Q2 2022 Regions Financial Corp Earnings Call
Good morning, and welcome to the regions financial Corporation's quarterly earnings call.
My name is Christine and I'll be your operator for today's call.
I would like to remind everyone that all participant phone lines have been placed on listen only.
At the end of 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 Christine and welcome to regions second quarter 2022 earnings call, John and David will provide high level commentary regarding the quarter earnings documents, which include our forward looking statement disclaimer and non-GAAP information are available in the Investor Relations section of our website.
Disclosures cover our presentation materials prepared comments and Q&A with that I'll turn the call over to John .
Thank you Dana and good morning, everyone. We appreciate you joining our call today. Once again, we are very pleased with our quarterly results earlier. This morning, we reported earnings of $558 million, resulting in earnings per share of 59.
And importantly, our second quarter adjusted pretax pre provision income represents the company's highest level on record. We continue to successfully execute our strategic plan and delivered strong results sentiment among our business customer stay as cautiously optimistic.
They are rebuilding inventories and looking for opportunities to expand their businesses.
Loan commitments and pipelines remained strong and utilization rates continue to increase.
The consumer remains healthy net population migration inflows into our markets remain robust and the majority of our footprint has returned to equal or better than pre pandemic employment levels and.
In fact unemployment rates and six of our top eight deposit markets are essentially at all time lows.
Date broad segments of consumers still maintain substantial cushion in their deposit accounts.
For example, consumers with less than $1000 on average in their checking accounts prior to the pandemic are averaging a balanced today remains approximately six times higher than pre pandemic levels overall asset quality remained strong during the quarter with most metrics remaining substantially better than historical.
Levels.
However, we will continue to closely monitor early warning indicators for any signs of deterioration.
Our capital ratios remained strong and in fact earlier this week, our board approved an 18% increase to our common stock dividend to <unk> 20 per share.
We have a strong balance sheet deliberately positioned to withstand an array of economic conditions.
Investments, we're making across our businesses are continuing to pay off.
And the corporate bank, we continue to invest in talent technology, and strategic acquisitions to expand our products capabilities and expertise excluding acquisitions. We have added over 200, new positions in the corporate bank since 2019.
With approximately 85% and revenue generating or supporting roles.
Our most recent acquisitions small capital partners and clear sign advisors are contributing to overall capital markets revenue growth in 2022.
We're also strengthening our credit product capabilities for small businesses.
<unk> capital is exceeding our expectations as provider of essential equipment financing.
We recently restructured our SBA organization and continuing to invest in key talent to build out our non restaurant franchise lending division positioning regions as a trusted resource for franchisees within our footprint.
<unk> been investing in our Treasury management and payments business for several years and are experiencing strong revenue growth.
Today, we offer a comprehensive and competitive suite of solutions position to meet the complex needs of any client.
We continue to invest in these businesses rolling out new products and enhancements across our our treasury platform, including real time payments and fraud mitigation as well as <unk> and new cash flow analysis tools.
Within the consumer bank, we continue to make advancements to become the premier lender to homeowners.
In recent years, we've expanded our mortgage loan origination team upgraded our mortgage contact relationship management platform.
And continuing to simplify the overall sales process.
We also continue to invest in our mortgage servicing portfolio.
Year to date, we've completed bulk purchases for the rights to service approximately $13 billion in mortgage loans.
Interbank are later in the Prime and Super Prime home improvement point of sale space helps us meet customer needs, while generating quality asset growth.
Within wealth management, we continue to invest in talent and technology to optimize the clot and associate experience.
Since 2019, we've added 44, new revenue generating positions in our wealth group, primarily in private wealth management and investment services.
Last month, we launched our digital investing product, which combines the ease of the self directed digital tool with the option of support from a financial adviser.
These investments contributed to a strong performance in the first half of 2022.
So wrapping up we have a solid strategic plan and outstanding team and a proven track record of successful execution.
While sentiment across both business and consumers remains generally positive.
We will continue to monitor our portfolios for indicators of stress.
We have a robust credit risk management framework, and a disciplined and dynamic approach to managing concentration risk, which has positioned us well to weather any economic environment.
And continue to deliver consistent sustainable long term performance now.
Now David will provide some highlights regarding the quarter.
Thank you John let's start with the balance sheet average loans grew 3%, while ending loans grew 5% during the quarter.
Average business loans increased 5%, reflecting broad based growth across all businesses and industries.
A majority of the growth this quarter was driven by existing clients accessing and expanding their credit lines to rebuild inventories and to expand their businesses.
While still below pre pandemic levels commercial land utilization ended the quarter at approximately 44, 4%.
Increasing 50 basis points over the prior quarter loan production also remained strong with linked quarter commitments up approximately $5 $5 billion importantly, digging into this commercial loan growth, we're maintaining a very high asset quality portfolio.
That balance is considered investment grade equivalent are up 30% compared to a year ago at approximately 44% of our total commitments are also considered investment grade equivalent representing its highest level on record.
Similarly, our overall probability of default in this portfolio has improved approximately 35 basis points since mid 2019.
Average consumer loans remained relatively stable.
Ending loans increased 3%.
Growth in average mortgage and other consumer was offset by declines in other categories.
And then the other consumer interbank loans grew approximately 7% compared to the first quarter.
As a reminder, interbank has a track record of well controlled loss rates throughout multiple cycles, and primarily originated prime and super Prime loans to homeowners, who tend to be lower risk borrowers.
Looking forward, we currently expect to hold total loans relatively stable over the remainder of the year, which would result in full year 2022 average loan growth of approximately 8% compared to 2021.
This assumes a slowing rate of growth compared to the second quarter, but also assumes increased capital markets activity in the back half of the year.
So let's turn to deposits.
Deposit balances acquired throughout the pandemic remain mostly stable early in the fed's tightening cycle importantly, seasonal patterns related primarily the income tax payments returned to those experienced prior to the pandemic.
While average deposit balances grew ending balances decline.
Ending consumer deposits were mostly stable, while corporate and wealth management balances decreased approximately $1 billion. Each in addition to seasonal patterns and in line with our expectations. The declines also include certain commercial and wealth clients beginning to reduce some of their excess balances.
We continue to expect a range of $5 billion to $10 billion of overall balance reduction for the full year of 2022, resulting from tightening monetary policy.
The combination of our legacy deposit base, along with a more stable components of surge deposits represents a significant opportunity for us as rates continue to increase.
Let's shift to net interest income and margin.
Net interest income grew $93 million or 9% linked quarter, evidenced a strong balance sheet growth and asset sensitivity in a rising interest rate environment.
Cash averaged $22 billion during the quarter and when combined with PPP.
<unk> second quarter's reported margin by 38 basis points, our adjusted margin was 344%.
The reduction in cash this quarter resulted mostly from strong asset growth, both loans and securities as well as seasonal deposit outflows.
Average loan balances grew $2 9 billion.
Or 3% in the second quarter.
Additionally, $1 $2 billion of Securities were added.
The recent increase in rates have certainly validated our decision to wait on a better rate environment to deploy cash into securities.
While not included in our current outlook additional security purchases would provide incremental benefit.
The primary driver of net interest income growth this quarter was higher interest rates and our decision to remain exposed to rates in the near term.
Importantly, deposit balance and yield outperformance, including a 5% cycle to date deposit beta.
Net interest income to grow by more than our previous guidance.
Net interest income is projected to increase 8% to 10% in the third quarter as expectations for rate hikes have been pull forward. So has our outlook for NII.
First quarter net interest income is now expected to be approximately 23% to 25% higher than our first quarter.
Regions balance sheet remains well positioned to benefit from continuing increases in interest rates incremental 25 basis point increases in the fed funds rate are projected to add between 40 and $60 million over a full 12 month period as deposit betas are projected to increase.
Into the 25% to 35% range.
This NII benefit is supported by a large portion 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 or roughly a 2.5% to 3% fed funds rate will support our net interest margin range of approximately $3 75 to three 8%.
This target incorporates the execution, our recent hedging activity at higher rate levels than originally contemplated.
While we have purposefully retained leverage to the higher interest rates during a period of low rates, we have begun to manage to a more normal interest rate risk profile as the interest rate environment normalizes.
This includes the addition of $8 $3 billion of forward, starting receive fixed swaps and a $1 $2 billion of spot starting securities during the quarter.
Through the first half of 2022, we have added $15 billion of swaps and securities.
Swaps become effective in the latter half of 2023, and 2024 and have a term of generally three years.
This represents approximately 75% of the total hedging amount expected this cycle.
With a sizable amount of hedging complete we were balanced market rate levels and potential risk as we decide the appropriate time to finish the program.
Now, let's take a look at fee revenue and expense adjusted noninterest income increased 10% from the prior quarter, primarily due to improvement in capital markets and card and ATM fees.
Within capital markets growth was driven by higher fees, and M&A advisory and real estate loan syndications as well as a $20 million benefit from CVA and DVA.
We continue to expect capital markets to generate quarterly revenue of $90 million to $110 million, excluding the impact of CVA and DVA.
While we expect to be on the lower end of the range next quarter, we do anticipate activity will pick up in the coming quarters.
Card and ATM fees reflect seasonally higher interchange on both debit and credit cards.
Spend was up 3% year over year as inflation has impacted several categories, including a 30% increase in fuel while discretionary categories, such as retail goods department stores and apparel are actually down.
Mortgage and wealth management income remained relatively stable during the quarter despite unfavorable conditions.
Seasonally higher mortgage production overcame first quarter gains associated with the sale of previously repurchased Ginnie Mae loans.
While we anticipated a decline in mortgage income relative to 2021 mortgage as well as wealth management will remain key contributors to our overall fee revenue.
Service charges declined during the quarter as seasonal increases were offset by NSF and overdraft policy changes.
The second phase of previously announced NSF and overdraft policy changes were effective at the end of the second quarter and the remaining changes will be implemented in the third quarter.
These changes when combined with previously implemented changes are expected to result in full year 2022 service charges of approximately $600 million.
We also expect to implement a grace period feature sometime in 2023, and now expect full year 2023 service charges of approximately $550 million.
We expect 2022, adjusted total revenue to be up seven and a half to eight 5% compared to the prior year driven primarily by growth in net interest income.
This growth includes the impact of lower PPP related revenue and the anticipated impact of NSF and overdraft changes.
Let's move on to noninterest expense.
Adjusted noninterest expenses increased 2% compared to the prior quarter.
Salaries and benefits increased 5%, primarily due to annual merit increases which became effective on April one.
Higher variable based and incentive compensation associated with increased financial performance and better credit experience as well as one additional workday in the quarter.
These increases were partially offset by a decrease in payroll taxes and lower HR asset valuations.
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 four five to five 5% compared to 2021.
Importantly, this includes the full year impact of recent acquisitions as well as anticipated inflationary impacts with the changes in revenue and expense guidance, we expect to generate positive adjusted operating leverage of approximately 3% in 2022.
Overall credit performance remained strong.
Annualized net charge offs decreased four basis points to 17 basis points.
Nonperforming loans increased modestly during the quarter, but remained below pre pandemic levels at 39 basis points of total loans, while business services criticized loans and total delinquencies continued to improve.
Provision expense was $60 million this quarter and included a modest build to our allowance for credit losses.
Terminable, primarily the strong loan growth and to a limited degree general macro economic uncertainty as well as some early signs of normalization within select commercial sectors.
Our allowance for credit loss ratio is 162% of total loans, while the allowance as a percentage of nonperforming loans remains very strong at 410%.
Our annualized year to date net charge off ratio was 19 basis points, given increasing expectations for a slowing economy combined with inevitable normalization, we are maintaining our full year net charge off expectations and the 20 to 30 basis point range, but.
Currently expect to be towards the lower end.
Based on the recent stress test results are preliminary stress capital buffer requirement for the fourth quarter of 2022 through the third quarter of 2023 is expected to remain at two 5% once our supervisory results are confirmed in August of 2022.
We ended the quarter with our common equity tier one ratio at an estimated nine 2%, reflecting continued strong loan growth, particularly during the last week of the quarter.
While loan growth remains our top priority for capital deployment.
We expect to manage to the midpoint of our nine 5% to 975% operating range over time.
Also as John mentioned, our board of Directors declared a quarterly common stock dividend of <unk> 20 per share an 18% increase over the prior quarter, which reflects strong earnings growth.
So wrapping up on the next slide our updated 2022 expectations, which we've already addressed in closing we have delivered strong year to date performance. Despite volatile economic conditions, we will continue to be a source of stability to our customers, but also remain vigilant with respect to.
Any indicators of potential market contraction.
Pretax pre provision income remained strong expenses are well controlled credit risk is relatively benign and capital and liquidity are solid.
With that we're happy to take your questions.
Thank you we will now be conducting a question and answer session if.
If you would like to ask a question. Please press star one on your telephone keypad.
You May press Star two and you would like to remove your question from the queue.
One moment, please while we poll for questions.
Okay.
Thank you. Our first question comes from the line of Peter Winter with Wedbush. Please proceed with your question.
Thanks, Good morning.
I wanted to start off on the net interest income just based on the guidance.
It looks like it's going to end the year about $1 6 billion.
So the question is if the fed were to stop raising rates at year end. It seems like you have a lot of strong momentum for growth into next year could you just talk about some of the big picture trends that you see for.
For next year.
Yeah sure. Peter This is David So we do have an expectation that the fed continues to raise rates, probably finishing the year and a $3 25 to $3 50 range.
And they could go past that they could stay there for a while we do believe there is risk that the economy slows to a point, where they have to become more accommodative in the latter part of 2023 and 2024, Hence why you started to see US play some forward starting swaps in this position.
To protect us to the extent that that happens.
Clearly rates could not come down and they may stay flat or go even higher but at that point, we're generating the kind of NIM that we talked about it's on our slide I don't have the page number but.
A very strong net interest margin and more importantly, a very good return on tangible common equity profile. So.
The benefit is through our deposit base, we think we're going to continue to have a lower beta through the cycle than our peers.
Be higher than last time for everybody, but nonetheless, we think thats our competitive advantage, even if the fed stops at year end without any further increases.
Got it.
And then just as a follow up.
Could you give a little bit more color on.
On the loan growth.
<unk> in the second half of the year with its slowing it just surprised given the momentum on a period end basis.
Sure. So one we have to acknowledge we had pretty strong loan growth I think the industry had pretty good loan growth in the first quarter.
Obviously things are slowing down a bit.
We think we're going to have a lot of opportunity to grow but this is when you need to be very cautious very careful and make sure. Your client selectivity is robust and ensure that you get paid for the risk that you're taking and so.
We may be a little conservative in terms of our loan balances from here on out.
What we wanted to make sure is we don't want to send the message that we're going to grow at the pace. We just did the first quarter.
We don't think that would be appropriate for us we still see good demand.
And a lot of sectors.
Financial services utilities.
Wholesale durables.
The name and elements of transportation are strong and we think.
Even in Investor Real estate there are some places that we've been able to grow in the multifamily sector in particular.
As well as in the industrial.
And industrial.
Area so.
It's a bit of a cautious tone is all we're sending and.
We will grow.
As the market gives us permission with the right metrics.
Peter This is John the other thing I would add is that.
All the Volatilities credit obviously created disruption in the capital markets. So we've seen.
Particularly our larger customers.
Rely on a pro rata bank market for funding.
Some point, we expect a little more clarity about the path of the economy.
So we believe that the what is pent up demand amongst issuers will.
They will begin to access the capital markets again, which will result in some pay downs in some of the larger credit exposure that we have enjoyed over the last two or three quarters. So.
That is part of our projections as well as David said it may be a conservative point of view, but we believe it will happen at some point in the <unk>.
Next few quarters.
Got it thanks for taking my question.
Thank you.
Our next question comes from the line of Ebrahimi, who along with Bank of America. Please proceed with your question.
Good morning.
Good morning I.
I guess, David just following up on your comment on the margin I think you mentioned, if I heard you correctly.
A $2 75 to 380 normalized margin for regions.
Yes.
If you could tell us like.
What the fed funds needs to get to in order for you to get to that level.
For the net interest margin and once we get there based on the hedging side did you that you have what you've laid out do you think that becomes.
It's something that's relatively stable.
Absent a big change indeed back up and I'll just need the protection that you have.
On the downside.
Sure. So if you look at our slide deck on page eight we tried to lay that out that gives you at least some parameters on where we think the margin could be in different scenarios.
So if the fed is going to get close to 3% at the end of the day.
And stay there for a while we think we can have a margin profile that's in that $3 80 range.
And if the fed doesn't move any further it doesn't reverse course and come back the other way, that's probably where we'll be.
If the fed starts to come the other way our margin will decline some but we think we can protect today, we can protect about 360 as rates continue to move up and.
And we finish our hedging program, we're about three quarters of the way through we have another 25% to do if were patient enough. If we kind of understand where the economy's going perhaps we can lock in a downside protection a bit higher than the $3 60, and that's really what our goal is.
And we think <unk> a great level today.
Can we get another few basis points on top of that if we're patient we think so.
Yeah.
Okay. That's helpful. And then I think the safety that you mentioned deposit betas, which is the core customer base could be higher than it took to the last cycle. That's the one thing if anything that you've seen so far in the last two to four weeks that would imply that customers' conversations around higher rates have picked.
Yup.
You could actually see a higher beta just think listen us.
Well so the answer to that is no we've been a bit surprised frankly on both.
Betas as well as balances.
The industry, so our beta cumulative beta.
As far as 5%.
We're one of the lowest peer group I think is that as the median is about double that so I.
We keep calling for deposit balances to decline some $5 billion to $10 billion.
The largest contributor to that would be corporate deposits that are going we believe in time seek a higher return.
We're starting to see that pick up a bit.
Again were surprised that it had moved quicker, but it fed move 75 basis points in the next move in September .
In September .
I am sorry at the end of July this month.
And an expectation of another 50 in September .
And we think those balances will start to move off balance sheet and frankly, we're going to help facilitate that for our customers.
Because we can earn a little bit of a fee on that and give them a better return.
Today.
It's happened some already so if you look at corporate customers they actually have.
And either deposit balances with us or off balance sheet that we've helped facilitate and if you add those two together actually a little higher than they were at year end. So.
We've been pleased with our deposit base in our and.
And our betas, thus far.
That's good color. Thank you so much.
Thank you.
Our next question comes from the line of Bill <unk> with Wolfe Research. Please proceed with your question.
Thank you good morning, good morning.
You've proven yourself to be astute managers of risk I'd love to hear how you're thinking about the risk that the strengths. We continue to see in labor markets and you mentioned, the balances and consumer accounts and strong liquidity and spending in general and and.
Got to which all of that is in and of itself inflationary and could lead us to have to do more so everything seems great now, but we all know the hiking cycle works on a significant lagging and we could see unemployment continued to rise well after.
The last fed hike and starting to see initial claims creep up a little bit. So maybe if you could just frame for us.
That dynamic, even though youre not seeing it.
Micro level, yet, perhaps how that if at all impacts the actions that you're taking today across the business.
Yes, Bill it's a great question and it's one we challenge ourselves with constantly as a team.
You know in our discussions with others in the industry, including our regulatory Supervisors then the fed in particular.
About.
Where they really want to go I think we all believe there is an expectation of getting to quote neutral as fast as they can as what they would like to do but I think every time, there's a move theres a need to pause and see what impact that's going to have on the economy, we do have inflation.
That that can get addressed by slowing the economy down which it is taking.
Taking effect now.
But as much as they want to get close to neutral that I don't think the fed wants to wreck the economy either so.
We're trying to do is as read all the tea leaves look at all the data that we can study our customers whether it be consumers or corporate customers to try and get an understanding of what they're thinking how their businesses how they are.
Managing there.
Personal money to gather and understanding of the slowdown in the economy and what the fed may or may not do we believe that the fed's going to get to $3 25 to $3 50 by the end of the year.
Don't know if they'll move exactly like the market thinks but.
We think that's going to be a place where they likely.
Stop and and.
Let things play out over time, but we have to be prepared for them to keep going and if that that's the case because inflation is not under control there could be some ramifications to that long term, which is why we are cautious on extending credit.
While we want to manage our bank as efficiently as we can because you have to have scenarios for anything that could possibly happen.
As we seek to continue to have appropriate returns on capital to our shareholders.
That's great color very helpful response. Thank you if I may follow up on under Bank can you remind us how growth math dynamics impacted or bank, what's the interplay between the need to build reserves on the strong loan growth that youre seeing versus the timing of the revenue benefits and then more broadly if you could also speak.
The trajectory of the reserve rate from here.
Okay I'll start on interbank so interbank.
We said represented 1% of an industry that was about $175 billion. So call that 1 billion, 7% production annual production for them that generates growth in the double digits, we've seen that play out.
We don't we don't think about the provisioning.
Getting ahead of earnings.
Because if we did that we would not make any loans ever.
That's why it's a terrible standard, but I won't go into that.
It is what it is so what we want to do.
As be there for our clients to extend credit.
Regards to the fact that we have to set up a reserve in advance so it doesn't come into play.
We've.
At nice growth within our bank very excited about that getting paid for the risk we're taking and it's worked exactly like we thought it would be you asked about the growth math component.
Our return is fee versus.
Interest income how does that that was his question primarily you've got care, you've got and net interest income is the biggest driver of our profitability there and it comes in two fronts. It comes from the customer paying a certain rate and there is a discount from the vendor thats, providing the service to the customer or an HVAC contractor for <unk>.
Instance, we take those two pieces and thats our yield adjustment.
Should average in the 9% range overtime.
Overtime and Thats, the primary profitability that youll see from interbank.
That's very helpful and the broader trajectory of the reserve rate from here that we should be thinking about.
Yes, so we set the reserves under seasonal based on the economic forecast at each quarter and we have to look out through the life of the loan to do that we have a reserve of 162% we think it's very robust.
And based on the risk that we see in the portfolio, we feel feel very good about that.
The biggest driver of the increase in our reserve this quarter by far was loan growth and so we.
We arent seeing broad based deterioration in credit at all as a matter of fact, we think it's actually pretty good. We did have an increase in mpls, primarily attributable to one particular customer.
But overall, we feel really good about credit we do think theres going to be some normalization I mean, we're at 17 basis points of charge offs this quarter.
That's lower than normal and we think over time it will get back to normal I don't know that it will get there in 2022.
We're forecasting charge offs in the range of 20 to 30 basis points and actually towards the lower end of that.
23, you can see losses pick up as the economy slows as certain industry, starting to struggle a bit more than others and I think youll see it manifest itself first in really small businesses it'll have bigger challenges than a larger business and certain.
Consumer groups.
Struggle more than others.
That's great. Thank you so much very helpful. I appreciate your taking my questions.
Our next question comes from the line of Gerard Cassidy with RBC capital markets. Please proceed with your question.
Good morning, Gerard John .
John how are you hi, David.
David can you elaborate a little further on your comments about the capital markets fees that you expect to be at the lower end of the range. I think you said in your prepared comments in the upcoming quarter.
Type of capital markets environment are you contemplating for that kind of guidance is it currently what we've just had this quarter or is it an improvement and then within the capital markets. Obviously, you guys are not ECM players where are you seeing or you think youre going to see the strength in the upcoming quarters.
Yes, I think that so we were if you cut out the CVA DVA were kind of at the lower end of the range.
We think that that that's kind of where we will be here.
Here at least in the short term capital markets activity is not as robust I think you've seen that play out across the board in particular in the money center banks that have more ECM, obviously, we don't have that.
M&A advisory and loan Syndications are the places, where we think can continue to be robust for us and.
I wish we were going to be at the upper end of that range, we've had to revise that down.
From the beginning of the year, a couple of times, but we think thats a pretty good.
Really good place to be.
Real estate capital markets.
Leveraging our small capital partners that we bought at the end of last year, I think is helping us and.
But I think we would be remiss, if we didn't say that's going to be a little more challenging than we would've hoped just because of capital markets arent quite where we all would like them to be at this point.
Very good and then as a follow up question to your comments about.
<unk> lending the strength of your lending in how you recognize and you guys are very well experienced in handling problems that for me.
Downturn in <unk>, so nobody expected me to make any areas like that but can you can you share with us what.
<unk> I think you used the word robust in client selection what are you doing.
If we are in and into this cycle in the economy. That's debatable of course, but when you see the growth not just for you but for the industry everybody is showing good loan growth towards the end of maybe.
Economic expansion, how can you reassure us that you guys are good metrics in place that you just won't really have the problems that.
Can be that as other banks may run into.
George It's John we learned a lot from nine.
Tim sort of timeframe and particularly the importance of balance and diversity. These.
These are good times, but you can make your worst loans and the best of times and so we're being very thoughtful about what we're putting on the books, 83% of our new production was to existing customers. We've been working very closely with those customers, particularly over the last.
Two and a half years as we work through the pandemic I think we have a really good sense of.
<unk>.
What's going on in their businesses, we have been focused as you know for a number of years on recycling capital on risk adjusted returns, we've been exiting certain portfolios and relationships that didn't generate an appropriate return on capital for so I think thats great discipline.
Exists within within the company we have.
Strong metrics and key performance indicators built around all of our businesses and again really dedication to a strong concentration methodology to ensure that we have good balance and diversity we assume.
We have different scenarios when stress testing credits and stress testing portfolios and as a result, we feel good about really good about.
The credit risk management culture that we have developed over time.
<unk>.
And think that our portfolios will perform well no matter what the economic conditions are how the economic conditions evolve.
Very good thank you.
Thank you.
Our next question comes from the line of Ryan Nash with Goldman Sachs. Please proceed with your question.
Hey, good morning, John Good morning, David Good morning, everyone.
David.
You talked about the $5 billion to $10 billion of potential deposit outflows starting to pick up.
If we would assume nay.
Over the next quarter or so can you maybe just talk about your expectations for deposit growth.
Given John's comments regarding what you guys think about loan growth in the second half how do you think about the tradeoff between growing deposits versus optimizing the mix and the cost of deposits.
So.
The first part of that or we do expect as I mentioned earlier those excess deposits from our corporate clients to seek a better higher yielding whom we also have about 1 billion eight in broker deposits that we picked up.
<unk> from <unk>.
From the interbank transaction.
So I think that.
We're always looking for quality.
Relationships.
Deposit relationships Treasury management relationships.
Able to grow that 14% this quarter.
And Treasury management, so we're excited about that.
<unk> debt.
From a consumer standpoint, we're in a good part of the country, where we ought to see better migration of people into our footprint and take it and we should be able to take advantage of that so we should be able to continue to grow core checking accounts.
We do have honestly inflationary pressures on consumers.
We I think we put in our slide deck that we've even looked at.
Segmented our deposit base on the consumer side, those that had a $1000 or less in their checking account pre pandemic have six times more cash in their account today then.
Then pre pandemic now thats going to start declining.
If inflation continues at a faster clip, but continuing to grow customers ought to help us maintain a pretty solid deposits our loan to deposit ratio is among the lowest.
In the peer group at 67% change maybe close to 60 68.
And so.
We're optimizing.
Our deposit book, we're growing deposits is foundational to how we make money and so we are we aren't even remotely close to having to worry about wholesale funding.
There are some of our peers have had to dip into that because of the loan deposit ratio, but this is where region shines. This is our competitive advantages our deposit base and we're looking to continue to grow that and grow customers and take care of our customers along the way.
Got it.
And then secondly, David you are targeting 300 basis points of positive operating leverage and I know, it's early to think about 2023, but maybe just to follow up on Peter's question from earlier, if you think about just reaching the NII run rate and assuming no further growth that would give you about 8% revenue growth into next year. So how do you.
Think about investing in this obviously its a tricky environment with the potential for an economic slowdown, but do you expect that we could potentially see accelerating positive operating leverage in that type of environment.
Well I think you answered.
Question upfront, it's little early to get into 2023.
But let me let me help you here.
We have a continuous improvement program, where we are constantly focusing on how to get better at what we do.
We had a pretty strong efficiency ratio this quarter of call it 54% on an adjusted basis.
We'd like that to be lower we're substantially below the median which is four.
400 basis points higher than we are and I think that at the end of the day, if we could get closer to 50 that would be great and we're going to figure out how to try and do that we cannot count on revenue growth just being the only driver of how we continue to be efficient.
If we stay focused on that Ryan I think we can generate pretty solid positive operating leverage now there is a caveat we have to continue to take our winnings. If you will and reinvest those in our company to grow that means we have to reinvest in talent, we have to reinvest in technology.
Reinvest in our transformation, we're going to go through on the.
Deposit side, primarily in other areas and.
And we do that while continuing to control our cost increases.
Which I told you earlier in the year the vast majority of our of our increase early in the year was really related to acquisitions. So we've been a good expense managers and I think youll see that continue into 2023.
Got it I'll make sure we hold you to that 50%. Thanks David.
Okay.
The target.
Yes.
Our next question comes from the line of Erika Najarian with UBS. Please proceed with your question.
Good morning.
Okay.
And being a great job on fly hey by the way.
Yes, David wanted to go back to slide.
What your fleet.
Securities Book.
Cash balances from here obviously.
<unk>.
The fed fund your cash is going to be working a lot harder by the end of the year.
Yes, so I'm glad you pointed that out so that's a 100% beta on that opportunity there we're at.
165% on on reserves.
We've been patient with our cash.
We didn't need to put it in the securities book to help NII, we had the benefit of our hedging program.
Doing that for us so we have been patient.
We're glad we have we put a little bit to work in the securities book, because the spreads got to a point where it was.
We were paid for.
The duration that we were going to take in that securities investments really part of our hedging program as well.
We were able to use our cash this quarter to fund all of our loan growth.
I think we were.
Down to call it $18 billion of cash.
At the end of the quarter.
And.
Normally that number is going to be 500 million to $2 billion worth of cash at the fed. So we've got some of that that we need to hold on to for that deposit outflow that I just talked about whether it's the corporate deposits or whether it's the interbank broker deposits.
We'll leave over time.
And then we don't have some for loan growth. So we don't see the need to tap into.
Our alternative sources of funding <unk> and alike.
The bank debt issuances are necessary either at this time so.
We've been cautious it's paid out paid off for US I think we the securities we invested this quarter, yielding 330 ish range. So.
And as you can see that in the change in tangible.
Common equity in terms of our.
Our decline was much lower than our peers.
I just wanted to make sure we're taking.
Taking away the right message here from.
Our second quarter NIM.
Yes.
Net interest margin of 370 to 380 right from.
Higher beta two B K.
At a fed funds rate of 3% and if the fed starts cutting rates. Your swap program has protected you to 360.
That's correct.
Okay.
And my thought.
A question for you David.
<unk>.
As we prepare for that.
I think about more.
ACL build there may need to be from that $1 62.
So you cut out on the first part of that but I think your question was how do we see the reserve build from here for 162.
Recession.
Yes.
Yeah, So we're having to forecast out through life alone today, which has elements of a slowdown already built into it. So it really is dependent on.
How severe it is relative to our expectations already and.
We kind of went through that and I guess in the in the pandemic you saw adjustments quickly.
Right now, we don't see that changing a lot because we think we're covered and the real change to the allowance are just two things what are charge offs app.
<unk> It and then the provision primarily for loan growth, which is what you saw this quarter our credit quality metrics are stable.
Net net all in we feel good about where we are but.
<unk> starts to slip.
Going to have to have higher provisioning.
Going forward.
And every quarter stands on its own so we'll have to reassess.
End of September .
Okay.
Got it.
Our next question comes from the line of Ken <unk> with Jefferies. Please proceed with your question.
Hey, Thanks, Good morning, just.
Two quick Closeouts here.
Just one question David on the C&I loan yields.
Just not up as much of course is the NIM and I am sure. Some of that is the hedging just wondering if you can kind of just help us understand how much of that is the hedging impact how much of that might just be mix and pricing et cetera. Thanks.
Yes, I would say most of that is related to the hedging our old hedges that we had protectiveness those start roll off to roll off.
We have some still protectiveness, they're still in place. So we're not expanding at quite the pace that maybe others that did hedge our but we still have pretty good loan yields net net and if you look at adjusted.
Net interest income that's after charge offs were one of the leaders in the peer group. So that's a good indicator of telling us we're being paid for the credit risk that we.
We're taking.
Yep got it Okay, and then on capital.
<unk> Q1, you're mentioning you wanted to get back to the middle of the 925 to 975 presuming that's to give room for loan growth. Just wondering obviously that probably applies that no buybacks. We're now can you just talk us through capital return expectations versus <unk> and then also just or is it just a little bit more conservatism about the environment.
Thanks.
Yes, so reasonably.
To be in that range is to give us flexibility to make investments when we see opportunities in this particular quarter. It was loan growth. So we had really robust loan growth and you can see our capital our common equity tier one decline.
The primary use of that was in fact <unk> growth through the loans.
We're generating call it 50 basis points of common equity tier one each quarter. Our release, we did this past quarter.
We use a third of that to pay a dividend and then the rest of us for investment.
First off it's for loan growth.
Already sent the message that we don't expect loan growth at the pace. We just saw the first quarter, we think that will level off a bit and.
And therefore, we can accrete back from the nine point to where we are closer to the $9 five probably can't get there at the end of the third quarter take us into the fourth quarter, but.
Share repurchases as the last.
Item two control our capital level.
We think nine nine to $5 975 sale is a great range for us based on the risk we see in our book.
Going into account all the macro factors that exist today, so youll see us accrete up back up towards that $9 50 before we.
Before we get into share repurchases.
Makes sense thanks, David.
Okay.
Our next question comes from the line of Betsy <unk> with Morgan Stanley . Please proceed with your question.
Hi, two.
Two questions one on the Securities book I know, we just had a bit of a chat on that but I wanted to understand what the.
Kind of repricing speed is duration.
How quickly should we be thinking about the.
Back book migrate into the front book of 33 that you just talked about.
Well if you look at all in growth. So the three three I just mentioned was an element of what we invest in primarily as part of our hedging program. We did have other security purchases all in yield going on was about $3 13.
That's replacing.
223, so we're picking up about 90 points on that.
As we think about duration.
We're looking at call it right at five years.
To date, and we don't think that extends.
A whole lot on us based on what we're buying so I think that I think I got what you wont investing yes.
So like 20% roll rate annually.
That's right okay.
Okay, and then on page 22.
The deck you have your base rns economic outlook.
So is this giving us the base case, and then you've got a probability assigned to the base case, you've got a probability assigned to the bull and the bear and that's what's feeding into the seasonal reserve analysis or would you say this.
Page 22.
Disclose is your.
Probability weighted scenario.
Yes, so we do ours are a little different we use a scenario and as our as our seasonal provisioning.
Do run stress testing, obviously, using very different scenarios, but we don't probability weight different things. So what youre seeing here on 22 is the driver of our seasonal provisioning.
Got it okay Super Thanks, Okay. Thank you.
Thank you. Your final question comes from the line of Vivek you in Asia with Jpmorgan. Please proceed with your question.
Hi, Thanks.
Good morning.
Morning.
Just a clarification.
David do you expect your liquid assets are actually go down to $750 million.
Much higher today.
No mystic.
No I was saying.
Yeah.
Hypothetically in normal times, we could take those down that cash down to a level much lower than the $18 billion that we are having that we have today.
And that would be over time.
So we wouldn't.
To get there anytime soon we want to maintain a lot of liquidity to take care of deposit flows because remember we had some $40 billion worth of growth in what we call a surge deposits and we've made our best estimate as to how we think those things will behave over time, and we have about $13 14 billion.
Of it that we think has either very high beta or its going to seek.
A better alternative which means we need to have the cash to pay for that if it starts to happen.
But in normal times.
Could be down in that.
So between $500 billion to $2 billion.
And of course, then we'd have the FHFA as our toggle to take care of other liquidity needs.
Okay.
And one more which commercial sectors are you seeing early signs of normalization.
From a credit risk standpoint, yes.
Yes.
I think David talked about small business, we have some concern around the transportation, particularly on the lower end of the sector, where you have transportation companies, who are involved in less than truckload hauling and the impact of diesel fuel inflationary costs labor.
Ben following office for some time and senior housing as well our portfolios that we're keeping an eye on I wouldn't say in those two instances that were seeing any normalization, but we do have we do have a watchful eye on them.
Okay.
Right.
Thank you.
Well I appreciate everybody's participation in today's call. Thanks for your interest in regions. If you have any follow up questions. Please contact the investor relations team.
Great day.
This concludes today's teleconference. You may now disconnect your lines.