Regions Financial Corp (RF) 2016 Q4 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' fourth-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 referenced throughout this call, as well as our earnings release and earnings supplement, are available under the Investor Relations section of regions.com.

I would also like to caution you that we will make forward-looking statements during today's call that are subject to risks and uncertainties and will also reference -- refer to non-GAAP financial measures.

Factors that may cause actual results to differ materially from expectations as well as GAAP to non-GAAP reconciliations are detailed in our SEC filing.

I will now turn the call over to Grayson.

Thank you, Dana, and good morning.

Thank you for joining our call today.

I will review highlights for our full-year financial performance and David will cover results for the fourth quarter specifically.

Let me begin by saying that we are very pleased with 2016 results; we diligently executed our strategic plan and maintained our focus on our business fundamentals.

Central to our success has been the continued emphasis on three strategic initiatives: growing and diversifying revenue; practicing disciplined expense management; and effectively deploying our capital.

Net income available to common shareholders for 2016 was $1.1 billion, a 10% increase over 2015.

Earnings per share was $0.87 representing a 16% increase over the prior year.

Total taxable equivalent revenue grew 3% and reported non-interest expenses were relatively flat.

In late 2015 we laid out financial targets for 2016.

Although the operating environment proved somewhat more challenging than anticipated or forecasted, we still met or exceeded most of our performance targets.

For example, we grew net interest income 3% versus the prior year.

We also grew adjusted noninterest income 7% driven by growth in customer relationships and new product offerings.

For example, through new and enhanced products and capabilities capital markets income increased 46% in 2016 and Wealth Management income increased 6%.

Adjusted non-interest expenses increased just under 2%, in line with our target of flat to up modestly.

Importantly we generated positive operating leverage, which is a critical metric and part of our focus, to an adjusted basis of 3%.

And the adjusted full-year efficiency ratio was 63.3%.

Finally, full-year net charge offs totaled 34 basis points.

Regarding loan growth, 2016 presented some unique challenges, which we tackled head on, and we were intentional and thoughtful in how we managed our portfolio.

Average loans were relatively stable in the fourth quarter of 2016 as compared to the prior year.

Notably, the overall financial health of our consumer portfolio was strong and we saw solid demand and steady loan growth in almost all consumer loan categories.

Average consumer loans grew $1.2 billion or 4% from the fourth quarter of prior year.

On the other hand, average business lending balances declined 3% from the fourth quarter of prior year.

This decline was driven by our continued focus and thoughtful focus on achieving appropriate risk-adjusted returns, the de-risking of certain portfolios and asset classes and the ongoing softness in demand for middle-market commercial small business loans.

Looking ahead we are encouraged by recent increases in market interest rates as well as possible benefits associated with the new administration.

We remain focused on improving efficiencies; our plan to eliminate $400 million of core expenses through 2019 remains firmly intact.

This along with our continued focus on appropriate risk-adjusted returns are fundamental to our long-term success and sustainability of our franchise value.

With respect to capital deployment we remain committed to effectively deploying our capital through organic growth and strategic investments that increase revenue or reduce ongoing expenses while returning an appropriate amount of capital to shareholders.

During 2016 we returned $1.2 billion of our earnings to shareholders through a combination of dividends and share repurchases while at the same time maintaining robust and industry leading capital levels.

On a separate note, we are pleased that our satisfactory CRA rating has been reinstated; we remain committed to optimizing our branch network and will optimistically expand in certain select growth markets.

During 2016 we consolidated 103 branches and announced plans to consolidate another 23 offices.

As [previously] announced, our plan is to consolidate at least 150 branch offices by the end of 2017.

In closing, I want to thank our team of 22,000 associates for their hard work and dedication in delivering solid financial results and their continued commitment to superior customer service.

We are extremely proud of our accomplishments in 2016 and are well-positioned to build on that momentum in 2017.

With that I will turn it over to David to cover the specific of the fourth quarter.

David.

Thank you, Grayson, and good morning, everyone.

Let's get started with the balance sheet and a look at average loans.

In the fourth quarter average loan balances totaled $80.6 billion, down 1% from the previous quarter and relatively flat with the fourth quarter of 2015.

Consumer lending remains a positive story for us as we experienced another quarter of solid growth.

Average balances increased $329 million, or 1% over the prior quarter, and $1.2 billion, or 4% over the prior year.

This growth was led by mortgage lending as balances increased $236 million or 2% linked quarter and $732 million or 6% over the same quarter of the prior year.

We made the decision to sell $171 million of affordable housing residential mortgage loans to Freddie Mac during the fourth quarter and generated a gain of $5 million.

Approximately $91 million of these loans included recourse and will remain in loans held for sale at year end until the recourse expires later in 2017.

Subsequent to the expiration of recourse provisions it is expected that an additional $5 million gain will be recognized.

The economics of the transaction and improved diversification drove the decision to sell.

We continue to experience success with our other indirect lending portfolio which includes point of sale initiatives.

This portfolio increased $110 million or 14% linked quarter and $366 million or 70% year over year.

Average balances in our consumer credit card portfolio increased $36 million, or 3% over the prior quarter, and $115 million, or 11% over the fourth quarter of 2015.

Penetration into our existing deposit customer base increased to 18.4%, an improvement of 110 basis points year over year.

Turning to the indirect auto portfolio, average balances decreased $17 million during the quarter.

As previously disclosed, we terminated third-party arrangement during the fourth quarter that historically accounted for approximately one-half of our total indirect vehicle production.

As such we expect the pace of runoff in the portfolio to exceed production generated by our preferred dealer network.

Average home equity balances also decreased $64 million as the pace of runoff exceeded production.

Now turning to business lending, average balances decreased $1 billion, or 2% during the quarter, and $1.4 billion, or 3% year over year.

As Grayson mentioned, the decline in business lending balances was impacted by our continued focus on achieving appropriate balance and diversity while also improving risk-adjusted returns.

Importantly, balances reflect decisions and choices that we made during the year.

We continue to reduce exposure due to concerns about increasing risk in certain industries and asset classes.

Average direct energy loans decreased $491 million or 19% and average multi-family loans decreased $239 million or 12% compared to the fourth quarter of 2015.

Further, continued softness in demand and increasing competition for middle-market small business loans has also impacted loan production.

While there have been headwinds to business lending growth in 2016, we continue to expect low-single-digit average loan growth in 2017.

Areas within business lending expected to contribute to this growth include: technology and defense, healthcare, power and utilities and asset based lending.

Let's turn to deposits.

Total average deposit balances increased $561 million from the previous quarter and $1 billion year over year.

Average low-cost deposits increased $503 million and $1.3 billion over the same respective periods.

Deposit costs remain near historically low levels at 13 basis points and total funding costs remain low totaling 30 basis points in the quarter.

Total average deposits in the Consumer segment were up $452 million, or 1% in the quarter, and $2.7 billion, or 5% year over year.

This growth reflects the unique strength of our retail franchise, the overall health of the consumer and our ability to grow low-cost deposits.

Average Corporate segment deposits increased $437 million, or 2% during the quarter, and $1.2 billion, or 4% year over year, as corporate customers remain focused on liquidity.

Average deposit in the Wealth Management segment decreased $398 million, or 4% during the quarter, and $2.3 billion, or 18% year over year.

Certain institutional and corporate trust customer deposits, which require collateralization by securities, continue to shift out of deposits and into other fee income producing customer investments.

So let's look at how this impacted our results.

Net interest income and other financing income on a fully taxable basis was $874 million in the fourth quarter, an increase of $18 million or 2% from the third quarter.

The resulting net interest margin was 3.16%, an increase of 10 basis points.

Both net interest margin and net interest income and other financing income benefited from several factors during the quarter including: higher interest rates; lower premium amortization on investment securities; a leverage lease residual value adjustment incurred in the third quarter that did not repeat; and higher security balances.

These increases were partially offset by lower loan balances; net interest margin also benefited from lower average cash balances held at the Federal Reserve.

The increase in interest rates during the quarter reduced the amount of premium amortization on mortgage-related securities to $43 million from $49 million and premium amortization is expected to decline further in the first quarter of 2017.

Now if interest rates remain at current levels, or continue to rise, we would expect to benefit from marginal declines in premium amortization ultimately achieving a quarterly run rate in the low- to mid-$30 million range in 2017.

Non-interest income decreased 13% in the quarter primarily due to insurance proceeds related to the FHA settlement recognized in the third quarter.

Non-interest income increased $8 [million] or 2% compared to the fourth quarter of 2015.

Adjusted non-interest income decreased 6% in the quarter but increased 2% year over year.

Service charges increased 4% in the quarter, however this growth was more than offset by declines in capital markets, Wealth Management, mortgage and other non-interest income.

Following a record third-quarter capital markets income decreased $11 million or 26% during the quarter driven primarily by lower merger and acquisition advisory services.

Capital markets income increased $3 million or 11% compared to the fourth quarter of 2015 driven by increased debt underwriting activity.

Also coming off a record third quarter, Wealth Management income decreased $4 million or 4% as lower insurance and investment services income were only partially offset by higher investment management [and] trust fees.

Compared to the fourth quarter of 2015, Wealth Management income increased $3 million or 3% as growth in investment management trust fees exceeded the decline in investment services while insurance income was unchanged.

Mortgage income decreased $3 million or 7% driven by seasonally lower production partially offset by increases in the market valuation of mortgage servicing rights and related hedging activity.

Within total mortgage production 59% was related to purchase activity and 41% was related to refinancing.

Mortgage income increased 16% compared to the fourth quarter of 2015 primarily due to increased gains associated with a 29% increase in production.

Also during the quarter we completed another bulk purchase of the rights to service approximately $2.2 billion of mortgage loans.

This brings our total purchases for 2016 to approximately $8.1 billion and our mortgage servicing portfolio has increased $6 billion to $45 billion.

Mortgage servicing income increased $5 million or 6% in 2016 compared to 2015.

We still have capacity and will continue to evaluate opportunities to grow our servicing portfolio.

And finally, other non-interest income declined during the quarter as the Company recognized a recovery during the third quarter of approximately $10 million related to the 2010 Gulf of Mexico oil spill which did not repeat this quarter.

So let's talk about expenses.

Total non-interest expenses decreased 4% during the quarter.

On an adjusted basis expenses totaled $877 million, also representing a 4% decrease quarter over quarter reflecting the results of our efficiency initiatives.

Total salaries and benefits decreased $14 million from the third quarter primarily due to a decline in base salaries associated with one less weekday, the impact of staffing reductions and lower production-based incentives related to decreased capital markets and commercial banking production.

Staffing levels continued to decline during the quarter and decreased 5% or over 1,200 positions in 2016 as we executed on our efficiency initiatives.

Professional and legal expenses decreased $3 million during the quarter primarily due to lower litigation-related costs.

We also recognized an $11 million linked quarter benefit associated with a credit for unfunded commitments.

And finally, recall there was an $11 million expense in the third-quarter associated with Visa Class B shares that did not repeat in the fourth quarter.

The fourth-quarter adjusted efficiency ratio was 63.2% and, as Grayson mentioned, we remain committed to achieving our expense elimination plans and our long-term target for an adjusted efficiency ratio below 60% by 2018.

The Company's effective tax rate for the fourth quarter and full year 2016 was 31.2% and 30.7% respectively.

And the effective tax rate is expected to be in the 30% to 32% range for the full year 2017.

Let's move on to asset quality.

Net charge-offs totaled $83 million in the fourth quarter, an increase of $29 million from the third quarter, and represented 41 basis points of average loans.

Charge-offs related to our direct energy portfolio totaled $14 million in the quarter.

The provision for loan losses was $35 million less in net charge-offs and our allowance for loan losses as a percent of total loans decreased 3 basis points to 1.36%.

The allowance for loan losses -- loan and lease losses associated with the direct energy loan portfolio decreased to 7% in the fourth quarter compared to 7.9% in the third quarter, which reflects continued improvement in credit quality of the energy book.

And our exposure to direct energy continued to decline ending the year at 2.6% of total loans outstanding.

Total nonaccrual loans, excluding loans held for sale, decreased 9 basis points to 1.24% of loans outstanding and total business services criticized loans decreased 3%.

The improvement in business services criticized loans was primarily due to declines in energy and energy-related credits.

The improvement in nonaccrual loans was driven by declines in non-energy commercial loans.

Troubled debt restructured loans increased 5% in the quarter primarily due to increases in indirect energy credits.

Allowance for loan losses as a percentage of total nonaccrual loans or coverage ratio was 110% at quarter end.

Excluding energy the coverage ratio increased from 123% to 138% in the fourth quarter.

Direct energy charge-offs totaled $37 million in 2016 and are expected to be less than $40 million in 2017 given current market conditions.

Now under a stress scenario with oil averaging below $25 per barrel, incremental losses could total $100 million over the next eight quarters.

We are encouraged by the performance of our energy portfolio to date.

However, we will continue to monitor and manage it closely.

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

Let's talk about capital liquidity.

As Grayson mentioned, we returned $1.2 billion of our 2016 earnings to shareholders through common dividends and share repurchases.

At the same time our capital ratios remain robust.

Under Basel III the Tier 1 ratio was estimated at 11.9% and the common equity Tier 1 ratio was estimated at 11.1%.

On a fully phased-in basis common equity Tier 1 was estimated at 11%.

And we were also fully compliant with the liquidity coverage ratio rule at the end of the year and our liquidity position remains solid with a historically low loan to deposit ratio of 81%.

So as we look ahead in terms of 2017, the targets that we laid out are as follows: we expect full year average loans and average deposits to grow in the low-single-digits; our expectation for net interest income and other financing income growth is in the 2% to 4% range; and our adjusted non-interest income is expected to grow 3% to 5%.

From an expense standpoint total adjusted non-interest expenses in 2017 are expected to increase between zero and 1% and we expect to achieve a full year adjusted efficiency ratio of approximately 62% with positive adjusted operating leverage in the 2% to 4% range.

From a credit standpoint full-year net charge-offs are expected to be 35 to 50 basis points.

So in closing, our solid 2016 results reflect the successful execution of our strategic plan and our commitment to our three primary strategic initiatives which are: growing and diversifying our revenue streams; practicing disciplined expense management; and effectively deploying our capital.

We are pleased to end the year on a positive note and believe we have the right team and the right strategy to deliver and create further shareholder value in 2017.

And 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, as a courtesy to others, please limit your questions to one primary question and one follow up.

We will now open the line for your questions.

(Operator Instructions).

Matt Burnell, Wells Fargo.

You mentioned a couple of times the momentum in the commercial side of the business and I want to focus a little bit on the small and medium size borrowers.

And obviously the competition there has been very, very intense.

But do you sense a greater level of optimism from your customers that might increase their desire to borrow over the next year or two presuming we get a little bit of benefit in the economy?

And then I have a bigger picture question for my follow up.

Absolutely.

I will make a few comments and then I will ask John Turner, who manages that part of the business for us, to make his comments as well.

Absolutely we are seeing anecdotally in our conversations with our customers a lot more confidence and a lot more optimism about what the future would hold.

And we continue to believe that at some point that turns into more business activity than we have seen thus far.

But that being said, we are still not seeing that enthusiasm turn into actual lending activity.

Line utilization is still not showing signs of that enthusiasm turning into activity, nor are we seeing applications of credits to do that.

But having said that, I can't underscore enough the amount of optimism we hear in the voices of our customers.

But I think it is going to take some time yet for that to result in a lot of economic activity.

John, if you would.

Yes, thank you, Grayson.

I just would add and reiterate we are hearing a more positive outlook from our customers, but we are not seeing that translate into new opportunities yet.

Pipelines are up a little, line utilization is down about 90 basis points in the quarter.

We are having meaningful conversations with customers but not of that has yet resulted in their desire to increase business fixed investment, which ultimately is what we need to see growth.

(Multiple speakers) your follow-up question?

My question really relates to the deposit rates, which actually went down a little bit quarter over quarter which was a little bit better than we have seen at some of your competitors.

Do you attribute that to just the location of your franchise or is there something else going on there?

And then maybe an update on your thinking of deposit beta as rates rise and where you are now relative to sort of your longer-term assumptions?

I think, Matt, when you look at our franchise, I mean the real competitive advantage we have is really as a deposit gathering franchise, that is where the real value of our bank is at.

You look at our deposit portfolio, it is a very granular portfolio and about 50% of that portfolio is located in small or community markets.

And if you look at our thoughts and our forecast you see a very conservative beta forecast for interest-rate increases.

Candidly the environment we are coming from right now we have never seen before, so this is new coming from this interest rate environment to start to increase.

We are optimistic that our deposit betas will provide an advantage for us.

And thus far, as you mentioned, our deposit cost has remained relatively low.

I think we are up 1 basis point quarter over quarter.

So we think we have done a very good job actually growing deposits in the face of that activity.

David, you may want to add to that.

Yes, it is a great question, Matt, because, as Grayson mentioned, this is really our competitive advantage that we have been waiting to see come through in our income statement.

As Grayson mentioned, the deposit makeup that we have really resulted in last up cycle we had one of the lower betas than any of the peers.

I think we were at -- terminally at about 54% was our beta.

Perhaps it will be higher because we are at historical lows.

And so we model a 60% beta as a terminal value, but we start slow in that 40% range.

And we think that is really going to be important.

Deposit rates, we think the faster rate increase from the Fed the more pressure there will be.

But what has happened thus far is we haven't had -- nor have many in the industry -- had to pass much through to deposit holders because we have had increases one off.

So we are looking forward to dealing with that, we have great liquidity and a great stable funding base that we think can create value for our shareholders in 2017 and beyond.

Thanks very much.

Michael Rose, Raymond James.

Maybe just a question for David on the margin.

Sorry if I missed this.

But can you quantify the impact of the premium amortization on the margin this quarter?

And then maybe just some greater context as to what your forecast includes for NII.

Does it include a couple rate hikes I assume?

And what would it look like if we didn't get any rate hikes?

Thanks.

So you saw our change in premium amortization early on.

It was about a point difference on that in terms of margin.

Clearly the increase in rates was a big driver for us.

And that is not just the Fed move, but really LIBOR starting to move in advance of that, as well as the 10 years.

So that is very helpful to us as we continue to be -- our sensitivity continues to be on the longer end.

Today between -- the short end is probably 42% of our sensitivity and 58% in the middle for the back end.

So as we think about increases for this next year we are closer to where the market is right now, which was having a rate increase sometime in the summer and maybe one towards the back end of the year.

We realize what Chair Yellen said the other day with regards to supporting the dot plots and perhaps there is an incremental increase baked into that.

But we don't forecast that.

If we get it then that is better for us, but our guidance that we just laid out really shows that increase in -- sometime in the summer than towards the back end of the fourth quarter.

Okay, that is helpful.

Maybe as my follow-up, if you can just give some color on some of the major fee income businesses given the (inaudible).

I know capital markets was down I guess greater than I expected sequentially.

And maybe if you can just give the outlook for some of the businesses for this year.

Thanks.

Yes, I think -- so we have a good story for non-interest income.

Clearly there is a lot of seasonality that hits that space.

You can see that manifest throughout the industry.

Same thing for us in particular.

We came off a lot of really strong third quarter in a number of areas, capital markets and Wealth Management.

We believe those rebound and that is what we have our guidance for non-interest revenue growth of 3% to 5% next year.

We went into this year with a 4% to 6% expectation, we ended up growing 7%.

So we feel confident about our ability to grow in that 3% to 5% range.

It will be a contribution for all those line items that you have seen in the past as we continue to just grow customers and continue to build out certain of our new platforms like BlackArch Partners.

That is great color.

Thanks for taking my questions.

Betsy Graseck, Morgan Stanley.

I had a couple of questions.

One was on the progress around the capital markets, investments that you are doing and the treasury management investments.

I was wondering how you think those are going to come through as you go through 2017?

Betsy, this is John Turner.

I would say we are very pleased with the investments we have made.

Capital markets revenue was up 44% last year in 2016.

We did see obviously some decline in the fourth quarter, but that business is going to be uneven.

The M&A advisory fee income that we enjoyed was more front and loaded into the second and third quarter.

So as we look forward to 2017 we face some headwinds at a few of our newer initiatives like the low income housing tax cut and credit platform that we acquired, CMBS platform that we have established.

The conditions in the market aren't great for those today, but we think they will ultimately work themselves out.

We feel very good about the initiatives and the investments and expect to continue to grow capital markets revenue and treasury management revenue in 2017 at a pretty good pace.

I mean a rising rate environment should be good for treasury management I would expect.

It will be.

And remember that, if you look at our deposit growth, we grew deposits by over $1.2 billion in the corporate bank.

And that is really a reflection of our focus on relationships, building broader and deeper relationships with our customers and winning more treasury management business than we have in the past.

And so I think you will continue to see that grow.

Okay, thanks.

And then just second question on the cost-saving initiatives that you have been very clear about, the targets.

Could you give us a sense as to how the efficiency will drop to the bottom line as you go through the year?

Is there any kind of trajectory that we should expect, is there backend loaded or what?

I think if you look at rates, if the rate curve will hold you will start seeking even a better improvement as we get towards end of the year.

We should start out having a pretty decent efficiency ratio contribution to that 62% that I talked to you about.

But it gets even better (technical difficulty) back end of the year.

Okay.

All right, thank you.

John Pancari, Evercore ISI.

Good morning.

Grayson, if you could just talk a little bit about the fact that you have gotten a satisfactory rating on the CRA, as you mentioned.

What are your -- does that pave the way for you to consider acquisitions again?

And if so, can you give us your updated appetite for whole bank deals and then non-bank deals?

Thanks.

Yes, I mean, John, I think first of all we were very pleased to get our CRA rating reinstated back to satisfactory.

The team here worked very hard to accommodate that.

And so it's indicative of the way we do business and they way we try to help our customers and all the communities we operate in.

So very encouraged by that turn of events.

What does that mean for us?

We are very focused on organic growth.

We are very focused on optimizing our distribution channels.

You saw in 2016 that we invested in all of our channels, our online banking, our mobile banking, our contact centers, our ATMs and our branches.

We had a number of consolidations in 2016 and opened relatively few branches in 2016.

You can see that while -- but at the same time we invested a tremendous amount of technology into those branches and changed our delivery format in a number of those offices to be more efficient and more effective.

You will see us continue to do that.

We think that it is an important and critical part of our franchise value and we think all of our distribution channels are important.

The branch still has an awful lot of relevance and it is still the predominant channel that customers choose to open new accounts with us.

So our primary focus is organic growth.

When it comes to acquisition opportunities we are very sensitive to what is going on in the market.

We have a team inside the bank that spends an awful lot of time monitoring markets and what is going on there.

We look for opportunities to invest through acquisition.

You saw last year that that was predominantly done through non-bank bolt-on acquisitions which has been predominantly our interest.

We look at whole bank deals.

Quite candidly, where valuations are right now I think some of the economics of that we find challenging, but there may be opportunities for that.

We are watching but our primary focus is on growing organically.

So we will watch and see where the market goes, but at this particular point in time we see most of our opportunity in growing organically and growing in non-bank bolt-on acquisitions.

And we are monitoring whole bank acquisition opportunities.

But right now that market seems to be improving, but I think it is early yet, it is early yet.

Okay, all right, thanks.

And then separately, I know you have mentioned that you are focusing increasingly on risk-adjusted returns and that to a degree has impacted your loan growth in the quarter and possibly your outlook.

So I guess if you could just talk a little bit more about identifying those exact areas, exact portfolios where you are deliberately deemphasizing production as you are focusing on the risk-adjusted returns?

Thanks.

Well, first of all, we recognize we are in a cyclical business and we have to be mindful of that as we establish our risk appetite across different lending segments.

And we spend an awful lot of time trying to adjust our risk appetite based on where we think we are in the cycle with those different lending categories.

We have signaled to you that we throttled back on indirect auto, we throttled back on investor real estate construction.

We have throttled back on multi-family to a certain degree.

But we are still in those businesses, still lending in those businesses.

And obviously the one business that we have been most cautious in is energy for apparent reasons.

But we still are in all of these businesses, we are just being more thoughtful, more careful given where we are at in the cycle of that.

But we also spend an awful lot of time on both business that we win and business that we lose.

We compete in a lot of different markets against very large financial institutions and small community banks as well.

And there is an awful lot of competition there and we are trying to be very thoughtful about what type of transactions we will do, what kind of risk-adjusted return we can achieve in those.

And I think in this market we are able to grow our business in asset classes that we think make a lot of sense.

As David said, we believe for 2017 we will grow in the low-single-digits.

But that is growing faster than some segments while constraining growth in some of the other segments.

I think most of this discussion centers around some of our commercial lending activity, so I will ask John Turner to make a few comments as well.

John, I think we have talked about, as an example, our focus on risk-adjusted returns in our shared national credit book.

And we spent a lot of time there this year as a result of what we'll refer to as recycling activity where we've exited some relationships and entered new ones.

We have seen the level of credit only shared national credits come down by about 16%, the revenue that we are generating per relationship in those newer relationships go up by 35%.

They generate over 100% more non-interest revenue and the risk-adjusted returns are 220 basis points greater than those relationships that we exited.

In addition to that I talked about deposit growth, we saw fee income growth in the business.

And the overall risk-adjusted return on the corporate banking business here at Regions inclusive of all three businesses is up 160 basis points year-over-year.

And at the same time we think we have a better quality loan portfolio as we are de-risking the business and adding better risk and getting an appropriate return.

We think that our commitment to profitable growth and appropriate returns is paying off and we will continue to see that in the coming quarters.

Got it, all right.

Thank you.

John McDonald, Bernstein.

Good morning, guys.

David, wanted to follow up on the net interest income margin question.

Is there a rule of thumb that we can use in terms of as we try to model Fed hikes for you guys, how much each Fed hike of 25 basis points adds to net interest margin?

Any rough rule of thumb there?

Well, we've tried to give you the parallel shift of 100 basis points, it's about $160 million right now.

And then we are 42% on the short end of that.

If you do some quick math -- depending on what beta assumption you want to use, you were talking about $15 million, maybe $20 million on an annual basis.

And again, deposit assumption -- beta assumption makes a difference.

Okay.

Okay, that is helpful.

And then just following up on the efficiency, the target this year, the 62%.

At a conference in December you guys you laid out a longer-term kind of sub 60%.

And I think you said by 2018.

Is that the right way to think about it, that you could go from 62% to 60% by the end of 2018?

Does that imply a real ramp up in the expense saves next year?

Well, so we can get to the 60%s, that is our commitment by the end of 2018 kind of on a run rate basis there.

So you will see us continuing to chip away at it each and every quarter through 2018 so that by the time we get there we are hitting the 60% or below target that we laid out.

And then by the time we get there we will reassess and give you our new target, because over time we think we will be south of that.

But let's get to the below 60% first before we establish that.

Okay, thanks.

Geoffrey Elliott, Autonomous Research.

Good morning.

Thank you for taking the question.

It looks like there was quite a bit of strength in service charges this quarter.

I wondered if you could elaborate on what happened there.

I am not sure what you are looking at from a stress standpoint.

Service charges continue to be fairly strong for us.

I said strength, I said strength.

I'm sorry.

We heard stress.

Okay.

Maybe it is the British accent or something.

What is really strong, we have such a strong retail network.

Continuing to grow customers is important and you are seeing that manifest itself in service charges.

We have also had increases in customers on the commercial side as well.

So if you look year-over-year we are kind of flat, but we were overcoming some obstacles last year on posting order.

And we expect service charges to continue to be robust in 2017.

We have done a really good job in our consumer bank.

And if you look at growth metrics across accounts and account activity and the quality of the accounts we are placing on our books, we continue to be encouraged by the progress we are making.

And as we do that it really improves a number of revenue streams.

And if the economy strengthens how does that impact this?

Do people make less use of overdraft if they're feeling better off or are the dynamics kind of more complex?

From my perspective there are certain people that is what happens.

And these aren't all overdrafts by the way, these are core service charges, so -- that are monthly maintenance fees and those things.

So a stronger economy we don't think would do anything but help that.

And it is really the customer growth that we continue to have that we think is most impactful to that line item.

And the more robust economy with the outreach that we want to do to continue to expand the franchise and grow relationships; we think that could be a positive for us in 2017.

And what we have seen, when you look at the consumer base we really have started really shifting the mix of fee income in our consumer book to where it is more around activity based, in particular on debit cards and credit cards, and less reliance on overdraft activity.

And as you look at our checking account features, we have introduced a number of new products that give customers more assurance, more safety that if they transact business in a correct way.

And so, we feel real good about our offerings, we feel good about our growth.

And we think 2017 you will continue to see this sort of pace of momentum that we have really started generating in 2016.

Thank you.

Ken Usdin, Jefferies.

Thanks.

Good morning.

Dave, I was wondering if you could talk a little bit about just total balance sheet size.

I think we understand the expectation for loan and deposit growth.

You guys have been at a pretty comfortable level of securities and it sounded like you did a little bit more remixing.

So is it fair to say that you are comfortable kind of at this level of earning assets?

Or what would drive the total size of the balance sheet from here unless you started to just take on some wholesale funding?

Yes, that is a great question, Ken.

Part of what we did this year is we were looking at certain of our deposit products.

We talked about the collateralized deposits that were in our Wealth Management group.

Those weren't providing virtually any liquidity value for us and certain of those were more expensive.

And so, we decided that we would move those out of the bank.

And so, if you look at deposit balances you really need to go to the supplement on pages 22 and see what the makeup is because we had good deposit growth in consumer and in business services or the corporate bank segment.

As we think about next year low-single-digit growth relative to loans and deposits, we think earning assets can grow in that 2% range.

We know that didn't happen this year but we think that can happen as we go through 2017.

Okay, got it.

And would that increment be then -- you did issue a bunch more debt in the fourth quarter, would that be also funded by more debt issuance this year?

Those were really FHLB advances.

And we are expecting our continued deposit growth to fund our activities on the left side of the balance sheet.

Okay.

And just one follow-up on the securities portfolio.

Outside of the premium amortization help to securities yields, I'm just wondering at what point -- how close are you to kind of getting to that back book-front book in terms of just new yields on new purchases versus what is rolling off the book?

Yes, so we have talked about where things settle down a little bit on premium amortization closer to that treasury yield of [275], we would settle on premium amortization -- premium amortization would settle in that mid-$30 million range.

But going on today is about [250] in terms of the mortgage backs, as corporates are about a point higher than that.

And so, we are -- we continue to see further benefit from rising rates on that portfolio, primarily through the slowing down of premium amortization.

So the new securities that we are putting on are accretive to our cause.

Right, outside of the premium benefit they are now accretive to the underlying?

That is right.

Okay, got it.

All right.

Thanks a lot.

Matt O'Connor, Deutsche Bank.

This is Rob from Matt's team.

I just had a follow-up on your outlook for commercial loan growth.

I was just curious how much additional balance reductions we should expect in those specific commercial segments such as energy and multi-family.

Or are you guys just about done at this point in terms of balance reductions there?

This is John Turner again.

I would say that we expect the runoff in energy to begin to moderate.

We will certainly have some continued pay downs as some of the problem credits work themselves out.

But there is good stability in that marketplace; we are seeing asset sales occur, we are seeing opportunities though limited thus far, to potentially land into the space.

And we did actually make two new E&P loans in 2016, one toward the end of the year.

So I think we will see runoff moderate.

With respect to multi-family, remember we are trying to change our mix of business from being primarily construction oriented to a better mix of construction in turn.

And we can't match the timing.

And so, what we have seen is runoff in the construction book as our term lending and initiative is getting some traction.

And so, we have had more runoff in that portfolio than we anticipated.

At some point it will bottom out and begin to grow as term loan initiative picks up.

And again, we are projecting 2% to 4% loan growth in 2017.

We think that will come in some measure from our specialized lending groups where we can lean into the expertise that we have in technology and defense and healthcare and power and utilities as an example and also within our Regions business capital group where we think we have an awfully good level of expertise and opportunity to grow our business.

Okay, thanks.

Just separately on the net interest margin, any color on where you see the consolidated NIM coming in for 1Q?

I know you'll have some benefit from premium [AM], but any other puts and takes -- will you see additional benefit from the addition of the December rate hike this quarter as well?

This is David.

From a NIM standpoint we still will get the benefit of lower rates now for the full quarter, which we think will be meaningful.

And we will pick up a couple of points with lower premium amortization as well.

But don't dismiss the impact of two less days in the quarter, which actually is accretive to the NIM.

And that will be 2 to 3 points in and of itself.

So, as you think about where we might be in the first quarter, we could be up in that low to [320], in the low [320s] then and continuing to improve -- if the rate environment will hold -- continuing to improve from there towards the fourth quarter.

Okay, thanks.

Steve Moss, FBR.

Good morning.

I was wondering on capital deployment here, if you could just give us a little more color as to what you are thinking about how aggressive you could be for your 2017 CCAR ask?

So we go through a very deliberate, thoughtful process on capital deployment, you saw that this past year where we returned $1.2 billion to our shareholders, which was more than our earnings at the end of the day.

We will continue to -- it is important for us to get our capital optimized.

One of our key metrics that we talk about is getting to that 12% to 14% return on tangible common equity in 2018.

To do that we have to have an optimal size of capital for the risk attendant in our balance sheet.

And so, clearly we have had a challenge of that capital base being as strong as it is with where loans were this past year.

So we will be valuating that, our submission, and I think we learned a few things through other submissions this past year on others that had a capital return in excess of 100% of earnings.

And I think that we will make a prudent decision.

Again, our primary focus is to ensure first and foremost that we have the right amount of capital to run the Company.

And then that excess capital, we need to use it up appropriately.

Grayson talked about organic growth, bolt-on acquisitions.

And when those don't use up the capital base, returning it to the shareholders is the right thing to do and we will continue to do that through our planning.

But I would just reiterate that our primary desire is to be able to use the capital we generate to grow our business and serve our customers organically.

As we use our team internally to put together our capital plan this year for approval by our Board, a lot of what we decide to do will be based on our outflow that we have for potential organic growth.

And if we -- depending on our outlook it will drive really what we do to deploy capital otherwise.

Okay.

And then my follow-up question with regard to your loan-loss reserve ratio, it's been coming down the last couple quarters, kind of wondering where you think it could fill out by year-end?

This is Barb Godin.

Again, as you know, we go through a very thoughtful process on setting the reserve for loan losses.

As we continue to see the energy portfolio improve I would say you will also continue to see some improvement in that level of reserve.

I will reiterate what I've said in the past, I never see it going back down to that 1% level.

And at some point it will probably bottom out somewhere in that [1.25%] or so.

Great.

Thank you very much.

Saul Martinez, UBS.

Good morning.

Thanks for taking my question.

I wanted to ask about your branch rationalization strategy, especially in the context of what is your competitive strength, your low-cost funding.

It's a pretty sizable reduction and your branch footprint is probably more geared on average in lesser competitive markets.

That obviously gives you very strong low-cost funding.

But when you think about your branch regionalization strategy, where you cut, how do you think about that, what are some of the variables you look at, how do you ensure you are not cutting into your strengths?

I guess as an adjunct to that how should we think about the economic benefit you get from the branch closures, the 150 branches or so.

Is there a way to systematically think about how that flows through to your bottom line?

First of all that is a very thoughtful data driven process because we are looking at all of our markets, how each branch is performing, whether transaction activity in that branch is growing or declining.

You hear a lot of institutions talk about average growth rates, average decline rates of transactions.

Those averages can be very deceptive because we have branches where transactions continue to grow year after year.

But what we have done is to try to take a very fact-based data driven process to determine where we have opportunities to not only consolidate offices but to serve our customers even better.

And so, we look very closely at proximity of our branch offices to where our customers live and work.

We spend an awful lot of time making sure that we do this the right way.

We believe the branches are still very relevant.

We still believe that there is opportunities to rationalize that particular distribution channel.

But we have to be careful how it fits in with all of our other channels and make sure that at the end of the day we are still able to attract and retain and service customers with excellence.

So John Owen, all of these branches report to you, if you would sort of speak to that.

Sure, Grayson.

Just to kind of level set, if you step back for a minute we peaked about 10 years ago in 2007 with 2127 branches.

We are down 600 branches, we are down 28% which is really more than anybody else in the industry.

A couple drivers there; you talked about proximity and things like that, that is a big part of it.

But the other part of it is we have made a lot of investments in mobile and online banking and really driving those transactions out of the branches that are what I will call service transaction.

So check your balance, make a deposit, move money around, pay bills.

So a lot of those things have been moved really out of the branches and moved to the mobile and online banking platform.

The other comment I would make is we have done a lot of work around what we call Universal Banker.

And Universal Bank really has helped us from a productivity standpoint by allowing us to have staffing at reduced levels in our branches.

I would tell you for 2016, between our 103 branch consolidations and our Universal Banker strategy, we reduced about 800 positions just resulting from those two items.

So it really is a balance.

So we take a balanced approach around what are we doing in mobile and online, what are we doing with our deposit smart ATM strategy, what are we doing with our virtual terminal strategy and also consolidations.

I will tell you over the next probably year or two you will see consolidations outpace any building, so our net branch count will go down from the 1,527 level today.

We'll probably be in that I would say 1,480 to 1,500 range.

But again, branches are very important as part of our strategy.

This is David.

I will add one thing to the last part of your question is that when we look at this from an economic standpoint, when we consolidate a branch we are going to lose some revenue.

So the goal is to take out more cost than any revenue that you might lose.

And for us we target about a two-year payback.

And when we consolidate these branches thus far the wave that we've had, the 103 this year, the ones last year have been slightly less than a two-year payback.

So we feel very good about how they are paying for themselves and it is a part of our expense initiative as well.

The other point I would make, even though we have less branches, our account growth is up.

We are growing our account base and checking account from that 1.7% to 2% range.

Our now banking growth is up in that 13% to 14% range.

Credit card growth is over 10% to 11% range.

So we are seeing strong growth in spite of the fact that we have less physical stores.

Our revenue per branch is up also.

That is helpful.

Thank you for that.

And if I could just follow up on loan growth and you are assuming in your 2017 guidance 2% to 2.5% real GDP growth.

How do you think about the potential upside of that number?

Maybe not in 2017 but looking out late 2017 into 2018, if we do get a bit better economic growth environment, I assume it is not a linear relationship -- risk appetite might move up, animal spirits and whatnot.

But how do you think about the potential upside if the environment really does improve?

It is hard to put a number of around.

But we are optimistic that as we look forward that there may be considerable upside to our forecast.

What we are trying to do is to balance our emotions between what we know is going on today, what we know we can deliver and what we hope the future may hold for us.

There is enough a lot of enthusiasm, a lot of people that are appearing to get more courage to invest, more courage to expand.

But we still are trying to balance that in our markets.

It is a great turn of emotions in our marketplace.

We really are excited about what the potential upside might be.

That being said, at the end of the day from a forecast standpoint we still have got to forecast what we know we can deliver.

And so, we are trying to balance that, as I am sure you are.

I am not sure there is a solid answer to your question, but I do believe that there is a potential for considerable upside.

I think your point though in terms of 2017 is probably a lot of this has to manifest itself in 2017 for the effect to take in 2018/2019.

So I think we have a lot to learn here over the incoming months to see what the administration really does.

Everything I would add is if you think about our business, the commercial and middle market small business customer represents about 25% give or take of the bank's profitability.

And that customer has not been borrowing for years.

So if we begin to see a little extra pickup in the economy, particularly amongst the middle market customer base, small business customer, I think there is a lot of upside.

Because it has a huge impact for our Company.

Absolutely.

That is good color.

Thanks a lot.

Gerard Cassidy, RBC Capital Markets.

Good afternoon, guys.

Thank you.

David, can we go back to the capital question?

You talked about with this year's CCAR that you are always going to want to keep the right amount of capital to run your business.

And I think in the past you may have used a 9% number.

Is that still an appropriate number for the risk on the balance sheet?

That's a good question, Gerard.

We use a 9.5% common equity Tier 1 as kind of the range that we think we ought to have.

Based on today's risk -- we are obviously looking at different portfolios and we have de-risked a little bit.

And as we do that that number can go down.

We also have added portfolios that have more risk to them that go the other way.

But right now we think 9.5% is probably a good target.

Good.

And then you I think also referenced in talking about this that you are looking at what other banks have done in terms of the ask in CCAR possibly going over 100% of earnings.

With the proposed change for the under $250 billion in asset banks not having to go through the qualitative portion of the exam, does that give you more confidence to ask for a bigger number in view of what some of the banks did last year but now with this change as well?

Certainly the removal of a qualitative aspect of this CCAR is incrementally helpful, but it is not a free pass.

The regulatory supervisors are still engaged very closely with our capital planning and governance processes, it just happens at a different time of the year.

It will most likely happen in the third, fourth quarters as we prepare for an April delivery each year.

Now this year is a transition year so it will take some time.

But not having the qualitative aspects and being able to leverage the models that we have built that have been reviewed over a number of years is where we get our confidence.

We need to run our bank with the idea of what capital we think and our Board thinks we need to have.

We know we are regulated and we have to evaluate that too but the regulators aren't looking for us to try to outguess them.

They are trying to get us to run our bank appropriately.

And that is why we feel confident about being able to get our capital down to that 9.5% common equity Tier 1 over time in a prudent manner.

And so, we are going to march in that direction, the pace of which is going to be determined through further analysis.

But that is really important for us to get 9.5% as we set our goal return on tangible common of [12%] to [14%], which embedded in that is getting our capital optimized and right sized.

But the capital planning process has made constructive progress every year.

And we look at how the process has changed from last year to this year and we think it has been very constructive, gives us more certainty, gives us more confidence.

And I think that we have really developed a very rigorous, very disciplined capital planning process inside our Company.

And we have got a lot of confidence that we can do the appropriate things given the risk in our balance sheet.

So we continue to build confidence around our ability to manage capital.

Very good.

And then just as a follow-up, you guys have done a very good job in closing down branches and in your answers today some good analysis of how you look at it.

Have you taken into account for the upcoming year and the branch closures that in a rising rate environment deposit behavior may be different?

And would that affect your modeling on your payback?

I think, David, you mentioned it is two years or less than two years.

Have you factored that into the equation yet?

Well, a couple things on that.

We have and we try to anticipate deposit behavior.

A couple things are happening.

One, we have a loan deposit ratio of 81%, so we are in pretty good position there from a liquidity standpoint.

The relationship bank has mattered and will matter going forward.

We also recognize a TLAC for the larger players have caused them to have a different liquidity profile than they otherwise would have had.

And therefore perhaps competition regarding deposits especially in a one low-single-digit 2%, 3% loan growth mode doesn't put as much pressure on deposits and deposit rates.

With growing, making investments that we want to -- John talked about the retail network strategy of getting in some of the major metros and being able to see inflation (inaudible) grow deposits is really important to us in 2017 and beyond.

But if you look at 2016, and even prior to that, our strategy has been to remix our deposit portfolio to make it more granular, to make it less interest rate sensitive.

And most of our growth has come in low-cost deposits.

And we have also reduced our dependency on higher cost deposits and also our dependency on deposits that require collateralization.

When you look at where we are at today, we have ran some limited exercises to try to better understand how much we would have to move rates to attract new deposits into the Company.

And we think we have a pretty good handle on how customers will react in higher markets and a higher rate environment and continue to be hopeful that our deposit betas will outperform.

Gerard, I will add one other thing.

If you'll look at our supplement on page 22 you will see our deposits broken out by Consumer, Corporate, Wealth Management, you will see our Wealth Management year-over-year was down $2.2 billion.

And that is a decision we made that we weren't getting the kind of liquidity that we wanted.

If we needed to we could change our tune on that.

And we might have to pay up a little bit for deposits.

But we have multiple avenues of funding and our liquidity position, in particular related to our securities portfolio and other assets that we can post up as collateral for the FHLB, is very strong, which I think will bode well for us not having to chase these deposits or be unduly restrictive on our consolidation efforts.

Great.

Thank you for the thorough answer.

I appreciate it.

Thank you.

That was our last question.

We appreciate everyone's attendance today and we will stand adjourned.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.