Regions Financial Corporation (RF) Earnings Call Transcript & Summary

Good morning, everyone. This is Gerard Cassidy from RBC Capital Markets. We now have a fireside chat with senior management of Regions Financial. As many of you know, Regions is positioned in the fastest-growing parts of the United States and the Southeast and extending into the Southwest with their franchise with about total assets of $168 billion. The company's market cap is around $20 billion, and the stock trades at a small premium to book value, about a 20% premium. And I'm really quite pleased to have with us on today's fireside chat President and CEO, John Turner. As many of you know, John took over this position back in 2018 from Grayson Hall, and he joined Regions back in 2008. And with him, of course, is David Turner, their CFO. And David's been with the company since 2005 and has always given great insights to managing the balance sheet at Regions, and we're pleased to have him. And of course, we also have Dana Nolan, who heads up their Investor Relations efforts. And gentlemen, and Dana, thank you for joining us.

Thank you, Gerard. Thanks for having us.

You're very welcome. Maybe let's open it up with a broader question about the current macro environment. It looks like the worst of the pandemic may be behind us, but there are still some lingering labor issues, supply chain issues that we're all well aware of. The risk, of course, we're worried about, inflation, especially now with the price of oil rising to levels that we've not seen in quite some time. And so maybe you can share with us what the business environment is like now. Obviously, we have the issue with the conflict with Ukraine and Russia influencing what's going on today. And what are you hearing from the clients about what's happening to their businesses? And with that, I'll pass it over to you, John and Dave.

Yes. Thanks, Gerard. Maybe I'll answer that question in 2 parts. If you had asked me 2 weeks ago, 2.5 weeks ago, I would describe the business community as being optimistic. As you acknowledged, there's still some challenges with finding labor to staff businesses of all kinds. It doesn't matter which geography I'm in or which industry business owner I'm talking to operates in, everybody is dealing with some sort of labor shortage that has an impact on their business. Similarly, there's still some supply chain issues, which I think are in part driven by -- ultimately by labor shortages, which are impacting some customers. But by and large, customers were, and I think still are, optimistic. I would say, over the last 2 weeks, that optimism has probably changed to cautiously optimistic because we really don't know what the impacts of the current conflict in the Ukraine might bring. Every day is a new day, rising oil prices -- I was just told that gas prices have now reached an all-time forever high. And I think we'll probably see that continue -- that trend continue at least for a short period of time, if not longer. And so businesses are being thoughtful, just as we are, about what the potential impacts of the conflict could be, how it might affect inflation and just generally, their businesses. And so again, I'd add that term cautiously optimistic now because of the additional uncertainty.

When you think about your businesses or business customers, that is, do you think because of them going through the pandemic that they may be better prepared for the disruptions we're seeing now because of this conflict between Ukraine and Russia?

Yes. No question. And I think -- and thinking back, too, to the last time we saw oil prices above $100, there was a period of time where that created some pressure on businesses and businesses had to learn how to adapt. Many of them implemented escalation clauses in contracts and in agreements, so they now have the ability to pass on increasing fuel cost to their customers. So I think there are a variety of things that have occurred, including the pandemic over the last number of years, that have positioned businesses to be better prepared for the uncertainty that we are currently experiencing.

Very good. You folks have done a handful of acquisitions in the recent past, EnerBank and Sabal Capital Partners, if I said that correctly, Clearsight Advisors. How are those acquisitions stacked up against your expectations when you were going into doing those deals?

Yes. So far, we're very excited about the contribution each is making. Ascentium is the oldest of the 3 you name. We also have added Clearsight in the last quarter, I guess. And I would say that we found the teams to be very talented. We like the technology that both Ascentium and EnerBank have. We like the synergies that we are beginning to see with Ascentium. Definitely with Sabal, where we've already experiencing a nice increase in business because of the flow of opportunities from our [ in- footprint ] bankers to Sabal Capital Partners. So all of them are performing at or above our expectations this early, particularly with the last 3, EnerBank, Sabal and Clearsight. But we feel good about the contribution they will make, about the capabilities that they now give us to meet additional customer needs and expand, importantly, relationships that we've banked for a long time.

When you look out, John, to the future, and I know it's very cloudy and uncertain because of what's going on over in the Ukraine. What's the bank's appetite for maybe more transactions like the 3 you just described? And then separately, over the years that we have all lived through a consolidating industry, you guys have -- are on the front lines of that. Can you share with us your thoughts about just non-depository -- I'm sorry, depository deals going forward?

Yes. So let me answer the question in reverse. We've had a number of transactions occurring in our footprint, near our footprint that caused us to take notice, to pay attention. We said I think all along that we haven't been interested in bank M&A. We think we have a very good plan to continue to deliver top-tier top quartile results for our shareholders. We've been working on that over the last 8 or 10 years and have moved from the bottom quartile to the top quartile and we're proud of that work. And really think just by executing the plan that we have, we can continue to deliver those quality results. And that's not to say that over time, maybe our position changes, that we're certainly going to continue to follow the market. Each year, we revisit our strategy. But today, bank M&A is not a part of our strategy. We find -- believe it's disruptive and would take us off our plan. With respect to nonbank M&A, we've made a number of acquisitions, going back to 2014, when we first acquired a Fannie-designated underwriting and servicing license. We acquired BlackArch Partners and First Sterling. Those were the first acquisitions that we made that gave us the confidence we could continue to acquire non-depository institutions that added additional capabilities that help us generate nice revenue stream. And a lot of those have been in the capital markets where we've seen an increasingly important contribution to the company. We've made an acquisition in wealth. We continue to buy mortgage servicing rights. And I think -- we believe those are -- those acquisitions have been and will continue to be helpful to stimulate growth to give us access to new customers, and so we'll look to do more of that in the future.

And Gerard, I'll just add to that. Those are important because we were generating above-industry returns on net interest income because of our hedging program. And instead of using that capital that we generated to buy our shares back, we thought it was better that we continue to grow the business, to expand capabilities, as John mentioned, diversify further our business model. And we think the return profile on that is going to be much better in creating shareholder return versus buying stock back. And so it's worked nicely for us over the past couple of years.

Very good. John, circling back to something you just brought up about execution, and that's what you're going to focus on. Can you share with us one of the -- what you guys really can execute? Is it driving new business, winning new business, controlling expenses, what are some of the -- if you pick the top 2 or 3 key metrics you guys focus on to really execute for your customers, your shareholders, your employees, what would those be?

Yes. Over the last few years, we've been remixing our business. We've been exiting certain businesses and portfolios. And so that sort of provided a counterweight to the growth that we've been generating. Clearly, a metric has got to be where we're growing our business. We're growing consumer checking accounts, we're growing small business checking accounts and we're adding relationships. And last year, we grew consumer checking accounts by over 3%, small business checking by over 5%, and we added a number of meaningful commercial banking relationships over the course of the year. So we feel good about that. Secondarily, it's got to be sound growth. We need to continue to manage credit well. And I think we're doing a better and better job of building a portfolio that's going to be more consistently performing, more stable, more resilient. And we're not going to have the surprises that we had 10-plus years ago sort of in our portfolio. So that's important to us. And the third thing is to continue to drive our efficiency ratio down. We've got to make investments in our business, but we need to do that because we've become more efficient -- another area of our business, we need to fund it with process improvements. And so we talk a lot about continuously improving and delivering more dollars of revenue with less dollars of expense for our shareholders. So those would be 3 key areas we want to focus on when we talk about execution.

And I'd add 2 more that were important to the return on tangible common equity is really important to us and our growth in earnings per share. Those 2 factors were held accountable by our Board for -- and the earnings per share growth has to be because earnings are growing, not because you're buying your stock back. Obviously, that's a part of how we manage our capital base, but you really have to have the other 3 things that John talked about, to get that consistent growth in earnings and making sure you're using your capital in the most efficient manner that you can so that you can keep your returns at the top quartile, as John mentioned.

And John, with this growth, you guys are blessed in the sense that you're positioned in one of the fastest growth parts of our country economically speaking. Is there -- within that franchise, is -- the Florida versus Texas, where do you find the greatest opportunities for growth for Regions?

Yes. And think about our franchise, 86% of our deposits are in 7 Southeastern states, if you add Texas, so over 90% of our deposits, I think, would be in those 8 states. And the core of our business is going to be in markets like Alabama and Mississippi, Louisiana and parts of Tennessee, Arkansas, that are very stable. We have opportunities to grow in Florida, Georgia, South Carolina, Tennessee and Texas. And so we think it's a nice balance of core markets that provide a very loyal, low-cost granular deposit base with opportunities to grow. And again, markets like Atlanta, Orlando and Houston, where we're making investments in physical facilities and bankers and increasing our presence.

Very good. David, maybe a question for you about interest rates. Obviously, it looks like the Fed, even with the conflict overseas, that we'll still likely to see the Fed raise rates this year, maybe not as many times as we initially thought in January or February. But can you tell us how you're positioned for a rising short-term interest rate environment for '22 and '23?

Yes. So we still anticipate that's going to tighten and begin doing that at their next meeting. I think the information in our deck is really built on the curve that existed at January 31. Subsequent to that -- and which has about, call it, 4 to 5 rate increases baked into it. One time, there was discussion of going up to 7 with a 50 basis point change at this first meeting to kind of jump-start things. I think given the conflict that we're seeing right now, there's probably going to be more caution. And I suspect 50 basis points is off the table. We'll see them begin tightening cycle. And I think each move, they're really going to be thoughtful about where do we stand with the economy. $125 barrel oil is going to manifest itself in inflation already that is really not controlled by interest rates. I think that having the Fed move at a brisk pace with oil at that same price is going to potentially have some negative effects. So I think they'll be thoughtful about that. So we think our 4 to 5 rate increases that are baked in for the year is probably our best guess right now. We began last year or so taking off some of our protection for low rate -- for low interest rates and terminating interest rate swaps. Our sensitivity comes back even more so in the third quarter for us. But we will benefit in the first and second quarter if we get rate increases because our deposit beta will be near 0 for the first increase. And so every 25 basis points to us means somewhere in the $60 million to $80 million range on an annual 12-month basis of NII. And so that's baked into our guidance. We still feel comfortable with that. We still feel comfortable with our balance sheet growth. But as this conflict continues to expand and we can't get it settled and oil prices stay higher, that could have some negative impacts to GDP, which I think will manifest itself in the slower growth. So we'll just have to wait and see how that conflict gets resolved.

Sure. David, can you share with us -- you gave us the point about the 25 basis point rate increase, leading to about a $60 million to $80 million increase in net interest income over a 12-month period. Let's assume for a moment, we do see 4 or 5 rate increases this year. Is the benefit for the subsequent rate increases linear, meaning is it always going to stay at the $60 million or $80 million or does it actually move up even more quickly? How would you approach that in answering this question?

Yes. Actually, it works the other way. It will be less than that range. Because what happens to you in our deposit base is the betas will move very, very slow for the first few rate increases. As you start going and there's anticipation of another increase coming at the next meeting, you start seeing betas that are going to have to start moving more rapidly. And so I think that ends up working. This is a single thing that will work against you in terms of having that type of increase. And we'll still have increases, but not quite at that pace.

Yes. And talking about the deposit betas, 2 questions on this for you guys. One is, I think, David, you've referred to maybe some of the deposits being surge deposits due to what the Fed has done with its balance sheet to get us through the pandemic. Maybe you can expand upon what you mean by search deposits? And then second, when you compare your deposit beta that you experienced in the 2016 to '18 time period, what are you thinking for this tightening period, whether the deposit beta will be equal to it, less, more?

Yes. I think all in, when we get to core deposits, our expectation would be that our beta, which was right at 30% would be what we should expect. We were one of the lowest betas. That's the nature of our deposit base. It's our competitive advantage that hasn't gone anywhere. As John mentioned, we continue to grow core checking accounts and operating accounts, and that's important to our overall profitability. But if you look at surge deposits, so we had about $40 billion that came in, $40 billion of deposit growth through the cycle. If you look at it, it's really 3 buckets. So the first bucket of about $14 billion really came from good core growth of accounts or customers that put more into their savings account. Those are very stable. Those should have deposit betas very similar to what we experienced on our legacy deposit base. So yes, this first move, you won't see much move, maybe 10%, call it, deposit beta 10%. As you look at the most volatile will be people that had cash that came in, didn't have any place to really put it. They're likely to want, as rates move up, to get paid more for it. We have a loan to deposit ratio that's very low. We don't need and will not pay up for those deposits. So they're likely to leave us. So we have a deposit beta that's closer to 80%, maybe 100% for that, call it, $14 billion. And then you got about $12 billion that's in the middle that's really the question mark for us. What's going to happen with them? We suspect there's going to be elements of a higher deposit beta. Some of it may stay with us longer. Especially as people see uncertainty out there, they may want to maintain more liquidity than they had in the past. And so our deposit beta on that, call it, 40% to 60%. So when we say the word surge, out of that $40 billion, you've got the $12 billion plus the $14 billion, that's $26 billion, the average deposit beta on that is about 70%. And so we've maintained a lot of cash to take care of the deposits. We have, call it, $26 billion worth of cash. We have not wanted to take the duration of risk for that. We don't think we are adequately compensated for that, and we realized we could make more money by doing so. But we think being patient right now and waiting for rates to take off, we can ride that curve. We'll have 100% beta on that. And so there will be a better opportunity for us to put that to work. We want to use that cash to grow our loan portfolio as well. The last piece of that on using that cash, we have a couple of billion dollars' worth of deposits that came in on our EnerBank transaction that were higher cost term deposits that we did mark them to market, but they still cost us more than we could borrow today. And those will work their way out over the next couple of years. So that $2 billion needs to be in cash to pay for that -- those maturities.

Yes. And following up on your comment about the liquidity you carry on your balance sheet. You mentioned the cash being around $26 billion, which, from my recollection, is almost double the level it was a year ago in 1Q 2021. What level do you feel comfortable? What's the optimal level for that number to be?

Yes. I think when things are running normally, we're closer to $750 million to $1 billion. So that's a lot of excess liquidity that we have to put to work. And as I mentioned, we just want to be patient instead of putting that in the securities book, if rates move like we think. It won't take but a couple of moves to have you underwater from a fair value standpoint. It's just not worth it to us. We're trying to build a consistent, sustainable business model, predictable, not just to top tick earnings every time we can, but to have something that shareholders really can count on over time to give the best risk-adjusted return to them.

Yes. Maybe John, pivoting back to you. The H8 loan data that we saw toward the end of 2021 was quite strong, particularly in the month of December in the C&I space. It has since, in the first, what, 8 weeks, 10 weeks of this year, has slowed down a bit. And so maybe can you give us some color what you're seeing for loan demand from your business and commercial customers, but also the consumers. What are you seeing on that front?

Yes. So we did see momentum really building as we ended the year. And after the end of the year, we probably expected some pay down on lines of credit, and we saw that actually probably a little bit of a slowdown in activity. But I would say loan demand has been steady, and we feel good about the production and the commitments that we've generated both in the fourth quarter and the beginning of this year and feel good about our ability to deliver on our commitment to grow loans through 2022. On the consumer side, mortgage is softer, but still, we think, okay. And we've always had a nice -- a little different mix of business. It's more purchase-oriented than refinance. And so that's still -- because of that favorable mix of business in this environment, we think our mortgage portfolio and mortgage business will perform maybe a little better than peer on a relative basis.

Very good. John, you talked a little bit about...

And the only thing I'd say about consumer -- the other thing I'd say about consumer not to forget EnerBank, which is a great addition for us, and we expect EnerBank to be an important driver of loan growth in 2022 and beyond.

Very good. John, you talked about expanding in certain markets, you mentioned Atlanta. And you guys have been transitioning your physical footprint over the last 5-plus years or so, closing down certain branches, opening up in other areas. How do you decide what branches need to be closed versus the branches where you're expanding? Is it due to just concentration overlap? You just don't need as many branches in a particular market? But maybe if you could share with us some of your thinking on what goes into that decision making.

Yes. When we look at a variety of factors, traffic patterns, proximity to other branches. Take for example, in Birmingham, we had a particular situation where we had 5 branches within about 2 miles of one another. It was a busy thoroughfare, lots of customers, physical facilities were somewhat limited in size. You begin to try to think about, well, how do I consolidate those 5 into 3, or 5 into 2? And oftentimes, you conclude, you don't have a facility that's large enough to accommodate a combined customer base. And so maybe you have to close 2 or 3 and build another one or relocate to a different spot. But you don't want to lose the good visibility you have associated with the site. So there are a lot of considerations, traffic patterns, growth trends, profitability of the branch, deposits per branch are all factors that we consider when thinking about whether or not to close a branch or relocate a facility.

And I still believe in [ the importance of ] these branches...

Yes. I still believe in the importance of branches. Yes. We still think they're an important driver of growth for us. And so we're building branches in Atlanta, Orlando and Houston in markets that we are entering new -- newly and finding that those de novo branches, we've built about 80 now across the footprint in the last 5 years or so are a nice driver of growth.

Yes, it appears that the omnichannel approach that you're using in some of -- most of your peers of having the digital channel as well as the physical footprint channel has the advantage over the digital-only players out there as evidenced by your success in growing these new branches and the business you're generating from there. Just a quick follow-up. When you do shed a branch, what are some of the attrition numbers? Are you very happy with -- that you keep 90-plus percent or whatever the number may be of your customers even though their branch may have been closed?

Yes. We are and we do. And that's our target typically is 90-plus percent, 92%, 94% retention depending upon proximity of the next branch. We follow that closely. We've been very pleased with retention numbers. To your point, customers are choosing to bank with us a lot of different ways, whether it be mobile, online, through the call center, using ATMs. The physical facility is important for certain things, but for lots of transactions, it's not. And so it makes it much easier to close a branch. And we're always careful and watchful of the impact that those closures have on communities. And so we want to be thoughtful about the considerations of closing a branch and what does that mean to the service that we're providing to that area?

Sure. And I guess we're running out of time here, but I'd like to try to squeeze in one last question on credit. Obviously, the credit quality of your organization is superb, like the industry. Tough to sustain such great low numbers on credit losses, and you've shared with us about the normalization trends you're likely to see in your peers, so you're not unique. But maybe just some color updates on what you're sensing on credit for the upcoming year? I know it's a little mixed right now because of what's going on over in Ukraine, but any thoughts would be very helpful.

Yes. I mean we're still guiding to good credit quality through the balance of the year. If there's -- if the normalization begins, we think it's more towards the second half of the year. We are seeing some increase in overdraft charge-offs, some increase in -- modest increase in past dues amongst consumers, but still nothing that gives us any real concern. And that would be true of the -- of our commercial and corporate banking sectors as well. There are certainly things that we are keeping an eye on given some of the volatility and potential impacts of the conflict and other things. But in general, we still feel very good about our ability to deliver really solid credit results in 2022.

I know none of us wish for credit cycles, of course, because they're very tough to get through. And it seemed to me that your organization would have been -- the last credit cycle would have been a good test to show everybody how you've changed from the last credit cycle. Do you think as we go forward, you mentioned you're still comfortable on credit that it's also not just because of the success the industry had from the federal government's aggressive attack on the pandemic-induced recession that surprised us all, but there wasn't much in credit losses at all. But you really changed the way you manage credit over the last 10 to 12 years that I think will hopefully show itself if we get into a rougher spot here because of what's going on around the world.

Yes. We used to wish for a credit cycle, so we could prove that. I don't anymore wish for a credit cycle. I have enough confidence in what we're doing. If everybody else doesn't believe, it's okay, I do. I don't -- we don't have to prove it. But I do think that, to your point, we've made tremendous strides in building a much stronger credit culture. Balance and diversity is really important to us. We've exited businesses and portfolios that we thought were underperforming. And we don't have any concentrations in any particular sector, industry portfolio. We're focusing on risk-adjusted returns, and we've seen, we think, the benefit of that flow through to the returns that we're delivering for our shareholders over time. As I mentioned, we moved from the bottom quartile to the top in terms of returns. That was -- I think is a reflection of the work that we've done, and we feel good about the quality of our business and our ability to deliver consistently performing sustainable results. So thank you for acknowledging the work. I appreciate it. And again, I don't -- I have plenty of confidence in what we've done. I'm not wishing for any problems.

It's all about execution, right, John? Very good try.

That's right. All about execution, Gerard.

Super. Well, gentlemen, thank you. Dana, thank you all. We really appreciate you guys coming to the conference. As always, it's a real positive to have you with us. So thank you, gentlemen, and again, Dana. Thank you.

Thanks for having us, Gerard.