Regions set to replace core deposit system

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Regions Financial in Birmingham, Ala., will begin replacing its core deposit system next year, a move executives say will help to support its future digital banking investments.

The $128 billion-asset Regions plans to put out a request for proposals in the first quarter next year and make a selection around midyear. The entire process is expected to take about four to six years, but executives say the upgrade is also needed because its vendor will stop supporting the current system five years from now.

The bank could purchase the source code and keep the current system, which would be cheaper, but Chief Financial Officer David Turner said that option is “not as ideal.”

“The newer systems have capabilities that could be useful to us in serving our customers,” he said in an interview with American Banker. “There’s a lot of investment that’s been taking place over time in the digital space that will have to continue. Customers want things faster, they want it easier and it’s got to be up and running and stable.”

Banks of Regions’ size seldom replace their core deposit systems like this because it’s a difficult, time-consuming and costly undertaking. Earlier this year, the $70.1 billion-asset Zions Bancorp. in Salt Lake City completed the second stage of its own core conversion, which it first announced in mid-2013. Zions’ case was especially complex because it involved converting both its loan and deposit systems.

While it’s too soon yet to say exactly how much it will cost, Turner said it should fit within the $625 million that Regions budgets for technology costs every year. Regions spends roughly half of that budget on maintenance and considers this particular project to fall into that category, rather than innovation or cyber security.

Regions’ third-quarter net income increased 8% to $385 million from the year-ago period. Earnings per share of 39 cents matched the mean estimate of analysts surveyed by FactSet Research Systems.

Net interest income declined 1% to $950 million, and the net interest margin narrowed 3 basis points to 3.44%.

Noninterest income increased 8% to $558 million. Service charges on deposits increased 4% to $186 million, and card and ATM fees rose 3% to $114 million. Capital markets income fell 20% to $36 million due to a decline in M&A advisory services in the third quarter.

Total deposits remained flat on a year-over-year basis at $94.1 billion.

Total loans increased 2.4% to $83 billion. Commercial and industrial lending was particularly strong, rising 7.5% to $40.2 billion. Investor real estate increased 8.4% to $6.4 billion, and indirect consumer loans rose 35% to $2.8 billion.

Net charge-offs increased 12% to $92 million from the year-ago period and represented 0.44% of average loans, which Turner said was in line with the bank’s expectations.

About $1.5 billion worth of loans in its criticized business loans portfolio were classified as substandard, representing a 50% increase from a year earlier. That increase was due to Shared National Credit exam results being included in this round of earnings and over half of the increase was tied to five energy loans, one of which has since been resolved.

Turner said those credits were downgraded because those clients held a high amount of leverage, although he stressed that that included debt held by other entities than Regions. He added that Regions has collateral against those credits and he expects any losses there to be minimal.

“We may have incremental losses, but we still believe those losses will be within the guidance that we provided,” he said.

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Core conversions Core systems Deposits Earnings Credit quality Commercial lending Regions Bank