Regions Financial (RF 0.89%) is starting to see the fruits of its aptly named Simplify and Grow initiative. The strategy helped drive another round of strong results in the third quarter as Regions reported net income of $385 million, an increase of 9% over the same period the year before, and a 22% increase in earnings per share.
Simplify and Grow is the bank's three-year growth plan, which was introduced in late 2017 but really took hold in 2019. It's based on the simple idea of making banking easier for customers. With that as the overarching goal, the Birmingham, Ala.-based bank is striving for sustained long-term growth through strategic investments and targeted expense reductions designed to make the company run more efficiently. So far this year, Regions' stock price has outperformed other bank stocks, up about 25%.
Focus on tech
Management said that of the 67 initiatives that are part of the plan, Regions has already completed 16 of them, with seven more due for completion by the end of the year. Many of them have been addressed through a sizable investment in technology.
Regions -- the 22nd largest bank in the U.S., with about $128 billion in assets under management -- budgeted $625 million for technology, or 11% of 2018 revenue, to make banking easier for customers. About 42% of that is allocated to new initiatives and projects like integrating artificial intelligence across multiple banking channels, expanding mobile deposit functionality, and voice banking to improve the customer experience. The rest will be spent on cybersecurity and upgrades to make existing systems to operate more efficiently.
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"These efforts are paying off and positively impacting the performance of our businesses," John Turner, president and CEO, said on the third-quarter earnings call.
Case in point: Mobile deposits have increased 60% in the past year and now represent 13% of all deposits, Turner said. Digital loan applications have jumped 55% overall, with 60% of all mortgage applications completed online. Further, digital credit card sales were up 35% in the third quarter year over year, while digital checking accounts sales were up about 24% over that same period. Also, logins to online and mobile accounts are up 90% over the last three years. J.D. Power ranked the company in the top quartile for mobile banking this past quarter.
Going forward, Regions will continue to focus on expanding its digital banking, loan, and wealth management capabilities.
Expense reductions
To make room for these investments, the company has strategically reduced expenses. The bulk of this expense reduction comes from shedding real estate, the bank's second-largest expense category. The company is in the process of reducing its real estate footprint by 2.1 million square feet -- or 15% -- by 2021. That's being achieved through branch and back-office space consolidations, utilizing collaborative work spaces, and expanding remote work options. About 100 branches will be consolidated in that period. This has resulted and will continue to result in staffing cuts.
The company also plans to reduce its use of third-party vendors to save another $60 million to $65 million. In the third quarter, third-party spend dropped 8% while professional, legal and regulatory expenses dropped 19%. Also, staffing levels decreased by 320 positions -- or 2% -- year over year. But overall, salaries and benefits increased by 2% driven due to an increase in incentives. Overall, expenses increased 1% over the second quarter and were down 6% year over year. They are expected to remain stable through the fourth quarter.
The third-quarter efficiency ratio was 57.7% -- a decrease of 170 basis points year over year. The efficiency ratio is measured by expenses divided by revenues; the lower it is, the better, as an increasing number indicates that either costs are increasing costs or revenues are going down. Bank officials are committed to lowering the efficiency rating to 55% by 2021 through further expense reductions and revenue growth.
In terms of growth, the bank is focusing on priority -- or high-growth -- markets including Atlanta, Houston, Orlando, and St. Louis. Deposits and checking accounts are growing faster in those regions than the average branch. The company will hire bankers, wealth management professionals, mortgage loan originators and other associates in these growth areas.
"We're going to continue to seek becoming more efficient as we go forward," Regions CFO David Turner said on the third-quarter earnings call. "So, there is still room to control cost into 2020."
The beauty of simplicity
A recent survey of banking executives by PricewaterhouseCoopers found that 53% said simplifying their products, channels, and business models will be the key to better service and increased profitability. But only 17% felt they were prepared to meet this new reality. Regions is one bank that seems ahead of the curve in making simplification a priority and it should serve investors well.
