Regions Financial Corporation (RF) Earnings Call Transcript & Summary

Interesting. We'll come back to something you said in a moment. But maybe just talk about AI, certainly been one of the themes of the conference. Maybe talk to just where Regions is seeing the biggest benefit from that maybe at the moment? And just where you see, kind of, some of the greater opportunities looking out?

Yes, for us, where we see the best benefit is when we couple AI with other process improvement opportunities. So AI by itself and trying to get a big bang benefit, it's just not an area we've been focused. Clearly, there's some low-hanging fruit, if you will. We've been developing or deploying GitHub CoPilot across our developer community all year long. I want to say we're about 80% deployed across our developers and see about a 30% lift in co-development. So that allows us to not have to add as many developers as we otherwise would have. Other places where we've deployed it would be an intelligent document processing or just processing documents. It's how we analyze information for next product offerings for our customers. These are some things that we've been doing for years, but generative AI is allowing us to amplify that. So for us, we're not looking at it as just a singular approach to drive meaningful cost efficiencies but more what can we use AI for to enable our bankers to have more productive conversations with customers to drive business. And for our back office personnel to be able to do their business in more efficient ways. There's some broader company-wide initiatives that we think we can continue to invest in with better data in terms of how we onboard customers, how we enable our bankers to service customers. There's some big enterprise projects that we think we can deploy through time. But for us, this hasn't been a, kind of, massive AI across all use cases. We're really taking a step back and saying, how can we use it in a productive way to be more efficient, but not on the singular use case standpoint. And from our perspective, it's helped us, as you think about some of the variable costs that have become more prevalent here of late with cost of tokens and things of that nature by taking a more deliberate approach. We haven't had any types of surprises that you've seen other stuff.

Got it. And then maybe shifting gears to credit quality metrics have been improving for several quarters in now. The environment has certainly been favorable. Just as you, kind of, look at your portfolio, any emerging areas of potential concern? Does the Fed potentially or likely raising rates add things to your portfolio of interest watch list and just how you're thinking about the backdrop there?

Yes. Credit quality has continued to improve quarter-over-quarter. We had several quarters ago, identified a couple we defined as portfolios of interest, office transportation, particularly being two. And we've worked through a few problems in those portfolios. We've seen the level of criticized and classified loans come down, non-accruals have come down, charge-offs have come down and we expect those trends to continue. So credit quality is improving still. And we don't particularly see any areas of concern do think as rates go up, there will be things to watch. But we've been focused on continuing to work through any areas of our portfolio where we thought we had maybe a little more risk than we were comfortable with, importantly focused on balance and diversity, ensuring that we don't have any concentration risk that we're uncomfortable with. And as a result, we expect our portfolio to perform very consistently as the economy evolves and feel good about credit quality, very good about credit quality.

Okay. I guess for several years at this conference, you always used to say our CECL reserve level -- or reserve levels are going to go back to CECL day 1, and they now have. So now we're there. So just how do we think about, kind of, the reserve level from here. Is that the floor? Could it go lower? And just you're growing loans or how does that impact?

Yes. So I think at this point -- to your point, we've gotten back to that day 1 measurement. From here, you really going to start looking at the construct of the balance sheet, right? And so back to my earlier comments, when you're growing investment-grade credits, you'd expect everything else equal, the math would push that reserve ratio lower. And so I'd say, really looking at where growth is coming from, we provide some disclosure where we have ACL ratios by product type. I think that can be helpful. But also, we still have some uncertainty embedded in our allowance today. Clearly, where we're sitting today with the prospective rates, it's probably good to have that in there. So that would be another area where through time, that could increase or decrease. But I really think at this point, you really got to look at where we're growing the balance sheet. To John's point, credit quality remains really strong. And so that's not going to be a big driver. But I think from here, the math will result in ratios based upon what we're putting on the balance sheet. And so it could go up or down from here. But right now, we feel really good about the levels. And we continue to put on investment-grade credits, you should expect that it could come down.

Got it. And then on capital, on a marked basis, I think you were 9.5 in the second quarter, smacking the middle of 9.25, 9.75 range you guys have talked about. I guess this quarter, there could be some AOCI pressure. I know share repurchases moderated a bit in the second quarter. You talked about it getting a little bit better in the third. Just how should we think about the overall pace of buyback and capital return.

Yes. I think -- so we'll continue to manage inclusive of AOCI as we have. And so to your point, we're kind of right at 9.4, 9.5 in the second quarter. We'll generate, call it, 40 to 50 basis points of capital every quarter, pay a dividend. That will take about half of that put in your whatever loan growth we're going to have. And then from there, it's just -- it's share repurchases, given what AOCI does. And so clearly, this quarter, it's going to stress AOCI given where rates are. but it really just becomes a bit of a math exercise at that point because we generate so much capital every quarter, we don't feel like we need to need to store house capital. And so really, our approach to share repurchases is trying to have as good a forecast as we can for loan growth and the impact of rates, which is incredibly difficult to do. And then we'll fill in with share buybacks when we can do so. We'll manage within that 9.25 to 9.75 range. it's really just, kind of, where rates end up really being the governor there.

And then if we look at the kind of Basel III proposals, I think you get like a 100 basis point potential pickup. How do you just think about that? You don't have it today, you'll likely get it in the future when you -- [indiscernible] if and when you do get it, just how do you play with that?

Yes. So I always like to remind everyone the net impact of Basel III end game is a negative to us just because we're managing to the AOCI everyday. So it will take us from, call it, reported 10.7, probably down to 10.4, 10.5. So a modest negative impact of the proposal overall. But to your point, the RWA benefit pushes you back up there. Yes. So for us, we'll look at that capital is capital that we can deploy either into our business as we have before or we'll buy back shares with it. Again, we'll understand the right range for us to manage to. We still think the 9.25 to 9.75 range is important. Others will manage their capital through time to levels they feel appropriate, and that will be important for us to consider. But for us, it's a great opportunity to continue to invest in our business, and we'll treat that additional capital that's freed up just like we do today.

As we speak about the uses of capital, John, it wasn't lost on me when you were talking about the deposit systems, how you said it positions you to depository acquisitions. If you want, I guess, do you want to? Clearly, this is a scale business, there's some big players in your market and your company is a product of 2 very, very sizable acquisitions and a bunch of smaller ones. Just how are you thinking about M&A in the backdrop and the regulatory environment that feels very favorable at the moment.

Yes. Today, we're not interested in depository M&A. Our position's unchanged.

But tomorrow?

Tomorrow either. We get through depository system conversion. We have some more flexibility. We're always thinking about how we're positioned and what's going on in the market, and it's something we are observing, we're considering. But the answer today is no, we don't have interest. It's really for the reasons we've said before, which is we have a plan that says we just execute our plan. We continue to deliver top quartile or top decile results in terms of return on tangible common equity, which is what we've been managing to. And we believe that's really important. There's a lot of risk of execution associated with M&A, and we think just executing our plan gets us to a very good place. So that's number one. Two, we are very focused on getting this deposit system converged completed. Our resources are focused there. And so anything that would distract those teams from the work they're doing, I think, brings risk to the company and risk to anyone we were potentially acquiring. So again, our position is unchanged. But we'll consider what's going on in the market. And this time next year, we may have a different conversation, but I don't know that, that will be true. We just have options then that we don't have today, let's say.

I know small deals aren't glamorous, the bolt-on deals that we've been doing before. But when we step back and look at the number of deals that we've done over the past several years, they have diversified our revenue streams. And just going back to capital for a minute, the latest Fed stress test, our PPNR covered charge-offs about 101%. And that's not by accident, it's by adding additional revenue streams. So in of themselves, none of these, [indiscernible] I know, were glamorous, but it does provide additional revenue diversification for us that allows us to be better positioned to manage capital through different environments. And so we like those. We'll continue to do those. I think they're great uses of capital and allow us to scale in certain parts of our business to much higher levels. This Frazer Lanier acquisition we did in July, again, a small acquisition, but really a great scale opportunity for our government and institutional banking business. And so we think we can take that business from what it is today in Alabama and scale it across our footprint and provide a real good growth opportunity for us.

I'll just make another point there. If you go back to 2011 come forward, we've given up about $600 million in noninterest revenue. $300 million was to Reg E and the Durbin Amendment interchange and another $300 million to changes in our overdraft NSF policies and practices. At the same time, over that period of time, we've grown noninterest revenue by $600 million. So we've produced about $1.2 billion in growth off of what was about a $2 billion run rate. Over that 15-year period, much of that has come from the investments we've made in things like capital markets and wealth banking in the mortgage business. So I think there's a lot of power in the non-depository acquisitions that we've made, and we'll continue to make to build -- to add to our business.

[indiscernible] There are, I guess, mergers, consolidations, integrations going on within your footprint. You have Huntington-Cadence, Synovus-Pinnacle and there's certainly some others. Maybe just talk to your ability to capitalize on potential disruption of others. I feel some deals aren't going as smoothly as others, just the ability to hire talent, pick up customers.

Well, we ask our bankers every day to stay in front of the customers to know who the other good bankers are in the market. That's just the way we should be doing business. And I think in periods of disruption where there is -- where there are acquisitions, does create periods of disruption, that creates opportunity. If you're out prospecting in your markets, if you're calling on other bankers in your markets, and on a regular basis. So we've been able to add 75 or 80 bankers to our commercial banking teams, our wealth banking teams, our treasury management teams across our footprint. We're adding customers, talked about growth in consumer checking account growth in small business checking accounts. Some of that is because of the disruption is being created in our markets. But it is the result of just consistently doing our business well. It's not because we're focused on one specific institution or one transaction, it's because there is a little disruption in the market, and we're out trying to take advantage of the opportunities the market provides.

Got it. And you talked about your strong profitability metrics driven by organic growth. I think you think 20% [indiscernible] in the second quarter. You talked to 16% to 18%, kind of, longer term. I don't know how do you, kind of, think about the current environment in terms of just cyclical benefits versus, kind of, structural changes talked about potential regulatory improvements. Talk about the fee income job you've done there. Just what is, kind of, the right profitability range to think about? And how do you just balance growth versus profitability?

Well, our folks has been sound as first. We want to create a consistently performing resilient, sustainable business with some investors, go back 15-plus years, we might have a reputation for being more volatile in the way that we operate or in the markets that we operate in. And we want to build a business that is the antis of that. We want to be, again, consistently performing, resilient, sustainable. So that starts with soundness. Then focus on profitability and then growth. There are going to be periods of time when you really can't grow profitably and soundly. And so if you look back on the last number of years, there have been periods when we haven't grown as much as maybe some of our peers. And that's because of our focus on soundness first, profitability second and then growth. And I think we'll -- that will continue to be our -- the way that we operate. We'll continue to make investments in our business. We think that we can through different periods in the economy, consistently generate that 16% to 18% return on tangible common equity. We had a 20% quarter last quarter. A lot of things came together. Credit quality continues to improve. So I think we're going to be a top quartile performer, and that's going to kind of be the range that we operate in.

I think when you just look at the range, you normalize for different rate environments. And so including AOCI, definitely uses a denominator. So that's just some math pieces of it. But through time, investing in noninterest revenue businesses. So the more we can deepen treasury management customers that adds to profitability. The more we can sell ancillary business to our core lending customers that increases profitability. So all these investments are intentional to help couple with lending to boost profitability when you think through time, I would say just be mindful: one, to John's point, just how good credit is right now, shouldn't always assume that; and then two, the inclusion of AOCI and the return metric does, kind of, boost it a little bit today in terms of what it could be in different rate environments.

Good point. I guess maybe for you, Anil, I guess, Regions had a CFO before you for a very long period of time. You get to come in and replace Dave. Just any areas of financial strategy or capital allocation philosophy where you see an opportunity to evolve, kind of, Regions approach?

Yes. So I joined Regions 15 years ago when David hired me into the bank and been working with Deron the entire period of time. So a lot of the capital management philosophies David and architect them I was behind the scenes, maybe plugging in wires and things of that nature. But I'm fortunate to step into a very well-performing bank. And we've been successful for deliberate reasons. So being thoughtful of how we allocate capital, understanding the returns we get off of that capital, making certain we understand the construct of our balance sheet, the liquidity of our balance sheet, making tough decisions deciding not to invest X what we thought -- or some people thought was excess cash into securities when we knew that was much shorter duration. So it's been a product of making very tough decisions, understanding the nature of our customers, understanding our balance sheet. And so for me, incredibly blessed to walk into a great situation, a very high-performing bank. But what guide us here isn't going to get us where we want to be. And so making sure we stay disciplined in times like now, when there are opportunities to grow and making sure we stay disciplined to maintaining good profitable growth, sound profitable growth is critically important. And so it's my responsibility to work with 20,000 people every day to make sure we're making the right decisions, not just for today for the bank that we want in 5 years from now. And so blessed to walk in, in a very strong situation. And it's our job to make sure it stays that way.

I guess what would you say is the biggest surprise as you, kind of, step into the new role? I know you've been buying the scenes for many years but here at the forefront?

Well, I was thinking about this and just go back to where we're sitting in January. And we were contemplating a world where the 10-year was going to be below 4% in that last -- in a couple of weeks.

And the week 2 Fed cut.

Exactly, yes. So just think about what's happened this year. First, AI is going to be a great enabler. Next thing AI is going to disintermediate all our deposits. Now AI may kill us all. I mean it's been a very dynamic first 6 to 9 months in the role, but making sure you, kind of, focus on the things you can control surrounding yourself with good people, but there's been a lot of curveballs thrown at us this year when you think about where we're sitting in January, where we're sitting today.

I guess one of the other things we thought at the start of the year was just more bank consolidation. I think we put it out to -- every year, we put out a top 10 list of things going to happen. The only thing you see year-to-date we're wrong on is the lack of bank M&A. And I guess, John, to your point, you're tied up with the deposit conversion [indiscernible] or interrupt that, which makes sense. But I guess why do you think there hasn't been just more consolidation. You're a top 30 bank, but there's 4,000 banks more than you at a scale business. This regulatory window is open. What do you think the holdup is?

It felt like initially when the regulatory environment improved that all of a sudden, everyone thought they were a buyer when a lot of people thought they were going to be sellers. And so I don't think there was much interest, frankly, as everyone anticipated. And then there were a couple of our peers who indicated very directly that they wanted to be a [indiscernible] dividend, they have been -- and as you observed, it takes a little while to integrate those acquisitions. And so I anticipate they may be back in the marketplace again. We'll see. But I think there just weren't as many -- as I said, weren't as many sellers as people thought they'd be now as we approach the end of President Trump's term may be people begin to rethink their positioning, but I don't really have any insight into that.

That's fair. Great. On that note, please join me in thanking John and Anil for their time today.