Q1 2022 Regions Financial Corp Earnings Call
Good morning, and welcome to the regions Financial Corporation's quarterly earnings call. My name is tomorrow and I will be your operator for today's call I would like to remind everyone that all participant phone lines have been placed on listen only.
We ended the call there will be a question and answer session. If you wish to ask a question. Please press star one on your telephone keypad I will now turn the call over to Dana Nolan to begin.
Thank you Jim Maria welcome to regions first quarter 2020 earnings call.
John and David will provide high level commentary regarding the quarter earnings documents, which include our forward looking statement disclaimer or non-GAAP information are available in the Investor Relations section of our website.
Closures kind of our presentation materials prepared comments and Q&A I will now turn the call over to John .
Thank you Dana and good morning, everyone. We appreciate you joining our call today.
Very pleased with our first quarter results.
This morning, we reported earnings of $524 million.
<unk> and earnings per share of <unk> 55 cents.
Might the challenging geopolitical backdrop and elevated inflation, we remain optimistic about 2022.
We have a strong balance sheet position to withstand an array of economic conditions.
<unk> customers for the most part have adapted and are prospering and the new operating environment.
Loan commitments and pipelines remained strong and utilization rates continue to increase.
The consumer remains healthy net population migration inflows in our markets remain robust and the majority of our footprint has returned to equal or better than pre pandemic employment levels.
Asset quality remains strong virtually all credit related metrics improving in the quarter.
Net charge offs remained below historical levels.
The integration of the ball interbank in clear sight are progressing as planned and were excited about their growing contributions. Additionally.
Additionally, we continue to make investments in talent and technology to support strategic growth initiatives.
We kicked off 2022 was a strong start and expect to continue building on that momentum.
We have a solid strategic plan and outstanding team and a proven track record of successful execution.
Now David will provide you with some select highlights regarding the quarter.
Thank you John let's start with the balance sheet.
Average loans grew one 5%, while ending loans grew 2% during the quarter average business loans increased 3%, reflecting broad based growth in corporate and middle market and real estate lending across our diversified and specialized portfolios.
I'll still below pre pandemic levels commercial loan line utilization levels ended the quarter at approximately 43, 9%, increasing 160 basis points over the prior quarter.
Loan production also remained strong linked quarter commitments up approximately $1 6 billion.
Average consumer loans declined 1% as increases in mortgage and other consumer were offset by declines in the other categories.
And then other consumer interbank loans grew approximately 2% compared to the fourth quarter.
Looking forward, we expect full year 2020 to average loan balances to grow 4% to 5% compared to 2021 and.
And excluding PPP loans and consumer exit portfolios, we expect full year average loan balances to grow 9% to 10%.
So let's turn to deposits.
Although the pace of deposit growth has slowed balances continued to increase seasonally this quarter to new record levels average consumer and wealth management deposits increased compared to the fourth quarter, our corporate deposits remained relatively stable.
We are continuing to analyze our deposit base and pandemic related deposit increases.
Approximately 35% of the increase or $15 billion is expected to be more stable with behavior similar to our core consumer deposit book.
This segment has historically quite granular.
And generally right insensitive and therefore can be relied upon to support longer term asset growth through the rate cycle.
The remaining 65% of the deposit increases is a mixture of commercial and other customer types that are expected to be more rate sensitive or that we are less certain about their long term behavior.
I assume this segment may have all in beta of roughly 70%.
This elevated beta assumption includes relationship repricing and some balance is shifting from noninterest and interest bearing categories.
It also reflects a range of $5 billion to $10 billion of balance reduction attributable to tightening monetary policy.
The combination of these segments and our legacy deposit base represents significant upside for us as rates increase.
So let's shift to net interest income and margin.
Net interest income was stable quarter over quarter, excluding reduced contributions from PPP net interest income grew 2%.
Fitting from solid loan growth and rising interest rates.
Net interest income from PPP loans decreased $27 million from the prior quarter, and we will be less of a contributor going forward.
<unk>, 93% of estimated PPP fees have been recognized.
Cash averaged $27 billion during the quarter and when combined with PPP reduced first quarter's reported margin by 58 basis points.
Our adjusted margin was 343% higher by nine basis points versus the fourth quarter.
The path, where net interest income enters the second quarter with strong momentum from both balance sheet growth and higher interest rates.
<unk> P. P. P average loan balances grew 2% in the first quarter and a similar amount of growth is expected next quarter.
Roughly one $5 billion of Securities were also added late in the quarter further benefiting future periods.
The recent run up in rates has certainly validated our decision to wait to deploy into securities and while not included in our current outlook additional securities would provide incremental benefit.
Higher short and long term interest rates provided additional lift to net interest income in the first quarter and these benefits are expected to expand in the coming quarters.
Total net interest income is projected to increase 5% to 7% in the second quarter and is expected to accelerate throughout the year such that the fourth quarter net interest income is expected to be approximately 15% higher than our first quarter.
<unk> balance sheet is positioned to benefit meaningfully from higher interest rates.
The first 100 basis points of rate tightening.
Each 25 basis point increase in the federal funds rate is projected to add between 60 and $80 million over a full 12 month period.
This benefit is supported by a large proportion of stable deposit funding and a significant amount of earning assets held in cash which compares favorably to the industry overall.
Over a longer horizon.
A more normal interest rate environment are roughly at two 5% fed funds rate will support our net interest margin goal of approximately 375%.
Well, we have purposefully retained leverage to higher interest rates during a period of low rates, we will attempt to manage a more normal interest rate risk profile as interest rate environment normalizes.
The fed's aggressive path for interest rates gives us the opportunity to protect NII at attractive levels.
We have begun this process by adding $4 $7 billion year to date, our forged starting receive fixed swaps at a $1 $5 billion of spot starting securities.
This represents approximately 30% of the total hedging amount needed the cycle.
Now, let's take a look at fee revenue and expense.
Adjusted noninterest income decreased 5% from the prior quarter, primarily due to reduced HR asset valuations as well as lower capital markets and card and ATM fees.
Within capital markets M&A advisory activity was muted by seasonality as well as the timing of transactions.
<unk> remained robust, but some deals have been pushed to later in the year.
Additionally, debt and real estate capital markets were impacted by uncertainty surrounding rates geopolitical tensions and volatility in credit spreads.
However, we are seeing some stabilization in the loan and fixed income markets and anticipate conditions will improve in coming quarters.
Further the reduction in real estate capital markets activity was offset by the addition of <unk> capital partners for the full quarter.
Similar to the corporate fixed income market refinanced demand has been softer than expected and our agency multifamily finance business has investors assess a significant move in interest rates.
We continue to expect capital markets to generate quarterly revenue of $90 million to $110 million.
<unk> the impact of CVA and DVA.
While we expect to be near the lower end of the range next quarter, we expect activity to pick up in the second half of the year.
Card and ATM fees reflects seasonally lower interchange on both debit and credit cards. In addition, debit card fees were further impacted by fewer days in the quarter.
Mortgage income remained relatively stable and included approximately $12 million in gains associated with previously repurchased Ginnie Mae loans sold during the quarter.
While mortgages anticipated to decline relative to 2021. It is still expected to remain a key contributor to fee revenue.
Wealth management income also remains stable this quarter, despite elevated market volatility.
Service charges were also stable during the quarter, despite seasonal declines in NSF and overdraft related fees.
The first phase of previously announced NSF and overdraft policy changes were effective at the end of the first quarter and the remaining changes will be implemented over the second and third quarters. These changes when combined with the previously implemented changes are expected to result in full year 2020.
To service charges of approximately $600 million and full year 2023 service charges of approximately $575 million.
We expect 2022, adjusted total revenue to be up four and a half to five 5% compared to the prior year driven primarily by growth in net interest income.
This growth includes the impact of lower P. P. P related revenue and the anticipated impact of NSF and overdraft changes.
So let's move on to noninterest expense.
Adjusted noninterest expenses decreased 4% in the quarter, driven by lower salaries and benefits expense and professional and legal fees.
Salaries and benefits decreased 5%, primarily due to lower incentive compensation, despite higher payroll taxes and four one K expense.
Hours and benefits also include the favorable impact of lower HR asset valuations.
Professional and legal fees decreased significantly as elevated fees associated with our bolt on M&A activity in the fourth quarter did not repeat.
We will continue to prudently manage expenses, while investing in technology products and people to grow our business.
As a result, our core expense base will grow.
We expect 2022, adjusted noninterest expenses to be up 3% to 4% compared to 2021. Importantly. This includes the full year impact of recent acquisitions as well as anticipated inflationary impacts.
We remain committed to generating positive operating leverage in 2022.
Overall credit performance remained strong annualized net charge offs increased one basis point to 21 basis points nonperforming loans continued to improve during the quarter and remain below pre pandemic levels at just 37 basis points of total loans.
Our allowance for credit losses decreased 12 basis points to 167% of total loans, while the allowance as a percentage of nonperforming loans increased 97 percentage points.
446%.
The decline in the allowance reflects ongoing improvement asset quality and continued resolution of pandemic issues, partially offset by loan growth and general economic volatility associated primarily with inflation and geopolitical unrest.
The allowance reduction resulted in a net $36 million benefit to the provision.
We expect credit losses to slowly begin to normalize in the back half of 2022, and currently expect full year net charge offs to be in the 20 to 30 basis point range.
With respect to capital we ended the quarter with a common equity tier one ratio modestly lower at an estimated nine 4%.
We expect to maintain it near the midpoint of our 925% to 975% operating range.
So wrapping up on the next slide our updated 2022 expectations, which we've already addressed I do wanted to point out that these expectations do not include any additional security purchases. So that certainly provides the opportunity for incremental benefit.
In closing as John mentioned, we began 2022 with great momentum and despite geopolitical tensions and market uncertainty, we remain well positioned for growth as the economic recovery continues pretax pre provision income remained strong expenses are well controlled credit risk is.
Fiddly benign capital and liquidity are solid and we are optimistic about the pace of the economic recovery in our markets.
With that we're happy to take your questions.
The floor is now open for questions. If you have a question. Please press the star key followed by the number one on your Touchtone phone.
Any point. Your question is answered you may remove yourself from the key by press the pound key we'll pause for just a moment to compile the Q&A roster.
Your first question comes from the line of Ryan Nash with Goldman Sachs. Please proceed with your question.
Hey, good morning, John Good morning, David.
Uh huh.
I was hoping maybe you could talk about expectations for deposit growth, which came in better than expected and particularly as it pertains to the surge deposit. So maybe just how youre thinking about the tradeoff between keeping some of these deposits and the potential for a higher beta and I think David you highlighted a potential for a $5 billion to $10 billion reduction.
Can you maybe just clarify how much you expect for these two to stick around and what it means for deposit growth.
Sure.
We were we.
We had expected the $5 billion to $10 billion of deposits to start flowing out in the first quarter.
<unk> maintained pretty conservative deposit assumptions, but.
If you look at the growth and where it came from it was in our consumer book.
Continuing to grow accounts and.
Continue to be.
I have a high level of privacy with our with our retail customers and so our deposit base is our competitive advantage and it's been that way for a long time and we're looking to to leverage that as we get into this higher rate environment. As you think about the surge deposits.
Sure.
We have a third of those that we think are going to be fairly similar to our legacy deposits in terms of data.
Price insensitive.
We have.
The other third on the other end, we think are much higher beta 80% to 100% beta those are corporate deposits thinner you could characterize those as non operational deposits that are probably going to look for a better home and ora are.
A higher rate.
As time goes by we will see what happens after this next rate increase but we've expected that to two <unk>.
Either reprice or really slow out out of the bank and then you have in the middle which is another third.
Deposits that are stimulus receiving deposit small business type deposits.
That one's a little harder to two.
We do have a higher beta on not as high as the as the second group, but.
Any event.
If we're wrong on the five to 10, it's likely that we've maintained our deposits and a higher level.
And over time, if we see that then that gives us a little more comfort to be able to take some of our.
Excess cash that we have some $26 billion sitting on the balance sheet to deploy that into the securities book, but our guidance that we're giving you does not have that.
Deployed intentionally.
Got it.
If we could dig a little bit into the new hedging program. So David I don't know if Darren is in the room. I guess you guys were the masters of adding swaps at in a timely manner last cycle.
This new program. So I think the market is having a little bit of trouble understanding why banks are adding swaps at this part of the cycle and I think all of US understand so can you maybe just talk about thoughts regarding locking in here, particularly using forward starters and I think you talked about.
Another 10 to 12 up additions can you maybe just talk about pacing in and why this is the right decision at this point in the cycle for for regions. I'll go ahead to start and then there is here and he can add to it but you hit on a key word.
That is forward starting and.
So what we're trying to do is get our margin.
Two the optimum level.
And then layer in protection for that margin over time. So if you look at where we put the first call it $4 7 billion in <unk>.
That said our receive fixed rate of $2 32.
Those are largely going to be effective for 2024. So we intentionally had them forward starting because we believe there is risk at that point in the cycle that actually rates could go the other way and we want to be able to protect that if we if we're wrong and it happens to not reverse and go lower then we haven't lost anything we haven't.
Given up any of our net interest income or margin at that point.
These are all five year duration, just like they were last cycle and so when you do it forward starting you can take advantage of pricing there are not all that expensive to get into and we're not giving up our asset sensitivity today. That's important we are becoming and maintain our sensitivity and if you.
On the.
Comments, just a minute ago. The way we are structured in the balance sheet is to benefit in particular at the backend such that our NII in the fourth quarter should be up 15% from the first quarter and it's just the nature of how our sensitivity.
As structured at this point in time.
You want to add to that the only thing I would add as David said, it well page eight of the deck just really shows the path of the net interest margin, which really underscores what David is saying we are going to enjoy a nice margin expansion as deferred.
Is tightening policy, but we have a very disciplined approach.
To manage that exposure as rates push higher as David said, the probability of a downturn at some point of the fed has to push higher increases over time, and so we want to be cognizant of that and as we get delivered those higher rates put in that protection and really manage the downside risk in those.
And out years.
Thank you both for all the color.
Thank you.
Next question will come from the line of Christopher Spahr with Wells Fargo. Please proceed with your question.
Good morning, good morning other bank.
Seem to be spending their rate driven incremental net interest income.
Some of it whereas you've kept your 2022 cost guidance unchanged.
So why do you think that is and with this higher NII outlook.
How confident are you that you can expand on your positive operating leverage this year next year.
Well.
And kind of leveraging the comments just before the.
The way, we structured the balance sheet, our NII will be growing nicely.
Throughout the year, but a really strong in the fourth quarter with sets up a really strong 2023, we're still asset sensitive through that time period.
And so we should have a nice tailwind in terms of revenue growth.
We pride ourselves on being able to control our cost.
We did a good job this quarter.
There is that HR valuation asset that benefited us by $14 million. So you need to add that back to kind of get us level set but in any event.
We continue to.
Leverage our continuous improvement program to stay focused on how we get better every day and how we can leverage technology.
And the process improvement so that we can keep our costs down because we are taking our savings and reinvesting those savings in things like digital.
Talent continuing to to hire people so that we can grow.
We had mentioned that the vast majority of our growth in expenses. This year related to the three acquisitions that we closed in the fourth quarter of 'twenty one so we've.
We've had a little bit of inflation, we've had to deal with.
And so we're continuing to work.
At all levels to try and keep our cost under control and generate positive operating leverage which we believe we will have in 2022, we didn't have it this quarter, but we will when you get to when you look at the whole year and expect to have that going forward in 'twenty three.
Thank you.
Your next question will come from the line of Gerard Cassidy with RBC. Please proceed with your question.
Good morning, John Good morning, Hey, good morning Gerard.
David.
The slide deck slide six you would give us the difference in the net interest margins based upon whats weighing down your margin today with the PPP loans and the excess cash.
Can you share with us on the excess cash portion.
Where does the fed funds rate need to go where youre not going to need to have that bullet point anymore, because it will match your reported margin.
Well it really gets back to the deposit.
Expectations. So we've maintained.
This excess cash to be prepared to the extent the surge deposits do seek.
Other alternatives and we have to pay that out honestly were getting 100% beta.
On the cash while we wait but being patient has benefited us.
Putting that into the Securities book earlier would have really cost us.
We did put a little bit of that to work this quarter.
One 1 billion and a half of that at about a $2 80.
Gary.
If we were to do it today would be even higher.
And so in the three 5% range. So I think it's important for us to understand what the surge deposit flows are going to do relative to with the fed rate movements are going to be and I think over a fairly short period of time.
Our cash will get down to our normalized level, which is 1 billion to $2 billion.
And then we will have to have.
This.
This disclosure and of course, PPP or run off for the most part after this year, we will have to talk about that one either.
Very good and then as a follow up especially talking to you with your background as an accountant.
Can you share with us your thoughts about a OCI, we all understand it's an accounting issue and it's only for the securities portfolio. Obviously, you similar to your peers had a big negative number this quarter, which took down tangible book value per share and book value per share again similar to your peers, so youre not standing out.
At what point does it become an issue for banks and again I know it doesn't go through your CET one ratio like it does for the advanced approach banks, but do we have to ever get concerned about it if it keeps on.
<unk> keeps on getting larger on the negative side.
So I'll try to answer this without getting upset.
Thanks.
I think that count.
David I didn't ask you about seasonal.
Yes.
That one [laughter], so you've hit on two of them there.
Counting standards relative to what we're doing but in any event, we have to file a gap.
OCI does not.
The change in OCI relative to securities gains doesn't affect our thinking whatsoever.
We manage the company based on regulatory cap, our capital based on the regulatory rules and four category for banks like regions and most of our peers.
That's excluded from the regulatory calculation.
Importantly, it's also excluded from the rating agencies. So they carve out the change in OCI relative to securities not pension or other things, but securities they carve out and what's frustrating about it is that.
Nobody talks about measuring the fair value of our deposit base, which is where the cash came from to go by the securities and so we are marking one element of our balance sheet through capital.
And that's just not how we manage the company and so it's really irrelevant. It's done because it's easy to do we can go get a quote.
But the fair value of the deposits in particular for regions because of the privacy because of the granularity that fair value of our deposits are shooting through the roof. You just don't see that manifest itself on the balance sheet, you will see it manifests itself in growing NII and net interest margin. This is the time period, we've been waiting for.
For rates to rise. So the fact that OCI is working against tangible book value, we could care less.
Very good I appreciate the insights.
Could not care less.
Your next question will come from the line of Erika Najarian with UBS. Please proceed with your question.
Good morning, Good morning, Eric.
My first question is a follow up to Ryan's question on.
The way he wrote out slide 14.
Your NII guide.
It includes both.
Chris.
Uh huh.
Of deposits.
Quick one for you though.
I guess I'm asking if that's if I'm reading that correctly isn't it.
One or the other in other words, if we stick around it might have a 70% data.
Yes that makes sense, yes, yes duped.
<unk> that the.
The five to 10 is baked into this entity.
So.
If we're wrong.
Our beta will be lower.
Thus far as I mentioned on Ryan's question, we thought deposits. These particular $5 to $10 billion worth of deposits would start flowing out in the first quarter they did not.
I think that's going to happen, perhaps it's just delayed a little bit waiting for the next move which we believe is going to be 50 basis points by the way in May and.
And we think those are largely corporate non operational deposits are going to seek a higher return than we're willing to pay and they're probably going to move off the balance sheet in that case so.
This really doesn't.
This is not going to be a big deal to us we've been planning for it all alone.
Got it.
No I think just going back.
David.
Type of earnings growth.
Yes.
Goes back to the deposit question right your.
Outlook has felt very conservative since we first put it outside.
What is it.
Growth range.
Lies underneath it.
Yes, so you have to take the pieces and look at it. So there's not an appreciable change there. We've got two things working one we ought to have pretty good.
Loan growth as we mentioned ex PPP in runoff portfolios, that's 9% to 10% growth.
In the loan balances, but will then we've got to $5 to $10 billion of deposits going the other way and so the cash will come down so.
It's not as much of an earning asset changes is mix.
What the carry what the yield is on the net assets of the earning assets that we do that and so we.
We should see our margin continuing to increase we're trying to give you the guide by telling.
Telling you that by the time, we get to the fourth quarter, our NII is 15% higher than where we are today.
Kind of cutting to the chase because theres a lot of moving parts there.
No.
Understood. Thanks Nathan.
Your next question will come from the line of Peter Winter with Wedbush Securities. Please proceed with your question.
Good morning.
I wanted to ask about in our bank.
The economic environment has changed.
Quite a bit since you guys acquired them and I was wondering.
Have your views changed at all with regards to the loan out outlook for Meadowbank or any consideration maybe further tightening.
The underwriting standards, given a much higher rate environment.
No we're very bullish on interbank, we're excited about the fact that we closed that in the fourth quarter.
If you look at our growth.
Bank this quarter. It was 2% obviously, if you annualize that it's eight which is below the guide that we gave you.
The big driver there is seasonality so it's the.
This first quarter is the low watermark for them, you'll see that pick up.
This is a prime book.
Really.
Excited about the carry that we can get there in the margin. We are ahead of schedule on where we thought we would be.
And so Peter absolutely not we're looking to that to be a good component of our growth and again, we feel good about credit quality in particular being paid for the risk that we're taking in a nice return for our shareholders on the capital deployed in that book.
Got it.
And then.
If I could just ask about the capital management strategy is going forward just between bolt on acquisitions in.
Which have really increased profitability versus buybacks I saw it yesterday.
You've got the $2 5 billion buyback.
My question is how aggressive will you be or is it just being opportunistic opportunistic.
And just want to have that authorization in place.
Sure. So let's go back through how we think about capital deployment first and foremost our capitals. Therefore organic growth is to support our business as I mentioned ex PPP in runoff, we got loans growing 9% to 10%.
Where we want our capital to go first and foremost.
The second is we want to make sure we pay an appropriate dividend to our shareholders. Our guide is 35% to 45% of earnings.
In the form of a dividend.
So as earnings growth so it will the dividend.
We then think about non bank acquisitions.
Three we closed in the fourth quarter are great. Examples we have a whole team continuing to look.
And work with our three.
Business segment leaders on how we can provide.
Products and services that we don't have to our customers. So we'll continue to do that and then we use share repurchases as the mechanism to maintain capital at the optimum level that optimum level is informed by things like CCAR and how we think about risk in our book now.
Of course, we just filed our CCAR submission in April we'll hear back in the end of June .
On that and yes, we did asked the board and received approval for $2 $5 billion share repurchase program over the next couple of years.
The.
The control factor there Peter is CET, one that needs to be in the range of 925% to 975 Thats, what our risk profile tells us we need to have CET one in that range, we're targeting the middle of it at $9 five and so we won't buy shares back if it takes us outside.
Our operating range, even if the price were right, which is where youre going Opportunistically I think thats just to help us manage our capital at the optimum level because that informs the denominator of our return on capital calculation, which we think is critically important to our shareholders.
Great really helpful and just.
One housekeeping just how much was the credit interest recovery this quarter net interest income.
I think I meant that the memory.
I just meant in Australia.
It's at the bottom of page, which is flat.
Now that's not to know where you stand.
Peter will get that to you.
Okay, you're talking about the impact NII right.
Yes, the interest recovery on NII, yes.
Yes, well look somebody looked at up.
We'll get 10 minutes.
Thanks, David Thanks for taking my questions.
Your next question will come from the line of Matt O'connor with Deutsche Bank. Please proceed with your question.
Good morning, you did mention earlier about from consideration in your reserve for in place and then I did want to ask you always talk about your average account size being smaller than some of your peers.
I guess logic.
Habit that that customer base might be a little more impacted by in place and by rising gas prices.
Wondering what youre seeing in some of those.
Leading indicators.
It would be helpful. Thanks.
Hey, Matt Hey, this is John I would just say so far not a lot of change generally speaking our customer base. When we look at deposit balances and the impact of Covid in relief dollars on customer deposit balances. We saw on average even in the lowest balanced segment.
A 30% increase in 30% to 40% increase in pre pandemic deposit balances and we are still seeing customers maintaining that level of excess liquidity as evidenced by the fact that our deposit balances actually grew.
For over quarter.
Are aware of the impact of inflation.
The likely impact of inflation on our customer base. It is a more mass market customer base as we've talked about before about 60% of our.
Our consumer deposit customers are in the mass market. So there will be some impact and we're certainly watching for that but we haven't seen it yet.
Okay. That's helpful and then I guess on the other side of the loan book.
And the commercial side, you had a big drop in nonperforming loans is a big drop in the criticized assets.
Was that.
Let's hope for a quick a couple of borrower or sectors are.
It has been improving for some time, but it's gotten quite low.
No I think it's broad based and we continue to see improvement in credit quality across the book of reduction in criticized loans classified loans nonperforming assets.
It reflects the work that our teams have continued to do.
Working with our customers closely to evaluate the risk in our portfolios to exit certain relationships portfolios and businesses where.
We feel like that we are.
See increased amounts of risk or we're not getting an appropriate return if I had to point to any business where.
Our businesses portfolios, where we saw improvement it would be restaurant as we continue to work out of that portfolio and hotel as the.
The economy recovers through the through the pandemic.
Thank you.
Your next question will come from the line of Ken <unk> with Jefferies. Please proceed with your question.
Good morning, Ken Hey, Hey, good morning, everybody.
Joe just a follow up on the on the fee side now that you are getting close to the implementation of your <unk>.
The changes to the deposit products and you're continuing to reiterate your service charges expectations for 'twenty, two and 'twenty three.
Service charges were actually probably better than people expected in the first quarter. So just wanted to kind of get your updated views on your confidence that <unk> got the right outlook and as you start to put the product in place what are your early takeaways from.
Continuation of that view.
Yes so.
Our service charge were a little better than anticipated.
I will say that we've put in some changes at the end of the first quarter Youll see more change coming in the second or third, whereas so it's too early to change our guidance that we gave you.
Last quarter, we reiterated this quarter, which was $600 million.
For service charges.
In 'twenty, two and $5 75 and in the next year as we go through and see what the impact is for these changes we will update that.
Whichever way it might go and we'll probably have a better feel for the year 2022 next earnings call, but right now, it's probably too early to change.
Yes.
Okay, and then one just follow up on credit.
Just following up on Matt's question about your provisioning thoughts, but can you just talk about as you talked about normalization of losses, starting to happen towards the back half of the year what parts of the portfolio are you expecting to see charge offs increase in first and what areas are you just noticing.
That potential change in terms of delinquencies and loss rates. Thanks, David.
Well I think that.
We lowered our range 20 to 30 basis points as we think about risk going forward.
There is certainly the consumer on the consumer side of the house.
There's been a lot of stimulus money I think we feel pretty good.
About the consumer, but that's an area we need to watch closely to see what that starts to move.
First.
The second piece of that would be small business I think.
Small business is an area that probably has on a relative basis incremental risk.
The issue is we're just not seeing any of that right now John had mentioned all of our asset quality indicators are getting better.
We believe our normalized loss rate is likely to be lower than our history.
Because of our de risking.
We just mentioned.
Our whole credit book, So we feel pretty good about that I think the leverage book.
Want to watch closely as well.
As we as we see rates, increasing and what kind of pressure might that put on the leverage portfolios. So those would be two or three that we watch.
Alright, thank you.
I do I do want to get back Peter you asked about the recovery.
Was in NII, it's $4 million this quarter.
Close that out.
Your next question will come from the line of John <unk> with Evercore ISI. Please proceed with your question.
Good morning, John Good morning.
On the.
On the expense side wanted to see if I can kind of the opposite.
Chris <unk> question earlier.
Wondering what type of expense flexibility you may have with revenue.
If the revenue backdrop comes in weaker.
<unk> expected this year.
Do you still think that.
Got you.
Youre, implying about 150 basis points of positive operating leverage in your guidance is that sustainable.
Revenue backdrop gets tougher.
Well, so you saw a pretty good quarter. This quarter again make sure you add back the $14 million on the HR to get.
Level set there.
The reason we were down is because our revenue was down in certain areas like capital markets.
That has a tendency to be more variable in terms of the cost relative to the revenue.
Things like M&A, if you don't have an M&A transactions and you don't have the compensation that goes with the deal. So it depends where the revenue challenges come from Jon If if we're seeing it in places like that.
And then we should have lower compensation mortgage if we don't have the mortgage production that we think then youre going to see lower compensation for that as well.
So we do have some mechanism to.
Take care revenue, if it's slower than we thought now a big driver of our change and we've changed I guess two times now our revenue outlook has been because of the rate environment.
And just more more carry there so.
If we have.
If we don't get the rate increases that the forwards imply.
Implied at March 31, which is what's baked into our guidance.
Then, we're probably going to have lower incentive compensation. So there are puts and takes there we still feel confident with.
The operating leverage number that you just mentioned that's exactly what's baked into our guidance.
And.
We will we are committed to having operating leverage overtime.
Okay. Thanks, David Thats helpful. And then on the on the loan side as you look at the remainder of the year.
In terms of.
Overall growth drivers, where you see the strongest.
Loan generation coming out of <unk>.
Both on the commercial side on the consumer side, what are the biggest drivers of growth.
This year as you look at the economic backdrop.
John This is John Turner.
Our growth in the last quarter and frankly over the last.
I guess, two or three quarters has been broad based across all three segments. So we're experiencing growth in our corporate banking business, our middle market commercial business and our real estate business, we're seeing customers access lines of credit and increasing rates to both rebuild inventories and two.
Adjust to increasing costs associated with inventory. So obviously increase in line utilization or both inventory and cost driven we're also seeing.
Some capex, which I'm excited about across a number of different industries customers are investing in expansion activity. Some of it is for modernization.
Recognition of a much tighter.
Labor market and Alabama unemployment is two 9% in Georgia is three 1%, Florida, and Tennessee to three 2%. So we're at full employment across some very good markets.
As a result customers are looking for ways to modernize and to continue to borrow.
Growth in the portfolio has come in health care, it's come in transportation.
Come in our technology and defense sectors, and asset based lending and the real estate business, we've seen some growth in and homebuilder.
Markets are again, continuing to expand as a result of consistent and migration of people also seeing some growth in our real estate investment Trust business, which has been an important.
Portfolio for us in a really highly performing portfolio. So we are optimistic about our ability to continue to grow through the balance of the year and would expect that growth to be fairly broad based.
Got it alright, thank you.
Your next question will come from the line of Betsy <unk> with Morgan Stanley . Please proceed with your question.
Hi, Betsy.
Hey.
I had a couple of questions one is.
I just want to make sure I understand how you are positioning yourself.
For the <unk> deposit.
Activity.
Outlined on slide five I know you put the expected beta of 40% to 60 for that mid stable mid beta and 80 to 100 for the least stable higher beta is that your indication to us what you think it would take to retain these deposits and would you go after them.
Or are you, saying look we think it would retain this and we're not going to go after them are it depends on how it progresses could you just give us some color on that.
I think if you looked at the pure on that page five let's start with the right hand side those are the higher beta 80% to 100% characterize those as non operational corporate deposits.
Our deposits are parked here that that probably are going to seek.
A better Avenue, a better yield than we're willing to pay for.
So you could expect those.
The most likely move off the balance sheet first.
When you get to the middle.
Is that 40% to 60 beta those are accounts that had stimulus or small business accounts.
A disproportionate amount of cash in their accounts that we think will normalize over time.
I think youll see a little bit of both youll see some of that move off the balance sheet youll see some of that where we will pay.
Higher price.
But at the end of the day, we're going to have to monitor that we have a deposit rate committee. This is what they do.
Every month, they meet to try to figure out what we should pay as you know our deposit beta was among the lowest of the peer group peer group, we expect that to be true going forward because of our <unk>.
<unk>.
Hi, Promisee deposit base so.
That one has that middle $13 billion is something we're going to have to watch closely.
To see whether it stays on and if it does.
It cost us.
There is going to be an avenue for both of these that is in the middle column and the right for off balance sheet opportunities, where we'll move those out of the bank, but we will be able to have a fee associated with that that will help compensate us a little bit we'll cover what we're earning today.
Or likely earning as rates move up but nonetheless, it will be a bit of a carry.
For us going forward.
Okay and then.
Since were looking for 100 bps up into Q right in May and June <unk>, we should start to see some of this.
Search deposit exit in <unk> suddenly or do I have that wrong.
No I think youre exactly right I think.
Again, when it's 25 basis points that may have been different 50, pure large corporation that has non operational deposits youre going to youre going to be moving pretty quickly. So again, we expect that to $5 to $10 billion that we talked about the move off in the first quarter. It.
It did not.
<unk>.
Now our corporate deposits were about flat.
On an average basis, we do expect that after this 50 basis points for that start happening. So yes, you would expect deposits to be down in the second quarter as a result of that.
Okay, and then just two other things one is.
What factors will drive you to shift your excess cash to securities or are you going to be.
Any get through like 80% of the fed funds rate hike to assess and then redeploy or are you going to be redeploying along the way.
Well I think we've redeployed some so we put 1 billion and a half to work.
This last quarter as spreads continued to actually gap out a bit.
Things like.
CBS Agency MBS.
A good place.
<unk>.
I guess, we've put at.
At $2 81.
And a half.
We don't do that today, it would be closer to three and a half so.
It's kind of a little bit of a game that we need to just watch and see what the rate environment will give us.
We do have some cash we can put to work if our beta assumptions are better.
Then we will have that much more cash to deploy over time, our guidance, we're giving you it doesn't have that.
Does not have that baked into the guidance, but using the spot securities and the forward starting swaps all of that's baked into our hedging strategy that we're trying to put in place. So that we can protect a really nice margin.
We think we can get to over time, and we've given you that that guidance of one of our slides.
Slide eight.
And I think.
Our prerecorded message, we think we can push up to 375 with a $2 50 fed funds, so that would be quite quite nice for us.
And last question is just on you had the Aoc I had I know Gerard spoke about that with you earlier on the call.
On the long end of the curve obviously since.
Since March 31.
So should we expect like.
DVR one hit in this quarter.
Would be similar to last quarter.
<unk> <unk>, one move or are some of these hedging strategies that you indicated earlier.
Changing that and I'm really asking what we need to take into consideration as we think through to <unk> with this rate back up what the ICI hit could be.
So my first point would be to ignore it and you don't have to do the math and you can go on to something else, but if you want to track that for whatever reason that you have.
I would expect it to probably.
Negatively impact us, but not to the tune of what it did this past quarter, partially because of what we're legging into right now and frankly the change in the long end isn't going to be us, we don't think be as severe as it was this quarter. So.
Good luck with your math.
Hedging strategies, you talked about earlier.
Help you on that front is that is that accurate statement or not.
That's right.
Alright. Thanks.
Your final question will come from the line of Bill Kirk <unk> with Wolfe Research. Please proceed with your question.
Thank you Bill.
Hey, good morning, Thank you for taking my questions.
We opened your response.
Both Gerard and Betsy I appreciate your comments around how it does it make any fundamental economic sense Mark securities to fair value on the left hand side of your balance sheet without also marking the deposits to fair value on the right side of this but fundamentally.
Available for sale OCI hits are nothing more than accounting noise.
How would you respond to the idea that in the recession bank stocks are going to trade by the tangible book value. So while it may not matter fundamentally from a practical perspective as a company.
I would care about.
So.
The whole concept of tangible book value came about in the recession that to the extent we have a recession in the rate environment is actually going to go the other way.
Securities are going to be worth that much more.
And so.
Again, I think if you.
If you want to mark the entire balance sheet to fair value that would be.
That would be reasonable.
Especially in trying times.
What are you trying to figure out what true.
The true fair value of net assets are for a given company.
But.
The toll concept to tangible book value. My opinion is really not a going concern issue. It's a failure notion I'm going out of business what Mike.
Get as a shareholder if we liquidate everything and.
The biggest issue I have with OCI as you market one element of the entire balance sheet.
Security should not market loans, you're not marketing deposits or anything else. So youre not getting a very good understanding of what true tangible book value is and any rate scenario, but.
And I realize I'm in the minority and people just are going to do what they want but in a recession.
It actually goes out of the way because of the rates will be down.
Understood.
Yes that makes sense.
Yes.
You guys have.
<unk>.
Promised in protecting your margins through the hedging program I guess is there anything.
That could lead you to ever consider wanting to protect the tangible book or maybe it is a focus of investors may be introducing the tantalum.
Tangible book value.
Available for sale, but it might be something that people focus on because I guess.
With the passage of time, those marks would not be realized.
Hold the securities to maturity.
Yes, I don't again.
We don't.
Yes.
We don't use this to manage our bank at all we don't use it for capital we don't use for rating agency. So to put it in held to maturity, where we don't have to have a mark all that does is restrict our ability to manage the portfolio.
The way, we want and so we don't see any need for that we do realize there are some people.
For whatever reason this is important.
All Im saying is go calculate the fair value of our deposits, which will be in our 10-Q coming up and just add that in as Youre thinking about tangible book value and then we at least have a better idea of what it is.
Understood. Thank you for taking my questions.
Thank you very much.
Thats all the questions. We had so thank you all for your time today. Thanks for your interest in regions have a great weekend.
This concludes today's conference call you may now disconnect.
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Okay.
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Yeah.
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