Yahoo Finance Regions Financial Corporation (NYSE:RF) Q1 2024 Earnings Call Transcript
Regions Financial Corporation (NYSE:RF) Q1 2024 Earnings Call Transcript April 19, 2024
Regions Financial Corporation isn't one of the 30 most popular stocks among hedge funds at the end of the third quarter (see the details here).
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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