Regions Financial Corporation (RF) Earnings Call Transcript & Summary

Yes. So as we mentioned before, the trajectory of net interest income is really going to be driven by the balance sheet. We've got -- for the most part, neutralized the impact interest rates through our hedging program and through some of the repositioning of our liability management efforts that we've had of late. A driver on the balance sheet will be PPP for loan forgiveness. As we had mentioned, that slow -- has slowed a bit. The driver of that is the portal, the SBA portal on forgiveness was shut down in the middle part of January. We're told that it will reopen the first of March because they're making some technology changes. They had some issues with -- if you had a PPP 1.0 loan and then you wanted forgiveness, but you needed a PPP 2.0 loan, those kind of conflicted and their system wasn't set up for that. And so they had to take it down, redo it. And so that's going to -- we're told to reopen in the 1st of March. But then we've got to go adjust our API to talk to their APIs to make sure that we could process this. So it could be -- this forgiveness, my point is it's going to be pushed out longer than we had thought. We still think it's there. We're still have a lot of confidence in our PPP 2.0 generation. We think that's going to be in the 40% range of what we did in PPP 1.0. And so it really comes down to timing of making those loans, running through the process and then getting the forgiveness back on track. And so your guess is as good as mine as the timing of a particular quarter that, that hits them, but that drives NII. The other is kind of what we're talking about from a loan standpoint. Our deposits grew dramatically last year. Unfortunately, a lot of that cash is sitting at the Fed, earning 10 basis points, so fairly dilutive to our net interest margin. We do get NII, but not a whole lot. And of late, what we've seen is a steepening of the yield curve, which is where I was going with my earlier comments, as the stimulus is coming out, one would expect the curve to steepen a bit. We have been in that 1 to 1 25 range in terms of the 10-year. Maybe that number moves up a little higher than we thought because more stimulus is coming than we had thought, which gives us an opportunity to reposition some of the cash into the securities book. So we'll do a little bit of that. As we think about really long-term rates, I think the Fed is pretty, pretty set to do what they can to support the economy, which is to keep rates lower. So I don't see the short rates going anywhere anytime soon. Long rates, they'll do what they can on their balance sheet to kind of control that to some degree. But you have a lot of world participants in the 10-year, and you throw a lot of stimulus out there and have deficit spending, that's what's going to happen. The question is where does that kind of stop? And I think we'd probably won't see a runaway along in going much past that. Maybe it gets to 1 50. So as we think about what can happen, we do sense a pent-up desire to spend. There's a lot of cash, a lot of liquidity in the system that the governments put into the system. And our clients have done a good job making money. They just aren't making that next dollar of fixed capital investment there. They're waiting. Our consumers have cash. They're waiting. Everybody wants to get out and spend. And we think if the vaccine works, people do take it, people have confidence, then people will start getting out and about and spending could pick up, which means inflation can pick up pretty rapidly at the latter part of this year and into '22. And I think when that happens, the Fed is going to let it run hot a bit and there could be a little bit of effort, in our opinion, maybe in the back half of '22, beginning on '23 where rates start to move. So we have to think about our hedging program which goes out an additional 4 years from now. The design of that was not to let it run all the way through those 4 years. It was trying to give us the protection. It's worked exactly like we thought. And so we have to think about when the right time is to take some of that down. And we don't have an answer for you today. But suffice it to say, I think you could see rates move a bit in the latter part of '22 and '23.

Okay. And just to clarify, were you to start taking that down, is there a cost to taking some of that down at this point?

It's not a cost. So the hedge is just that, it's a hedge. It's not -- it was not designed to help us use NII or stick -- protect us in a low rate environment because our input cost, i.e., deposit costs, were going to get to a level where we couldn't go any lower. And so that's worked. They're in gain positions right now. So any termination of our derivatives, whether they'd be interest rate swaps or caps or floors, would be those gains are deferred and amortized over the life of the original derivative instrument. So you don't get a pick up. There's not a cost to you, but the longer you wait and the market moves, your fair value goes down. And so again, we're not trying to top tick anything. We're trying to protect ourselves, and we're trying to have more stability with NII. Because it's 2/3 of our revenue. If we can have a stable revenue stream, a predictable revenue stream, control expenses and have good credit, that's what we think investors want from a bank like Regions. And so far, we've done a pretty good job of that. We just have to keep going.

Yes. You have done a good job. So -- and just to clarify, with the protection of the hedges, if we think about your near-term NII guidance, 9 to 12 [ to match on ] guidance, but pushing out some of the PPP forgiveness and a little bit less, but potentially in the way of loan growth, I assume you're still in the range of modestly lower for the first quarter?

Yes. We haven't -- we're not changing that. But you've hit exactly what the moving parts are. And of course, this -- the 10-year getting out a little bit is incrementally helpful, but it's such a short period of time, it's hard to really change the guidance we gave you.

Perfect. Perfect. Okay. And then just quickly in terms of credit and any update on the path of loss realization or loan loss reserve release that has changed really since January?

I'll go back and say the same thing. I know I sound like a broken record, but we've given you guidance on what we think charge-offs would be for the year, 55 to 65 basis points. And the provisioning, what we've learned, at least through the CECL thing this year is or you need to really wait until the date that you set the allowance, which is the end of the quarter. Now we're not quite as volatile as we were those 3 weeks in March of this past year. And so things are starting to get a little more predictable, but CECL is a funny accounting standard. And it, by design, creates this massive volatility, which is one of the reasons why I don't like it. But in any event, I think we just need to wait to get to March, see what the macro environment looks like. We're pleased with how credit has been performing for us. We've done an awful lot of work. In particular, in our commercial -- our corporate banking group loan by loan, a lot more interaction with our customer base, understanding their business challenges. And we feel like we've really -- have our hands around credit. Now there are certain industries, obviously, that are more vulnerable. But I think we're in pretty decent shape with credit. We just can't answer when we're going to "release the reserves," and I don't like that word either. But I think I know what you mean, reserves coming back.

I'll be back to you on March 31. So let's turn to kind of strategic initiatives, if you will. And I already have the questions coming in on M&A, but let's put that off for 2 minutes right now. And let's just start with Simplify and Grow, which I kind of think isn't necessarily really a thing anymore at Regions because it's just the way you run your business. But do you want to talk about kind of how that's evolved into your business from both an expense management as well as growth initiatives?

Yes, sure. So you're right to point out that it's just part of our business. And as a matter of fact, we don't even use the word Simplify and Grow. We use the words continuous improvement. And John kind of had us put that in because we're trying to send the message, not only to you and other investors, but our people, our 20,000 people that work here, that it's incumbent upon us to get better every day at whatever we do. And so yes, we have specific projects. We're asking people once they finish a project, go into the next one. Find a way to get better. We've done a great job with that, but we have a lot more we can do. We aren't leveraging technology to the fullest extent as we think we can. That takes time and effort, and we're working on it. And so continuous improvement was not a cost reduction exercise. Early on, Simplify and Grow was really working on our efficiency. But we've kind of moved into continuous improvement, which is how do we make banking easier for our customers? How do we make banking easier for our associates to serve our customers? And so leveraging technology is a way to do that. It has a revenue component to it and an expense component to it. And I think if we stay on that, it's one of the ways we've been able to keep our expenses relatively stable, and we'll continue to work on our efficiency ratio because we've had revenue initiatives that have helped the denominator. And we're going to keep that up every day. It's just part of the fabric, who we are.

Okay. So when you think about more to do on the technology side of the equation, and let's weave this into M&A as we kind of move through our time limit here. And this is really an increasingly hot topic in the land of the regionals, super-regional banks. This time last year, you had announced the Ascentium acquisition, Ascentium Capital. And I know you've been very clear in your interest in bolt-on acquisition. You've also touched on some interest in bank deals as well. So we've seen some activity. Why don't you update us on your interest in both the bolt-on acquisitions as well as bank deals?

Well, we remain very interested in bolt-on acquisitions, nonbank opportunities. You mentioned Ascentium Capital, was a bit of a financial technology play as an example. They have some technology that we think is unique and that we can apply across our business, across our branch system to help us grow loans to small businesses. We've made investments in a number of different capital markets type capabilities. We've -- I mentioned earlier, invested in mortgage, buying more in servicing rights and other things. And we want to continue to do that. None of those are big home run-type investments. They're all smaller investments, but each has a positive impact on our ability to serve customers, and we continue to see the benefits to noninterest revenue through those acquisitions. So we'll continue to do that. With respect to bank M&A, our point of view really hasn't changed, and that is we're not actively interested in bank M&A. We believe we have a really solid plan. We want to continue to execute that plan. M&A is hard, it's disruptive, it is oftentimes not successful. And so we think that just based upon our own view of our internal plans that if we continue to execute our plan and do that well, we'll continue to see the benefits of our execution in an improving currency. As our currency improves over time, then we are better positioned to potentially participate in M&A activity if we decide to do that. But it is not a strategic imperative for us today. It's not something that we're actively considering.

Okay. That's about as clear as you could be. I am curious even though you're not actively considering, and I hear what you're saying, are you concerned at all as we contemplate a shift in the composition of the Fed that the window or opportunity to do a transaction might be less [ supported ], if you will, on a go-forward basis?

I mean I think that's possible, certainly. But I have to think that when transactions are announced, that they -- the management teams involved, think they make good sense, think they benefit ultimately, customers and communities, obviously, shareholders, and that we'll continue to see M&A activity improve -- approved by the regulators. So I don't worry so much about that. But again, we're not actively contemplating M&A, so it's not something I think a lot about.

Understood. I am curious with so much activity kind of in and around your footprint, do you find yourselves to be a net beneficiary of others who are actually distracted right now?

Well, we think -- I mean, we're continuing to hire, we think, some awfully good talent from many of our competitors. We are growing our consumer and small business customer base. We think we're based upon data we get from different industry support groups. We think we're growing faster than our peers are. And we operate in some of the best markets in the country. Over 50% of all job growth over the last 10 years and 50% -- 52%, I think, of population growth over the last 10 years has been in the markets that we operate in. And so we think that we are well positioned in some really attractive markets. And what we need to do is just continue to execute our plan, and that will provide an appropriate amount of growth for us to deliver nice returns for our shareholders over time.

Okay. Fair enough. I have to say, I mean, the theme that really recurs in having a conversation with all of you is the degree of conservatism with which you're running the bank, the determination to protect the house and grow and grow at a responsible pace. And I think that's kind of a refreshing message, if you will. The one question that I need to ask in terms of conservatism, as we wrap up this session here, is around capital. Because you have tended to also [ air ] the conservative side in terms of setting your CET1 target relative to both the requirement, distressed capital buffer, the CCAR outlook. Where do you stand on that target that you set well in excess of your required minimum? And how would you potentially see that changing? Or what would cause you to be willing to perhaps take it down even [indiscernible]?

Yes. So we have our range of 9.5 to 10. We said we're going to operate at the higher end of that, call it, 10%. Because there was a lot of uncertainty. As that uncertainty continues to decline. Again, the vaccine, economy opens up, feel better about it, that's a driver of maybe being able to reduce that. The other is we did get the scenario for CCAR for this year. We are not required to participate. However, based on our resubmission that we did in December and the results we got from that, our degradation of capital was far less than the 3% SCB that we have that you know we appealed. We didn't win the appeal, but in any event, we believe we would be the worst in the floor, and that's what that resubmission told us. Looking at the scenario, the scenario was equal or better on all the metrics with the exception of commercial real estate, which got worse yet again. And we just don't have that much investor real estate that creates a big problem for us. So we are leaning towards participating and running the scenarios through. That gives us further confidence that maybe we don't have to have as much capital. And so we could change our range here in the not-too-distant future. And when we do, we'll come back and update that for our shareholders.

Okay. Well, I think that's a perfect note to close out this session on. David and John, thank you so much again for sharing your insights, for the candid responses to the questions. And I certainly hope I see you face-to-face in the next 12 months, if not in Miami this time next year. Thank you so much.

Thank you, Susan. We appreciate it.

Thank you.