Regions Financial Corp (RF) 2015 Q2 法說會逐字稿

Good morning, and welcome to the Regions Financial Corporation quarterly earnings call.

My name is Paula and I'll be your operator for today's call.

(Operator Instructions)

I will now turn the call over to Mr. List Underwood to begin.

Thank you, operator, and good morning, everyone.

We appreciate your participation on our call today.

Our presenters this morning are Grayson Hall, our Chief Executive Officer and David Turner, our Chief Financial Officer.

Other members of management are present as well and available to answer questions as appropriate.

Also, as part of our earnings call, we will be referencing a slide presentation that is available under the investor relations section of www.regions.com.

Finally, let me remind you that in this call, and potentially in the Q&A that follows, we may make forward-looking statements which reflect our current views with respect to future events and financial performance.

For further details, please reference our forward-looking statement that is located in the appendix section of the presentation.

Grayson?

Thank you, List, and good morning everyone.

We're pleased you could join us for today's call.

Second-quarter results reflect our continued momentum in 2015, as we reported earnings of $269 million, or $0.20 per diluted share.

These results demonstrate that we are successfully executing our strategic priorities.

In the second quarter, we experienced increases in metrics that we believe are fundamental to future income growth, including households, checking accounts, credit card accounts, and Regions 360 relationship.

This growth has been broad-based, geographically, as all of our areas continue to expand and deepen relationships through our needs-based approach to relationship banking.

Total revenue was particularly strong, as both net income and non-interest income grew.

Net interest income was loan growth of 2%, and production increases of 28%, and our pipelines continue to expand.

Business lending growth was achieved by all three businesses: commercial banking, corporate banking, and real estate banking.

Within real estate, real estate corporate banking, and our REIT business growth was particularly strong.

Commercial and corporate growth reflects the strength of our business model, as local bankers partner with industry and product specialists, particularly in Regions' business capital, government and institutional banking, healthcare and restaurant banking to grow our loan portfolio.

We also had a strong quarter in consumer lending, with growth in every loan category.

Of note, the home equity portfolio balances increased for the first time in more than six years.

Also, new point-of-sale loan product offerings drove additional growth in consumer lending.

Further we continue to diversify non-interest income as most categories achieved growth in the second quarter.

Demonstrating that Regions 360, and our investments are beginning to pay off.

Adjusted non-interest revenue increased 7% from the previous quarter, reflecting growth in mortgage, capital markets, and card and ATM fees in addition to deposit related service charges.

We continue to refine our retail network strategy, as we identified certain parcels of undeveloped land that had been purchased for future branch expansion.

We no longer intend to build on these sites, which resulted in additional expense in the second quarter.

At the same time, our occupancy expenses declined, due in part to branch consolidations executed in prior periods.

This quarter also included some legal and regulatory related matters that impacted earnings.

First we recorded a charge related to a contingent legal and regulatory item for previously disclosed matters.

And second, we received an insurance recovery related to a settlement of a previously-disclosed class action lawsuit.

During the quarter, asset quality was stable to improving, net charge-offs, nonperforming loans, troubled debt restructurings, all declined.

The provision for loan losses increased and exceeded net charge-offs.

This increase was primarily attributable to loan growth and reflects the results of the recently completed Shared National Credit exam.

We are continuing to monitor our energy portfolio and have experienced some downward risk breeding migration.

If oil prices remain at low levels for an extended period of time, additional migration is likely.

We are, however, staying engaged with our customers and taking necessary actions as appropriate.

Before I turn it over to David, let me mention that we are extremely proud that we were the recipient of two prestigious honors this quarter.

First, we were recognized by the Reputation Institute and the American Banker magazine, as having the highest reputation with our customers, among US banks.

And second, we were honored by Gallup as one of the best places to work.

These honors provided strong evidence that our focus on building a culture based on our core values is resonating with our associates and with our customers.

We were also focused on delivering strong financial results, and equally important is how we obtain these results.

The principle is central to fulfilling our mission of creating share value for customers, associates, communities, and shareholders.

With that, I'll now turn it over to David who will cover the details for the second quarter.

Thank you and good morning everyone.

I'll take you through the second-quarter details and then wrap up with our expectations for the remainder of 2015.

Loan balances totaled $80 billion at the end of the second quarter, up $1.9 billion or 2% from the previous quarter.

Year to date, loans have increased $2.8 billion, or 4%.

Business lending achieved solid growth, as balances in this portfolio totaled $51 billion at the end of the quarter, an increase of 3%.

Linked quarter production was strong, increasing 29%.

Commercial and industrial loans grew $1.7 billion, or 5%, and as Grayson noted, all three businesses within business lending experienced growth.

Also, line utilization increased 97 basis points, and commitments increased 3%.

Consumer lending also had a strong quarter.

Loans in this portfolio totaled $30 billion, an increase of 2% and production increased 24%, linked quarter.

Mortgage loan balances increased $171 million and production increased to 26% linked quarter.

Indirect lending for vehicles increased 2%, as production increased 12%.

And other indirect lending increased $111 million linked quarter and was driven by new partnership, focuses primarily on home improvement retailers.

Looking at the credit card portfolio, balances increased 3% from the previous quarter, and our penetration rate now stands at 16.4%, an increase of 80 basis points from last year.

And finally, total home equity balances increased $45 million from the previous quarter, as new production outpaced portfolio runoff in the second quarter.

Let's take a look at deposits.

Supported by our multichannel platform, average deposit balances totaled $97 billion, an increase of $1.3 billion during the second quarter.

Deposit costs remain near historical low levels at 11 basis points, while total funding costs were 25 basis points in the quarter.

Let's look how this impacted our results.

Net interest income on a fully taxable basis was $839 million, an increase of 1% from the previous quarter.

Driving this increase was an additional day in the quarter, higher loan balances, and a decrease in the cost of wholesale borrowings.

This was partially offset by the continued low rate environment and modest compression of spreads in the loan book.

The net interest margin was primarily affected by pressure on asset yields, resulting in a 2 basis-point margin decline to 3.16%.

Total non-interest income increased $120 million, which included $90 million related to the insurance proceeds received in the second quarter, related to a previously disclosed matter we accrued for in the fourth quarter of 2014, and this matter settled during the second quarter.

Excluding this item, adjusted non-interest income was robust, increasing 7%, reflecting our investment in and commitment to diversify and growing fee-based revenues.

Mortgage had a solid quarter as income increased 15%.

Loan production volume and market valuation of mortgage servicing rights also improved.

Capital markets was a significant contributor, with a $7 million quarter-over-quarter increase in fees.

This was primarily related to the placement of permanent financing for real estate customers, and increase in broker-dealer revenue associated with corporate fixed income underwriting, and the successful completion of our first M&A advisory engagement.

Card and ATM fees increased 6% as a result of increased debit and credit card usage, as customer spending increased 7% and transactions increased 9% over the prior quarter.

Commercial credit fee income increased from the previous quarter, due to a reclassification from net interest income.

This lowered net interest income by $3 million.

And the future run rate of commercial credit fee income should be approximately $20 million.

And finally, service charges increased 4%.

Let's move on to expenses.

Total reported expenses in the second quarter were $934 million, which included two charges totaling $75 million.

First, as Grayson mentioned, we transferred some properties originally purchased for future branch sites to held for sale, and incurred a $27 million write-down.

Second, professional and legal expenses totaled $71 million.

However, this included a $48-million net accrual for contingent legal and regulatory items for previously disclosed matters.

Importantly, based on current information, we expect the estimate of reasonably possible contingent losses to decrease by a significant amount.

Salaries and benefits increased 4% from the previous quarter.

Annual merit increases impacted expenses, along with an increase in incentive compensation.

This increase is partially due to unusually low incentives in the first quarter, as well as additional incentives tied to revenue growth.

Outside services increased $9 million, partially related to fees paid in connection with revenue generation, as well as increases in other costs associated with risk management activities.

However, due to the nature of these expenses, we believe there are opportunities for improvement going forward.

Deposit and administrative fees declined from the first quarter, primarily due to refunds from prior periods.

And the expected run rate for this line item is in the low $20 million range.

Our adjusted efficiency ratio was 64.5% in the quarter, an improvement of 40 basis points from the prior period, as we continue to make investments in talent and technology for future revenue growth and long-term efficiencies.

Our effective tax rate for the second quarter was 30.1%, which included a benefit of $7 million, related to the conclusion of state and federal tax examinations.

Excluding this benefit, our income tax rate would have been 31.8%.

Moving on to asset quality, total net charge-offs declined $8 million, and represented 23 basis points of average loans, an improvement of 5 basis points.

The provision for loan losses was $63 million, exceeding net charge-offs by $17 million.

As Grayson mentioned, this increase was primarily attributable to loan growth, and reflects the results of the recently completed Shared National Credit exam.

Our allowance for loan losses was 1.39% at the end of the second quarter, down 1 basis point from the end of the first quarter.

Total commercial and investor real estate criticized and classified loans increased $126 million, or 5% from the prior quarter.

However, they remained relatively flat as a percentage of total loans.

The increase was driven by some weakening in large dollar commercial and industrial loans, within the energy and other portfolios.

Compared to the prior quarter, troubled debt restructurings, or TDRs, declined 7% and our nonperforming loans decreased 6% linked quarter.

And at quarter end, our loan loss allowance for nonperforming loans, or coverage ratio, was 149%.

Given where we are in the credit cycle, the large dollar commercial credits in our portfolio and fluctuating commodity prices, volatility in certain credit metrics can be expected.

Let's move on to capital liquidity.

During the quarter, we repurchased $172 million or 17 million shares of common stock, and declared dividends of $80 million.

During the quarter, we returned 94% of earnings back to shareholders.

And under the Basel III provisions, we maintained industry-leading capital levels, as a tier 1 ratio was estimated at 12%, and Common Equity Tier 1 was estimated at 11.2%.

On a fully phased-in basis, Common Equity Tier 1 was estimated at 11%.

Liquidity at both the bank and holding company remains solid, with a low loan to deposit ratio of 83%.

And regarding the liquidity coverage ratio, Regions remains well positioned to be fully compliant with the January 2016 implementation deadline.

It is important to note that no major balance sheet initiatives are expected in order for us to be compliant.

Let me give you a brief review of the expectations for the remainder of 2015.

We continue to expect total loan growth in the 4% to 6% range on a point-to-point basis.

However, if current momentum continues, we should skew towards the higher end of that range.

Regarding deposits, we continue to expect full-year average deposit growth in the 1% to 2% range, and with respect to margin, our expectations for the year are essentially unchanged, and we look for margins to remain relatively stable over the balance of 2015.

However, we anticipate net interest income growth under our baseline expectations, for loan growth and an increase in interest rates later in the year.

Finally, we expect to continue to benefit from revenue initiatives, while at the same time prudently managing our expenses.

And we remain committed to generating positive operating leverage over time.

The second quarter was evidence of our continued momentum in 2015, and we remain focused on executing our financial priorities of diversifying revenue, generating positive operating leverage, and effectively deploying our capital.

With that, thank you for your time and attention this morning, and I'll turn it back over to List for instructions on the Q&A portion of the call.

Thank you, David.

Excuse me.

We are ready to begin the Q&A session of our call.

(Caller Instructions)

Now let's open up the line for questions, operator.

(Operator Instructions)

John Pancari, Evercore ISI.

Good morning.

Good morning.

Question on the margin again.

David, thanks for the guidance there.

For your expectation for relatively stable, just how would you define that?

Is that give or take a couple of basis points?

And if so, is it fair to assume, just given this rate environment, that we continue to see some modest degradation, maybe a couple of bps a quarter or so, until we get the Fed really moving?

So, John, you're right, we've tried to maintain the definition of relatively stable throughout this last year or so, as 1 to 2 points either side of where we are right now, and so when we say that, that's what we're looking for, for the remainder of the year.

Obviously, if we get rates turning on us a little bit and we have the loan growth, send a message on the NII group that we expect to have and we should see margins move in that direction.

But right now our call is relatively stable for the remainder of the year.

Okay.

All right.

And then, separately on expense side, I know you had initially given some efficiency ratio expectations and you're talking about the low 60s by the end of 2015 and wondering how you feel about that at this point.

And then, also, high 50s or so in 2016 and wondering if that is still something that you view as achievable?

Yes.

We've continued to target being in the lower 60s, to get into the 50s we do need to have a rate increase for that.

Clearly, we need two things to happen, revenue increases and continued focus on expense management to get our efficiency ratio down.

We had a 40 basis point improvement in the quarter, and I think, with our internal focus on expense management, and continuing to make investments in the right areas to grow our revenue, things are working out.

We're moving in that direction so to get into the lower 60s, it will require us to continue on the path that we're on right now.

Okay.

And on that, the low 60s, you don't need higher rates -- any kind of rate hike to get to that, though?

Like I said, we have forecasted to have a rate increase this year.

And that is in our discussion and conclusion on improvement from here of our efficiency ratio.

Okay.

All right.

Thanks, David.

Stephen Scouten, Sandler O'Neill.

Yes.

Hi.

Thanks guys.

I was wondering if you could give some more color around your existing portfolio, where the overall size of that portfolio is and kind of what concerns you might have coming off of that?

If you will, I'll ask Barb Godin, our Chief Credit Officer, to make a few comments on that and John Turner, our head of Corporate Banking Group, the two of them can provide color on that.

The overall size of our outstanding SNC portfolio is roughly in $16 billion range.

But as it relates to the results of the SNC exam itself, that cannot be disclosed.

It is confidential, supervisory information so I would not say much more about that, but we are comfortable with the book in terms of the credit quality that we see in that book.

It is very well rated, I'll turn it over to John Turner to make another comment.

Just in general terms, the SNC book represents a little bit less than 45% of our total commitments within the corporate banking group.

We do think it's an important part of our business.

It's a business that we have grown some, clearly over the last two or three years, and it's a business we think that will provide us significant revenue opportunities.

So as we talk about shifting the mix of revenue in the company, one of our key focuses is to grow our corporate bank and to grow our capabilities to serve those customers that we are now interacting with at a more significant level as part of the Shared National Credit portfolio.

So we view it as just being very strategic and giving us an opportunity to grow significant relationships with customers who can drive it.

Okay.

And then maybe one other question here just in regards to other opportunities for capital deployment.

What are you guys thinking about from an M&A perspective at this point in time?

Are there any increased conversations or increased desire on you all's part to get something done in that regard?

Especially given BB&T, the approval of their Susquehanna deal, does that give the any greater level of confidence or move up the timeline for potential M&A for you guys?

No.

I think the first and foremost, we are focused on organic growth, focused on executing our business strategies and trying to build a better bank and have a better team.

We are closely monitoring all M&A activity, we are preparing ourselves in the eventuality that opportunities present themselves.

We think that some of the activities in a space of late have been constructive.

We think that's helpful as we sort of prepare our long-term strategies.

That being said, at this juncture, our efforts are predominantly around preparation, if opportunities present themselves.

But our primary focus is growing organically.

Okay.

Thanks, guys.

Appreciate you taking my questions.

Eric Wasserstrom, Guggenheim Securities.

Good morning.

Just a couple of questions on credit quality.

You were very clear on the dynamics about what led to this quarter's provision, but as I look at the relationship of the reserve to loans, it seems to be stabilizing at around the 1.4% level.

Whereas some peers have continued to take it down closer to 1.25%.

And I'm just wondering what you sort of you as adequate going forward if there is any incremental migration in the SNC portfolio.

So, this is David.

We don't have any particular percentage that we paying for -- we let the model record there is obviously some judgment at the end of the day but I lot of it is model driven.

When you have 23 basis points worth of charge-offs and that can continue, if that continues over time you should see a migration down to some point.

I will tell you the loan growth we've had have been larger commercial credits, we tried to give you some color on the volatility that you can expect when you have larger credits, and one of them trends negatively.

We have -- we feel good about the reserve.

We feel good about our overall credit quality and trends and our non-performers coming down, and, but we also have loan growth that we have to provide for.

When you mix all that together, if we can continue to see a reduction in non-performers and a reduction in charge-offs, you would expect the coverage to come down.

But we need to see that on a quarter-by-quarter basis and let our model run.

It's got to be -- we're committed to a very data-driven process and we're letting the data drive that number.

We're, as David said, we're not targeting a particular ratio, but instead we're targeting a process where we evaluate the credit quality of our portfolio and let the data drive that decision.

However, I don't think it will go back to the old days of the goal of 1%, it will be a more established at some point.

But it will not go back to, we don't believe, those pre-recession levels.

Thanks.

That's very clear and just one quick follow up.

Obviously an outstanding quarter on the brokerage and investment banking line item.

How do you suggest we think about sort of the sustainable run rate of revenues in those business lines going forward?

Well, really, I think in a lot of ways very important quarter for us.

We really saw growth across, more broadly across our markets and more broadly across products.

We've been making a number of investments in parts of our business that grow non-interest revenue.

We've really started to see the traction that those businesses are able to gain in this market.

We believe that their contributions will continue to increase and, when you look at the growth across the Company, it's very encouraging, just starting to be reflected into the numbers, but very promising as we look forward.

And David, do you want to comment more?

Yes, we were encouraged, as Grayson mentioned we made investments in people.

We got our first M&A transaction.

We're looking at growing that space.

We've made a number -- invested in the Fannie Mae license, not quite a year ago.

That's paying off for us.

So these investments that we've made, we feel good about the continued improvement, there was nothing in revenue that causes us to believe there was a one-time issue there.

In terms of favorability that won't repeat.

We are looking to continue to grow that.

The face of which depends on the business that we can execute, so we're very encouraged by that and our growth and how broad it was.

Thanks very much.

Matt O'Connor, Deutsche Bank.

Good morning, Matt.

Good morning.

Can you guys provide the premium amortization within the bond belt this quarter and maybe how that compares to previous periods?

Yes.

So we're at $41 million this past quarter, Matt, it was about $2 million different than previous quarter.

$2 million lower I would assume?

That's right

Okay.

And then just looking forward, does that drive more significantly if the backup it rates hold here?

I think we're showing a relatively stable kind of a moderation of that premium amortization from here.

Okay.

And just, I mean in terms of why that would be, is -- there's some banks out there where it's really sensitive quarter to quarter, and I think yours Incorporated both the rate outlook and the actual prepayment.

So is it just a bit of a smoother impact then maybe some other banks?

Yes.

I think others can have a different method of amortization.

Ours are fairly -- should be fairly resilient like I said from here.

We used to have, our premium amortization was a much bigger impact to us, but our total premium that exist in the book is down.

We also have more 15 year product, so it's a little less impactful to us than perhaps some others.

Okay.

And then just separately, the deposit service charges, obviously nice bounce linked quarter there, probably on seasonality.

But as we think about you implementing some of the changes you've talked about, I think it's the high to low and some other, just provide an update on that, the magnitude and the timing, and if there's been any change versus what you thought maybe six months ago.

Yes.

So our service charges, that was seasonality that you saw.

If you compare year over year, the main difference between the prior-year had already advanced product in there that you know we are out of that product now.

We have continued to investigate changing of our posting order.

We still are committed to that effect on us when we implement it to be in the $10 million to $15 million range.

We expect to implement that towards the latter part of the year, so we haven't changed our timing from our last call.

But you should see that go in the latter part of this year, so there'll be some impact in 2015.

Additionally, Matt, we've seen steady growth in consumer checking accounts since the first of the year and so as we continue to grow accounts then that gives us an opportunity to continue to grow that line item, so pretty encouraging news in that regard.

Okay.

Thank you very much.

Thanks for taking my questions.

Sameer Gokhale, Janney Montgomery Scott.

Good morning.

Thanks for taking my questions.

Just on the last question you got, to follow up on that, to clarify, I think that you have switched or are switching to a chronological format for posting order.

Is that right?

Or are you doing high to low -- I just want to clarify that?

Chronological.

Okay.

To the extent possible, I think chronological pure sense is not possible, but chronological to the degree that transactions allow us to do that.

Yes.

No.

I understand, there seems to be a lot of complexity and understanding of a lack of clarity about exactly what the final rules will be.

But just to kind of further flesh that out, I was curious as to your adoption of the chronological order because in talking to other banks it seems like many of them have not yet done anything, they're waiting for the final rules to come out.

And if and when the final rules come out if they're different from what you kind of implemented, then wouldn't you need to change that again?

So I'm just trying to get a sense for the thought process there and kind of going ahead with the chronological process, the chronological order.

Yes, Sameer.

As we think through it, we are absolutely focused on trying to serve our customers, in the way that we believe to be appropriate and we think that there's a growing reception on the part of customers that some type of chronological base posting is a more appropriate way to go.

We are in close communication with our regulatory authorities about thoughts on process, thoughts on posting, and we appreciate that may change on us.

Believe we're building the process to where almost all of our transactions will be time order posted.

That being said, because of the complexity of posting, you never quite get to perfection, but we believe it's the right thing to do and so we are pressing ahead with it, as David said.

Right now, our project plans will have us completing that this year.

So we are on schedule to do that.

And if changes occur, in subsequent quarters, we'll make changes as they are deemed necessary and appropriate.

But I think we've waited long enough and we feel like that it's the right time purely from a customer standpoint that we need to do this.

It's got -- obviously, any change can have a mixed reaction on the part of the customers and we just want to be careful that our customers we communicate well and we're transparent, and we do this not only do the right thing but do it the right way.

So we're trying to do that.

Okay.

And then, just a quick one if I may -- I know you did talk about the home equity loans growing for the first time in a long time, I don't know if you had mentioned what the reason for that is and if you could give us a sense for what those proceeds are used -- being used for -- are they being used to pay down consumer credit cards or something else that would be helpful?

Thank you.

Well, I mean, we have been -- a few years ago we were predominately an equity line of credit.

Is the product that we went to market with.

I think that, as you saw, quite a while back, we introduced a amortizing home equity loan that has proved very attractive to our customer base.

What we've seen is, in this quarter, when you consolidate the net of home equity lines and home equity loans, you've seen customer's debt -- you've seen that pivot point where on a net basis for the first time in six years, we have started to grow that portfolio.

That's the combination of the runoff of the equity line portfolio has slowed and the increase in the home equity loan has increased substantially to accommodate that.

I would say anecdotally, most of the home equity loans we're making are for sort of the smaller dollar home refinance, also home repairs, and to a less degree, and the last on that list would be debt consolidation.

Strong FICO score, probably averaging close to 778, LTD around 60%.

So good product going on.

And I think serving our customers well.

That's great.

Thanks, Grayson.

Erika Najarian, Bank of America.

Hi.

Good morning.

Good morning.

I just had one follow-up question on credit.

Barb, it looks like the way I'm reading the charge-off breakdown, in C&I this quarter and in owner occupied CRE last quarter, the single basis point loss rate implies to me that there could be recoveries in those two categories.

And I guess the question here is, if we think about provisioning and reserving going forward, is the 23 to 28 basis point charge-off range at least on the past two quarters sustainable, or given potentially outsized recovery, should we look to the range prior to those two quarters of between 35 to 40 basis points?

Erika, recovery actually did play role in what we saw the past quarter, but it also played a role in prior quarters.

The one thing I would caution on is I think in recoveries is, a lot of the loans that we charged-off, those were the recoveries that we already received as our charge-offs have come down as opportunity for recoveries going forward.

The 23 basis points of loss that we're pretty pleased about this quarter is great, but we do believe again that's probably close to at the bottom of where we are going to be they make it another point or two out of it, but again we'll probably move somewhere between that 25 to 35 basis point range as we think forward.

And as my -- the second question to that is, how long do you think from a credit standpoint we could stay in that 25 to 35 basis point range?

And I guess a better way to ask that is, do you see anything near-term that could move you outside of that band?

The only thing I can see near-term at all is something that we can't see.

Everything that we see, that's in front of us, we feel comfortable that we'll expand that band, but again, you never know if you have some other factors that happens in the economy that will create an issue for us and disclose at that time.

Got it.

That's helpful.

Thank you.

Ken Usdin, Jefferies.

Good morning, Ken.

Thanks.

Good morning, Grayson.

I was wondering if I could ask a question on expenses in an absolute sense, so David you talked about having a little room in some areas to improve but then you talked about also the kind of normalization of that deposit administrative line.

So what are the puts and takes about -- in future expense growth and how much of that can continued investment burden do you still bear from here?

Well, I wouldn't categorize investment as a burden.

Some of that is good, the investments we are making to grow are revenue generators is a good expense.

We'll do that all day long, and expect a return for those type of investments.

I will tell you, though, as we think about managing our expense base, again, we've got to look at salaries and benefits.

I can see two pictures in our outside services, so those four categories, and in that, we can tighten up a little bit in terms of some of those investments we've had to make over time to deal with the regulatory environment that we are facing.

And just the banking industry, things that are related to risk management, capital planning, and those kinds of things that in compliance and audit.

All those, we over time will rationalize and you should see some opportunities for us there.

Also, as you know, we've done branch consolidations in the past.

That's brought down salaries and benefits, it's brought down furniture is and fixtures, it's brought down occupancy expense and while we don't have any current plans for branch consolidations, we're continuing to look at our branch footprint as part of our retail network strategy to ensure that channel is optimized.

We will make investments where appropriate and we'll tighten up other areas -- other branches where the revenue generation isn't strong enough for us.

And then lastly, I'll tell you, we have a number of six Sigma initiatives underway in our Company.

Virtually every department has an obligation to look at how they can become more efficient.

We haven't had a named expense initiative, as you know, but internally, we have an intense focus on expense management, and so there is not an expense that is off the radar screen.

But the areas where we'll move the meter are those four or five areas I mentioned.

And it -- sorry.

Go ahead, Grayson.

No.

I'd just add to what David said, I think we're absolutely committed to rigorous expense management across the Company.

You can never be as good as you want to be in that regard.

We continue to challenge ourselves internally but are we being good expense managers?

In this environment, it's a critical skill.

But we also are more than willing to make prudent investments that allow us to grow prudently.

So we will continue to do that.

We think those have been smart decisions.

They certainly are paying off and to David's point, we'll do that every day.

And we've done that in terms of recruiting, new bankers on our team, making investments in our current team to allow us to grow more appropriately, but prudently, and so it's part of -- if you look at, if you back up and look at our efficiency ratio and you look at it both expense and revenue side, we've done much better on expense side then we have on the revenue side.

And we're trying to take a very balanced approach to expense management, a thoughtful approach, that gets us where we want to be and to David's point, we're trying to make incremental improvement every quarter to get down to that lower 60% efficiency ratio.

It's going to require work on both sides of that formula.

Yes.

Understood.

And just as a quick follow up on that, the working on it and is it the type of stuff that, I know you don't have a program or a number, but as you think about the things you can work on, is it more just about monitoring the rate of growth or do you think you have the ability to actually at some point get the expense base back down?

Well, let me just -- not to make it more complicated than it is.

We clearly have been making investments in risk management.

And we've been making investments in bankers and growth opportunities that we see.

We tried to self fund a great deal of that expense and have by process improvement in a number of our back offices.

We've tried to do that process improvement in a lot of our support offices.

Such as legal and in vendor management.

But we also have tried to rationalize our channels, and in particular, the branch channel and have been, we think pretty aggressive in rationalizing channels and trying to make them as efficient as we can without reducing our effectiveness for the customer.

And so -- while we don't have a branded program, rest assured we've got lots of internal programs.

Yes, and Ken, we were down in expenses four years in a row.

We didn't commit to having expenses in 2015 lower than 2014 because we knew we wanted to make investments in the revenue generators.

And some are still coming aboard, so they hadn't generated the revenue.

We think that's the right kind of spend for us, can we get down to the expense level that we had in 2014 at some point?

It just depends on the investments we make going forward.

I think the first order of business is to watch the spend so that the rate of growth is the most appropriate rate of growth.

And then we can look at how efficient can we get over time with the use of things like six Sigma and so forth.

Understood.

Thank you.

Geoffrey Elliott, Autonomous Research.

Good morning, Geoffrey.

Good morning.

How are you?

Well.

Question on the energy portfolio.

I was interested to see that was kind of down a couple of percent over the quarter, which is lower than the pace of decline we've seen at some of the other banks.

So I'm curious, is that a deliberate strategy on your part?

Are you trying to pursue more of a stick with the customer key providing credit strategy than you think some of the other banks might be?

Or do you think that could just be differences in structure of portfolios?

Yes.

This is John Turner.

First of all, let me say, we are committed to sticking with our customers.

Where that makes sense.

And I think, as you think about what we are doing today, we are approaching our evaluation business on an ongoing basis with a healthy skepticism but staying very close to our customers so that we understand what's going on in their businesses.

When you look at the reduction in commitments, primarily occurred in the E&P space where, as a result of borrowing base redeterminations we reduced commitments by a little over $320 million, or on average about 16%.

We also had a number of our customers access the capital markets and in fact, over the last seven months, I guess has raised over $7 billion in the capital markets and have used those funds both to add additional liquidity, to potentially make investments to reduce their leverage and so that certainly had an impact as well.

And we think our clients are doing all the right things, and so, as a result, we have a cautiously confident about the performance of the book.

When I say doing the right things, our customers have reacted quickly to market conditions.

They've reduced their expenses, reduced their CapEx, they are raising liquidity and reducing leverage where appropriate and as a consequence, the bank will continue to see some reduction in the business until the market turns and reinvestment occurs.

And the John, if you would speak for a minute about customer selectivity and limited number of names in our book.

Yes.

I think, just another aspect of the way we think about the risk in the book is as I said this before, we have really a small number of larger names, if you think activity has been one of the hallmarks of our energy book.

Its customers that we have known for a long time, most of them at least of any size are very recognizable in the industry, management teams are very experienced, as I mentioned good access to capital markets and a liquidity, and we think that they are doing all the right things.

We spent a lot of time internally reviewing the portfolio, I mentioned that we have a quarterly review process for oilfield services book.

We've now looked at internally over 91% of our oil field services exposure within the last four months.

We also have done borrowing base redeterminations on all but one of our E&P relationships, so 98% plus or minus for that book.

And then our energy portfolio has been subject to a number of external reviews, including the SNC exam where we think 67% of our total energy book was reviewed as part of the SNC exam.

That's about 89% of the E&P portfolio and over 55% -- or about 55% of oilfield services, so a lot of eyes on our energy portfolio.

We think a lot of transparency given the fact that they're smaller number of larger exposures.

Which is a good thing.

On the downside, there is some single name risk associated with deterioration, but all in all I think we feel like we have a pretty good handle on the exposure in the energy portfolio.

And to follow up, the increase in indirect exposure, what happened there over the quarter?

We -- had some reclassifications as we continued to look for indirect exposures that are in some way impacted by the energy business.

So as an example, we pulled in some of our investor real estate portfolio where we have income producing properties that are least to third parties which happen to be in the energy space.

So, as we captured that as an indirect exposure, that had an impact on outstandings, as an example.

Thank you.

Matt Burnell, Wells Fargo.

Hello, Matt.

Good morning.

Good morning.

Thanks for take my questions.

David maybe a question for you, you mentioned the branch reduction and obviously that's been a positive story for you, all down about 3% year over year with somewhat more positive momentum in the last couple of quarters.

But also looking at the transaction services only, line, that's been pretty stable.

I guess I'm curious how you all are thinking about the product delivery capability over the next couple of years as you think about rationalizing branches, full-service branches.

Should we begin to see full-service branches continue to come down, but at the same time the transaction services presumably smaller, less costly branches rise?

Well, you asked the question of David, but if you don't mind I'll answer it.

I think it is -- we've said about a number of our businesses around the Company, we tend to be very data-driven and we think it's important to make sure we understand the data and what's going on in all of our channels and branches in particular.

We're doing a lot from an experimentation and innovation perspective with new branch formats, less people, more technology.

We also are experimenting with a number of innovative designs around drive-throughs and our capabilities our ATMs, and off-site locations.

All that being said, we still, when you look at the markets we operate in, and the customers that we serve and we serve almost 4 million customers across 16 states, they all have different needs.

And when you look at our customer base, still 59% of our customers will visit one of our branches in the next 30 days, so we still have a lot of customer traffic.

In fact, we've got a lot of branches that are operating at over-capacity levels.

So we've introduced a number of digital capabilities, deposit, smartphone deposit capture, remote deposit capture for small business and corporate customers.

We tried to use innovation to try to take more transactions out of our branches that allows us to be more efficient, but also dedicate more resource to sales and service.

And so, we've been introducing technology under ATMs, roughly 75% of our ATMs today have the ability to take a deposit through image technology.

If you look at how efficient we've got, almost 21% of the deposits of our Company are coming through a digital channel, as opposed to coming through one of our branch offices.

So making good progress but we're letting the data drive the number, so when we see a branch that is -- that transaction volumes and customer accounts of a particular branch is -- drives that decision, so that we don't do that anecdotally, but we do it with a lot of data and data analytics, and so we'll continue to do that.

I do think customers are showing of preference for our additional channels but it varies from market, and a lot of our markets are still very, very branch dependent, and so we pay attention to that.

Okay.

That's helpful, color, and David, maybe I can direct this one to you specifically on the earning assets.

You saw about an $860 million decline, 29% decline in other interest earning assets, which I presume is mostly cash at the Fed.

How does that number trend in your current outlook for margin through the rest of the year?

Yes.

You are exactly right so we put the excess cash to work so that push in terms of the loan growth.

We should see some growth in earning assets that will come with deposit growth picking up.

And the question is, where will that be deployed in the security book, cash in the Fed, or in loan growth?

And we feel good about our loan growth and gave you little bit of guidance in terms of what we thought we would do, skewing towards the upper end of our previously announced range.

Right.

So we expect that to pick up slightly.

Thank you.

Gerard Cassidy, RBC.

Good morning, Gerard.

Good morning.

Thank you.

A couple questions.

One, could you guys just go over the Shared National Credit outstandings, I didn't hear it clearly and I think the transcript it may have gotten the number incorrect.

Yes.

Barb, if you could speak to that.

Yes.

I'll speak to -- in fact it's $18 billion roughly of outstanding that we have in Shared National Credits.

Okay.

And because the transcript I think said 50, I assume the transcript is incorrect, then.

You are correct.

Okay.

Thank you for clarifying that.

Coming back to your loan portfolio, at one point you guys were de-risking the portfolio by allowing the commercial real estate balances to come down.

And I believe that ended some time ago.

But they are still shrinking and maybe can you give us some color what's going on in the commercial real estate investor as well as owner occupied commercial real estate mortgage portfolios?

Yes.

This is John Turner.

First let me start with owner occupied real estate, we're continuing to see that book run off a bit and I think that's as much reflective of the fact that we're just not seeing middle market or the lower end of the middle market in our business banking, small business customers invest in expanding their businesses.

So the volume of activity that we see is down.

That portfolio amortizes every month and so we're continuing to see some runoff, although the runoff is slowing a bit and we expect that trend to actually turn in the future.

As it relates to investor real estate, we did de-risk the book.

We have remade our business model, built it around professional real estate bankers working closely with real estate developers who, again, real focus on activity.

It's a business we want to grow but it's heavily construction oriented today and we'd like to see a shift more towards have a better balance between construction and term lending.

We are very committed to managing that book in a very disciplined and thoughtful way.

Applying our concentration limit methodology to make sure that we don't have too much exposure to any product type or to any particular market, diversity is really important to us as we think about managing that business going forward.

But I think you can expect to see it grow sort of as the economy grows would be our plan.

Kind of the 2% to 4% range, but not much faster than that as we seek to manage that risk prudently and shift again the mix from construction to more term oriented.

Thank you.

And just as a follow-up, Grayson, you gave us some good color on the branches and your digital channel and the activity you are getting through the digital channel.

And it's certainly a topic of debate in the industry today about the retail branch model.

With your 1,500 or so branches, can you guys give us some color on the profitability -- how many of those are meeting your return on equity or internal rate of return hurtles?

How many are not profitable, to give us a flavor?

Yes.

I mean we've certainly, we calculate that data on a real frequent basis and we've got different hurdles that we tried to monitor to make sure each of our offices are meeting our hurtles.

And where we are at today, is roughly 98%, 99% of our branch offices are providing a positive direct contribution to our earnings.

That being said, they all hurdle over internal rate of return requirements for branches or we have to look at each individual branch and see whether that branch is predominantly servicing transactions, are they growing accounts?

Are they growing balances?

Both deposits and loans?

And we take all that into consideration, and we take into consideration the markets they operate in before we make that consolidation decision.

Quite frankly, we are seeing tremendous growth in digital channels.

But the growth in digital channels is faster than the reduction of activity in our branches.

A lot of the digital activity is new activity, it's additional activity, but we are seeing patterns in our branches change and we make movements, take decisions, based off of those behavioral changes.

But I'll go back to my earlier comment, when it comes to our branch, our decision can't be anecdotal.

It has to be based off the absolute numerics of that branch and it has to be in the best interest of the community that we operate in.

Our engagement, and our communities, and our commitment to the communities that we operate in is very, very important to us and so all of that has to be considered when we look at branches.

Gerard, I'll add to that, one thing we have consolidated a little over 20% of our branch accounts since the crisis.

We stay focused on it and one of the things we have to think through is, even those that don't give us a return, we would like, is we have to look at what the next alternative is if we don't have that branch, because anytime we consolidate a branch, we lose revenue.

Now, the goal is to lose more expense than the revenue that we just lost and that's why you've seen the consolidation in a very measured pace.

We will continue to look at that and while we don't have any identified as of right now, you should expect us to continue to rationalize our whole retail footprint over time.

But I think an important point to make is that, today, we are seeing a higher level of sales growth in our physical points of presence.

In fact, our branches, our sales in the second quarter, new account sales in the second quarter, is the highest we've seen in four years, so very good performance out of the branches this quarter.

Grayson, David, thank you.

Thank you.

Vivek Juneja, JPMorgan.

Good morning.

Hi.

Thanks for taking my questions.

A couple of questions, firstly, Barb, on your Shared National Credit of $18 billion, how much are you the lead on?

We are the lead on -- I don't have the dollars at my fingertips -- but it is roughly 100 credits.

100 credits --

Out of a book of approximately 1,500.

Okay.

Great.

And then secondly, let me just -- Grayson and David, let me turn back to the efficiency ratio question.

When I look at your efficiency ratio calculation I have back to the deposit administrative fee refund that you got.

Your core efficiency ratio is essentially flat with last quarter.

At roughly 65%.

Which is up almost 180 basis points from a year ago.

And I know you're talking about it coming down and into the low 60s.

How much of that decline in a given that there's a lot of pressure which you've touched on and investment that you are doing, how much of the decline that you are expecting are you factoring in that's coming from Fed rate hike benefit?

65 to low 60s?

David or Grayson, how much do expect to come from there?

Yes.

We don't have it broken out in terms of just related to the rate hike, what I will tell you is that the main driver for our efficiency ratio is growing our revenue appropriately.

We do have expense measures that we are looking at in net revenue growth is expecting those investments that we've made thus far to continue to generate the revenue growth and we're seeing that.

We saw that this quarter with 7% NIR growth but we have people we hire just as an example, our financial consultants, we're up to 200, we saw our 201 this week.

But it takes time for those new folks to generate the revenue that we expect.

It's about eight or nine months, so we carry the expense load until the revenue comes.

And so part of our getting into that lower 60s is rates, part of it is continued execution from the people that are here, and then, from the expense side, as I mentioned earlier in the call, continuing to look at the support groups.

Whether it be, again, finance, HR, risk management, credit teams, all that infrastructure that we look at, we continue to work to rationalize that, to use technology to help us deliver our products and services cheaper to our customer base.

So all of that has to work together to get our efficiency ratio down into the lower 60s.

We really want to get to the higher 50s.

That does take a rate hike to get where we are in a normal rate environment, so that will take some time to get there.

Okay.

Thank you.

David Eads, UBS.

Good morning, David.

Hello.

Thanks for taking the call.

Just, I guess, a couple questions on the loan growth maybe on indirect auto, we've seen some talk about the CFPB and dealer markups on those loans.

I'm curious, what you guys do when it comes to dealer discretion on pricing and then I guess more broadly, what you think that those moves could mean for competition across the industry.

Well, we have seen, obviously, a change in some of our competitors in terms of dealer markups.

Today we give 200 basis point discretion, which is a little lower than the average peer.

The average peer has been 300 -- they lowered down to 250, so we're a little lower than peers.

We have seen some go to flats.

The industry really is looking along with the captives which have just come into the fold for the CFPB, they really give -- those of us that operate what the rules of the game are.

And what I'll tell you is that we'll adapt and overcome, we just want to know what they are.

We'll figure out how to make money in whatever environment it is.

So right now, I think, there is a measured pace as to whether or not we go to flats or whether or not we go from 200 to 100 or some other basis.

But I think that if you looked at our business, half of it only has 100 basis points of discretion in it.

So we are positioned well to adapt to whatever the rules are.

We just need some finalization to come from the regulatory side.

And to just add to what David said, we have -- we've done a number of things strategically to try to position ourselves better, or what David has outlined is an industry that's under change.

And we're trying to measure that change, interpret that change, so we've done some experimentation and some innovation around pricing.

We've experimented with substantially reduced markups.

We've experimented with something much lower than our standard.

We've worked with our dealers and strategically we've reduced the number of dealers we do business with, to make sure that we've got large dealer groups, that we've got confidence in the way they run their risk management part of their business and we'll continue to make changes as the market changes.

Today, though, the commercial banks are only about a third of that marketplace, and so commercial banks are responding to it.

It's still been a good market for us, but it's been very selective in who we do business with and what kind of business we'll place on the books.

Great.

That's some good color.

And then, I think you guys broke out this other consumer indirect category this quarter and I'm just kind of curious, you talk about that being partnerships with primarily home-improvement retailers.

Is that kind going to have the characteristics of home equity loan?

Or a card loan?

And kind of what you are looking to do with that business?

That is basically indirect lending through point-of-sale and we've partnered with people who provide the front end origination of those loans at retailers and so we've -- it's just an alternative source.

As you see, there's a lot of change in the consumer lending space.

A lot of digital offerings in the market.

But there's also a lot of offerings that are taking place at point-of-purchase, if you will, and home-improvement is a big issue for a lot of our customers.

But they want to get that financing when they walk into the home-improvement store, and so we've partnered to try to capture some of that and so we're trying to be integrative in consumer lending and this is just an example where we've had some good progress in that regard.

Great.

Thanks.

This concludes the question and answer session of today's conference, I will now turn the floor back over for closing remarks.

Listen, thank you for your questions.

We very much appreciate your questions, appreciate your participation, your interest in Regions and we look forward to speaking with you again next quarter.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.