Regions Financial Corporation (RF) Earnings Call Transcript & Summary

Great. Good afternoon, everyone. Let's get started with our next fireside chat with Regions, Regions Financial. Regions is headquartered in Birmingham, Alabama, ranked 17th in the U.S. in terms of deposits. As it relates to markets, Regions has the top 5 or better market share in 70% of the MSAs across their 15 state footprint, and 60% of these MSAs are projected to grow faster than the U.S. national average. Assets at the end of last quarter totaled $145 billion. With us today from Regions, we have David Turner, CFO; Barb Godin, Deputy Chief Risk Officer and Chief Credit Officer; Martha Raber, Head of Financial Risk; Ronnie Smith, Head of Corporate Banking; Deron Smithy, Treasurer; and Anil Chadha, Head of Risk -- Head of Shared Risk Services and Analytics. Before turning it over to David, I'd really like to encourage anyone who would like to ask a question to use the feature on the left side of your screen that will forward your questions directly to me, and I will do my best to get them asked and answered over the next 45 minutes. So with that, I know David has some opening remarks. Toss it then over to David.

Okay. Terry, thank you. I appreciate you putting this on and everybody attending. Talk a little bit about kind of where we are. As we look at our footprint and look at our customer base and kind of what's going on, clearly, COVID cases increasing caused us to pause a bit. But when we look at activity and we talk to people, activity is still quite robust. Our customers are in pretty good shape, and they're looking to make investments to grow their business, but there's some uncertainties that they want to get addressed. One of them was the election. So the fact that we have the election, at least the executive branch dealt with, we'll get the Senate dealt with in January. The next is really COVID and the vaccine. That's why all this volatility is what's really going on with COVID and can we get that under control. And there's a lot of pent-up excitement, if you will, about businesses growing once that uncertainty gets removed. For us, we expect the Fed to be accommodative. We expect the economy to grow slowly. We expect rates to be low for an extended period of time. We anticipated that a couple of years ago and entered into our hedging program, which we can talk about later on. But it is a differentiator for us. It added some $95 million to NII this past quarter. It will add $95 million, $97 million the next quarter, and it will be roughly at that level for the next few years. So we're excited about that. We all know we would like to have robust loan demand. We are seeing production quite nicely, but our line utilization continues to be at historical lows. And again, part of that is just uncertainty. So if we can get that removed, we think we can get some draws there. Our NII has done a little better than we had anticipated because our deposit growth has been extraordinary, and that's been in all 3 of our segments: retail, wealth and commercial with commercial being the biggest single driver. And that's really proceeds that are generated by these businesses that just aren't being put to work. They're being put on deposit with us. Our NIR has done very well, driven in large part by an outperformance in mortgage. We do continue to experience more of a purchase shop than many. So our production is really about 50% refi, 50% purchase, and that's been extremely strong. We think our production this year will be twice what it was last year. So we're expecting the fourth quarter to be strong. And we think '21 will be strong because we expect rates to be low, and you're going to see purchase activity continue. We suspect. Service charges still aren't where we were prepandemic primarily because of NSF fees. That's the largest single driver. And that's really driven by cash sitting in accounts of our customers through stimulus payments. We think our customers are really watching how they spend. So we see debit spend being actually a little slightly ahead of where we were last year, credit spend still behind. But nonetheless, reasonably robust. So our card and ATM fees are actually ahead of where we were a year ago. Capital markets continues to do well. There is volatility in that business. But net-net, they've done a good job, and wealth has continued to grow as well. Our goal has been on expense management to try to keep our expenses relatively stable while making investments in technology and people to grow our business. We've been pretty successful in doing that and we're going to continue to do that. We're not going to give you '21 guidance, even though we'll get 5 questions today about it. But we'll -- we're going to try and see if we can keep expenses relatively stable as we have year-over-year. Credit. We'll talk a lot about credit today, I'm sure. But credit continues to perform slightly better than what we originally thought, but there's still uncertainty with regards to credit that I think we all need to be cautious of. We expect charge-offs. Obviously, we'll have charge-offs next quarter. We've given you a little bit of a range as to what we expect that to be this next quarter. And what the provision looks like is really going to be dependent on the mix of the loan portfolio, macroeconomic variables. And we can talk more about that if you want. Capital continues to grow for us, we were up about 40 basis points in the third quarter, as you saw. And we're looking to continue to build that to that 9.5% to 10% range on common equity Tier 1. And then after that, hopefully, we can control our capital. We'd like to put it to work organically, pay a dividend, nonbank acquisitions like Ascentium, and then buying shares back if we -- just as our toggle to keep that capital ratio down. So obviously, not allowed to do that today, but hopefully, after this fourth quarter stress test, we'll get a little bit more leeway in understanding as to what our regulatory supervisors will allow us to do. So I'll stop there here, Terry, and open it up for your questions or anybody on the call.

Thanks for that, David. Let's just start with a few questions that really are coming from yesterday's news. The Southeast, no stranger to bank M&A. SunTrust, BB&T still working through their integration and now yesterday's news of PNC and BBVA. So I guess the question is, could you talk about how Regions has positioned itself for market disruption over the years? What's been the result? And then what opportunities do you see coming out of yesterday's news, recognizing that it's a little more than 24 hours old.

Well, it -- so the deal was actually announced yesterday. We suspected, given the capital and cash position of PNC that they were looking at something we suspected it needed to be reasonably sizable. And of course, now we know it's BBVA. We have a lot of respect for PNC and BBVA. We compete with both of them. Just as we competed with SunTrust and BB&T. And in both cases, we are going from 2 competitors to 1 competitor. There's also -- when you do M&A, there's a lot of disruption. And with that disruption comes opportunities to pick up people and to pick up producers, to pick up customers from time to time as well. So they're in our footprint. We're not going to just stand by and let it happen. We're going to be out there beating the bushes, like we do every day to try and grow our customer base, and we think there are going to be opportunities. We saw that. It happened in the Truist merger, and we think it's going to happen here as well.

And then maybe one more question on that topic before we move on. Just certain of your peers are pursuing or at least talking about more national strategies right now. So what are your thoughts on building out a more national franchise versus building more density within your current markets?

Yes. So in our 15 states, we've talked about M&A and kind of how we think about it. Of course, our #1 focus has been on organic growth, and it continues to be. We have a good strategic plan that is focused on organic growth. And our expectation is if we will execute against that plan, then we can get a currency that maybe puts us in position to take advantage of opportunities if they arise in the bank space later on. In a low growth environment, low rate environment, low revenue growth environment, M&A has a tendency to pick up. We understand that. And as a result, we've tracked targets that we would like to look at. We think of M&A from a strategic standpoint, being not just the financial play in cost saves, but what are you going to do with the customer base. Starting with the right side of the balance sheet, what's the deposit franchise look like? And what we have found is when you have density in markets, density allows you to command -- have a commanding presence in those markets, allows you to get the first bite at the apple, allows you to attract new customers when they migrate in. So for us, M&A in the existing footprint to get more dense would be more important to us than a coast-to-coast national-type franchise at this point.

We'll move on here. Maybe just a point of clarity. The net charge-off outlook, 40 to 65 basis points, is that the current view for the fourth quarter, for 2021 or more of a longer-term range? I know I had some questions last week at a similar event. So I was hoping just to clarify that, please.

Yes, it's Barb. Let me clarify that. What I meant by that in the question that preceded it was that at Investor Day back in 2019, what did we think the loss range would be? That's what we quoted. And in fact, our losses came in 43 basis points for '19, et cetera. We're looking at 2021 as being part of that 3-year cycle. We're saying if you average that 3-year cycle, we'll be between that 40 and 65 basis points. So you're going to have some quarters that are high. You're going to have some years that are higher than others. But on average, for the 3 years ending at the end of '21, somewhere between 40 and 65.

So with that understanding around charge-offs, you mentioned in the past that ultimately, the reserve should get back to that day 1 ratio of, call it, 1.7%. And so the question is, what do you need to see to return to that more normal day 1 level to help us understand kind of the time frame for when the ACL normalizes?

Anil, why don't you go ahead and answer that?

Sure, I'll be glad to. So there's 2 primary factors you need to think about with respect to when do you return back to more of a day 1-type allowance? The first is charge-offs and the timing over which those charge-offs occur. So we've guided that we expect, like many do, that charge-offs will peak in mid-2021. And then there'll be somewhat of a tail on that depending upon further stimulus measures, things of that nature. So charge-offs and the timing of charge-offs is an important consideration as to how the allowance is utilized in terms of those charges. The other important factor is uncertainty, and David led off with this. That despite the fact that we've seen some optimistic news with respect to the vaccine, there's still a lot of uncertainty that is existing in the market today. And so we really need to see both the timing of charges come to fruition as well as these remaining sources of uncertainty being resolved before you can expect to be back closer to that day 1 type of allowance-to-loan ratio.

And then a question that just came in, just to continue the topic. With multiple vaccines now moving forward, how does that impact you to loan loss provisions? And I think you just addressed that. So maybe I will add that economic adjustment in a CECL world, is that the variable that will drive the provisions and the need to build or release reserves?

Yes. A couple of things. With respect to both an economic forecast as well as a vaccine, I would focus less on the vaccine and focus more on the time between a vaccine and when it's widely available. Because what we're really talking about here is economic activity returning to the point that we have greater confidence that the economy is on a firm footing. So again, it's wonderful news that we have multiple vaccines in place but we know it's going to take a period of time for that to be widely distributed, such that you have a return to strong economic activity. And so I think that's really what we need to be focused on. With respect to the economic forecast, the economic forecast is a good gauge in terms of how do we think the economy is improving. But let's also remember, we're a good 6, 7 months into this pandemic. We have a good understanding of where we see risk in our portfolios. And so it's really managing that risk, staying on top of that risk. That's going to be a good internal guide for us as to how we're progressing. I would say the economic variables are a good outside-looking-in indicator as to what do we think the overall economy is looking like. But it's really now becoming more a story of where we're seeing stress in our portfolio, how are we managing that, staying on top of that and ensuring we continue to have an appropriate reserve there.

Maybe a question for Ronnie. Ronnie, there's a Bloomberg article out last week with a title, American Companies are Stockpiling Cash before COVID Winter Hits, and the theme was more on corporate America raising cash. Are you seeing that among your corporate clients? And do you think we could see commercial line draws like we saw earlier in the year?

We are clearly seeing the increase in cash, both on the clients' balance sheet and ultimately ours. David mentioned a little bit earlier we're the ones that are really driving the deposit growth at this point. We're -- it started with defensive line draws. But in majority, Terry, those line draws have been paid back. But we're seeing -- and you would think in a logical way that, that would mean our cash balances would be coming down. But the opposite has actually happened, and we've seen deposits continue to move up, even though those defensive line draws have been paid down. So as we talk to our clients, what we learn is, number one, they're doing a better job on managing their current asset, days -- inventory days receivable and just generating more cash. And they're being much more efficient in their operations. We are all going to learn things coming out of COVID. And for our client base at large, that's no exception. So what do I think about -- well, I think your question was what happens in the future. I think we'll see clients lean back into their cash before advancing back on their lines of credit. So we are anticipating that line utilization will remain in that 41% range for the immediate future until things get back to normal. We feel like the cash is where our clients feel the safest. But as more confidence builds -- and David, I think you said that in your earlier comments. As client confidence builds, we do feel like that we'll see more line utilization at that point.

And a follow-up there. Back-to-back vaccines, the elections 2 weeks away, have you picked up a more upbeat tone from any of your clients given news on the vaccines? Or is it still too early? And uncertainty is still the theme of the day?

I think the answer is yes, that we've seen more upbeat tone but measured. Everyone's more upbeat because there appears to be a solution. The biggest concern as it would be for the general public is, how quickly can it be effective? And what do we see occurring once the vaccine is rolled out? Tempering that upbeat tone is the fact that we're seeing more spikes right now. And so you hear both sides of the concern.

Okay. And then circling back to a question here on capital that came in. Any updates on the next round of CCAR? And how is Regions prioritizing capital return in 2021, specifically buying back stock. And I know, David, you addressed the topic, but maybe prioritizing, if you could, the capital return question.

Deron, you want to address that?

Yes, sure. So I would say our priorities for capital really haven't changed. First, we need to build our capital levels back to what we think are appropriate. And certainly, in this environment, capital levels are going up, just reflecting the uncertainty. And so we'll initially let our capital levels build back to 9.5% to 10%, probably closer to the upper end of that range. And then after that, it remains as it's always been. We'll focus on opportunities to grow the business. Some of those may be strategic in nature, like you've seen us do with the Ascentium acquisition and other bolt-on type acquisitions that we think enhances our ability to serve customers and build the gap in our product or service set. We want to keep the dividend at an appropriate level and keep it growing, commensurate with earnings. And then finally, share repurchase is sort of the third in line there. But I wouldn't anticipate share repurchases returning until, a, we get back to our to our capital targets first. And then, b, we've got to have a good line of sight as to the path forward with the economy and the environment. And so all of those things have to come together for us to feel like it'd be appropriate to be returning capital in that manner. With respect to the stress test, as you know, we just recently submitted that. We don't have a lot of incremental insight as to how things go from here. We think we'll find out the results of that stress test or the Fed piece of that by the end of the year. But in terms of what the downstream implications of that are with respect to SCBs and the like, we don't have a lot of insight on that.

And another question that came in, I guess there's 2 parts to it to address the currency. Meaning Regions valuation is relatively high versus peers today. Why not pursue a bank acquisition to offset the headwinds from the hedge roll off in 2022? So maybe the first part of the question, maybe talk about the headwinds on the hedging side, maybe put some numbers behind that. And then the second part is acquisition to offset those headwinds.

Deron, why don't you take the headwinds and I'll do the other.

Agreed. So David's talked about at the outset, the hedge contribution. And it's been steadily growing throughout 2020. And in fact, there's still a marginal piece to come online. But we'll be fully hedged by the beginning of 2021. And then it's a 4-year period roughly thereafter that the hedge will cover protection against low rates. And the contribution, as David mentioned, is in the mid-90s, $95-ish million per quarter recently. We think that grows up to around $100 million. And then it is roughly $100 million run rate benefit per quarter to net interest income, assuming that rates stay at current levels. And then there's a staggered -- sorry, there's just a staggered roll off. Most of it is in place for at least the next 4 years.

I think that the page that shows you by quarter, we didn't put it in this deck. It's in an earlier version of our -- one of our decks. But in this particular deck, on Page 15, you can see the contribution that the hedge has to NII and also the remaining term, and ours is much higher than our peers, which we think gives us a competitive advantage to fight that low rate environment, Terry, that you're talking about. And as I mentioned earlier, I think low rates, revenue challenges really increase the desire on many to enter into some form of acquisition to grow revenue, to grow markets at a time where organic growth is tough. I think that's the case for all of us. While we haven't been fixated on M&A and are not currently, we do acknowledge that if we'll execute our plan and get our share price up where we think it ought to be, it creates an opportunity for us to take advantage of opportunities should they arise to do bank M&A, perhaps in '21 and beyond. We don't know that we're there yet, but we're getting closer. And I think for us is we don't need to just do an acquisition just to do an acquisition. We need to do it because it's strategic. Gets back to your question you asked me earlier, why? And where would you be looking to do it. And building out our footprint and density is important to us. And so our industry has not been as disciplined as it should have been when acquisitions started going in the early days. It's like everybody needed to get on that train. We're not in that position. We want to do what's right for our shareholders over the long haul and be very thoughtful about putting their capital to work. And we do that internally every day as we challenge ourselves on returns on capital for the businesses that we're in. So M&A is -- can be and probably will be a bigger part of our industry, I think, going forward, but I think in a measured way.

And then maybe one more interest rate question before we move on to credit. Could you just talk about the headwinds to NII or in the net interest margin from the repricing of fixed rate loans and securities? And really how much of a benefit you see from the recent steepening of the yield curve?