Q1 2024 Earnings Summary
- • Strong Fee Income Growth:*
- Treasury management fees increased 7% year-over-year, reflecting growth in relationships and activities.
- Wealth management fees grew over 6% year-over-year, due to increases in asset valuations and customer assets.
- Credit quality concerns due to increased net charge-offs: The company reported higher net charge-offs in the first quarter, primarily driven by a large legacy restaurant credit and one commercial manufacturing credit. These two credits accounted for 13 basis points of net charge-offs, raising the net charge-off ratio to 50 basis points, which is at the high end of their full-year guidance range of 40 to 50 basis points. Both credits are still being worked out, indicating potential ongoing pressure on credit quality. ,
- Pressure on Net Interest Margin (NIM) from increased liquidity: Regions Financial is carrying more cash out of an abundance of caution, which, while not significantly impacting net interest income, is hurting their NIM. The company expects the NIM to be in the upper 350s to 360 basis points range, acknowledging that higher cash levels and deposit costs could pressure margins.
- Softened loan growth outlook impacting earnings: The company anticipates that average loans in 2024 will be stable to down modestly compared to 2023, citing limited client demand, client selectivity, paydowns, and increased debt capital markets activities moving loans off-balance sheet. This outlook contrasts with some peers who expect loan growth acceleration, suggesting potential challenges for future earnings growth. ,
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Credit Quality and Nonperformers
Q: What's causing increases in nonperformers and how are reserves?
A: Management noted that increases in nonaccrual loans and classified loans are consistent with stress in specific industries like office, senior housing, transportation, healthcare, and technology. They anticipated this deterioration and have returned to pre-pandemic credit metrics, with nonaccruals at 105 basis points and average charge-offs at 46 basis points. With high visibility into problematic credits—where 21 credits make up 72% of nonaccruals, and 18 of those 21 credits are in the stressed sectors—they feel confident about their reserve position. -
NII and NIM Outlook
Q: How does slower loan growth affect NII guidance?
A: Management maintained their NII guidance, despite expecting lower loan growth, because loan growth was anticipated in the back half and wasn't factored into NII projections. They feel good about their position with neutral to short-term rates and are reinvesting their securities book, picking up over 200 basis points. They also expect deposit costs to stabilize, supporting NII. -
Deposit Costs and Noninterest-Bearing Deposits
Q: Are deposit costs stabilizing and how are NIB deposits trending?
A: Deposit costs have stabilized from February to March, giving management confidence in their cumulative beta in the mid-40s. Promotional rates are coming down, and they are adjusting pricing accordingly. They expect noninterest-bearing deposits to decline slightly but remain in the low 30% range, as shifts from NIB have mostly occurred. -
Expense Management and Operational Losses
Q: Will expenses decrease after the high Q1 levels?
A: The first quarter represents the high watermark on expenses, with approximately $75 million in non-recurring items like operational losses, payroll taxes, and severance costs. Management expects these won't repeat and has taken actions to reduce expenses. They are confident in their expense guidance. -
Capital Deployment and Securities Repositioning
Q: Any plans for more securities repositioning?
A: Management is considering opportunities for securities repositioning if paybacks are less than three years, ideally closer to 2.5 years. They added some duration with negligible extension—only about 12 basis points per year—and see it as a good use of capital, especially if rates are expected to remain low. While not committing, they'll look for advantageous opportunities. -
Regulatory Proposals and Capital Impact
Q: What's the update on long-term debt proposals?
A: The Basel III and long-term debt proposals are on hold but expected to resume this year. The initial proposal requires 6% of RWA, equating to raising about $5 billion after existing debt. Management hopes the requirement may be reduced to 2–3%, which would lessen the impact. The potential drag on NII is less than 1% if fully implemented. -
Fee Income and Capital Markets
Q: How are fee income and capital markets performing?
A: Treasury management fees are up 7% year-over-year, reflecting fee increases and relationship growth. Wealth management revenue is up over 6%, with increases in assets under management. Mortgage activity increased and is expected to continue. Capital markets activity remains strong, with pipelines full and M&A activity picking up, supporting fee income in the $60–$80 million range per quarter. -
Loan Mix and Higher-Yield Portfolios
Q: How has loan mix shift impacted charge-offs?
A: The shift in loan mix, notably with portfolios like Interbank and Ascentium, which are higher-yield and higher-loss content, has influenced comparisons to pre-pandemic charge-offs. These portfolios are performing in line with expectations, with loss rates around 2–2.5%. The CECL reserve adjusted for current portfolio mix implies a reserve of 1.62%, indicating strong coverage. -
Inflation Impact on Deposits
Q: Has inflation changed corporate deposit behavior?
A: Management hasn't observed significant changes in corporate deposit behavior due to inflation expectations. Most shifts from noninterest-bearing deposits have already occurred, and they expect NIB deposits to remain in the low 30% range. Customers are maintaining liquidity amid uncertainty. -
Core Systems Conversion Progress
Q: Is the core systems conversion on track?
A: The core systems conversion project is progressing as expected, staying on budget and on time. Management feels good about the project's status and continued progress.
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