Regions Financial Corporation (RF) Q1 2019 Earnings Report, Transcript and Summary

Good morning and welcome to the Regions Financial Corporation’s Quarterly Earnings Call. My name is Shelby 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. [Operator Instructions] I would now turn the call over to Dana Nolan to begin.

Thank you, Shelby. Welcome to Regions’ first quarter 2019 earnings conference call. John Turner will provide highlights of our financial performance and David Turner will take you through an overview of the quarter. A copy of the slide presentation as well as our earnings release and earnings supplement, are available under the investor relations section of our regions.com. Our forward-looking statements disclosure and non-GAAP reconciliations are included in the appendix of today’s presentation and within our SEC filings. These cover our presentation materials, prepared comments, as well as the question-and-answer segment of today’s call. With that, I will now turn the call over to John.

Thank you, Dana and thank you all for joining our call today. Let me begin by saying we are pleased with our first quarter results. The momentum we experienced in the fourth quarter has continued in the 2019. We reported earnings from continuing operations of $378 million delivering solid year-over-year revenue growth, broad-based loan growth and stable, but normalizing acid quality, all while reducing expenses and generating positive operating leverage. Loans grew somewhat faster than we anticipated in the quarter, driven in part by increased line utilization by our business customers. We intentionally funded a portion of this incremental loan growth with commercial and corporate treasury deposits and while this was more economical than also borrowings, deposit costs were impacted during the quarter. We expect loan growth will moderate through the remainder of the year, providing opportunities to optimize our deposit mix. With respect to the economy, we feel good about the health of the consumer and businesses. I’ve traveled across our footprint in the last few weeks to markets including Tampa, West Palm Beach, Atlanta, Nashville, Houston, Greenville and Spartanburg, South Carolina and Mobile, Alabama. I’ve met with clients of varying sizes and industries, and customer sentiment remains positive. Many customers experienced record revenues in 2018 and are expecting even better results in 2019. In general, our clients do not expect a recession in the near-term and neither do we. That being said, we remain focused on building a balance sheet that will position us for consistent and sustainable performance through all phases of the economic cycle. The outlook for the interest rate environment continues to evolve. clearly, the lower rates and the shape of the yield curve makes near-term revenue growth more challenging for the industry. However, as we did over the last four, five years, we will make the necessary changes and adapt to the evolving market conditions. In the meantime, we’ll continue to focus on the things we can control, providing customers with the quality financial products and services they need, maintaining appropriate risk-adjusted returns, prudently managing our interest rate sensitivity profile, and effectively controlling expenses while continuing to make investments in technology and talent. Again, we are pleased with our financial results this quarter. Our focus on continuous improvement remains key to our ability to generate consistent and sustainable long-term performance. With that, I’ll now turn the call over to David.

Thank you, John. Let’s begin on Slide 3 with average loans and deposits. Adjusted average loans increased 2% over the prior quarter, driven by broad-based growth and the business lending portfolio, and relatively stable balances across a consumer lending portfolio. Once again, all three areas within our corporate banking group experienced broad-based loan growth across industries and geographic markets. adjusted average business loan growth was led by a 4% increase in adjusted commercial and industrial loans, where growth was driven by our diversified specialized lending and REIT lending portfolios. Average investor real estate loans grew 8% in the first quarter, while average owner-occupied commercial real estate loans declined 4%. both were impacted by a reclassification of approximately $345 million of senior assisted living balances from owner-occupied commercial real estate to investor real estate at the end of last year. Excluding the impact of this reclassification, average investor real estate loans increased approximately 3% driven by growth in term real estate lending, which is consistent with our strategic initiative to achieve better balance between term and construction lending. As John noted, a 160 basis point increase in line utilization also significantly contributed to this quarter’s loan growth. With respect to consumer, adjusted average loans remained relatively stable as growth in indirect-other consumer and credit card portfolios was offset by a decline in home equity lending. Average mortgage loans remained relatively stable. However, the sale of $167 million of affordable housing residential mortgage loans late in the first quarter, will impact second quarter average balances. Despite solid growth this quarter, we continue to expect full year 2019 adjusted average loan growth in the low single digits. And with respect to deposits, we continue to execute a deliberate strategy focusing on growing low-cost consumer and relationship-based wealth and business services deposits. Total average deposits increased 1% during the quarter, reflecting 1% growth in consumer and 2% growth in corporate, partially offset by declines in wealth and other. Importantly, our bankers continuing to grow new consumer checking accounts and consumer households as well as corporate deposit accounts and total wealth relationships. Let’s take a closer look at the composition of our deposit base. To protect our deposit advantage, we continue to execute strategies to ensure we are effectively serving our customers. These strategies facilitated growth in interest bearing checking, money market and time deposits at the end of last year, which contributed to total average deposit growth this quarter. Increasing deposit rates combined with overall deposit growth and portfolio remixing drove an increase in total deposit costs this quarter to 46 basis points. Despite the increase, we remain well-positioned relative to peers, further illustrating the significant funding advantage provided by our deposit base. Our cumulative interest bearing deposit beta increased to 25% this quarter. assuming no additional rate increases from the Federal Reserve, we expect a through the cycle deposit beta in the low 30% range. Retail deposits include consumer and private wealth deposits. Our cumulative retail interest bearing deposit beta increased to 10% this quarter, while our cumulative consumer deposit beta remained low at just 6%. As previously noted, a portion of this quarter’s loan growth was funded with commercial deposits contributing to additional pressure on overall deposit costs. However, we remain committed to our long-term return targets and we will continue to optimize both sides of the balance sheet. So, let’s look at how this impacted our results. Net interest income decreased 1% over the prior quarter and net interest margin decreased two basis points to 3.53, both net interest income and margin benefited from higher market interest rates offset by higher funding cost, including the impact from our January parent company debt issuance. Net interest income also benefited from higher average loan balances, both negatively impacted by two fewer days in the quarter. Net interest margin, however benefited from fewer days, but was negatively impacted by average commercial loan growth. In the current interest rate environment, growth and net interest income and margin will be driven by balance sheet growth and business mix. With respect to net interest margin, rates consistent with the current yield curve and moderate balance sheet growth is expected to generate a relatively stable to modestly lower full-year margin, implying moderate margin compression for the rest of 2019. With that said, we continue to expect full-year adjusted revenue growth of 2% to 4%. With respect to fee revenue, adjusted non-interest income increased 4% this quarter compared to the fourth quarter of last year. Significant asset valuation declines in the fourth quarter associated with market volatility improved in the first quarter. Variable market value adjustments on total employee benefit assets increased $19 million while also contributing to an $11 million increase in bank-owned life insurance income. The increase in bank-owned life insurance also included the additional claims income compared to the prior quarter. As we look forward, we are taking actions to reduce future volatility associated with certain of these assets. Service charges and card and ATM fees declined 5% and 2% respectively reflecting seasonality and fewer days in the quarter. Capital markets income decreased 16% attributable to lower loan syndication income and fees generated from the placement of permanent financing for real estate customers, partially offset by an increase in merger and acquisition advisory services, and higher revenues associated with debt underwriting. As you know, capital markets income can be volatile for quarter to quarter. However, we do expect an increase in the second quarter. mortgage production and sales revenue increased compared to the prior quarter. However, total mortgage income decreased 10% primarily due to lower hedging and valuation adjustments on residential mortgage servicing rights. Other non-interest come includes an $8 million gain associated with a sale of $167 million of affordable housing residential mortgage loans late in the first quarter. In addition, fourth quarter other non-interest income included a net $3 million decline in the value of certain equity investments and a $5 million loss associated with impairment or disposal of lease assets. Let’s move on to expenses, which we believe were well-controlled in the quarter. On an adjusted basis, non-interest expense increased 1% compared to the fourth quarter, primarily due to a 2% increase in salaries and benefits reflecting higher payroll taxes as well as an increase in expense associated with Visa Class B shares sold in a prior year. Partially offsetting these increases, occupancy expense decreased 5% primarily due to fourth quarter’s storm-related charges associated with Hurricane Michael. Furniture and equipment expense decreased 7% primarily due to a benefit in property taxes recorded during the quarter and professional fees decreased 26% driven primarily by a reduction in consulting fees. The adjusted efficiency ratio was 58.3% and the effective tax rate was approximately 21%. For the full year, we continue to expect relatively stable adjusted expenses and an effective tax rate between 20% and 22%. let’s shift to asset quality. in line with our expectations, asset quality remained stable while continuing to normalize this quarter. Net charge-offs improved 8 basis points to 0.38% of our average loans. including the impact of loan growth, the provision for loan losses exceeded net charge-offs resulting in an allowance equal to 1.01% of total loans and 163% of total non-accrual loans. Total delinquent loans decreased $102 million as loans 30 to 89 days past due decreased $106 million while loans 90 days or more past due increased modestly. total non-performing loans excluding loans held for sale increased 2 basis points to 0.62% of loans outstanding. business services criticized and troubled debt restructured loans increased $197 million and $27 million respectively. These results include the recently concluded Shared National Credit exam. While overall asset quality remains within our stated risk appetite, volatility in certain credit metrics can be expected. We continue to expect full-year net charge-offs in the 40 to 50 basis point range. So, let me give you some brief comments related to capital and liquidity. During the quarter, the company repurchased 12.2 million shares of common stock for a total of $190 million through open market purchases and declared $142 million in dividends to common shareholders. We continue to execute our 2018 capital plan that as you know, we’re not required to participate in the 2019 CCAR process. However, we were required to provide our updated planned capital actions to the federal Reserve in early April. These planned capital actions, which remained subject to approval by our Board of Directors, provide a path for us to achieve our targeted 9.5% common equity Tier 1 ratio this year. At quarter-end, the loan deposit ratio remained unchanged at 88% and the company continued to be fully compliant with liquidity coverage ratio rule. Our full-year 2019 expectations provided at Investor Day remained unchanged and are summarized on this slide for your reference. So in summary, we are pleased with our first quarter financial results. Despite market uncertainties, we are focused on things we can control. We have a solid strategic plan and are committed to achieving our 2019 and long-term targets. With that, we’re happy to take your questions, but do ask that you limit them to one primary and one follow-up question. We will now open the line for your questions.

[Operator Instructions] Your first question comes from Ken Usdin of Jefferies.

Good morning, Ken.

Hey, good morning guys. Thanks. David, just on your comments about the outlook for the changing rate environment and the potential pressures that brings forth, can you talk through where that manifests itself the most? Is it the investment portfolio? is it loan spreads? And if you could go back a little bit further into that ability to kind of remix those deposits as you move through the year? Thanks.

Sure, Ken. So yes, we’ve looked at the rate environment clearly changed, since going into the year, not anything different than we’ve experienced before as we showed you at Investor Day. We had a three-year outlook, if rates were lower than we thought and we adapted and overcame that and we’ll do it again this time. As we think about rates, from a reinvestment standpoint, we still have a front book, back book benefit, is not as much as it was originally. But we still benefit from that. In this particular quarter, we had a couple of things that impacted us. We had loan growth that was a little stronger than we had anticipated with 160 basis point increase in line utilization. We had to fund that and we chose to fund that with higher cost deposits versus going to the wholesale market. So, if you look at deposit betas, that caused our deposit base to be up. our overall funding beta is kind of in line with peers. But we thought that was the right thing to do. The loans that we put on were a little center spread, which puts a little pressure on our margin. The margin actually was impacted by our parent company Danish once we had in the first quarter, as well as a reclassification of purchasing card assets that don’t carry any interest carry. those two things were two basis points of margin in the quarter. So, as we look forward, what we need to do is continue to remix the balance sheet both on the loan side and the deposit side as we seek to optimize both levels to get our net interest income, where we want being in the resulting margin. I will go ahead and answer the question, because it’s probably coming up that our margin expectation for the year, we believe to be a commensurate with what we had last year in the 3.50 range, give or take a point or two. So, that’s kind of how we see the rates and our expectations for the year.

Got it. Okay. And then one follow-up on the loans. You’ve reiterated that with a good start to the loan growth, the adjusted loan growth. Can you give us an idea of just the summary of the non-core, the combination of the auto stuff and then the new ones you sold than what you expect that would be on the full year? Thanks, David.

Yes. So we’re still guiding on the adjusted loans with cards out the runoff portfolios to be in the low single digits. You’ll see some of the remixing there. A little bit of that growth that you saw in the first quarter where companies that have access to the capital markets that chose to come to the bank market, because it’s cheaper. We expect that to change over time and so you should expect some runoff there. And we’ll refill that still to get our low single digit – low single-digit growth. The auto book continues to run down. We’ll be in the $700 million, $800 million range on those runoff portfolios.

Got it. Thanks, David.

Your next question comes from John Pancari of Evercore.

Good morning, John.

Yes. Good morning. John, on that point, on the deposit and margin commentary there, given the loan growth you saw on the quarter, you said it came in a little bit better, why did you make the decision to fund that growth with higher cost funding versus a deposit?

What we – what I said was we chose to have – fund that with higher cost deposits versus wholesale funding, because the deposit growth was cheaper than what funding was. What I was trying to address is the deposit beta was negatively impacted, because of that decision. If you look at our total funding beta, our total funding beta was fairly consistent with the peers. So, it’s just a mix of what we chose to fund that growth with versus what somebody else might have done.

Okay. Thank you. And I misunderstood that. I just wanted to get clarity on that, okay. And then separately, around the loan growth expectation for the year and that you expect it to slow from here; could you just talk about some of the give and takes, what you think will drive to the net moderation off of this level versus any incremental, strengthening on the commercial side for example.

Yes. So, as John mentioned in his comments, we feel good about – our customers feel good about the economy and they’re continuing to borrow. We had and that increase we saw part of that this first quarter. Again, we’re – customers we believe have access, we know have access to the capital markets that chose to use their bank lines of credit to give them more flexibility in terms of timing on when they would go to the capital market system. It’s just a matter of time before that happens. So, we’re going to see those loans run out of the bank as we continue to grow consistent with our expectations at the beginning of the year. So, when you get net-net to the end of the year, we think net loan growth is still on that single, the low single digits.

Okay. thanks, David. And one last thing on credit, could you just give us a bit of color about around the drivers of the higher classified in special mentioned loans. And then I guess your thought around the longer-term loan loss reserve level of here. I know it stands around 1.01%, I wanted to get your thoughts on where that could trend to?

Certainly, John. It’s Barb Godin. relative to criticized and classified in terms of those numbers, that’s attributable to really two or three credits that moved over, and given the lows that were on, it’s simply starting to slowly normalize. Also recall that our results include the results of the recently completed Shared National Credits survey or credit exam. So that’s all encompassing. We don’t see any trends in there that we’re looking at that concern us at all at this point. And in terms of our loan loss reserve, we’re sitting at one-on-one; we think that area 1% one-on-one is probably the right number as we look forward as well until we get the seasonal next year.

Got it. Thank you, Barb.

Yes. John, I would just reiterate that I think we still feel very good about our credit metrics. As Barb said, we’re really a better than 10 year lows in terms of criticized, classified, non-performing loans. And so from time to time, we’re going to see a little movement up or down I think in those metrics in this particular quarter, as Barb mentioned, we had one or two credits and impacted both criticized loans and non-performing loans. And so given the low base we’re coming off, I think you’re going to see some back and forth there, over the coming quarters as credit begins to normalize a bit, but we feel still feel very good about our credit quality.

Okay. Got it. Thanks.

Your next question comes from Betsy Graseck of Morgan Stanley.

Hey, good morning.

Good morning, Betsy.

Hi. I just had a question on your capital target. I know you mentioned that with the expectation that you have for buybacks this coming year, you should be able to get to 9.5% target seats you won. I’m just wondering if given the proposal the Fed has for, its NPR that’s outstanding out there for banks to your side, would you be at all rethinking the target seats you won at any point or is that something that you think you need to have it as high as 9.5% going forward?

Yes, Betsy. We had mentioned at Investor Day that mathematically, our capital that we think we need based on the risk profile that we have, would lead one to a common equity Tier 1 of 9%. And we said to our – those attending and listen that we added another 50 basis points of cushion on that. We believe that that capital level one provides the proper capital we need to have plus a little bit. Wow, allowing us to get to our return expectations that we also laid out, so that those targets were not derived based on supervisory input or CCAR mechanism. So, I don’t see that changing at all. As you know, we have to get through the second quarter, which is based on last year submission. And then the third quarter, we’ll start – we’re not under CECL, but it’ll start our capital planning and that’s why we have confidence. We will get to our 9.5% by then. And we’ll have – we’ll be able to toggle between loan growth and share buybacks as we seek to manage the capital at that level.

Okay. Since the teams are very – there’s a lot of cushion in there. So, I’m wondering, maybe it reflects the view that you feel your portfolio might be a little more risky than peers or you’re just superconservative.

Well, as I mentioned our math, based on our risk profile would lead you to 9. We choose to have an extra 50 basis points in there, which we think gives us flexibility, especially as you think about, where we are in a 10 year run. And if the county were turned down, we have the ability to perhaps take advantage of some opportunities that might come our way to invest in the assets. they could give us growth. So, it’s – we think inappropriate amount of cushion, because it didn’t weigh us down from our return objectives and gives us that flexibility. So that’s why we do it.

Yes, I got it. Thank you.

Your next question comes from Erika Najarian of Bank of America.

Hi, good morning.

Good morning, Erika.

Good morning. I wanted to follow up on the comments on capital actions. So, if we filled in the template that the Fed distributed or getting to about a max preapproved capital action of about 2.15 billion for 3Q 2019 to 2Q 2020. And I’m wondering if that’s a ballpark with how your team calculated the template?

Well, I think, again, the way we want you to get there is by looking at our target of common equity tier 1 of 9.5%. We think that the toggle we have to think through on buyback is what’s loan growth going to look like. Now we’ve said we wanted to pay out a dividend in the 35% to 45% of a range that uses a piece of it of earnings. and then the rest of it is either going to be used for loan growth or it’s going for the most part or we’re going to buy shares back. So, trying to now stipulate exactly what the buybacks going to be is when we don’t think it’s necessary as much because we’re giving you what the end result’s going to be. So you have to – you have to come up with your expectation of what our loan growth is going to be and it’ll help you get your buyback number.

I met all-in. Okay. And just taking a step back, you unveiled a mid-term efficiency ratio of 55% or below during your Investor Day. And of course, the curve dynamics have gotten less friendly since, I’m wondering, as we think through the next few years, is there that much expense leverage left, to be able to get you to this target of less than 55% by 2021. Would this type of curve backdrop or are we underestimating some of the investments that you’re making that could boost revenue beyond rates beyond 2019?

Yes, Erika. I would say it’s combination of both. First of all, we’re committed to the 55% efficiency ratio by the end of 2021 and we believe we have appropriate levers both in terms of revenue growth from investments we’re making and opportunities to reduce expenses to be reinvested in additional initiatives that will help generate revenue growth to get to the 55% efficiency ratio. We’re absolutely committed to get there.

Okay. Got it. Thank you.

Your next question comes from Matt O'Connor of Deutsche Bank.

Good morning, Matt.

Hi. I’m wondering where do market rates have to go to fly it out than them. obviously, you’re guiding to flattish to them on a full-year basis, but trickling down from the 1Q level. And then just conceptually, and I realized that 10 year is not the only right that matters, but what’s kind of the break-even point on the 10 year, where it does fly now that this kind of 3.53 that this is trickled down?

Well, if you just think about the 10 year just on reinvestment that security’s book. So, we’re coming off a 2.70-ish range, reinvesting in the 2.90, the 3% range. So, we’re getting some lift, just reinvesting those cash flows over the near-term. It’s really not curved dynamics as much that drives versus the mix of what we put on both on the right and the left side of the balance sheet. So, I think you could have – you could be where rates are in the curve can look, where it is now and depending on what your choices are would depend on whether or not you can continue to grow an NII resulting margin or whether it stays flat. We’re looking to optimize our balance sheet for not only NIM, but net interest income growth, return, credit risk management, all that has to work together. And again, we’ve laid out our three-year expectations and our one-year expectation and we intend to kid all of that. So, there are a lot of moving parts that you have to deal with. And it’s that’s a hard one to explain.

Okay. No, I understand. I think what’s changed versus a few months ago is the rate environment versus I think your strategy, so – and obviously, rates, they move around and we’re up to 20 bps off the bottom and maybe, two months from now, we’ll be 20 bps higher and we’re up about…

Yes, Matt. I’d add, our expectation for that rates were going to go down at some point, which is why we began our hedging program over a year ago. As we’ve mentioned, we’re about 70 – we’re about 75% through our hedging program right now. And we did that in large part with forward starting swaps to begin in 2020 as we expected GDP to decline to 2.5% in 2019, 2% in 2020 and 1% in 2021. And that the probability of rate cuts would increase in 2020 and 2021 and we wanted to be protected there. What you’re seeing of late as a reversal from the Fed? And it put more pressure on not getting, not only not getting an increase this year, but having some probability of a cut this year, which we don’t think will happen by the way. And so that that’s really, where we’re more exposed as if there were cut right now. Again, we’ll take that risk, because we don’t believe that’ll happen.

The other point, I guess I make just if I might on, a balance sheet optimization is we’ve indicated we think that loan growth will begin to moderate a bit. At the same time, our core deposit base continues to grow very consistently. Consumer demand deposits grew over 4% last year. They’re growing for the seventh year in a row point to point up about 7%. We see growth in consumer savings, consumer checking continues to grow. And so that’s a more consistent to lever an increase in deposits that will occur over time and as that catches up with loan growth, which will be moderating. We have an opportunity to also optimize our deposit base and we think that will accrue to our benefit.

Okay. I guess the optimization and the mix that you’re talking about, I thought it would have been beneficial from them.

Yes.

Okay. But the combination of that and where we are in rates still causes it’s trickled down a little bit.

Well, I think you can ask some noise in the interim. Again, we’re at 3.53, we said we’d be at 3.50 for the year give or take a foreigner too. And it’s going to be dependent on how well we optimize and the 10 year has moved quite rapidly, it’s gone from 3.50 to almost 3.60. We’re down a little bit this morning. So, if we continued – the 10 year continues to move up a little bit, then the reinvestment helps us to increase, net interest income and helps us from a margin standpoint.

Got it. And then if you don’t mind, I just want to squeeze in the line utilization increase of 160 basis point, was that concentrated in like a handful of credit and if not, I guess what makes you think it’s going to decline so much to if you don’t meaningfully slow the loan growth? It was so good this quarter. Thank you.

Yes, Matt. I’ll ask Ronnie Smith, who heads our Corporate Bank to answer the question. Ron?

Yes, Matt. It was very broad-based. It was not in a handful of clients and really focused in on most of our higher quality clients that I think David mentioned earlier that have access to other markets and we’re anticipating that we’ll see changes with those advance rates as we go forward, but very broad-based across the industries and within geographies as well.

Okay. Thank you.

Your next question comes from Jennifer Demba of SunTrust.

Good morning, Jennifer.

Thank you. And hi, good morning. Question on credit, Barb. Two questions. First of all, I assume you’re running parallel right now. I’m wondering if you have any preliminary estimates on what the day one impact will be for CECL. And my second question is on your criticized leverage loans that slide was very helpful in the deck. Is there any industry concentration within those criticized leverage credits? That’s it.

First question on CECL is, yes, we are in the midst of doing a lot of work, running parallel, making sure our models are operating the way they need to et cetera. We’ll probably disclose something in the second quarter, but we’re not quite ready to do that yet on the CECL front. Relative to the leverage loans et cetera, there’s nothing that sticks out in terms of anything that’s an anomaly. So, a pretty good book.

Just for clarification, I think in our second quarter release, probably we’ll provide some information on the third quarter – third quarter release, day one impact. So, we’re still a ways off.

It’ll be in the third quarter release something. Yes. We want to run parallel for a couple of quarters to see what it looks like.

Great. Thank you so much.

Your next question comes from Marty Mosby of Vining Sparks.

Good morning, Marty.

David, I wanted to – hey, good morning. I’d talk to you a little bit about NII versus net interest margin. When you had a little bit of extra loan growth this quarter and then you went out and funded it, I mean you literally could have funded it through the securities portfolio, which would have increased your NIM, just by substituting higher rate assets, loans being investment securities. So, I think the temporary nature of what you did or thought your loan growth is going to have and the sense of the run up, it’s going to come back down. You just went out and funded it, which incrementally caused some pressure on your net interest margin. And if you look at NII is still growing relatively nice year-over-year, but you have the day count in the first quarter. So, it just seems like to me the margin this quarter was exacerbated just given all in the incremental funding of the balance sheet.

Yes, Marty. So, the NIM to us is the result of all things that we do. And you’re exactly right, but we put on, we want to be fixated at our NIM and then we could have done different things. I do want to make sure if I caught the fact that our NIM was impacted 1 basis point by our parent company issuance. And then we had the reclassification of our purchasing card into loans, which is a non-interest bearing asset. So that weighted us down another point. So, we could have kept the margin relatively stable at 3.55, but we were able to keep NII level, not withstanding two days, which caused us $10 million in the quarter. So, we thought it was pretty good. Again, we’ll optimize the balance sheet and those loans that we did put certain of those loans we put on had thinner spreads to them. They’ll run out to the capital markets, we’ll get a capital market fee when that happens, we’ll remix the balance sheet and we’ll be off to the races. So, we’re not overly fixated on the margin.

Well that’s what I thought. And then when you thought, you talked about a deposit betas and you said that through the cycle or the key motivator right now is about 25% and you said by the time we’re done, we’re going to be at 30%. now that would, in general assume that you had further rate hikes that then we’re going to push deposit rates up. But if we kind of stabilize here and rates don’t go up anymore, let’s just assume that they don’t, wouldn’t deposit pricing, maybe with a little bit, till increase in the second quarter began to kind of flatten out. So, I just want to make sure we’re being consistent with that. How much of the excess you expected in deposit pricing going forward?

Yes. So, what our history tells us is that it takes about 12 months and change after the last Fed hike for deposit rates to stop moving. So that’s a piece of this that’s usually just even if we don’t get another increase, you’ll see that continuing to come through. Mix has a big deal to do with it too. So as we continue to grow low-cost core checking accounts and interest freak accounts, that’s helpful. but our commercial customers want to, they’re trying to take their excess cash and get the best yield that they can. If rates stop moving, that will abate to. So moving up into the 30s, we can argue, where in the 30s, we might end up. The point is we’re going to continue to see some costs, some funding costs, increases continuing to come through that we need to deal with. And we have a little bit of the headwind on reinvestment on the left side of the balance sheet. And then the optimizations really will carry the day for us.

And then I guess the thing that I would suggest or highlight is that this deposit beta market has not been like any historical period we’ve seen in the past. It’s been a lot different and it’s actually reacted much better than what we’ve seen in the past. So, why shouldn’t we expect that maybe we could see this thing slowed down or actually begin to flatten out a lot quicker given that the deposit beta has been better than what we’ve seen in the past cycles?

Well, you’re certainly correct that is different. Betas last time were in the 60 range and now we’re talking in the 30 range. And part of that is because of how slow the recovery has been and the pace of those increases. Also coming off historic lows and so I think all that matters and there is a chance that things flatten out quicker than we have anticipated. if that happens, then we’re going to be better off than we think. And we’d much rather give you a number that we – that we can hit versus trying to promise something that will struggle achieving.

And then just last question, the swaps next year, is there any net increase in earnings from the spread lock, enough freights were flat given the fixed rate that you locked in? Is there a – there should be a little bit of a positive spread. So, I was just curious if there’s some upcoming income that you’re going to get out of those swaps once they actually hit the four dates. And when does that actually happen? Thanks.

Yes. So, the forward dates are in 20 and you’re right, we would have some positive carry there, but we – we also entered into some interest rate floors, where you had to pay a premium and you amortize the premium. So, the amortization unfortunately offsets the swap benefit. So, again, if rates didn’t move from here, we kind of pushed there. So, you won’t see any real positive carry.

Thanks.

Your next question comes from Stephen Scouten of Sandler O'Neill.

Hey, good morning everyone.

Good morning.

I’m curious, just digging down in the name a little bit further, obviously Investor Day, you laid out this range of 3.40 to 3.70 and by the commentary from you, David, that – we might get to 3.50 for the year implies that the NIM will move into high 3.40s by year-end. So, can you talk to me a little bit about how that lower end, even on a zero policy range scenario would only get down to 3.40 and maybe what’s – what dynamics have changed since 2016 when we were at 3.15, 3.16 that sort of range?

Yes. So part of which – what we want to do is try to frame up the range at Investor Day like we did. And what changed since then was the near-term risk before our forward starting swaps began in 2020. So even if you saw a dip in 2019, we actually start recovering that in 2020 when our derivatives kick in. So that’s the piece that gives us confidence that we’re still within the range that we told you back then. If we received a rank cut in 2019, that would – we’d have a different ballgame. We’d be telling you something different. We just don’t think the probability is very high than that happens. So, anyway, that’s…

Yes. That’s a perfect answer. Thank you. And the swaps are really what prevents you from getting down into those levels we saw back in 2016, even if we were to revert back to a similar rate environment.

That’s exactly right.

Okay. And then just lastly on the security’s book, is there any chance that you guys look to reduce that as a percentage of average earning assets to fund some of the growth or is that kind of 22% range, where you’d like to stay?

I think there, we have a little bit in there that’s helping part of our hedging program right now that works against us again on our margin. It’s not a tremendously large number. We kind of like, where we are from that standpoint. I think what you should expect over time as a remixing of our security’s book, kind of today, we still have treasuries and Ginnie Maes in there that we used for LCR purposes. And to the extent that that changes, then maybe we can put those, working a little more effectively force into mortgage backs. So, you’ll see us do that from time to time. As a matter of fact, you saw us take security loss as of this quarter to pair off with a gain that we had on selling the affordable mortgage loans. So that we could get better carry going forward and we’ll pay for that in less than a year. So, those are the kinds of things you should expect us to do over time.

Perfect. Thanks so much.

Your next question comes from Saul Martinez of UBS.

Hey guys. A quick – I just wanted to follow up on the line of questioning on the deposit betas and actually, just wanted to make sure I understand the math kind, what you guys are saying, So, the 25% – the 25% through the cycle Beta thus far basically implies that your deposit costs have moved up in the neighborhood of about 55 basis points given where the Fed funds is that right now. if I assume no further hikes and you get to the low 30s, that implies an additional 15 to 20 basis points of deposit cost pressure over the next 12 months. Is my math more or less, right? Is that what you’re kind of baking into that at assumption?

Yes. I think you’re close – just probably closer to 10. But we’re at 46 basis points of costs, one of the lowest. So, when you start looking at beta and percentages, you get, you can get some odd numbers, but we feel, we feel like, again, back to, I think as Marty asked a question if we miss it, we’re going to outperform what we’re telling you.

It’s closer. I’m sorry, it’s closer to 10 basis points is what you’re kind of baking in, in terms of incremental deposit cost pressure without any further hikes?

That’s right. That’s right.

Is that on total deposit or interest bearing?

Those are really more interest bearing.

Interest bearing. Okay. Want to make sure I got that math. And then I guess on the – just a broader question, the 2% to 4% revenue, I say, you’ve talked about NIMs and NIM was sort of stabilizing at 3% to 5% for the full year – of being at 3% to 5% for the full year, but in the 2% to 4% revenue growth, how do we think about that in terms of NII growth versus fee growth?

We kind of put those together, Saul at this time, because there – obviously, there’s challenges in terms of managing earning assets in the mix and all that. So, we put that together with NIR, we’re still convicted that will be within 2% to 4%. Right now, there is more pressure on the NII component of that, but not enough that would cause us to not meet that, that goal that we had.

Okay. Right. Fair enough. Thanks.

Your final question comes from Gerard Cassidy of RBC.

Good afternoon. How are you, John and David?

Hey, Gerard. Fine.

Can you guys give us a little further color on the portfolio of the breakout that you showed on leverage loans and then the Shared National Credits; are you comfortable with these levels or we’re talking a year from now these numbers going to be much different than they are today?

No, I don’t think so, Gerard, and not let maybe far, speak as well, but I think we’ve established some internal limits, just as we have concentration limits for lots of other aspects of do we manage risk in our portfolio and we’re at a level with respect to leverage lending that we’re comfortable with. We expect to continue to manage to about the level that we’re at. I think the most risky exposure we’ve talked about before in the portfolio has been loans to sponsor own companies. We brought that down from kind of the mid-30% to somewhere in the 26%, 27% range as I’d recall. And we’ll continue to work on that to ensure that the leverage exposure that we do have is to customers that we have full relationships with that it’s in industries that we know well is distributed across a variety of different industries. So, we don’t have any real concentrated exposure by industry sector either. And I think we do feel comfortable with it, but I’ll let Barb respond to that question as well.

I think you’ve done a great job responding, John.

Thank you.

The only thing I have to add is just as you said; these are to our best quality CNI customers that we do leverage lending to in particular. So, we are very comfortable with them. We look at them on a regular basis. We look at the book on a monthly basis and we recycled. If we see something that either is not carrying its weight or that we feel that that’s probably a good opportunity for us to move out of. We take immediate action on it. So again, I’m feeling very good with that book.

I’m just curious, Barb, do you recall during the last downturn what the non-NPL percentage was for leverage loans for regions, where we could dig it up, but if you don’t?

Yes. We’ll have to dig it up; we don’t have it at the top of my head.

Okay. I’m not expecting that. Okay. I’m not expecting that to be the same this time. But I was just curious and maybe, coming back to you, John. At Investor Day, you talked about the expansion into some priority markets in St. Louis, I believe, Atlanta, Orlando, Houston, can you share with us how that is progressing and how do we, as outsiders, determine whether you’re being successful in those markets?

Well, we think it’s progressing well. We have about 40 de novo branches that have – that are now open and operating I guess for less than a year, largely across those markets. We continue to reposition our retail franchise as an example in St. Louis as we shift that franchise and we shared this with you at Investor Day, I think we now have access to 10% more households, more wealth, more businesses. The same would be true as we think about the expansion in Atlanta. I think we now have access to more than a million, more or nearly million more customer households, businesses and wealth. And so those opportunities continue to be available to us. The year-over-year checking growth, about 15% of our growth is attributable to de novos. And so – and we’ll continue to look for ways to provide you all with some information like a percentage of growth attributable to de novos as an example. that’ll give you some sense of how we’re doing. I think, again, core to our strategy is looking for ways to continue to grow our core customer base. So, as we’re growing consumer checking accounts, as we’re growing debit cards usage, as we’re growing credit cards on the consumer side, as we’re growing small business accounts and small business deposit balances, those should be indicators to you that, that our expansion strategy is gaining some traction. We’re recruiting talent in those markets and feel good about the teams we continue to build. all-in-all, I think, we’ll – we’re going to continue it to on the path to execute that strategy.

Very good. Thank you.

Thank you.

Let me – this is David. I just want to clean up one thing. So, I think as Saul had asked a question about the impact of beta going into the 30, I said – and we said more like 10 points on and I said, interest bearing that’s a total, it shouldn’t be total. So, I want to clean that up.

Okay. I think that’s all the questions we had today. Really appreciate your time. appreciate your interest in regions and thank you very much. Have a good day.

This does conclude today's conference call. You may now disconnect.