Regions Financial : 4Q21 Earnings Transcript - pdf, 433KB, opens in a new window

Corrected Transcript

20-Jan-2022

Regions Financial Corp. (RF)

Q4 2021 Earnings Call

	Total Pages: 23
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Regions Financial Corp. (RF)	Corrected Transcript
Q4 2021 Earnings Call	20-Jan-2022

CORPORATE PARTICIPANTS

Dana W. Nolan	David Jackson Turner, Jr.
Executive Vice President & Head-Investor Relations, Regions Financial	Senior Executive Vice President & Chief Financial Officer, Regions
Corp.	Financial Corp.
John M. Turner
President, Chief Executive Officer & Director, Regions Financial Corp.

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OTHER PARTICIPANTS

Erika Najarian	Gerard Cassidy
Analyst, UBS Securities LLC	Analyst, RBC Capital Markets LLC
Betsy L. Graseck	Matt O'Connor
Analyst, Morgan Stanley & Co. LLC	Analyst, Deutsche Bank Securities, Inc.
John Pancari	Stephen Kendall Scouten
Analyst, Evercore ISI	Analyst, Piper Sandler & Co.
Bill Carcache	Christopher Spahr
Analyst, Wolfe Research LLC	Analyst, Wells Fargo Securities LLC
Ebrahim H. Poonawala	Vivek Juneja
Analyst, BofA Securities, Inc.	Analyst, JPMorgan Securities LLC
Ken Usdin	Jennifer Demba
Analyst, Jefferies LLC	Analyst, Truist Securities, Inc.

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Regions Financial Corp. (RF)	Corrected Transcript
Q4 2021 Earnings Call	20-Jan-2022

MANAGEMENT DISCUSSION SECTION

Operator: Good morning and welcome to Regions Financial Corporation's Quarterly Earnings Call. My name is Natalia, and I will be your operator for today's call. I would like to remind everyone that all participant phone lines have been placed on listen-only. At the end of the call, there will be a question-and-answer session. [Operator Instructions]

I will now turn the call over to Dana Nolan to begin.

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Dana W. Nolan

Executive Vice President & Head-Investor Relations, Regions Financial Corp.

Thank you, Natalia. Welcome to Regions' fourth quarter 2021 earnings call. John and David will provide high-level commentary regarding the quarter. Earnings' documents, which include our forward-looking statement disclaimer and non-GAAP information, are available in the Investor Relations section on our website. These disclosures cover our presentation materials, prepared comments, and Q&A.

I'll now turn the call over to John.

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John M. Turner

President, Chief Executive Officer & Director, Regions Financial Corp.

Thank you, Dana, and good morning, everyone. We appreciate you joining our call today. We're very pleased with our fourth quarter and full-year results. We achieved a great deal despite a challenging interest rate and operating environment. Earlier this morning, we reported full-year earnings of $2.4 billion and record pre-taxpre-provision income of $2.7 billion.

Despite continued economic uncertainty, we remain focused on what we can control and our efforts are paying off. We grew consumer checking accounts by 3% and small business accounts by 5%. Notably, our 2021 net retail account growth exceeds the previous three years combined and represents an annual growth rate that is 3 times higher than pre-pandemic levels. We increased new corporate banking group loan production by approximately 30% and generated record Capital Markets revenue.

Through our enhanced risk management framework, we delivered our lowest annual net charge-off ratio since 2006. We made investments in key talent and revenue-facing associates to support strategic growth initiatives. We continue to grow and diversify revenue through our acquisitions of EnerBank, Sabal Capital Partners, and Clearsight Advisors. We successfully executed our LIBOR transition program to ensure our clients were ready to move to alternative reference rates. We continue to focus on making banking easier through investments in target markets, technology and digital capabilities. We've surpassed our two-year $12 million commitment to advanced programs and initiatives that promote racial equity and economic empowerment for communities of color.

Before closing, we're extremely proud of our achievements in 2021, but none of these would have been possible without the hard work and dedication of our nearly 20,000 associates. The past year posed unique challenges as we continue to transition to our new normal, both on a personal and professional level. Despite continued uncertainty, our associates remain steadfast. They continue to bring their best to work every day, providing best- in-class customer service, successfully executing our strategic plan and maintaining strong risk management practices, all of which contributed to our success.

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Regions Financial Corp. (RF)	Corrected Transcript
Q4 2021 Earnings Call	20-Jan-2022

In 2022 and beyond, we'll continue to focus on growing our business by making investments in areas that allow us to make banking easier for our customers, all while continuing to provide our associates with the tools they need to be successful. We will make incremental adjustments to our business by leaning into our strengths and investing in areas where we believe we can consistently win over time.

As announced earlier this week, a key priority in 2022 will be additional comprehensive changes to our NSF and overdraft policies which are detailed in the appendix of our presentation. These changes represent a natural expansion of our commitment to making banking easier for our customers and complement the enhanced alerts, time order posting process, as well as our Bank On certified checking product we launched late last year. It's important to note that the financial impact of these enhancements have been fully incorporated in our total revenue expectation for 2022.

Again, we're pleased with our results and have great momentum as we head into 2022. Now, David will provide you with some select highlights regarding the quarter.

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David Jackson Turner, Jr.

Senior Executive Vice President & Chief Financial Officer, Regions Financial Corp.

Thank you, John. Let's start with the balance sheet. Including the impact of acquired loans from the EnerBank transaction, adjusted average and ending loans grew 6% and 7%, respectively, during the quarter. Although business loans continue to be impacted by excess liquidity, pipelines have surpassed pre-pandemic levels. And encouragingly, we experienced a 240-basis-point increase in line utilization rates during the fourth quarter. In addition, production remained strong with line of credit commitments increasing $4.7 billion year-over-year.

Consumer loans reflected the addition of $3 billion of acquired EnerBank loans, as well as another strong quarter of mortgage production, accompanied by modest growth in credit card. Looking forward, we expect full-year 2022 reported average loan balances to grow 4% to 5% compared to 2021.

Let's turn to deposits. Although the pace of deposit growth has slowed, balances continue to increase this quarter to new record levels. The increase includes the impact of EnerBank deposits acquired during the fourth quarter, as well as continued growth in new accounts and account balances. We're continuing to analyze our deposit base and pandemic-related deposit inflow characteristics in order to predict future deposit behavior.

Based on this analysis, we currently believe approximately 35% or $12 billion to $14 billion of deposit increases can be used to support longer-term asset growth through the rate cycle. Additional portions of the deposit increases could persist on the balance sheet, but are likely to be more rate sensitive, especially later in the Fed cycle.

While we expect the portion of surge deposits to be rate sensitive, you will recall that the granular nature and generally rate insensitive construct of our overall deposit base represents significant upside for us when rates do begin to increase.

Let's shift to net interest income and margin. Net interest income increased 6% versus the prior quarter, driven primarily from our EnerBank acquisition, favorable PPP income and organic balance sheet growth. Net interest income from PPP loans increased $8 million from the prior quarter, but will be less of a contributor going forward. Approximately 89% of estimated PPP fees have been recognized.

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Regions Financial Corp. (RF)	Corrected Transcript
Q4 2021 Earnings Call	20-Jan-2022

Cash averaged $26 billion during the quarter; and when combined with PPP, reduced fourth quarter's reported margin by 51 basis points. Our adjusted margin was 3.34%, modestly higher versus the third quarter. Excluding the impact of a large third quarter loan interest recovery, core net interest income was mostly stable as loan growth offset impacts from the low interest rate environment. Similar to prior quarters, net interest income was reduced by lower reinvestment yields on fixed rate loans and securities. These impacts are expected to be more neutral to positive going forward.

The hedging program contributed meaningfully to net interest income in the fourth quarter. The cumulative value created from our hedging program is approximately $1.5 billion, roughly 90% of that amount has either been recognized or is locked in the future earnings from hedge terminations. Excluding PPP, net interest income is expected to grow modestly in the first quarter, aided by strong fourth quarter ending loan growth, as well as continued loan growth in the first quarter, partially offset by [indiscernible] (08:53).

Regions' balance sheet is positioned to benefit meaningfully from higher interest rates. Over the first 100 basis points of rate tightening, each 25-basis-point increase in the federal funds rate is projected to add between $60 million and $80 million over a full 12-month period. This includes recent hedging changes and is supported by a large proportion of stable deposit funding and a significant amount of earning assets held in cash when compared to the industry.

Importantly, we continue to shorten the maturity profile of our hedges in the fourth quarter. Hedging changes to- date support increasing net interest income exposure to rising rates, positioning us well for higher rates in 2022 and beyond.

In summary, net interest income is poised for growth in 2022 from balance sheet growth and the higher yield curve in an expanding economy.

Now, let's take a look at fee revenue and expense. Adjusted non-interest income decreased 5% from the prior quarter, primarily due to elevated other non-interest income in the third quarter but did not repeat in the fourth quarter. Organic growth and the integration of Sabal Capital Partners and Clearsight Advisors will drive growth in Capital Markets revenue in 2022.

Going forward, we expect Capital Markets to generate quarterly revenue of $90 million to $110 million, excluding the impact of CVA and DVA. Mortgage income remained relatively stable during the quarter; and while we don't anticipate replicating this year's performance in 2022, mortgage is expected to remain a key contributor to fee revenue, particularly as the purchase market in our footprint remains very strong.

Wealth management income increased 5% driven by stronger sales and market value impacts, and is expected to grow incrementally in 2022. Seasonality drove an increase in service charges compared to the prior quarter. Looking ahead, as announced yesterday, we are making changes to our NSF and overdraft practices which along with previously implemented changes will further reduce these fees.

NSF and overdraft fees make up approximately 50% of our service charge line item. These changes will be implemented throughout 2022; but once fully rolled out, together with our previous changes implemented last year, we expect the annual impact to result in 20% to 30% lower service charges revenue versus 2019. Based on our expectations around the implementation timeline, we estimate $50 million to $70 million will be reflected in 2022 results.

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