Regions Financial Corp (RF) 2019 Q1 法說會逐字稿

Good morning, and welcome to the Regions Financial Corporation's quarterly earnings call.

My name is Shelby, and I will be your operator for today's call.

(Operator Instructions) I will now turn the call over to Dana Nolan to begin.

Thank you, Shelby.

Welcome to Regions First Quarter 2019 Earnings Conference Call.

John Turner will provide highlights of our financial performance and David Turner will take you through an overview of the quarter.

A copy of the slide presentation as well as our earnings release and earnings supplement are available under the Investor Relations section of regions.com.

Our forward-looking statements disclosure and non-GAAP reconciliations are included in the appendix of today's presentation and within our SEC filings.

These cover our presentation materials, prepared comments as well as the question-and-answer segment of today's call.

With that, I will now turn the call over to John.

Thank you, Dana, and thank you all for joining our call today.

Let me begin by saying we're pleased with our first quarter results.

The momentum we experienced in the fourth quarter has continued into 2019.

We reported earnings from continuing operations of $378 million, delivering solid year-over-year revenue growth, broad-based loan growth and stable but normalizing asset quality, all while reducing expenses and generating positive operating leverage.

Loans grew somewhat faster than we anticipated in the quarter driven in part by increased line utilization by our business customers.

We intentionally funded a portion of this incremental loan growth with commercial and corporate treasury deposits.

And while this was more economical than wholesale borrowings, deposit costs were impacted during the quarter.

We expect loan growth will moderate through the remainder of the year providing opportunities to optimize our deposit mix.

With respect to the economy, we feel good about the health of the consumer and businesses.

I have traveled across our footprint in the last few weeks to markets including Tampa, West Palm Beach, Atlanta, Nashville, Houston, Greenville and Spartanburg, South Carolina and Mobile, Alabama.

I've met with clients of varying sizes and industries and customers' sentiment remains positive.

Many customers experienced record revenues in 2018 and are expecting even better results in 2019.

In general, our clients do not expect a recession in the near term and neither do we.

That being said, we remain focused on building a balance sheet that will position us for a consistent and sustainable performance through all phases of the economic cycle.

The outlook for the interest rate environment continues to evolve.

Clearly, lower rates in the shape of the yield curve makes near-term revenue growth more challenging for the industry.

However, as we did over the last 4, 5 years, we will make the necessary changes and adapt to the evolving market conditions.

In the meantime, we'll continue to focus on the things we can control, providing customers with the quality financial products and services they need, maintaining appropriate risk-adjusted returns, prudently managing our interest rate sensitivity profile and effectively controlling expenses, while continuing to make investments in technology and talent.

Again, we're pleased with our financial results this quarter.

Our focus on continuous improvement remains key to our ability to generate consistent and sustainable long-term performance.

With that, I'll now turn the call over to David.

Thank you, John.

Let's begin on Slide 3 with average loans and deposits.

Adjusted average loans increased 2% over the prior quarter driven by a broad-based growth and the business lending portfolio and relatively stable balances across the consumer lending portfolio.

Once again, all 3 areas within our Corporate Banking group experienced broad-based loan growth across industries and geographic markets.

Adjusted average business loan growth was led by a 4% increase in adjusted commercial and industrial loans while growth was driven by our diversified specialized lending and REIT lending portfolios.

Average investor real estate loans grew 8% in the first quarter, while average owner-occupied commercial real estate loans declined 4%.

Both were impacted by a reclassification of approximately $345 million of senior assisted living balances from owner-occupied commercial real estate to investor real estate at the end of last year.

Excluding the impact of this reclassification, average investor real estate loans increased approximately 3% driven by growth in term real estate lending, which is consistent with our strategic initiative to achieve better balance between term and construction lending.

As John noted, a 160 basis point increase in line utilization also significantly contributed to this quarter's loan growth.

With respect to consumers, adjusted average loans remained relatively stable as growth in the indirect other consumer and credit card portfolios was offset by decline in home equity lending.

Average mortgage loans remained relatively stable.

However, the sale of $167 million of affordable housing residential mortgage loans late in the first quarter will impact second quarter average balances.

Despite solid growth this quarter, we continue to expect full year 2019 adjusted average loan growth in the low single digits.

With respect to deposits, we continue to execute a deliberate strategy focusing on growing low-cost consumer and relationship-based wealth and business services deposits.

Total average deposits increased 1% during the quarter reflecting 1% growth in consumer and 2% growth in corporate partially offset by declines in wealth and other.

Importantly, our bankers continue to grow new consumer checking accounts and consumer households as well as corporate deposit accounts and total wealth relationships.

Let's take a closer look at the composition of our deposit base.

To protect our deposit advantage, we continue to execute strategies to ensure we are effectively serving our customers.

These strategies facilitated growth in interest-bearing checking, money market and time deposits at the end of last year, which contributed to total average deposit growth this quarter.

Increasing deposit rates, combined with overall deposit growth and portfolio remixing, drove an increase in total deposit costs this quarter to 46 basis points.

Despite the increase, we've remained well positioned relative to peers, further illustrating the significant funding advantage provided by our deposit base.

Our cumulative interest-bearing deposit beta increased to 25% this quarter.

Assuming no additional rate increases from the Federal Reserve, we expect a through-the-cycle deposit beta in the low 30% range.

Retail deposits include consumer and private wealth deposits.

Our cumulative retail interest-bearing deposit beta increased to 10% this quarter, while our cumulative consumer deposit beta remained low at just 6%.

As previously noted, a portion of this quarter's loan growth was funded with commercial deposits contributing to additional pressure on overall deposit costs.

However, we've remained committed to our long-term return targets and we will continue to optimize both sides of the balance sheet.

So let's look at how this impacted our results.

Net interest income decreased 1% over the prior quarter and net interest margin decreased 2 basis points to 3.53%.

Both net interest income and margin benefited from higher market interest rates, offset by higher funding costs including the impact from our January parent company debt issuance.

Net interest income also benefited from higher average loan balances, but was negatively impacted by 2 fewer days in the quarter.

Net interest margin, however, benefited from fewer days, but was negatively impacted by average commercial loan growth.

In the current interest rate environment, growth in net interest income and margin will be driven by balance sheet growth and business mix.

With respect to net interest margin, rates consistent with the current yield curve and moderate balance sheet growth is expected to generate a relatively stable to modestly lower full year margin, implying moderate margin compression for the rest of 2019.

With that said, we continue to expect full year adjusted revenue growth of 2% to 4%.

With respect to fee revenue, adjusted noninterest income increased 4% this quarter compared to the fourth quarter of last year.

Significant asset valuation declines in the fourth quarter associated with market volatility improved in the first quarter.

Favorable market value adjustments on total employee benefit assets increased $19 million, while also contributing to an $11 million increase in bank-owned life insurance income.

The increase in bank-owned life insurance also included additional claims income compared to the prior quarter.

As we look forward, we are taking actions to reduce future volatility associated with certain of these assets.

Service charges and Card & ATM fees declined 5% and 2%, respectively, reflecting seasonality and fewer days in the quarter.

Capital markets' income decreased 16% attributable to lower loan syndication income and fees generated from the placement of permanent financing for real estate customers, partially offset by an increase in merger and acquisition advisory services and higher revenues associated with debt underwriting.

As you know, capital markets' income can be volatile for quarter-to-quarter, however, we do expect an increase in the second quarter.

Mortgage production and sales revenue increased compared to the prior quarter.

However, total mortgage income decreased 10% primarily due to lower hedging and valuation adjustments on residential mortgage servicing rights.

Other noninterest income includes an $8 million gain associated with the sale of $167 million of affordable housing residential mortgage loans late in the first quarter.

In addition, fourth quarter other noninterest income included a net $3 million decline in the value of certain equity investments and a $5 million loss associated with impairment or disposal of lease assets.

Let's move on to expenses, which we believe were well controlled in the quarter.

On an adjusted basis, noninterest expense increased 1% compared to the fourth quarter primarily due to a 2% increase in salaries and benefits reflecting higher payroll taxes as well as increase in expense associated with Visa class B shares sold in the prior year.

Partially offsetting these increases are occupancy expense decreased 5% primarily due to fourth quarter storm-related charges associated with Hurricane Michael.

Furniture and equipment expense decreased 7% primarily due to a benefit in property taxes recorded during the quarter and professional fees decreased 26% driven primarily by reduction in consulting fees.

The adjusted efficiency ratio was 58.3% and the effective tax rate was approximately 21%.

For the full year, we continue to expect relatively stable adjusted expenses and an effective tax rate between 20% and 22%.

Let's shift to asset quality.

In line with our expectations, asset quality remained stable while continuing to normalize this quarter.

Net charge-offs improved 8 basis points to 0.38% of average loans.

Including the impact of loan growth, the provision for loan losses exceeded net charge-offs resulting in an allowance equal to 1.01% of total loans and 163% of total nonaccrual loans.

Total delinquent loans decreased $102 million as loans starting to 89 days past due decreased $106 million while loans 90 days or more past due increased modestly.

Total nonperforming loans, excluding loans held for sale, increased 2 basis points to 0.62% of loans outstanding.

Business services criticized and troubled debt restructured loans increased $197 million and $27 million, respectively.

These results include the recently concluded Shared National Credit exam.

While overall asset quality remains within our stated risk appetite, volatility in certain credit metrics can be expected.

We continue to expect full year net charge-offs in the 40 to 50 basis point range.

Let me give you some brief comments related to capital and liquidity.

During the quarter, the company repurchased 12.2 million shares of common stock for a total of $190 million through open market purchases and declared $142 million of dividends to common shareholders.

We continue to execute our 2018 capital plan.

As you know, we're not required to participate in the 2019 CCAR process.

However, we were required to provide our updated planned capital actions to the Federal Reserve in early April.

These planned capital actions, which remain subject to approval by our Board of Directors, provide a path for us to achieve our targeted 9.5% Common Equity Tier 1 ratio this year.

At quarter end, the loan-to-deposit ratio remained unchanged at 88% and the company continue to be fully compliant with the liquidity coverage ratio rule.

Our full year 2019 expectations provided at Investor Day remain unchanged and are summarized on this slide for your reference.

So in summary, we are pleased with our first quarter financial results.

Despite market uncertainties, we are focused on things we can control.

We have a solid strategic plan and are committed to achieving our 2019 and long-term targets.

With that, we're happy to take your questions, but do ask that you limit them to 1 primary and 1 follow-up question.

We will now open the line for your questions.

(Operator Instructions) Your first question comes from Ken Usdin of Jefferies.

David, just on your comments about the outlook for the changing rate environment and the potential pressures that brings forth.

Can you talk through where that manifests itself the most?

Is it the investment portfolio?

Is it loan spreads?

And if you could go back a little bit further into that ability to kind of remix those deposits as you move through the year.

Sure, Ken.

So yes, we've looked at the rate environment clearly changed since going into the year, not anything different than we've experienced before.

As we showed you at Investor Day, we had a 3-year outlook and rates were lower than we thought and we adapted and overcame that.

We'll do it again this time.

As we think about rates, from a reinvestment standpoint, we still have of front book, back book benefit is not as much as it was originally, but we still benefit from that.

This particular quarter, we had a couple of things that impacted us.

We had loan growth that was a little stronger than we had anticipated with 160 basis point increase in line utilization.

We had to fund that and we chose to fund that with higher cost deposits versus going to the wholesale market.

So if you look at deposit betas, that cost our deposit beta to be up.

Our overall funding beta is kind of in line with peers.

But we thought that was the right thing to do.

The loans that we put on were a little thinner spread, which put a little pressure on our margin.

The margin actually was impacted by our parent company debt issuance we had in the first quarter as well as reclassification of purchasing card assets that don't carry any interest carry.

Those 2 things were 2 basis points of margin in the quarter.

So as we look forward, what we need to do is continue to remix the balance sheet, both on the loan side and the deposit side as we seek to optimize both levels to get our net interest income where we want it to be and the resulting margin.

I will go ahead and answer the question because it's probably coming up that our margin expectation for the year we believe to be commensurate with what we had last year in the 350 range, give or take a point or 2. So that's kind of how we see the rates and our expectation for the year.

Got it.

Okay.

And then one follow-up on the loans.

You've reiterated that with a good start to the loan growth, the adjusted loan growth, can you give us an idea of just the summary of the noncore -- the combination of the auto stuff and then the new loans you sold?

And what you expect that would be on the full year?

Yes, so we're still guiding on the adjusted loans.

So it carves out the runoff portfolios to be in the low single digits.

You'll see some of the remixing there.

A little bit of that growth that you saw in the first quarter were companies that have access to the capital markets that chose to come to the bank market because it's cheaper.

We expect that to change over time, and so you should expect some runoff there.

And we'll refill that still to get our low single digit growth.

The auto book continues to run down.

We'll be in the $700 million to $800 million range on those runoff portfolios.

Your next question comes from John Pancari of Evercore.

Just on that point on the deposit and margin commentary there.

Given the loan growth you saw in the quarter, you said it came in a little bit better.

Why did you make the decision to fund that growth with higher cost funding versus deposits?

Look, what I said was we chose to have -- fund that with higher cost deposits versus wholesale funding because the deposit growth was cheaper than what funding was.

What I was trying to address is that the deposit beta was negatively impacted because of that decision.

If you look at our total funding beta, our total funding beta was fairly consistent with peers.

So it's just a mix of what we chose to fund that growth with versus what somebody else might have done.

Okay.

No, I misunderstood it, just wanted to get clarity on that.

Okay.

And then separately, around the loan growth expectations for the year and that you expect it to slow from here, can you just talk about some of the give and takes about what you think will drive to the net moderation of this level versus any incremental strengthening on the commercial side, for example?

Yes.

So John mentioned in his comments, we feel good about -- our customers feel good about the economy and they're continuing to borrow.

We hadn't -- that increase we saw, part of that this first quarter, again, were customers we believe have access -- we now have access to the capital markets that chose to use their bank lines of credit to give them more flexibility in terms of timing on how -- when they go to the capital market system.

It's just a matter of time before that happens.

So we're going to see those loans run out of the bank as we continue to grow consistent with our expectations at the beginning of the year.

So when you get net-net to the end of year, we think net loan growth is still on that low single digits.

Okay.

And one last thing on credit, can you just give us a little bit of color around the drivers of the higher classified and special mentioned loans?

And I guess, your thought around the longer-term loan loss reserve level here I know it stands around 1.01%.

I wanted to get your thoughts on where that could trend to.

Certainly, John.

It's Barb Godin.

Always hit the criticized and classified in terms of those numbers.

That's attributable to really 2 or 3 credits that moved over.

And given the lows that we're on, it's simply starting to slowly normalize.

Also, recall that our results include the results of the recently completed Shared National Credit survey, our credit exam.

So that's all-encompassing.

We don't see any trends in there that we're looking at that concern us at all at this point.

And in terms of our loan loss reserve, we're sitting at 1.01%.

We think that area of 1%, 1.01% is probably the right number as we look forward as well until we get to see this whole next year.

Yes, John, I would just reiterate that.

I think we still feel very good about our credit mix.

As Barb said, we're really at better than 10-year lows in terms of criticized, classified and nonperforming loans.

And so from time to time, we're going to see a little movement up or down, I think in those metrics.

In this particular quarter, as Barb mentioned, we had 1 or 2 credits that impacted both criticized loans and nonperforming loans.

And so given the low base we're coming off, I think you're going to see some back and forth there over the coming quarters as credit begins to normalize a bit, but we feel still very good about our credit quality.

Your next question comes from Betsy Graseck of Morgan Stanley.

I just had a question on your capital target.

I know you mentioned that with the expectation that you have for buybacks this coming year, you should be able to get to that 9.5% target CET1.

I'm just wondering if given the proposal the Fed has for its NPR that's outstanding out there for banks your size.

Would you be at all rethinking the target CET1 at any point?

Or is that something that you think you need to have it as high as 9.5% going forward?

Betsy, we had mentioned at Investor Day that mathematically our capital that we think we need based on the risk profile that we have would lead one to a Common Equity Tier 1 of 9%.

And we said to our -- to those attending and listen that we added another 50 basis points of cushion on that.

We believe that, that capital level, one, provides the proper capital we need to have plus a little bit while allowing us to get to our return expectations that we also laid out.

So those targets were not derived based on supervisory input or the CCAR mechanism, so I don't see that changing at all.

As you know, we have to get through the second quarter, which is based on last year's submission.

And then in the third quarter, we'll start -- we're not under CECL, but it will start our capital plan and that's why we have confidence.

We will get to our 9.5% by then.

And we'll have -- we'll be able to toggle between loan growth and share buybacks as we seek to manage the capital at that level.

Okay.

Just it seems a very -- there's a lot of cushion in there, so I'm wondering maybe it reflects a view that you feel your portfolio might be a little more risky than peers or you're just super conservative?

Well, as I mentioned, our math based on our risk profile would lead you to 9%.

We choose to have an extra 50 basis points in there, which we think gives us flexibility, especially as you think about where we are in a 10-year run.

And if the counting were turned down, we have the ability to perhaps take advantage of some opportunities that might come our way to invest in the assets that could give us growth.

So it's, we think, an appropriate amount of cushion because it didn't weigh us down from our return objectives and gives us that flexibility.

So that's why we do it.

Your next question comes from Erika Najarian of Bank of America.

I wanted to follow up on the comments on capital actions.

So if we filled in the template that the Fed distributed or getting to about a max preapproved capital action of about $2.15 billion for 3Q '19 to 2Q '20.

And I'm wondering if that's ballpark with how your team calculated the template?

Well, I think, again, the way we want you to get there is by looking at our target Common Equity Tier 1 of 9.5%.

We think that the toggle we have to think through on buyback is what's loan growth's going to look like.

We've said we want to pay out a dividend in the 35% to 45% of the range, so that uses a piece of it, of earnings.

And then the rest of it is either going to be used for loan growth or it's going for the most part or we're going to buy shares back.

So trying to now stipulate exactly what that buyback is going to be is -- well, we don't think it's necessary as much because we're giving you what the end result is going to be.

So you have to come up with your expectation of what our loan growth is going to be and it'll help you get your buyback number.

I'm at all in.

Okay.

And just taking a step back, you unveiled a midterm efficiency ratio of 55% or below during your Investor Day.

And of course, the curve dynamics have gotten less friendly since.

I'm wondering, as we think through the next few years, is there that much expense leverage left to be able to get you to this target of less than 55% by 2021 with this type of curve backdrop or are we underestimating some of the investments that you're making that could boost revenue beyond rates, beyond '19?

Yes.

Erika, I would say, it's a combination of both.

First of all, we're committed to 55% efficiency ratio by the end of 2021, and we believe we have appropriate levers both in terms of revenue growth from investments we're making and opportunities to reduce expenses to be reinvested in additional initiatives that will help generate revenue growth to get to the 55% efficiency ratio.

We're absolutely committed to get there.

Your next question comes from Matt O'Connor of Deutsche Bank.

I'm wondering where do market rates have to go to flatten out the NIM?

Obviously, you're guiding to flattish NIM on a full year basis, but trickling down from the 1Q level.

And just conceptually, and I realize the 10-year is not the only rate that matters, but what's kind of the breakeven point on the 10-year where it does flatten out at this kind of 353 almost just trickle down?

Well, if you think about the 10-year just on reinvestment in the securities book, so we're coming off a 2.70-ish range, reinvesting in the 2.90% to 3% range.

So we're getting some lift just reinvesting these cash flows over the near term.

It's really not curve dynamics as much that drives versus the mix of what we put on both on the right and left side of the balance sheet.

So I think you could have -- you could be where rates are and the curve can look where it is now.

And depending on what your choices are would depend on whether or not you could continue to grow NII and resulting margin or whether it stays flat.

We're looking to optimize our balance sheet for not only NIM, but net interest income growth return, credit risk management, all that has to work together.

And again, we've laid out our 3-year expectations and our 1-year expectation.

And we intend to get all of that.

So there are a lot of moving parts that you have to deal with and that's a hard one to explain.

Okay.

No, I just asked.

I think what has changed versus a few months ago, is the rate environment versus, I think, your strategy.

So -- and obviously, rates they move around and we're up 20 bps off the bottom and maybe 2 months from now we'll be 20 bps higher and that's in the sort of hedging?

Matt, I'd add.

Our expectations were that rates were going to go down at some point, which is why we began our hedging program over a year ago.

As we mentioned, we're about 70 -- we're about 75% through our hedging program right now.

And we did that in the large part with forward starting swaps to begin in 2020.

As we expect that GDPs decline to 2.5% in '19, 2% in '20 and 1% in '21, and that the probability of rate cuts would increase in '20 and '21, and we want to be protected there.

What you have seen of late is a reversal from the Fed, and it put more pressure on not getting -- not only not getting an increase this year, but having some probability of a cut this year, which we don't think will happen, by the way.

And so that's really where we're more exposed is if they were cut right now.

Again, we'll take that risk because we don't believe that will happen.

Matt, I guess that -- Matt, just if I might, on balance sheet optimization is we've indicated we think that loan growth will begin to moderate a bit.

At the same time, our core deposit base continues to grow very consistently.

Consumer demand deposits grew over 4% last year.

They're growing for the seventh year in a row, point-to-point, up about 7%.

We see growth in consumer savings, consumer checking continues to grow.

And so that's a more consistent deliberate increase in deposits that will occur over time.

And as that catches up with loan growth, which will be moderating, we have an opportunity to also optimize our deposit base and we think that will accrue to our benefit.

Okay.

Yes, I guess, the optimization in the mix that you're talking about, I thought would have been beneficial to NIM.

Yes.

Okay.

But the combination of that and where we are on rates still causing this to trickle down a little bit?

Well, I think you can have some noise in the interim again.

We're 3.53, we said we'd be at 3.50 for the year, give or take a point or 2. And it's going to be dependent on how well we optimize and the 10 years move quite rapidly from 3.50 to almost 3.60, we're down a little bit this morning.

So if we continue -- the 10-year continues to move up a little bit, then the reinvestment helps us to increase net interest income and helps us from a margin standpoint.

Got it.

And then if you don't mind, I just want to squeeze in the line utilization increase of 160 basis points.

Was that concentrated in, like, a handful of credits?

And if not, I guess, what makes you think it's going to decline so much to meaningfully slow the loan growth that was so good this quarter?

Yes, Matt.

I'll ask Ronnie Smith who heads our Corporate Bank to answer the question.

Ron?

Yes, Matt, it was very broad-based.

It was not in a handful of clients.

And really focused in on most of our higher-quality clients that, I think, David mentioned earlier, that have access to other markets.

And we're anticipating that we'll see changes with those advanced rates as we go forward, but very broad-based across the industries and within geographies as well.

Your next question comes from Jennifer Demba of SunTrust.

Question on credit, Barb.

Two questions.

First of all, I think you're running parallel right now.

I'm wondering if you have any preliminary estimates on what the Day 1 impact would be for CECL.

The second question is on your criticized leverage loans that slide was very helpful in the deck.

Is there any industry concentration within those criticized leverage credits?

First question on CECL is, yes, we are in the midst of doing a lot of work running parallel, making sure our models are operating the way they need to, et cetera.

We'll probably disclose something in the second quarter, but we're not quite ready to do that yet on the CECL front.

Relative to the leverage loans, et cetera, there's nothing that sticks out in terms of anything that's an anomaly.

So it's a pretty big book.

Yes, just for clarification, I think, in our second quarter release probably we'll provide some information on third quarter, third quarter release Day 1 impact.

So we're still ways off.

Yes, it'll be in the third quarter we release something.

Yes.

We want to run parallel for a couple of quarters and see what it looks like.

Your next question comes from Marty Mosby of Vining Sparks.

David, I wanted to talk to you a little bit about NII versus net interest margin.

When you had a little bit of extra loan growth this quarter and then you went out and funded it.

I mean you literally could have funded it through the securities portfolio, which would have increased your net interest margin just by substituting higher rate assets to our loans being investment securities.

So I think the temporary nature of what you did or thought your loan growth was going to have and since the run up is going to come back down, you just went out and funded it, which incrementally caused some pressure on your net interest margin.

And if you look at NII, still growing relatively nice year-over-year, but you have the day count in the first quarter.

So it does seem like, to me, the margin this quarter was exacerbated just given all in this incremental funding of the balance sheet.

Yes, Marty.

The -- so the NIM to us is the result of all the things that we do.

And you're exactly right, what we've put on -- if we want to be fixated on our NIM, we could've done different things.

I do want to make sure if I caught the fact that our NIM was impacted 1 basis point by our parent company issuance.

And then we had the reclassification of our purchasing card into loans, which is a noninterest-bearing asset, so that weighed us down another point.

So we could've kept the margin relatively stable with 3.55.

But we were able to keep NII level notwithstanding 2 days, which caused us $10 million in the quarter.

So we thought it was pretty good.

Again, we'll optimize the balance sheet in those loans that we did put, certain of those loans we put on had thinner spreads to them, they'll run out to the capital markets.

We'll get the capital markets fee when that happens.

We'll remix the balance sheet and we'll be off to the races.

So we're not overly fixated on the margin.

That's what I thought.

And then when you talked about deposit betas and you said that through the cycle or the cumulative beta right now is around 25%.

And you said, by the time we're done, we're going to be at 30%.

Now that would've -- in general, assume that you had further rate hikes that then were going to push deposit rates up.

But if we kind of stabilize here and rates don't go up anymore, let's just assume that they don't, wouldn't deposit pricing maybe with a little bit of tail increase in the second quarter begin to kind of flatten out.

So I just want to make sure we're being consistent with that, how much of the excess you expected in deposit pricing going forward?

Yes, so what our history tells us is that it takes about 12 months and change after the last Fed hike for deposit rates to stop moving.

So that's a piece of this that you just even -- if we don't get another increase, you'll see that continuing to come through.

Mix has a big deal to do with it too.

So as we continue to grow low-cost core checking accounts and interest-free accounts, that's helpful.

But our commercial customers want to -- they're trying to take their excess cash and get the best yield that they can.

If rates stop moving, that will abate too.

So moving up into the 30s, we can argue where in the 30s we might end up.

The point is we're going to continue to see some costs, some funding cost increases continuing to come through that we need to deal with and we have a little bit of headwind on reinvestment on the left side of the balance sheet.

And then the optimization has really well carried the day for us.

And then, I guess the thing that I would suggest or highlight is that this deposit beta market has not been like any historical period we've seen in the past.

So, it's been a lot of different and has actually reacted much better than what we've seen in the past.

So why should we expect that maybe we could see this thing slowdown or actually begin to flatten out a lot quicker given that the deposit betas have been better than what we've seen in the past cycles?

Well, you're certainly correct that is different.

Betas last time were in the 60 range and now we're talking in the 30 range.

And part of that is because of how slow the recoveries been and the pace of those increases, also coming off historical lows.

And so I think all that matters and there is a chance that things flatten out quicker than we have anticipated.

If that happens then we're going to be better off than we think.

And we much rather give you a number that we can hit versus try and promise something that we'll struggle achieving.

And then just last question, the swaps next year, is there any net increase in earnings from the spread lock in if rates were flat given the fixed rate that you locked in.

Is there a -- it should be a little bit of a positive spread.

So I was just curious if there is some upcoming income that you're going to get out of those swaps once they actually hit the forward dates, and when does that actually happen?

Yes, so the forward dates are in 20.

And you're right, we would have some positive to carry there, but we also entered into some interest rate floors where you have to pay a premium and you amortize the premium.

So the amortization unfortunately offsets the swap benefit.

So again, if rates didn't move from here, we kind of push there.

So you won't see any real positive carry.

Your next question comes from Stephen Scouten of Sandler O'Neill.

I'm curious just digging down on the NIM a little bit further.

Obviously at Investor Day, you laid out this range of 3.40 to 3.70.

And by the commentary from you, David, that might get to 3.50 for the year implies that the NIM will move into high 3.40s by year-end.

So can you talk to me a little bit about how that lower end even in a 0 policy range scenario would only get down to 3.40?

And maybe what dynamics have changed since 2016 when we're at 3.15, 3.16 that sort of range?

Yes.

So part of which -- what we want to do is try to frame up the range at Investor Day like we did.

What's changed since then was the near-term risk before our forward starting swaps began in 2020.

So even if you saw a dip in '19, we actually start recovering that in '20 when our derivatives kick in.

So that's the piece that gives us confidence that we're still within the range that we told you back then.

If we received a rate cut in '19, that would -- we'd have a different ballgame.

We'd be telling you something different.

We just don't think the probability is very high that, that happens.

So anyway, that's -- did I lead your way?

Yes, that's perfect answer.

And the swaps are really what prevents you from getting down into those levels we saw back in '16, even if we were to revert back to a similar rate environment?

That's exactly right.

Okay.

And then just lastly on the securities book, is there any chance that you guys look to reduce that as a percentage of average earning assets to fund some of the growth or is that kind of 22% range where you'd like to stay?

I think there -- we have a little bit in there that's helping part of our hedging program right now that works against us again on our margin.

It's not a tremendously large number.

We kind of like where we are from that standpoint.

I think what you should expect over time is a remixing of our securities book.

Today we still have treasuries and Ginnie Maes in there that we used for LCR purposes.

And to the extent that, that changes and maybe we can put those working a little more effectively for us into mortgage bags.

So you'll see us do that from time to time.

As a matter of fact, you saw us take security losses this quarter to pair off with the gain that we had on selling the affordable mortgage loans so that we could get better carry going forward and we'll pay for that in less than a year.

So those are the kinds of things you should expect us to do over time.

Your next question comes from Saul Martinez of UBS.

Quick, I just want to follow up on the line of questioning on the deposit betas.

I actually just want to make sure I understand the math kind of what you guys are saying.

So the 25% through-the-cycle beta thus far basically implies that your deposit costs have moved up in the neighborhood of about 55 basis points given where the Fed fund is at right now.

If I assume no further hikes and you get to low 30s, that implies an additional 15 to 20 basis points of deposit costs pressure over the next 12 months.

Is my math more or less right?

Is that what you're kind of baking into that assumption?

Yes, I think you're close, it's probably closer to 10, but we're 46 basis points of cost, one of the lowest.

So when you start looking at beta in percentages, you can get some odd numbers.

But we feel like, again, back to, I think, it was Marty who asked the question, if we miss it, we're going to outperform what we're telling you.

Got it.

It's closer to 10 basis points is what you're kind of baking in, in terms of incremental deposit cost pressure without any further hikes?

That's right.

That's right.

Is that on total deposit or interest-bearing?

Those are really more interest-bearing.

Interest-bearing, okay.

I want to make sure I got that math.

And then, I guess on the -- just a broader question that 2% to 4% revenue, I know you've talked about NIMs and NIM sort of stabilizing at 3.5 for the full year, or being at 3.5 for the full year.

But the 2% to 4% revenue growth, how do we think about that in terms of NII growth versus fee growth?

We kind of put those together, Saul, this time because obviously there's challenges in terms of managing earning assets and the mix and all that.

So we put that together with NIR.

We're still convicted that we'll be within 2% to 4%.

Right now there's more pressure on the NII component of that, but not enough that would cause us to not meet that goal that we had.

Your final question comes from Gerard Cassidy of RBC.

Can you guys give us a little further color on the portfolio breakout that you showed on leverage loans and then Shared National Credits.

Are you comfortable with these levels?

Or we're talking a year from now, are these numbers going to be much different than they are today?

No.

I don't think so, Gerard.

And I'll let maybe Barb speak as well.

But I think we've established some internal limits just as we have concentration limits for lots of other aspects of when we manage the risk in our portfolio.

And we're at a level with respect to leverage lending that we're comfortable with and we expect to continue to manage to about the level that we're at.

I think the most risky exposure we've talked about before in the portfolio has been loans to sponsor-owned companies.

We brought that down from kind of the mid 30% to somewhere in the 26%, 27% range, as I recall.

And we'll continue to work on that to ensure that the leverage exposure that we do have is to customers that we have full relationships with, that it's in industries that we know well that's distributed across a variety of different industries.

So we don't have any real concentrated exposure about industry sector either.

And I -- we do feel comfortable with, but I'll let Barb respond to that question as well.

I think you've done a great job responding, John.

Now the only thing I have to add is just, as you said, these are to our best quality C&I customers that we do leverage lending to in particular.

So we are very comfortable with them.

We look at them on a regular basis.

We look at the book on a monthly basis.

And we recycle if we see something that either is not carrying its weight or that we feel that it's probably a good opportunity for us to move out of, we take immediate action on it.

So again, I'm feeling very good with that book.

I'm just curious, Barb, do you recall during the last downturn what the non -- NPL percentage was for leverage loans for Regions?

We could dig it up, if you don't.

Yes, we'll have to dig it up, I don't have it off the top of my head.

Okay.

I'm not expecting that to be the same this time, but I was just curious.

And maybe coming back to you, John, at Investor Day, you talked about the expansion into some priority markets, St.

Louis, I believe, Atlanta, Orlando, Houston.

Can you share with us how that is progressing?

And how that we as outsiders determine whether you're being successful in those markets?

Well, we think it's progressing well.

We have about 40 de novo branches that are now open and operating, I guess, for less than a year, largely across those markets.

We continue to reposition our retail franchise.

As an example, in St.

Louis, as we shift that franchise and we shared this video at Investor Day, I think we now have access to 10% more households, more wealth, more businesses.

The same would be true as we think about expansion in Atlanta.

I think we now have access to more than 1 million more or nearly 1 million more customer households, businesses and wealth.

And so those opportunities continue to be available to us year-over-year checking growth.

About 15% of our growth is attributable to de novos, and so we'll continue to look for ways to provide you all with some information like percentage of growth attributable to de novos as an example.

That'll give you some sense of how we're doing.

I think again core to our strategy is looking for ways to continue to grow our core customer base.

So as we're growing consumer checking accounts, as we're growing debit card usage, as we're growing credit cards on the consumer side, as we're growing small business accounts and small business deposit balances.

Those should be indicators to you that our expansion strategy is gaining some traction.

We're recruiting talent in those markets and feel good about the teams we continue to build.

All in all, I think, we'll -- we're going to continue to, on the path, execute that strategy.

Let me -- this is David.

I just want to clean up one thing.

So I think it was Saul that asked the question about the impact of beta going to the 30 you said, and we said more like 10 points on.

And I said interest-bearing, that's the total, should be total.

So if you want to clean that up.

Okay.

I think that's all the questions we had today.

Really appreciate your time, appreciate your interest in Regions and thank you very much.

Have a good day.

This concludes today's conference call.

You may now disconnect.