Regions Financial executives were candid Friday about one of their biggest challenges: what to do with a glut of deposits before its begins to hurt the bottom line.
Total deposits at the Birmingham, Ala., company rose more than 25% year over year to $122.5 billion in the fourth quarter. The increase was across the board: Consumers are receiving government stimulus payments and spending less because of the pandemic, corporate clients are consolidating liquidity, and wealth management customers are clutching their extra cash.
But the company, like many of its peers with the same problem, has limited options to deploy its excess liquidity. With the exception of Paycheck Protection Program loans, executives anticipate loan demand won’t pick up much until the second half of the year. And mortgage rates are currently too low to make it worth investing in mortgage-backed securities.
Still, “if we continue to see deposit growth at this pace, then at some point we’re going to have to put some of our cash to work, or it’ll be an earnings drag," Chief Financial Officer David Turner told American Banker after the company issued quarterly results.
Regions’ interest-bearing deposits at other institutions (mostly consisting of its deposits at the Federal Reserve) swelled to $16 billion in the fourth quarter from $2.5 billion a year earlier.
Regions executives eventually expect non-PPP loans to grow at a rate in the low single digits this year — mostly later in the year after COVID-19 vaccines are more widely distributed. Turner warned, too, that there could be a lag between when customers draw down deposits and when loan demand picks up.
“Some industries are doing well: health care, financial services, certain manufacturing, but clearly as the economy reopens, then you’ll have travel and hospitality start to come back and create opportunities there,” he said. “We don’t see that opening up in the first half of the year just because the vaccine just came out.”
Fourth-quarter net income increased 58% from a year earlier to $616 million. Earnings per share totaled 61 cents, or 19 cents higher than the mean estimate of analysts surveyed by FactSet Research Systems. Total revenue rose 14% to $1.7 billion.
Net interest income grew nearly 10% to $1 billion, benefiting from the company’s hedging strategy, lower deposit costs and fee income from PPP loans forgiven during the fourth quarter. At 3.13%, the net interest margin was flat compared with the prior quarter and narrowed 26 basis points from the year-earlier quarter.
Noninterest income increased 21% to $680 million, with growth occurring across all categories except for service charges on deposits. Capital markets income rose 80% to $110 million, and mortgage income increased 53% to $75 million, for example.
Regions charged off $94 million in loans during the fourth quarter compared with $113 million in the prior quarter and $96 million in the fourth quarter of 2019. The company recorded a $38 million benefit from credit losses, compared with a provision of $113 million in the prior quarter.
Executives said they expect net charge-offs to peak around midyear, although they generally expressed cautious optimism for the year ahead.
Yet, when asked by an analyst about the big-picture risks he remains mindful of, CEO John Turner replied: “We're still confronting a number of crises across the country whether they be health-related, the economy, the political environment we're operating in, social unrest. All those things potentially impact our business.”
Turner said that Regions needs to concentrate on recruitment, customer service and investments in technology and other parts of its business.
“We can't take anything for granted,” he said. “If we do those things, then I think we're doing a good job of managing the risks that are in our business and we'll deliver that consistent sustainable long-term performance. It's about really focusing on what we can control.”
