Regions Financial Corporation (RF) Earnings Call Transcript & Summary

Good morning, again. Moving right along, I'm very pleased to have Regions Financial with us as we close out this morning's session. [Operator Instructions] We've gotten some pretty good questions from the audience so far, so keep those coming. In addition, there's audience response polling questions we've been using, time permitting. And if we don't get to those questions today, we'll certainly publish the answers tonight. But there's 4 questions, if you [indiscernible] the next one on top and go to the second, and we find that data useful. Next up, very pleased to have Regions Financial. We've got a full slate of the management team. I see John Turner, President and CEO, and a whole host of other members of management with him to kind of help facilitate our discussion this morning. Before we kind of kick it off, John, maybe you want to kind of just give us some overview remarks in terms of kind of what you're seeing, hearing and thinking.

Yes. Just a couple of quick opening remarks. We want to make best use of this time for all the investors that have -- that are in attendance. So first of all, I'd be remiss if I didn't acknowledge the great work that the Regions team has done over the last 6 months responding to the challenges and the opportunities that the crisis -- the health crisis has created, responding to and reacting to social unrest across our communities and responding to other events, like hurricanes, that have occurred in our market. So really proud of the work that our team has done and continues to do to support our customers and our communities. We have, for the last 4 or 5 years, been working to prepare ourselves for a period of stress. We have focused on derisking our portfolios, exiting businesses that weren't generating an appropriate return on capital. We have been effectively managing, as we'll talk about, our interest rate risk with a very effective hedging strategy. We've been focusing on expenses and expense control, going back 2.5 years, to our Simplify and Grow initiative, which has transitioned into continuous improvement and allows us to manage expenses effectively while making investments in our business. And as I say, we have been investing in our business, hiring talent, investing in technology and doing other things that we think have positioned us well to work through this crisis. Looking ahead in this uncertain environment, our markets and the economy in our markets are beginning to recover. States in the southeast were some of the last to shelter in place and some of the first to reopen. As a result of that, unemployment rates were 200 basis points or more better than the national average. The number of small businesses that were forced to close were fewer in the southeast, in particular, than in other parts of the country. And so while the recovery we think is still fragile, impacted by health concerns, impacted by social unrest, impacted by the political environment, we are seeing a recovery. We are seeing customers make appropriate adjustments to manage through this challenging period of time. And we think that we're, again, well positioned to work through the period of stretch. We're focused on things we can control: the well-being of our associates; the -- providing capital, advice and guidance to our customers; and supporting our communities. And again, I think that's appropriate during this period of time. So Jason, we're prepared to take any questions you have. And happy to be here this morning.

No. That's a helpful overview. I guess maybe the best place to start is, Regions has had a lot of kind of strategic initiatives under the way over the last couple of years that you've laid out. And maybe talk to how COVID-19 has kind of impacted that, maybe areas you've kind of pulled back in or other areas that perhaps you're kind of accelerating with.

Yes. I'll say, from a standpoint of acceleration, like everyone else, we've seen customers embrace digital. They've been forced to do that. So we've seen an increase over 30% in mobile deposits. We've now reached to have over 2 million active digital customers. New account openings, digitally, have reached almost 30% of all new account openings, and online and digital log-ins are up about 24% -- 23%, 24%. So clearly, a more active digital customer. We have been investing in our mobile app and other digital capabilities. But as a result of both what we've seen in the way of changing customer preferences and our own experiences with reacting more quickly through the crisis, we've elected to accelerate our investment in both mobile and enhancing our mobile app and in our digital origination capabilities. And so those things will be a real focus of us -- of ours internally over the next 6 to 9 months. We recently announced that we pushed out our core transformation from the 2024 time frame to 2028, again, giving us some space to make investments and to allocate resources, primarily talent, to work on how do we enhance and increase the digitization of our business. So those will be some areas where we are increasing investment and, at the same time, curtailing some activity.

Helpful. We've kind of framed the last couple of presentations, kind of just walking through the income statement. So maybe we'll kind of continue with that theme. Maybe perhaps starting with loan growth. Generally speaking, it feels like commercial has been under pressure, although maybe some green shoots there. Consumer, there's been some pockets of strength, I know, in certainly some of the areas that you're playing in. Just maybe talk to in terms of kind of what you're seeing on that front.

Yes. Obviously, when the virus was -- initially impacted the economy, we saw a real increase in line utilization pretty quickly. Companies began to pay lines of credit back as the asset conversion cycle slowed as -- or actually sped up, I guess, created liquidity as companies went to the capital markets, creating liquidity. Since then, we've seen customers -- the commercial customers much more reserved, maintaining and accumulating liquidity. There are some pockets, to your point, of business that are doing well. But I'd say, all in all, we think that currently, anyway, commercial loan growth is muted. I think that was the term you used. On the consumer side, we've seen very good activity, obviously, in mortgage and some growth in mortgages. We hold additional loans on the balance sheet. On the other hand, our indirect auto portfolio, indirect consumer unsecured, at [ both end and better runoff ], and so those portfolios are declining today. Card as well, paying down as customers deleverage.

Right. And I guess the positive growth on the flip side has been, and it looks like continues to be extremely robust. Maybe talk to kind of what you're seeing both on the consumer side and the wholesale side and the ability to kind of further reduce deposit costs from here.

Yes. Sure, Jason. So to your point, we have continued to see deposit growth, both in the consumer and the business service side. The business service side has probably been a bit quicker, faster than the consumer side. A lot of that's going into noninterest-bearing deposits, so that's helping us continue to bring down deposit costs. We have a few more ticks to go on deposit costs, coming down from what we saw in the second quarter. And we've seen more expensive deposits continue to mature and -- like CDs and things of that nature that are a little more expensive. So like I said, there's a little bit more room to come to help us from an NII standpoint as deposit costs get reset a bit lower. We are seeing more deposit growth than we had anticipated and -- but we haven't deployed all that cash. We have a disproportionate amount of cash sitting at the Fed, earned 10 basis points. So while we get some NII pickup, it does weigh on our margin, and you'll see that coming through this quarter.

Okay. And maybe we can kind of stick with that. I guess you kind of brought up the margin. But I guess previously, you kind of talked to NII down, I think, 1.5% to 2.5% sequentially in Q3. We've had several things, kind of talked about net interest income being lower than expected in the back half of the year. Can you maybe kind of maybe talk to your kind of current expectations?

Yes. So relative to that range, I think we're a little better or at the lower end of that or the higher, depending on -- it's closer to that minus 1.5%, however you want to look at it, to -- we'll see how we finish. But again, driven in part by the deposit growth that we've seen, the prepayments on the mortgage-backed securities portfolio, maybe a tad better there as well. And so for us, I think continuing to deploy some of that excess cash in the securities book or continuing to look for opportunities to have some liability management, I think, will be in order for us in the second half of the year so that we can do the best job we can to hold NII. But this particular quarter, I think you'll see it slightly down.

It's interesting, you talked about prepayment on MBS being a bit better because [ I don't think ] you kind of talked about that being worse this quarter for what it's worth. And I guess it sounds like to date, you haven't necessarily put kind of that deposit to work, but that's something you think you could do before the year is out?

Yes. I think we're looking at getting some opportunities to redeploy that. Our fear has been, one, it's just hard to put in work when you have the curve where it is right now. But I think we can put incremental dollars in the securities book. Deposits, we were looking for maybe deposits to actually move the other way and move fairly rapidly, and we didn't want to be caught in a tough spot there. So we've had excess cash that we're holding. As this continues to play out there, we're looking at maybe being a little more aggressive putting that to work. And I think that would be in order for the second half of the year. Let me comment on the -- where you started on the prepayments. My comment was relative to what we told you earlier, which was we expected prepayments to go up in the quarter. And we do expect that, but maybe not as much as we originally had thought, but still an increase.

Appreciate it.

I just want to -- I want to clear that up to make sure we've got that.

No. I appreciate that. And I guess, in John's opening remarks, he mentioned the hedging strategy. But I think hedges added $60 million to NII in Q2. I think we were looking for like $95-or-so million in Q3. Maybe just kind of talk to how hedges have benefited you, how that plays out and kind of what happens or when kind of the hedges stop adding to results because, obviously, a tough environment to add new hedges.

Yes. So we had started putting on our hedges a number of years ago because we knew that the economy was going to slow. We knew rates were going to be down. We didn't know exactly the timing, and they actually moved to '19 a little sooner than we thought. So our hedges became effective in 2020. First quarter was pretty muted, only $10 million worth of benefit, $60 million in the second. And we expect now $95 million plus for the remainder of the term, which is these swaps and floors were put on with 5-year terms. And so we get a lot of questions on -- today, the fair value of those swaps are about $1.8 billion pretax, sitting in OCI, which is, by the way, not in our capital -- not in our regulatory capital ratios. We get a lot of questions on why not tier those up and take them into income. And the math -- the accounting didn't work that way. You tier them up, and then you have to amortize the gain over time. And frankly, while we think the risk of rates going lower is pretty low, it's not 0. And frankly, we got them for protection as a hedge. If we're wrong and rates go the other way, while our $1.8 billion of value may go down, that means we're earning that much more on the portfolio itself. So it's a hedge. I mean that's what it's for, and it wasn't -- it was to protect us. And so given the comments that the Fed said last week on we're going to let things run a little hotter from an inflation standpoint before we start raising rates, I think that having a rate increase anytime in the near term is pretty low. And I think even before that, the Chairman said, "We're not thinking about, thinking about, thinking about raising rates." I think there are 3 thinking abouts. So I think this is going to be a pretty -- there's no need for us to worry about taking those off. If we see rates starting to increase, then maybe we'd change our mind, but that's not offing right now.

Fair enough. And then just last question on the topic. But you've talked to kind of a NIM in the mid- to high 3s kind of ex PPP and cash. I guess how do you feel about that? And then if the kind of PPP cash drag was 19 basis points last quarter, it sounds like there'll be a little bit more than that this quarter. Is that a fair observation?

Yes. I think it's incrementally a bit more with the excess cash that we had in PPP that we won't get to those numbers in the 3.30s. But over time, we still think that our guidance there, ex PPP, is in order.

That's fair. And maybe just shifting gears to the fee income front. I think one of the themes emerging from this conference is mortgage continues to be strong. Some of the consumer and commercial fees that were adversely impacted last quarter starting to come back. Maybe just talk to kind of what you're seeing in the marketplace and just what opportunities you have on that front.

Yes. So I'll start with mortgage. Mortgage has continued to be strong, as a matter of fact, stronger than we had anticipated. We had typically been a purchase shop, where about 70% of our production was purchased and 30% refi, and that's flipped on us. We still have a lot of purchases, but we have refis or we just overwhelm that. So continue to make good, solid revenue there. I'll say our expense base is going to have to reflect increased incentives and pay for those that are generating the mortgages. But that's going to be a good story for the third quarter, and we suspect, for the rest of the year. And frankly, we think '21 can have a pretty solid mortgage year as well. The question is, can it be as good as '20? Don't know, but it should be a pretty solid one. As it relates to other NIR-type categories, service charges, in particular, service charges for us are really 2 things. One is the monthly service charge you get if you don't keep enough balances with us. That's down because there's stimulus and consumers are being careful on how they spend their money. So they have higher balances and they're avoiding service charges. The bigger play in total service charges, NSF fees, which are also down because, again, more money in customers' accounts, they're spending it more wisely. And that's cost us about $10 million to $12 million a month. And we expect that to persist. We think -- we're not confident we can get back to those levels that we had pre-COVID because we think there could be -- consumers are getting a little more cautious on how they spend and a little smarter, so we don't know that we will get back to the service charge pre-COVID. So we expect that $10 million to $12 million to persist a bit longer.

Before we get off the revenue picture, maybe John, flip it back to you. But maybe just talk to -- because I think there's a revenue opportunity here. Have you observed any disruptions in your market? You have BB&T and SunTrust getting together; First Horizon, IBKC getting together. Have you taken any proactive measures to kind of benefit from hiring away individuals from other teams? Or just what opportunities are there? Are these companies integrating? Some of them change their names, hire people and your thoughts around that.

Well, I would say just generally, in a market with this much uncertainty and disruption, there are opportunities. The challenge is interacting with customers and building relationships when you can't necessarily get out and see a prospect or a customer. The good news is we hopefully have laid the groundwork over time. We've been calling actively in our markets. And as opportunities arise, as customers begin to -- as they find themselves needing capital, needing advice, needing guidance, they're looking for -- potentially looking for a new banking relationship, are we in the right place. So we're out always recruiting, not specifically from the institutions you named, but just broadly, always looking for building a better team, building a stronger team. We've been actively recruiting, have been, I think, over the last 6 months, adding talent and even senior talent in this environment. Feel very good about the progress we've made and momentum in our new business development activities.