We'd like to get started with our next fireside chat. Many of you know Regions Financial. Regions has over $155 billion in total assets, a market cap of $22 billion. Price to book on an adjusted basis, backing out AOCI, trades at about 1.3x book as well as 2x tangible book. Joining us today from Regions to my immediate left is David Turner, Chief Financial Officer. David joined Regions back in 2005. To his immediate left, Deron Smithy is the Treasurer, and he's been in this role for a number of years, and he joined Regions back in 2008. To Deron's left is Ronnie Smith, Head of Corporate Banking.
Ronnie joined way back as a trainee, like myself, in the early 80s, I won't give the year, and has held the current position since 2018. Gentlemen, thank you very much for joining us.
Thanks for having us.
Maybe we could start off with a macro question. David and Ronnie, since you do a lot of work with the corporates in your market, just what's your guys outlook for the economy? There's so many crosscurrents that we're seeing. You look at the inverted yield curves, but on the other hand, you look at employment and it's quite strong. Headline in today's Wall Street Journal, more women are coming back into the workforce, lifting up the economy. What are you guys seeing down in your footprint down in the Southeast?
Thanks for having us. I'll start and Ronnie and Deron can add to it. You know, we're feeling pretty good about the economy. We had, and still do forecast a slowing economy, but not a recession. Our base case is right at 1% GDP for the year. We have some nuances in the quarter, but slow growth and frankly, the difference on things like credit quality, should we have a slight recession versus a slowing growth is really negligible. If we go into a statistical assumption, it wouldn't be all that surprising. You know, our footprint continues to have one of the lowest unemployment rates. We, you know, we were late to slow our business down because of the pandemic.
We reopened earlier, we've seen quite a lot of migration of people coming into our footprint, Florida, Texas, some in Georgia, Tennessee, taking advantage in part to no state taxes. We look at our accounts customer by customer, account by account, our consumers have a lot of cash in their account. Businesses are strong, we may not see a lot of growth. Clearly, the Fed's trying to slow inflation down, they're gonna keep going till they feel like they have it under control. It will have an effect to slow the economy down, but it may take some time because the resilience of consumers and businesses alike. All in all, we feel pretty good about the year. We do think the Fed's changed policy.
You'll have probably a later question in terms of rates. We can talk about that, but net net feel pretty good. Ronnie, you want to add?
Yeah. Gerard, you hit labor, which is kind of the common theme that we hear not just from large corporates, but across all businesses. If you ask what is the number 1 challenge that they have that's struggling to grow their business, it's skilled labor, and labor in the right places. We hear that over and over again. Supply chain at a macro level as well is better, but not repaired completely. You can find certain sectors within the businesses that we do business with that are really struggling on delivery dates and still years out on heavy equipment and really replacements of machinery that they need to handle. There's still interruption in the supply chain that is occurring as well.
They're overall concerned about inflationary pressures, but the majority of our companies report that they are able to pass along, at this point, the rising costs to either their consumer or to the businesses that they do business with. There is some consistency, but also very cautious about how much longer that they will be able to pass these increasing costs. Of course, rates. That's the other thing that we hear from companies today. How high will rates go? And that's an added expense that they did not have a couple of years ago. Those are the concerns. To David's point, though, I'll just reiterate this. We say our business is building more cash.
They're really focused on if we can't buy inventory and have it in just in time, even solutions, we do see them leaning back into building cash balances and preparing for whatever storms may be ahead as we move into 23 and beyond.
David touched on this in his comments about, you know, you're part of the country came out of the pandemic faster. They seemed to open up quicker. many companies became lean and mean, I think, during that period because we really didn't know for six months how bad it was gonna be. Do you guys see that you know, when you talk to your corporate customers that they just seem to be stronger or better than 10 or 15 years?
They're much more efficient.
Okay.
They had their hand forced to become a lot more efficient, depending on new processes, new delivery types. They continue to focus on that on a go-forward basis. There is just so much of a runway that you can put in place to create that kind of efficiency. It becomes more tweaks rather than overhauls than we saw during the height of the pandemic.
Yep.
And I would-
Yeah.
I would just add, I think, and it's really important, you see it in our stability of the deposit base. They've become more liquid through that period, and they're maintaining higher levels of liquidity.
Yeah. Speaking of deposits, I always reference your slide in your slide deck, I think it's slide 18, where you show the deposit trends of the lower deposited types of customers against the delinquencies.
Sure.
It's very impressive how the deposits remain elevated on the consumer side. Can you share with us some of your thoughts on what you're seeing on the consumer side in terms of the balances?
Yeah. Broadly speaking, consumer balances. It's on a different slide than that one.
Yep.
I'll come back to that one.
Yep.
Actually have grown year-over-year. It's been the business services, Ronnie's deposits that have declined as expected. The consumer, if you go back to why is that? Because how do they have that much cash? In particular, the slide you're referring to, the lower balance customer today has six times more cash in their account than they did pre-pandemic. We can mine that data customer by customer.
Yep.
As we think about how can that be, especially with inflation.
Yeah
... all the costs. They were also the recipients of most of the stimulus, still getting stimulus in some form, or they were recipients of minimum wage increases, those don't go away, so they've reset their earnings. If you look at the area of the country where we are, we're in smaller markets than major metros, that has been a big benefit to us. We have more non-interest bearing accounts in part because of where we bank. It's just, that's our competitive advantage we've talked about for many, many years. You just don't see the value of that until you have a rate environment like we do today. You wanna add anything to that?
Yeah. I would just reiterate the point that we've studied it over a number of years. It is interesting that this is true for our median customer as well, but particularly in the small balance customers, they've seen wage increases that have kept pace with inflation, if not a little better. They built liquidity, whether it was through rescue payments or stimulus payments, and they've held on to that. As we enter what is in front of us, they're in a much better position to manage through what is to come.
Gerard.
Yeah, go ahead, Ronnie.
One other point David and I have made is that small businesses, medium, large corporates are all building more cash.
Yeah
... it's a little bit counterintuitive for us to say that we're seeing a big shift out of the corporate deposits. I probably would like to point out that there is additional use of dollars going back into, and I mentioned inventory purchases, which drive receivables, uses of cash. We have seen a shift down, but we also measure liquidity held by our depositors, not only what's on our balance sheet, but what we're able to sweep off balance sheet as they look for higher rates than what we're willing to pay. If you look at the peak of where we were during the height of the pandemic and the surge deposits hit, we are only down about 10% in what we consider to be total liquidity under management.
I don't want that to come across as you're saying they're building cash, but you're also seeing declines. They're putting their money to work where they can get the most return. That's with their business. The second place they're putting their money to work is with some off-balance sheet options. We get fee-based revenue off of that.
Right.
They're working their dollars harder as it's become more meaningful. Overall, more liquidity sits at the business level than what we've seen historically and certainly pre-pandemic.
I'll put a final point when you move on.
Yeah, move on.
If you look at our material, we're calling for our deposits to decline this year, $3 billion-$5 billion. We would see that during the first half of the year. It stabilizes, maybe we grow a little bit from there. That $3 billion-$5 billion is what Ronnie is talking about, companies putting it to work, maybe wanting a higher rate than we're willing to pay. We can move that off balance sheet. We get paid a fee to do that. If we need that, all we have to do is pay a little bit more, we can get that back. It's another source of liquidity for us. We don't have wholesale borrowings. We don't expect to have that until perhaps this summer. That's all gonna be dependent on loan growth.
Coming back to the lower denominated deposits, do you find that those are very sticky, and they're not the first to leave on a 10, you know, 100 basis point increase in rates versus a large denominated deposit of $300,000?
Yeah. We have higher primacy than most banks. That is, our customers look to us as their primary bank. Money goes in, money goes out every month. If you can look on one of the slides, we show you the number of accounts in our portfolio that are less than 250,000. We have more than everybody else. It's again, where we happen to operate. Yes, we're in major metros, but we're in a lot of tertiary, you know, secondary markets where there's just a lot of price insensitivity, a lot of non-interest bearing. Our non-interest bearing percentage today is 39% of our deposit base. We've always had a high level, not that high.
Yeah
I think we're at 29 or 30 in normal times. That's a big funding advantage for us.
Oh, absolutely. Absolutely. You touched on, you know, what you expect for deposits this year. Maybe, David, you gave us guidance in January about the quarter and also for the full year. Is there any updates you'd like to add to what you guys said?
You know, we gave an increase in NII of 1%-3% for the quarter. I think that that's intact. I think we're 13%-15% for the year. Clearly, rates are higher. The curve is higher today than, I think, it was a cut that was baked into the curve right at the end of the year. It's probably not gonna happen. We still think that range is appropriate. Perhaps we end up at the higher end of the range. We'll see what happens, but feel good about that. You know, our expense increase was 4.5%-5.5%. We still think that's a good annual number. You're gonna see some quarterly changes.
We try to give you a little bit of heads-up on the first quarter because we changed our merit increase to start in the first quarter versus the second. Of course, we have payroll taxes, so our first quarter number will be higher. If you try to annualize that, you're gonna get a bad answer.
Yep.
You know, do that at your own peril. I think that we feel good about the revenue. Revenue is gonna be up 8%-10%, so that generates positive operating leverage of about 4%. You know, we feel good about that. Credit. Credit is 25-35 basis points for the year. We still believe that's the right number. You can have, if in any given quarter, a number outside of that. You just got to be careful. From time to time, we'll have an idiosyncratic charge-off, a large credit, something happens. As we look at our portfolio and talk to our relationship managers all work for Ronnie, we feel good about the 25-35 charge-off range.
Just sticking with credit for a moment, Ronnie, you probably have seen this more in your part of the bank, Regions has really de-risked the balance sheet over the last 15 years. When you look at credit going forward, obviously, I shouldn't say obviously, you're probably gonna outperform what happened in the recent past in, you know, 2008, 2009. Are there any spaces that you do kinda keep extra attention to, whether it's, like, construction loans or leverage loans, anything like that?
Yeah. Certainly leverage loans carry more risk that's associated with it. We reserve leveraged lending for those deep relationships that we have. It's not a strategic play for us, but anytime there's more debt on a company's balance sheet, there's more risk that is associated with it as well. There are a couple of other sectors, though, that we're certainly paying close attention to. Office, that I'm sure that all of you have talked about before. There's been certainly a change in how we think about office on a go-forward basis. Certain areas that sit within our healthcare world, specifically around technology and some of the senior care, also has faced pressures throughout the past year. Although we've seen some stability in that sector, we still are keeping a real close eye.
Those are a few. On the lower end of transportation, single freight operators, as there have been changes in last mile delivery, we've seen more pressure in that particular space, and that really has more of an impact on our small business book than any of the large corporates within the freight and transportation area. Those, Gerard, those are a few. You know, when I get asked that question and someone says, "You know, what are you looking at?" Everything. There's a lot of fast-moving changes in this economy, but those are ones that we probably have more of a hyper-focus on at this point.
A couple things I'll add to that. Our leverage book is a little over $3 billion, and so not all that large. I think 90 something % of that, 93% of that's in the shared national credit book, too. You had mentioned going back to the crisis 2008, 2009, and you said we ought to perform better. We, yes, we will perform better, substantially better.
Good.
I mentioned 25-35 for this year. That's not back to quote, "normal.
Right.
Because of what we just talked about, the strength of the consumer and businesses. We think based on our risk profile, that our normalized charge-off rate is 35- 45 basis points. When we get there, who knows? Again, it goes back to what's gonna happen in the economy. We just don't see how that can happen this year. There's just too much cash sitting in consumers' checking accounts and operating accounts for businesses.
One of the questions we've been asking your peers is, for your guys' opinion, you're obviously experienced bankers. You know, I go back to 1994, 1995, the Federal Reserve took the federal funds rate from 3%-6% in 12 months. Orange County, California went bankrupt. Mexico was a mess. We had Wall Street derivative disasters. So far, I mean, we've gone from 0% to 4.75%, or soon to be 5%, and we haven't seen any real, other than the U.K. pension issue, which was resolved. You guys have any thought? We're not out of the woods. I'm not suggesting we're gonna make it out of the woods without a disaster, but any sense of why it hasn't been as disruptive as what we've seen in the past?
You want me to start? Part of it is we're absolutely still lower, though, than the 3 to 6.
Yeah.
When you come out of a crisis, you learn a few things on what to do and not to do. I think businesses are just run better. I think consumers are, in general, they're more frugal. They pay attention. They put money away for the rainy day today. They don't live as much as levered as perhaps they were. If they are levered. We see a lot of leverage in the system, but it's fairly cheap. You talk about fixed rate mortgages and things. Now, today, the mortgage rate's pretty high, but if you look what's in the portfolios, it's really low. A lot of value in homes and things of that nature. I just think it's a different environment all around.
Well, yeah, I would just add that, you know, there's still a lot of liquidity in the system. You know, a lot of liquidity has been built in the pandemic period, and much of it still remains on corporate balance sheets as well as consumers, as we talked about. I think it is businesses being more efficient through the pandemic period, being better prepared, liquidity, as well as it's been pretty well telegraphed. Now I think we're likely getting to interest rate levels that are higher than we might have thought, I think the market was prepared for rates need to move higher. I think Fed's done a good job in communicating that. I think all of those things together.
I think one of the things David mentioned also is, you know, even though we're in a higher rate environment now, there was an extended period of low rates where consumers were really able to term out debt at really low levels, especially their mortgage debt, which is likely the largest, you know, single fixed payment that consumers have. They've been able to take advantage of really low rates and lock in those long-term low rates, which has helped their cash flows. I think it's a combination of all of those things, but really, I think the liquidity in the system so far, is what's really helping.
Yeah. I wanna try an analogy on the group, see if it resonates. What the Fed is trying to do is think about approaching a stop sign in a car. You know, when you first start to brake, you hit your brake pretty hard.
Mm.
As you get closer to the stop sign, if you know how to drive, you're like, ease up on the brake so you don't, you know, kill yourself when you stop. That's what they're trying to do with interest rates. They were braking hard early on, and they're trying to, you know, to back off a little bit. The problem is, the point Deron's making is they have their left foot on the accelerator at the same time, and that accelerator is liquidity. The liquidity in the system is working against what they're trying to do, not to mention supply issues with energy and things of that nature we could talk a lot about. There's so many things at play here, it's making it hard for them to get inflation under control.
The question that we get asked all the time is how far are they gonna go? We don't know. We know this, they're gonna keep going until they get it under control. That's the message I think that the chairman's trying to send. I think he did a pretty good job sending that message to everybody, whether you like it or not, get this thing under control and go pretty hard.
Speaking of interest rates, maybe, David, you could share with us, your hedging strategy. You've been using this quite actively over the last two, three, four years quite successfully. Maybe just talk to us what you're doing now, how you're positioned for these higher rates.
it's Deron's baby, so I'm gonna let him talk about it.
Okay.
Well, I think that strategy has to start with an understanding that our balance sheet naturally benefits from higher rates. The flip side is true as well. When rates are low, that's where the value of the deposit base, we're not able to extract the value out of having that very sticky, low-cost core deposit base. Our hedging has really been designed over the last several years to help us manage through those low and protect those low rate environments, but give us an opportunity to now begin to see the true value of the deposit base emerge as we get to more normalized rates. You know, again, it's an ongoing strategy, understanding how our balance sheet is evolving.
As we sit here today, we're still modestly asset sensitive. We have been protecting the potential downturn more on the horizon, not in the very near term. We've been adding protection that some of that starts in late 2023 and continues into 2024 and covers a period from 2024-2026. We're really comfortable with that position today. We've messaged that we're roughly 75% hedged. There's still a lot of uncertainty as to how far rates have to go, how long they have to stay there, and then ultimately what plays out on the deposit front. We think we have some reasonable assumptions. We're expecting higher betas than last time, last cycle, just simply because we're gonna be at a absolute higher rate level and likely stay there for a little longer.
We've positioned the balance sheet to be modestly asset sensitive, which gives us some added flexibility if the Fed has to go farther and we stay there longer, that we're still going to to have stability in the margin. Our attention is really looking further out on the horizon and thinking about that environment where the Fed goes back to neutral because they've been successful with dealing with inflation or the weight of higher rates rolls over the economy, and they have to go to a more accommodative position. That's where our focus is. Again, we feel pretty good about the protection we have in place over the next three years, but we are adding to positions out 2026 and beyond.
Despite the shape of the yield curve, we're still seeing levels that we can put protection on that are really attractive, better than 3% receive rates on 3- or 4-year swaps. We think that's a pretty attractive level because even if the Fed goes back to neutral, you know, and none of us know exactly where neutral is, but 2.5%-3.5%, somewhere in that range, those swaps are going to be there to protect us if they need to go lower. They're not going to present much of a headwind if, you know, we're back to neutral rates.
That's out on the horizon where we think what we're going through now will have largely played out, several years in advance, several years out on the horizon, but still know that our exposure is to low rates, and we think these are very attractive levels to protect that downside. This is real important. These hedges are not trades. We're not trying to make money here. It's protection for the low rate environment. When you have a low-cost deposit base like we do, we don't have a mechanism to protect us when rates are low, we have to do it synthetically through the use of derivatives. We do these on a forward starting basis. Deron mentioned quickly there, we have some of these going on in the middle of this year.
Yeah.
They take us out a number of years. We can, at some point, get into negative carry.
Right.
We're okay with that because what we've done is to position ourselves to have nice returns on tangible common equity. It's all the other things that we've done to manage our business. Expense management is a great example. When we can get a return. Our return last quarter, I think, was 33%. Now, that's got AOCI, the crazy accounting, and helps the denominator. Even if you strip that out, it's high. That's not normal for a regional bank to have. When we can get the kind of returns that put us in the top quartile of our peer group, it allows us to be able to give up a little bit of margin that we could have gotten had we not had the derivatives. Again, we're not trying to top-tick the margin.
We're trying to protect ourselves when rates eventually go the other way. If we're wrong and rates go to 5, 6, and stay there for an extended period of time, we're okay with that. Doesn't hurt our feelings at all. Betas will start catching up, but we'll still make a lot of money.
Sure. That's very, very good. Very clear. You mentioned accounting, crazy accounting. One of the areas I know you and I enjoy talking about is CECL, which is different than AOCI, but in the same ballpark.
Yes. Both poor.
The, we're hearing that so far, and it's only February, and I know you guys will get another Moody's outlook in March, but we don't seem to be seeing the deterioration that we saw Q2, Q3, and Q4 last year. Maybe what's your thoughts about just reserving if the Moody's outlook stabilizes?
Yeah. We do our own shocks. We do look at Moody's as well, and we come up with a scenario that we use to base our allowance on. We have a pretty robust allowance. I think at the end of the year, it's 163. You know, that has unemployment baked into it, I think in the mid-4s, right at 4.5%, 4.4%, I think. Pretty tough on housing and things like that, unemployment, other things that cause us to have robust reserves. We see right now that the additions to the reserves, if any, will be primarily driven by loan growth and whatever we have. We forecast 4% loan growth for the year.
You know, we got to provide, unfortunately, when you book a loan, you got to go life of loan losses at day one. Which makes no sense, but that's the rule. We got to abide by it. I don't see the deterioration in the economic environment right now.
Right.
That's what we remeasure every quarter, and if we see it changing, then we'll adjust the reserves accordingly at that point in time.
When you look at capital and the CET1 ratio, of course, is the binding constraint, maybe you could refresh us what your targets are for CET1, and then just how you approach distributing your earnings every year or your excess capital?
We have an operating range of 9.25%-9.75%. As a Category IV bank, we don't have to include the OCI component in regulatory capital, and that's why we don't care about OCI, and what that does to us, because it's driven by the change in interest rates. You know, as we think about capital, we're gonna generate a lot of capital. We want to put that first and foremost to work to support our balance sheet growth. Second, we want to pay a fair dividend to our shareholders. We've targeted 35%-45% of earnings for that, and that range is determined based on stress. We want to be able to maintain that dividend in case something really bad happens.
Now we have been at the lower end of that, but I think our dividend increase last time was about 18%. We've been increasing it quite nicely. Fortunately, earnings keep growing faster because of the rate environment and all the things we just talked about. We really would like to put the capital over and above those two things to work in non-bank acquisitions. We had in 2021, a lot of activity. Those worked out well for us. None of them did we bet the farm on.
Those are the kinds of things we have our M&A team that'll sit down with our segment leaders, Ronnie's one, the corporate commercial segment leader and a wealth leader and a consumer leader, to talk about products and services that they may not have or that they want to expand that can help our customer base. We're out there looking all the time. Bank acquisitions are really not something we're looking at right this minute. I think that's played out well for us. Being a little patient and being able to put that capital to work with the non-banks acquisitions are first and foremost our priority. If we can't put it to work, we'll buy our shares back because we wanna be in that operating range.
We said we'd be at the upper end of that range, primarily because there is some uncertainty out there, and frankly, 25 basis points of capital for us and the impact to our return is negligible. We're okay having a little bit more capital today.
David, I know you're not interested in depository acquisitions. In years past, you guys obviously have done some. Just your view of why has it taken so long? Not specific deals, but just the regulatory process is brutal, it seems like, to get deals done. Any thoughts in the way you, the way you view it?
Well, I think, you know, there's still several that are going on right now that have been out there quite some time. We don't know the facts.
Right.
...of any given deal. What we do know, and this is talking directly with regulatory supervisors, whether they be our ones in Atlanta or Washington, that, you know, the process just is taking longer. You know, you got community groups that are involved big time, and you can see some of the commitments to the communities, to work all that through the system does take time. You can see when the filings are made, all the thoughts that went in there, whether it be for each of the companies or the regulatory supervisors. It's just, I think they want to be pretty thorough. We can debate how thorough one needs to be, but we don't see that changing.
Right.
As a result, there are risks to entering into a depository transaction from anything of size.
Right
...because you put the company being acquired at real risk of their customer base and their people just saying, "I don't, you know, I don't know if I wanna hang out here. I need some certainty." Uncertainty for anybody is a bad idea.
Right.
That's what I wish we would get, is a little bit more clarity. We need to take the proper time to do the proper things, but let us know how long it's gonna take, then we can adapt and overcome.
Yeah.
When you don't know and you're just sitting idle, it's pretty hard to.
I've noticed the red light's going off, so I wanna thank all three of these gentlemen for joining us. Please join me in a round of applause for the three of them. Thank you.