by putting too much in HTM. It's all one problem and create another one for you. So we think 25%, just about any regime, is a pretty good starting point. And once we get there, we'll reevaluate and come back to all of our investors and analysts and update that percentage if need be.

Question: Betsy Graseck - Morgan Stanley Co. LLC - Analyst : Couple of follow-ups here. One, on the expenses, you were indicating that the loan system will go into place this year, what was it, 2Q, 3Q? David Turner - Regions Financial Corp - Chief Financial Officer, Senior Executive Vice President of the Company and the Bank That's correct.

Question: Betsy Graseck - Morgan Stanley Co. LLC - Analyst : Right. But once it goes live, you test it, wait a couple of quarters and then you get to turn off the old system, right? David Turner - Regions Financial Corp - Chief Financial Officer, Senior Executive Vice President of the Company and the Bank We do, but I don't think there's appreciable savings there. I think the new system really gives us an opportunity to serve our clients better. That's what that's all about. And it's a cloud-based system. And I think that it will help our relationship managers, in particular, serve our customers better.

Question: Betsy Graseck - Morgan Stanley Co. LLC - Analyst : Got it. And I'm just wondering, I'm sure you've been hiring people into this business along the way as well and you're indicating that you are going to be accelerating the pace of hiring into this space. I'm just wondering, is this a doubling of prior pay, tripling?

Question: Chris Spahr - Wells Fargo Securities, LLC - Analyst : So this is a kind of a (technical difficulty) of the strong footprint and outsized growth you expect, and yet obviously, loans and deposits to you. It's a lot of recent points, growing much. What do you think the organic growth rate should be in a more normal environment for both?

Question: Chris Spahr - Wells Fargo Securities, LLC - Analyst : And I know this was kind of asked a little bit already, but just can you just be a little more specific on the tech progress like what's the timeline when you think you'll be done? And what are kind of the ancillary benefits you may expect to see, both just on an operating standpoint, but also an opportunity standpoint?