Regions Financial Corp (RF) 2016 Q2 法說會逐字稿

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

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

(Operator Instructions).

I will now turn the call over to Ms. Dana Nolan to begin.

Thank you, Paula.

Good morning and welcome to Regions second-quarter 2016 earnings conference call.

Participating on the call are Grayson Hall, Chief Executive Officer, and David Turner, Chief Financial Officer.

Other members of senior management are also present and available to answer questions.

A copy of the slide presentation we will reference throughout this call as well as our earnings release and earnings supplement are available under the investor relations section of regions.com.

I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risk and uncertainty.

Factors that may cause actual results to differ materially from expectations are detailed in our SEC filings including the Form 8-K filed today containing our earnings release.

I will now turn the call over to Grayson.

Good morning and thank you for joining our call.

Second-quarter results reflect continued momentum in 2006 (sic) and demonstrate that we are successfully executing on our strategic priorities.

We are pleased by our continued progress despite a challenging and somewhat volatile economic backdrop.

For the second quarter, we reported earnings available to common shareholders of $259 million and earnings per share of $0.20.

We continue to deliver results in areas we believe are fundamental to future income growth.

We expanded our customer base as we grew checking accounts, households, credit cards and wealth relationships.

Our approach to relationship banking and customer service excellence is instrumental to our success and we are always pleased to receive external recognition of these efforts.

In that regard, the Reputation Institute and the American Banker magazine recently ranked Regions as the most reputable US Bank overall and for the second consecutive year, the most reputable among customers.

We are honored to again receive this top ranking as it recognized the efforts of all Regions associates in identifying and meeting the needs of our customers and communities we serve.

Another outstanding recognition came from Temkin Group, which ranked Regions among the top 10% of companies they rated in 2016 as we rank second in the nation for online experience.

Looking further at our results, we achieved total average loan growth of 4% compared to the prior year.

Despite market uncertainty, the overall health of the consumer remains a bright spot.

To that end, consumer loans increased 5% year over year with loan balances up in every asset category and our consumer credit metrics continue to improve.

Consumer net charge-offs decreased 5% from the second quarter last year.

Non-accrual consumer loans decreased 16%.

Delinquencies decreased 5% and troubled debt restructured loans decreased 4%.

Active credit cards increased 12% year over year while active debit cards increased 4%.

Total transactions on cards increased 6% and total spend is up 5%.

Further, average consumer deposits are up 3% year over year including savings deposits were up 9%.

Turning to business lending, average loans increased 3% over the prior year.

As we indicated last quarter, we are experiencing some softness in our commercial lending pipelines, still strong but soft.

In some areas customer sentiment continues to reflect less optimism and more uncertainty in the economy and we have yet to see small business owners really return to the market with confidence to invest and expand.

We were also exercising caution and discipline as we approach internal concentration risk lending limits with certain segments and certain geographies.

As we highlighted recently at Investor Day, we continue to strengthen our loan portfolio and our focus on migrating credit only relationships, recycling that capital into more profitable and deeper relationships that result in a better portfolio overall.

As a result and as previously disclosed, we expect to track towards the lower end of our 3% to 5% average loan growth for 2016.

Despite softer business loan demand, total adjustment revenue increased 4% over the second quarter of 2015 reflecting the effective execution of our strategic plan to grow and diversify our revenue.

Our investments are clearly paying off as Capital Markets increased 41% and Wealth Management increased 6% on a year-over-year basis.

With respect to market conditions, the global and macroeconomic environment does remain challenging.

As such it's critical in this operating environment that we focus on what we can control.

To that end, we remain committed and focused on disciplined expense management and are on pace to achieve our 2016 efficiency and operating goals.

For the first six months of 2016, our adjusted efficiency ratio was 62.3% and we have generated 4% positive operating leverage on an adjusted basis.

With respect to energy lending, while oil prices have improved, low prices continue to create challenges for certain industry sectors while benefiting others.

On a point-to-point basis, our direct energy loans have declined $324 million or 12% from the first quarter and currently stand at $2.4 billion or 2.9% of total loans.

Additionally, we continue to maintain appropriate energy reserves which now stand at 9.4% of our direct energy exposure, up from 8% last quarter.

The percentage increase is primarily due to the decline in direct energy loan balances.

Further, we are substantially complete with our spring redeterminations which as of to date resulted in a 22% decline in customer borrowing basis.

Turning to capital deployment, we successfully completed the annual Comprehensive Capital Analysis and Review process, or CCAR, and received no objection to our planned capital actions.

And last week our Board of Directors approved a $0.065 dividend on common shares and $640 million share repurchase plan.

We remain committed as a team to deploying our capital effectively through organic growth and strategic initiatives that increase revenue or reduce ongoing expenses while returning an appropriate amount of capital generated to our shareholders.

In closing, our second-quarter results reflect the successful execution of our strategic priorities and our continued commitment to our three primary initiatives which are growing and diversifying our revenue streams, practice disciplined expense management, and effectively deploy our capital.

These are all integral to our success and we remain on track to deliver our performance targets.

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

Thank you and good morning, everyone.

Let's get started with the balance sheet and a recap of loan growth.

Average loan balances totaled $82 billion in the second quarter, up 1% from the previous quarter.

Consumer lending had another strong quarter as almost every category experienced growth and total production increased 20%.

Average consumer loan balances were $31 billion, an increase of $303 million or 1% over the prior quarter.

This growth was led by mortgage lending as balances increased $162 million linked quarter reflecting a 49% seasonal increase in production.

Indirect auto lending increased $93 million and production increased 4% during the quarter as we continue to focus on growing our preferred dealer networks.

Other indirect lending which includes point-of-sale initiatives increased $87 million linked quarter or 15%.

Turning to the credit card portfolio, average balances increased $16 million from the previous quarter and our penetration into our existing deposit customer base increased to 17.7%, an improvement of 20 basis points.

Total home-equity balances decreased to $87 million from the previous quarter as the pace of runoff exceeded production.

As Grayson mentioned, we continue to experience softer pipelines in the Commercial space.

As a result, total business lending average balances were relatively stable with the previous quarter.

Average Commercial loans grew $178 million linked quarter inclusive of a $64 million decline in average direct energy loans.

The net increase in average Commercial loans was driven by Corporate Banking as our specialized industry segments added new relationships within technology and defense and financial services.

And commitments in line utilization were relatively flat with the previous quarter.

Let's take a look at deposits.

Total average deposit balances decreased $253 million from the previous quarter.

Deposit costs remain near historically low levels at 12 basis points reflecting the strength of our deposit base.

And total funding costs continue to remain low totaling 29 basis points in the second quarter.

With respect to deposits, loan growth expectations provided the opportunity to accelerate our planned reduction of certain deposits within our Wealth Management and Corporate segments which contributed to the overall decline in deposit balances.

Within Wealth Management, certain trust customer deposits which require collateralization by securities were moved into other fee income producing customer investments.

Average deposits in the Consumer segment increased $1.2 billion or 2% from the previous quarter reflecting the strength of our retail franchise, the overall health of the consumer and our ability to grow low-cost deposits.

Our liquidity position remains solid with a historically low loan to deposit ratio of 84%.

Let's see how this all impacted our results.

Net interest income and other financing income on a fully taxable basis was $869 million, decreasing 2% from the first quarter but up 4% compared to the prior year.

The resulting net interest margin for the quarter was 3.15%.

As you recall, the first quarter benefited from items that were not expected to repeat which partially contributed to the linked quarter declines in net interest income and other financing income as well as the net interest margin.

Recent long-term debt issuances, lower loan fees and less favorable credit related interest recoveries along with reduced dividends from trading assets that benefited the first quarter were the primary drivers behind the linked quarter decrease.

These were partially offset by higher loan balances.

Noninterest income growth was strong in the second quarter reflecting our deliberate efforts to grow and diversify noninterest revenue.

Total noninterest income increased 2% on an adjusted basis from the first quarter driven by growth in service charges, mortgage income and card and ATM fees.

Service charges increased 4% in the second quarter reflecting the benefit of 2% growth year to date in checking accounts again highlighting the strength of our retail franchise.

Mortgage income increased 21% driven by a seasonal increase in production.

Of note, within total mortgage production, 75% related to purchase activity and 25% related to refinancing.

Additionally during the quarter, we entered into an agreement to purchase mortgage servicing rights on a flow basis.

As a result, we expect to purchase the rights to service approximately $40 million to $50 million of mortgage loans per month on a go-forward basis.

Card and ATM income increased 4% during the quarter driven by a 1% increase in active debit cards and an 8% increase in transaction volume.

We had another good quarter in Capital Markets with increased fees from merger and acquisition advisory services.

Linked quarter results declined 7% relative to the prior quarter's strong results.

The decline was primarily due to reduction in fees generated from the placement of permanent financing for real estate customers and syndicated loan transactions which were especially strong in the first quarter.

Wealth Management income decreased 3% primarily due to seasonal decreases in insurance income.

This decrease was partially offset by increased investment management and trust fees.

Importantly, despite our reduction in the Wealth Management deposits, total assets under administration increased 2% quarter over quarter.

Noninterest income was also impacted by market value adjustments related to assets held for certain employee benefits which increased $20 million compared to the first quarter.

However, this is offset salaries and benefits with no impact to pretax income.

Bank owned life insurance decreased this quarter primarily due to $14 million in claims benefits and a gain from an exchange of policies recognized in the first quarter.

Let's move on to expenses.

On an adjusted basis, expenses totaled $889 million, representing a 5.5% increase quarter over quarter.

During the second quarter of 2016, we incurred $22 million of property related expenses in connection with the consolidation of approximately 60 branches as well as other occupancy optimization initiatives.

These branches are expected to close in the fourth quarter of 2016.

Including these 60 branches, Regions has announced the consolidation of approximately 90 branches as part of the Company's previously disclosed plans to consolidate 100 to 150 branches through 2018 and we continue to expect to be at the higher end of the range.

Total salaries and benefits increased $5 million from the first quarter and as previously noted, includes $20 million in additional expense related to market value adjustments associated with assets held for certain employee benefits which are offset in other noninterest income as I mentioned.

In addition, severance related expenses declined by $11 million quarter over quarter.

Excluding the impact of the market value adjustments and severance charges, total salaries and benefits would have declined compared to the first quarter.

Year-to-date, staffing levels have declined 4% serving to lower basin salaries and fully offset the impact of the annual merit increase.

Professional and legal expenses increased $8 million primarily due to $3 million in legal and regulatory charges incurred during the second quarter related to the pending settlement of previously disclosed matters as well as the impact of a $7 million favorable legal settlement recognized in the first quarter.

FDIC Insurance assessments decreased $8 million from the previous quarter primarily due to a $6 million refund related to overpayments in prior periods.

As previously disclosed, we expect FDIC Insurance assessments to increase by approximately $5 million on a quarterly basis associated with the FDIC surcharge.

We anticipate this will be implemented in the third quarter resulting in a quarterly FDIC run rate in the $27 million to $30 million range.

Other expenses increased $25 million including an $11 million increase to the Company's reserve for unfunded commitments as well as $9 million of credit-related charges associated with other real estate and held for sale loans.

Our adjusted efficiency ratio was 64% in the second quarter and 62.3% year to date.

As Grayson mentioned in this uncertain market environment, we are focused on what we can control and to that end disciplined expense management is paramount.

Our plan to eliminate $300 million of core expenses through 2018 is well underway.

We are also evaluating opportunities to pull forward some of the identified savings as well as challenging our team to thoughtfully identify additional expense eliminations beyond the $300 million previously announced.

Let's move on to asset quality.

Total net charge-offs increased $4 million to $72 million and represented 35 basis points of average loans.

The provision for loan losses essentially matched charge-offs in the quarter and our allowance for loan losses as a percent of total loans remained unchanged at 1.41%.

Total nonaccrual loans excluding loans held for sale increased 3% from the first quarter and troubled debt restructured loans or TDRs increased 4%.

Total business services criticized loans increased 1%.

These increases reflect global market uncertainty and the strength of the US dollar along with continued volatility in commodity prices.

At quarter-end, our loan loss allowance to nonaccrual loans or coverage ratio was 112%.

We continue to see credit improvement within the consumer portfolio as net charge-offs decreased 24% from the prior quarter.

Additionally, consumer TDRs improved linked quarter while total delinquencies remained relatively stable.

Within business services, we experienced $17 million worth a net charge-offs within the energy portfolio during the quarter.

Approximately half were attributable to oil and gas and half were attributable to coal.

While oil prices have recently traded around $50 per barrel and are showing signs of stabilization, uncertainty remains.

Should prices fall and consistently trade in the $35 to $45 range, we expect additional losses between $50 million and $75 million.

However, the timeframe for these losses now extends through 2017 as we expect resolution will take longer for certain customers in the portfolio.

And should oil prices average below $25 per barrel through the end of 2017, we would expect incremental losses of $100 million.

In addition, weakness in energy, mining and metals and agriculture continues to put some pressure on certain commercial durable goods companies.

We also continue to monitor investor real estate in energy related markets.

We continue to believe our total allowance for loan losses is adequate to cover inherent losses in these portfolios.

Now given where we are in the credit cycle and fluctuating commodity prices, volatility in certain credit metrics can be expected especially related to larger dollar commercial credits.

Let's move on to capital and liquidity.

During the second quarter, we returned $258 million to shareholders including the repurchase of $179 million of common stock and $79 million in dividends completing our 2015 CCAR capital plan.

As Grayson mentioned, we successfully completed our 2016 CCAR process and received no objection to our planned capital actions.

And last week our Board of Directors approved a $0.065 quarterly dividend on common shares and a $640 million share repurchase plan.

Now under Basel III, the Tier 1 ratio was estimated at 11.6% and the Common Equity Tier 1 ratio was estimated at 10.9%.

On a fully phased in basis, Common Equity Tier 1 was estimated at 10.7%, well above current regulatory minimums.

So let me provide you with an overview of our current expectations for the remainder of 2016.

We continue to expect total loan growth in the 3% to 5% range on an average basis relative to the fourth quarter of 2015.

Given softer pipelines in the commercial space, we expect to track toward the lower end of that range.

Regarding deposits, softer loan growth expectations coupled with a strategic reduction of certain deposits within our Wealth Management and Corporate Banking segments will result in total average deposits remaining relatively stable with fourth quarter 2015 average balances.

Our expectation for net interest income and other financing income remains unchanged.

Assuming no rate increases for the remainder of 2016, we expect to be at the midpoint of our 2% to 4% range.

As a result of our investments, we continue to expect to grow adjusted noninterest income in the 4% to 6% range on a full-year basis and given our year-to-date performance, we would expect to be at the higher end of that range.

Our plan to eliminate $300 million of core expenses is on track and we continue to expect to achieve 35% to 45% in 2016.

Therefore, total adjusted noninterest expenses in 2016 are expected to be flat to up modestly from 2015.

We also expect to achieve a full-year adjusted efficiency ratio of less than 63% and adjusted positive operating leverage in the 2% to 4% range in 2016.

Full-year net charge-offs should be in the 25 to 35 basis point range and given the volatility and uncertainty in the energy sector, we continue to expect to be at the top end up that range.

So in closing, we are pleased with our second-quarter performance and believe our results demonstrate that we are effectively executing our strategic plan in the context of a difficult operating environment.

We look forward to updating you on our progress throughout the remainder of the year as we continue to build sustainable franchise value.

With that, we thank you for your time and attention this morning and I will turn the call back over to Dana for instructions on the Q&A portion of the call.

Thank you, David.

Before we begin the Q&A session of the call, we ask that you please limit your questions to one primary and one follow-up in order to accommodate as many participants as possible.

We will now open the lines for your questions.

(Operator Instructions).

Marty Mosby, Vining Sparks.

Good morning, Marty.

Good morning.

I want to ask a question about the other expenses not that they were unusual but there was some credit related to the unfunded commitments as well as some other credit related expenses.

It looked about $20 million higher than the run rate.

Just wondered if there was something that elevated that this particular quarter?

Yes, Marty, this is David.

So from time to time we will have some credits that go sideways on us.

This particular quarter we had really one large credit in the unfunded commitment that caused an $11 million increase there and the charge for that we run through noninterest expense.

And you'll see over quarters the volatility that can have pluses and minuses.

We expected that credit would fund in the third quarter but we believed it was important for us to continue to have an unfunded reserve for that today.

From an OREO and held for sale standpoint again just a couple of credits, they happen to be large and we had some write-downs that we believe needed to take place so we took valuation adjustments in total of about $9 million.

So you're spot on between the two, it was about $20 million of charge that we had to take during the quarter.

Thinking about that and then your tangible book value growth has been creating about a 2% or better consistent growth.

As you are looking at creating shareholder value, one of the things is probably what you've been able to derisk because just getting credit from the tangible book value growth would be an upward momentum for the overall valuation.

So just wanted to see if as you think about where you're at today versus where you were at as we went into the last downturn, what makes Regions different from just a risk profile significant changes have been able to address that should at least make investors comfortable with tangible book value?

Sure.

So I mean over the past six years we've made a lot of changes in people and process, content of our whole balance sheet has changed dramatically and the most obvious one is the decline in investor real estate which represented almost 30% of our loan portfolio at one time.

Today it's about call it 9% -- right at 9%.

The credit discipline that we have with regards to how we approach business is very different and we feel good.

We have our hands around our loan portfolio.

Energy has been a challenge for our industry and those of us that participate in it but our concentration risk management program that we have in place has reduced the impact, the negative impact we'd otherwise have had.

Being the largest bank headquartered in the Gulf states, we have now about 3% of our loan portfolio in energy and we've talked about the reserves, the 9.4% reserves so we believe we have that covered.

There is some volatility and uncertainty there.

We feel like we're on top of that.

As we think about our commitment to continue to grow our cash flow, our PP&R, look at the investments we've made over time.

Those investments are paying off as we continue to grow and diversify our revenue stream and we've had a fairly consistent margin if you look at that.

And then I will wrap up with expense management.

We have a $300 million target out there where we said we would take 35% to 45% of that in the first year.

We're on track with where we want to be and I gave you guidance as to where we thought we'd finish the year.

So it's a very different Regions and a very different approach to the business and the stability of growth and tangible book value and we've been leveraging our earnings well and returning mid 90% of our capital back to our shareholders in the form of a dividend around 30% of that earnings and 60% plus in terms of share buyback.

So we think we're deploying our capital effectively.

So good business, good markets, good customers and executing against the strategic plan that we laid out in October for our Board and at Investor Day.

Thanks, David.

Jennifer Demba, SunTrust.

Good morning.

Thanks for taking the question.

Question on your Capital Markets revenue.

What do you think the potential is for this fee line over the next two to three years?

It's been growing at a rapid pace for a few quarters now.

As David mentioned earlier, we continue to see some softness in our wholesale sales pipelines and if you look at strategically what we've tried to do with that business is to build out a lot of product offerings we have primarily in Capital Markets but also in treasury management so that we can generate a very reasonable return on invested capital in that business.

And the Capital Markets group is a place that we've made significant investments.

We continue to believe that those have been thoughtful and smart investments.

We've demonstrated very strong growth this year.

We continue to challenge the team in terms of what the growth capabilities are of that activity.

We're coming from a relatively low base so the percentages look remarkably high but we have not publicly stated a percentage increase goal but we do believe strongly and confidently that that's a business that we can continue to grow over time at an above rate level to our other parts of our business.

Okay, thank you.

Geoffrey Elliott, Autonomous Research.

Hi, good morning, thank you for taking the question.

When I look at the criticized loan balances you're giving overall on page 8, I see an increase and then when I look at page 12 just specifically, the energy balances I see a decrease.

So I wondered if you could elaborate on what's driving the increase outside of energy?

Yes, this is Barb Godin.

Energy as you said did go down.

We saw some other movement as we look at some of the other areas that we have considered to be a little soft that would be agriculture, some transportation and primary metals.

So we're keeping an eye on that.

We're being very cautious in those categories.

We're watching them and as we see signs that there's any deterioration, we're immediately moving them to a special mention category and so that's what accounted for the increase there.

Thank you.

Then just a quick follow-up.

I didn't catch earlier but I think you said the noninterest income growth you thought should be at the high-end of the 4% to 6% range.

I just wanted to check if I had that right?

That's right.

Just taking kind of where we are today and looking at the investment we made and what's in the pipeline we feel like we will most likely be at the higher end of that.

We'll give you a better guidance one more quarter out but we feel confident enough to be able to lean towards the higher end of the range.

Great, thank you.

Matt Burnell, Wells Fargo Securities.

Good morning.

Thanks for taking my question.

David, maybe a question for you just following up on your comments about $300 million cost reduction and the 35% to 40% specifically you're targeting for this year.

Is it reasonable to assume that the pace of that 35% to 40% reduction will be largely back-end loaded or could it be perhaps a bit more evenly spaced over the course of this year?

Well, you can have -- we haven't placed it in any given quarter.

We really are trying to guide more to the full year than any given quarter.

You can have at times spikes in expense from one quarter to the next but we'd rather just stick with the guidance for the full year of being where expenses would be flat to up modestly from 2015.

Okay.

And then just on what sounds like a little bit of softness in the commercial pipelines particularly in C&I, are there -- outside of energy are there specific industries where you are seeing particular softness or is it more of a broad-based greater level of caution on your borrower's part given the economic uncertainty?

I think where we try to compete is in the lower end of the commercial market and you've seen a lot of our competitors demonstrate growth.

A lot of that growth has been in the higher end of commercial into the corporate space.

But when you look at that middle market C&I customer, we're seeing a lower level of demand for lending to support capital spending.

I would tell you that energy is an obvious place where that has occurred but you do see that spread across a number of different commercial industries as there's been obviously the strengthening of the US dollar and some uncertainty created by a lot of events both globally and drastically.

So I wouldn't say it's limited to one particular industry.

It seems to be more broad-based than that.

But if you look at credit quality, commercial is still very good.

We've had a really good experience now for several quarters in a row.

We still expect it to be good but it's modestly soft, modestly weaker than what we saw a quarter ago and at the same time, we're just not seeing the new and renewed production that we were seeing this time last year.

Okay, that's helpful.

And David maybe just another quick one for you.

In terms of the bank owned life insurance numbers, you mentioned one of -- a couple of reasons why that had moved around over the last couple quarters.

I guess I'm just trying to get level set on what a reasonable run rate would be for the second half of the year?

Yes, so the first quarter did benefit from a couple of things.

We exchanged a policy into a different product and we also had a claim.

Where we are right now is about where you ought to expect that for the rest of the year.

Okay, thank you very much.

Ken Usdin, Jefferies.

Hi, good morning.

On net interest income I wanted us to understand, you've got the purposeful decline on the wholesale balances so the balance sheet looks to have shrunk and with the offset being a little bit better NIM, can you just walk us through how you kind of expect that trade-off to go going forward?

Do we see not as much growth in earning assets but a lesser decline in the NIM in terms of growing NII?

Well certainly from a NIM standpoint we're really trying to get growth in NII but NIM will be continued pressure if this rate environment stays where it is and I would expect you could have 4 to 6 more points of compression for the remainder of the year.

But as we think about growing NII, we do it from a couple of different spots.

One growing earning assets which is really on the funding side, the deposit side and then putting those -- that growth in good solid loan growth where we can get compensated for the risks that we're taking, where we can get compensated for having a full customer relationship versus just renting out the balance sheet from a credit only standpoint.

It's very hard to make money if you just are making loans only.

So we're challenging our teams where we have our relationship that's a credit only relationship to figure out how we recycle that capital into a more fulsome relationship with the customer.

So just because we don't have the loan growth doesn't mean we can't continue to grow NII if we execute that program appropriately.

So that's kind of how we think about the NII going forward.

Go ahead, Grayson.

Sorry.

I would just reiterate, we continue to see solid loan growth opportunities on the consumer side of our balance sheet.

We expect that to continue.

We don't see any reason at this point in time to not believe that continues and the health of that consumer customer continues to be remarkably strong.

Now on the wholesale side, our focus continues to be at the lower end of that commercial middle-market space and we're trying to be much more rigorous, much more thoughtful and certainly more disciplined at this point in the credit cycle to make sure that what we're putting on our balance sheet makes sense, that it has a reasonable return and a full relationship as David said.

And just one follow up on that, David, so getting to 3% year over year on a high growth is almost baked in the cake even if you don't grow it sequentially from here.

But are you confident though that you still can envision an X rates growth in NII from the second quarter point?

Well, again we've landed on 3% for the full year.

We're working hard to take where we are right now to continue to grow.

It's obviously very challenging given the rate environment what's rolling off versus what's going on, flattening of the yield curve.

So we have some reinvestment risk with regard to the securities portfolio but we think if we will execute we can continue to have some modest growth in NII and again, we believe strongly in the 3% growth for the year.

Okay got it.

Thank you.

David Eads, UBS.

Hi, good morning.

Maybe just following up on the last point about the reinvestment risk in the AFS portfolio, with the 10 year where it is, is there any change to your policy?

I mean you are basically just looking to replace maturities and pay downs at current prices or anything you'd look to do to change on that perspective?

We don't have any major change anticipated.

We haven't extended duration.

We are a little over three years right now.

It's been that way for a while and we don't look to make that change.

We have the risk profile in the securities book like we want it to be so we haven't looked for a lot of wholesale changes from basically the mortgage-backs that we have there today.

So as you are pointing correctly, the risk to us is that reinvestment yield as the 10 year continues to have pressure on us, we will put pressure on our return on the securities book but we don't believe the risk of trying to change that dramatically is worth it to us right now.

So you kind of answered I think your own question.

Right.

That makes perfect sense.

Maybe on a related point, it was a good quarter for mortgage revenues and you guys made the point that it was mostly purchase related.

Do you have an expectation for how that business is going to shake out over the next couple of quarters and whether it gets a little bit more refi heavy and whether I guess revenues can stay high near the seasonally high levels for a couple of quarters?

I think we were pleased with the performance of our mortgage team this quarter.

Again the mix of business that we placed on the books this quarter about 75% repurchase and about 25% refinance or purchase and refinance.

We do expect to have a good third quarter based off what we are seeing today.

We have seen a shift in the application volume.

I would tell you that instead of being about 75/25, it appears to be shifting more to 60/40 in terms of purchase versus refinance.

So we should see that shift in this quarter.

But I think we will have a good quarter traditionally if you look at our numbers second and third quarter are always our strongest mortgage origination quarters.

So absent any change that we don't see today, we think -- you'd think we'd ought to have good progress going forward.

Great, thanks for taking the question.

Stephen Scouten, Sandler O'Neill.

Hey guys.

I appreciate you taking the time here.

I had a question for you on the previously announced relationship with Avant and where that's at and if there's any changes given kind of their volume cuts and their business or what that's going to look like for you guys moving forward?

So Avant is still in the early stages.

We will launch that in August so it's premature for us to comment.

We think it can be accretive to us over time but the way we're treating some of these investments that we're making is we're not taking a lot of risk.

We're trying some things.

We're seeing what we can learn.

We're seeing how we can better serve our existing customer base with these opportunities.

So we think it will work for us but again too early to tell.

We will update you as we go through the third quarter and into the fourth.

I mean, we continue to get good feedback from our customers on our online experience and as we mentioned earlier in the call, had gotten some recent recognition in that regard and ironically we're in the process even as we speak of refreshing our online and mobile experiences for our customers.

We're launching that as we speak and then Avant will be in August as David said.

We think it's just one more way of trying to provide a better experience for our customers in both the online and mobile channels but it will be incremental to what we're doing.

Good consumer numbers.

I think we were extremely pleased overall with consumer numbers this quarter across all channels.

One of the better quarters we've had.

Sounds good.

And I guess maybe as a follow-up, do you have any trepidation on either from the standpoint of giving away customer data or losing customer contact in a relationship such as this?

And also just you mentioned the growth in consumer as a whole.

Any trepidation there in terms of increasing that exposure and what ultimate losses could be on the consumer side even as I know credit metrics on the consumer side have been good here as of late?

Well first of all, the foundation of our business is built off customer trust.

Without customer trust our business model doesn't work and so we are very sensitive to anything we do that involves customer data and the privacy of that data, the confidentiality protection of that data.

So we have very extensive risk management reviews.

Our due diligence process is very rigorous and will continue to be.

That being said, cyber security is an area that we are challenged with today but spending an awful lot of resource and time on it but there's nothing more important to us than the trust of our customers with their information and their assets.

Okay, thanks guys.

Michael Rose, Raymond James.

Hi, good morning.

David, just one for you just going back to energy, you laid out the scenario if oil was $35 to $45 but what if we're contracting above that into the back half of the year, what would that imply for losses and maybe any updated commentary into 2017?

So we have as you now see reserves of about 9.4%.

Those reserves are established based on in large part due to the risk ratings we assigned that come from our work and our credit team's work and also evaluated by our regulatory supervisors.

In terms of what ultimate losses are, we'll have to see.

If we continue to get stabilization and a higher oil price, that reduces our pressure and risk of ultimate charge-offs.

But I would say given the volatility that we see in prices, it would be premature to see how those reserves would come back into income in the short term.

I think we need to let that play out over a little longer period of time.

This is Barb.

I would add Michael that with oil even at $50 or higher a barrel, that certainly helps the E&P companies first but the oilfield services companies, they tend to lag.

So again, that is the reason for us putting out the 50 to 75 between now and the end of next year.

Fair enough.

And maybe just a quick follow-up.

Provision [net] charge-offs this quarter, obviously I understand volatility with oil and the lag from service companies but is the way to think about that is that provisions should match pretty closely to charge-offs moving forward?

We have a process that we go through; absent anything unusual that's a pretty good guess.

That being said as credit continues to improve across the board and risk ratings change, then you don't have to provide for those losses.

And that would be the indicator of where provision could be less than charge-offs.

We need to let our model run and trying to forecast that out is probably not the best thing for us to do.

Understood.

Thanks for taking my questions guys.

Erika Najarian, Bank of America.

Good morning.

You had two of your peers give guidance on dollar expenses beyond 2016 in fact going all the way out to 2018 in a bid to tell investors that they can support efficiency gains without rates.

And I'm wondering as we think about 2017, you're guiding that we should enter the year with a base, an absolute expense base of let's say $3.45 billion.

And I'm wondering if how you're thinking about some of the cost savings that you have already identified to go into that 2017 number and whether they can overwhelm some of the investments?

In other words is there room to cut that $3.45 billion number to support efficiency if we don't get the help from the rate environment?

So Erika, it's a good question.

I've tried to address a little bit of that in the prepared comments.

So we have a $300 million expense elimination program.

We're on track with that.

We really are challenging ourselves to think of a couple of things.

One, how do we -- some of those savings actually through our model start in 2018 and so the question is what can we do that's prudent, makes sense to move into 2017.

That will take some work.

We will come back as we get later in the year and start giving you a little better guidance into 2017.

We will give you an update on that.

The second would be there's a -- we had a lot of rationale that went around the $300 million.

It was roughly 9% of our expense base but we're going to go back to challenge ourselves to think through how we might change that over time.

Again, we need to be very thoughtful.

We need to make sure we don't benefit the short term at the expense of the long-term franchise building that we're trying to do.

We want sustainable franchise value.

We don't want just a short term.

So it gets trickier as we start thinking in these terms but we believe rates, you have to have a mindset that rates are going to be lower for longer and this is something we can't control so we have more work to do here and we're looking forward to the challenge.

We've been in this environment for a good long while and we've learned how to manage through it.

We've had to really defend our margin, defend the credit culture that we're trying to build in terms of how we grow and build our loan portfolio and managing expenses in this lower for longer environment has just got to be a skill set that we continue to exercise and deploy.

We've been very aggressive on branch consolidations.

We think we know how to do that and do it well.

But I think that as David said is that in a lower than longer forecast, we have to go back and just continue to re-challenge ourselves and redefine how we manage through this for a longer period of time.

Thank you.

And just as a follow-up question to Barb, you mentioned something about how energy prices impacts different parts of your energy portfolio from a different timing perspective.

The question really here is investors are starting to wonder what type of oil price level do we need to see to see that 9.4 reserve ratio start getting relief for going down?

Appreciating that this reserve is built on a loan by loan basis but is there an external factor that we can look to to say okay, that's now done and we can now expect to release some of those reserves into the rest of the book?

Erika, I think you hit the nail on the head relative to the reserve is made up of different groupings.

Of course E&P as I said will benefit from higher oil prices where we see them in the $60 to $70 a barrel range.

It's great for the E&P company but again even at that level, oilfield services companies will continue to be challenged.

It takes them longer to restructure and get back on their feet.

So again, the extended tail on the oilfield services and as we think of our provision, roughly two-thirds of our provision right now is established against the oilfield services subsector in our book.

Okay, thank you.

That was helpful.

John Pancari, Evercore ISI.

Good morning.

Regarding the loan growth on the commercial side, I know you indicated some of the weakening of the pipeline but also some of the intentional pullback in the single relationship credit.

How would you split that up in terms of the impact on second quarter end of period loan growth on the commercial side?

How much of that weaker than expected or how much of that weakness should we say came from the intentional pullback versus the softening demand?

That's a great question.

It's one we've spent some time ourselves internally discussing and debating and clearly part of the weakness we're seeing is just general market demand or credit.

And if you look at top of Company and domestic US numbers, the level of fixed capital spending by wholesale customers continues to be below historical proportions.

And so we're seeing that in demand for credit.

But at the same time, you also hear us talking about making sure that we've got full relationships and we are getting paid a reasonable return for providing banking services to our clients so we need a full relationship to do that.

The return on a credit only relationship is just not sufficient.

But we also have been very disciplined in making sure that we have diversity in our balance sheet and so there is certain asset categories that our risk appetite is fulfilled on and so we've been more judicious about not adding more of that product type to our balance sheet.

And we're absolutely committed to staying diversified.

I think if you look at it today, we would say it's about half and half.

About half of it is the market and about half of it is disciplines that we are invoking.

I'd also remind you that when you look at our loan growth for this quarter, keep in mind the reduction in energy loans that we've achieved over the past quarter has been -- there's a story there that without that reduction in energy, growth in our wholesale book would have been much stronger.

Okay, that's helpful.

And then real quick, Barb, on credit, did you say that both the criticized balance increase as well as the NPA increase were attributable to the other areas that you cited, agriculture, metals, and transportation?

No, NPA was primarily an energy story -- besides the other groups that I told you about.

Okay, got it, got it.

All right.

And then lastly, in terms of the margin impact of putting on less of the more thinly-priced relationships that are single-relationship type of credits that you are deemphasizing, just trying to put a number around it in terms of yield.

At what yields are some of those loans running off that you're deemphasizing that are single relationship?

And then how does that compare to new production yields and what you are putting on your book?

Well, it really just depends, John, in terms of different products.

In the C&I space, we haven't seen spreads change dramatically there, but if you're [225] over you're working against yourself.

That portfolio yields today about 3.5%.

And so as we think about how to combat some of this, one is a deeper relationship.

We're not having to look just at spread, because a spread is only a component part of the income we get from the customer basis.

It's the other NIR sources that help round it out.

So if, in fact, we had a lower spread asset with a full relationship, we can deal with that.

It's having a low spread without the relationship that's a problem.

So I think that also how to combat this would be the consumer growth.

We grew consumer loans about $300 million.

We've had nice production in consumer where we're getting paid for that risk and that's helping to combat the downward pressure on loan yields.

So our loan yields from the first quarter were only down 2 basis points.

Part of that is the mix shift and the remixing of business that we're trying to make in our total balance sheet to be more profitable or to get the better returns to our shareholders.

Okay got it.

Thanks, David.

Paul Miller, FBR & Co.

Yes, thanks for much.

But most of my questions have been answered but I do have one on noninterest income.

You gave I think a range of 5% growth there and over the last year, most of your growth has come from either Card and ATM fees or Capital Markets.

Is that what we should be modeling in?

Is that where most of the growth is going to come from or is there some other categories that you've been investing and you should start seeing some growth there?

No, if you look at that, we've made lots of investments in capital markets.

You are seeing the growth there but also in terms of service charges and credit card, ATM card kind of growth.

All that's really coming from core consumer household growth.

We're seeing better consumer growth across the communities we serve more broadly than we've seen in the past.

We really are pleased with the progress we've made in the customer experience in our consumer business and the results really are starting to come through and we think that that continues to be a good story.

Additionally, we've made several investments in our Wealth Management offerings.

Wealth Management had a good quarter this quarter.

We think that continues and has the prospect of even improving.

So overall, a very good story this quarter.

And where are you seeing most of the growth?

I know you've invested in Florida pretty heavily over the years.

Is it coming across your geographic footprint or is it coming in certain states?

No, it's more broad than it's been in the past and you are correct and historically we had a very strong growth out of the state of Florida.

That -- Florida continues to be very critical market for our franchise but growth is much more broad than it's ever been historically in the Company.

That's been purposeful on our part.

We very much try to make sure that we are not only diversifying our business by product but we're diversifying by geography and we've made very conscious investments to improve the production of our consumer and our wealth management business as well as wholesale across all the communities that we serve.

Okay, thank you very much, guys.

Matt O'Connor, Deutsche Bank.

Hey guys.

Any update on the CRA downgrade from earlier this year in terms of what you're doing to remediate that and if there's any impact it's having on the day-to-day operations of you guys?

Yes, Matt, this is David.

So we have to go back to kind of the exam that we had, the results.

Our core CRA program continues to be robust.

We have a lot of assessment areas especially relative to anybody else in the country and we do a good job.

Our team is really committed to the customers and communities that we serve and we feel like we're doing a pretty good job there.

We did have an issue that was outstanding from another regulatory agency was considered and so we're going through -- we have to go through another exam cycle for that to get cleared up.

The timing of which is completely dependent on our regulatory supervisors and we believe we've done everything we need to to continue to work through this and we hope that the conclusion is favorable when that is concluded upon by our regulatory supervisors.

Okay.

Then just separately if we look at the indirect consumer bucket, I think which includes the POS loans, the $600 million to $700 million of loans, you've had good growth there.

It seems like there's the typical beginning of the seasoning of that portfolio from a credit quality perspective.

Obviously very small numbers but do you have a sense of what losses in that book may get to?

It's a good yielding book and you've been growing it a lot.

When you look at the indirect portfolio, we've been growing it quite steadily.

We started off from a relatively small base.

We've been very selective on where we participate in that market.

We've been very selective in the auto space and we've been very selective in a number of point-of-sale spaces that we participate in and we continue to test the production that's going on in the book and we do believe that expected losses in this portfolio, we're targeting them to be less than 2.5%.

Okay, thanks for taking my questions.

Vivek Juneja, JPMorgan.

Good morning.

A couple of questions please.

MBS premium amortization, can you just give us -- it's a nitpicky one -- what was the amount in the second quarter and where do expect it to go in the third quarter?

So we've had in kind of the mid-30s in terms of premium amortization.

We do expect that to increase modestly over the second half of the year maybe up $5 million to $7 million each of the quarters third and fourth quarters.

Just dependent on prepayments that come in.

We see the refinance activity that's occurring through pipelines and at volume for us so we can project that out a little bit in terms of prepayment speeds and expected it will pick up just a bit.

That being said, that is embedded in our forecast of our NII growth which we said would be somewhere right at the 3% range for the year.

Okay, great.

So it didn't go up David in the second quarter.

You are waiting for prepayments to sort of show the path before you increase it in the third quarter?

That's correct.

And capital, a bigger picture question.

How do you get it down and this is for both of you.

You've got such a high level, close to 100% payout.

What do you do to bring that down?

Because obviously loan growth is not -- you're not growing that any faster based on all of the other factors that you're taking into account.

So we'd like over time -- we've mentioned to get to our capital targets and bring those down over time.

If you look at the CCAR continuing to address a couple of things there.

One, the stresses in each of the portfolios we have some learnings that we can take from that as we reshape certain of our businesses to take out risk which then reduces the amount of capital you need to have in particular in a stressed environment.

We did not have -- go over 100% of earnings.

We did have a couple of regional players that did for the first time.

For us, we want to make sure we optimize our capital structure in terms of the nature of the components, our preferred stock and common stock in the like and make sure that that's optimized and over time we will do that to reduce our cost of equity.

But I think working on the stresses inherent in the balance sheet which we have done and you've seen that come down in places like commercial real estate losses came down quite dramatically but still high.

So how do we change our business model over time to reduce the amount of capital we have to have so that we can either put it to work if there's opportunities to grow loans and when there's not, returning that capital to our shareholders especially where we trade at tangible book value.

All right, thank you.

Gerard Cassidy, RBC.

Hi, Grayson, hi David.

I've got a question -- your loan to deposit ratio upticked a little bit this quarter to 84%.

What's the optimal level for that loan to deposit ratio for you folks and how do you plan to reach that level?

Gerard, it's a good question.

So we've been one of the lower loan deposit ratios.

I think getting up a few more points perhaps in the upper 80s, lower 90s is the right place for us to be.

In the good old days we'd be over 100% when you can rely on wholesale funding that you can take money out every night and that market doesn't operate that way.

So I would say upper 80s, lower 90s.

I do think the construct of the deposits we have given the LCR framework deposits, there are certain deposits that aren't as useful to us and in particular as we think about liquidity, those deposits that are collateralized provide little liquidity value to us and that value really stems from the diversification of funding more so than actual liquidity because we're having to post up our best securities for it.

So I think you will see that drift up a bit over time, the pace of which is hard to tell.

And if you look at our deposit for this quarter, core deposit is really a very good story.

We've created a much more favorable mix of deposits and we've reduced some of our deposits to David's point that are less attractive under LCR but also less attractive at the end of the day from a liquidity perspective.

So while our deposits were down modestly at the top of the Company this quarter, actually core deposits, core deposits that we find attractive were actually up and the liquidity of the Company actually improved.

And so we continue to believe that the core value of this franchise really is as a deposit gatherer and we continue to have a very good story there and a good message back.

And so I think that to David's point, there was a time when you could fund loans in a very different way.

But today the best way to fund loans is with core deposits and we think in that high 80s, low 90s would optimize the earnings power of this Company but we're going to need good solid organic loan growth to make that occur.

Thank you.

Regarding the consolidation of the branches, have you guys done any work to measure when you consolidate or shut down a branch, what percentage of the customers stay with you and -- (multiple speakers)

Absolutely.

Go ahead.

I was going to follow up.

But go ahead, David.

Go ahead and finish.

Okay.

Then with the advent of the mobile technology you all have today versus 15 years ago when if you shut down some branches the numbers may have been different, have you noticed, is there a differential, meaning you're keeping more of them today because of the mobile technology?

I think one, since I guess 2007, 2008 we've closed and consolidated over 500 branch offices.

We have a very good process for that.

I think that from our perspective, we continue to see that how you -- the process for consolidating those offices really have to do a lot with customer communication and how you equip and train and staff the receiving offices.

To the extent if the receiving offices is a relatively close proximity, and we would say that close proximity is within 10 miles of the other branch, that you are seeing very, very good success with virtually no losses in customers in that regard.

We do think that the alternative channels, ATM, call center, mobile, phone line, all of those other channels provide us an opportunity to provide strong connectivity to a customer and while we've seen branches losing traffic in the sort of 3% to 5% a year range, we've seen tremendous growth in the online and mobile channels.

So we think continuing to add functionality there enhances the customer experience and enhances the retention of those customers.

But I would say all of it has to be done.

You have to do all of those things well in order to have a successful consolidation.

But great question.

It's one that we continue to adjust and fine tune on a regular basis.

Gentlemen, thank you.

Christopher Marinac, FIG Partners.

Thanks, good afternoon.

I appreciate the question.

I wanted to ask about slide 14 which has got into the loan split in Texas and Louisiana.

I guess I'm curious with energy prices trying to stabilize, does that portend that you would want to see those markets be stable in terms of loan balances or could we actually see growth still in those areas?

Well, I think if you look at Texas and Louisiana in those slides, very important markets for us and a much more diversified market than you would have seen a few years ago and even though we are seeing obvious stress on our customers that are directly or indirectly tied to the energy business, we're seeing an awful lot of strength in other industries.

We're seeing an awful lot of opportunity to still provide banking services in those markets and so we're still very confident about our ability to grow there.

Great, Grayson.

Thank you very much for the background.

This concludes the question-and-answer session of today's conference.

I will now turn the floor back over to Mr. Hall for closing remarks.

Thank you very much for your attendance and participation today and really appreciate your questions and your interest and thank you.

We stand adjourned.

Thank you.

This concludes today's conference call.

You may now disconnect.