Regions Financial Corp (RF) 2018 Q2 法說會逐字稿

Good morning, and welcome to the Regions Financial Corporation's Quarterly Earnings Call.

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

(Operator Instructions) I will now turn the call over to Dana Nolan to begin.

Thank you, Shelby.

Welcome to Regions Second Quarter 2018 Earnings Conference Call.

John Turner, our Chief Executive Officer, will provide highlights of our financial performance; and David Turner, our Chief Financial Officer, will take you through an overview of the quarter.

A copy of the slide presentation as well as our earnings release and earnings supplement are available under the Investor Relations section of regions.com.

Our forward-looking statements disclosure and non-GAAP reconciliations are included in the appendix of today's presentation and within our SEC filings.

These cover our presentation materials, prepared comments as well as the question-and-answer segment of today's call.

With that, I will turn the call over to John.

Thank you, Dana.

Good morning.

Thank you for joining our call today.

Let me begin by saying that we are very pleased with our second quarter results.

Our performance clearly demonstrates that we're continuing to successfully execute our strategic plan, building long-term sustainable growth, while delivering value to our customers, communities and shareholders.

Our reported earnings from continuing operations of $362 million reflected an increase of 21% compared to the second quarter of the prior year.

Importantly, we delivered solid revenue growth, while maintaining a focus on disciplined expense management.

Of note, adjusted pretax, pre-provision income increased to its highest level in 10 years.

In addition, this marks another very strong quarter with respect to asset quality, as virtually every credit metric improved.

In terms of the overall environment, we would remain encouraged by improving economic conditions as well as continued improvement in customer sentiment.

We remain focused on generating prudent and profitable loan growth, while also meeting the evolving expectations of our customers.

Once again, we're proud of our robust capital planning process.

Our planned capital actions received no objection in the recent CCAR results, and we're set to deliver a robust return of capital to our shareholders, while maintaining appropriate levels to meet customer needs and support organic growth.

With respect to our business strategy, we're committed to the diligent execution of our plan, and are making notable progress with respect to our Simplify and Grow strategic initiatives.

While much has been accomplished, the process is ongoing, and we currently have approximately 40 initiatives underway aimed at accelerating revenue growth, driving operational efficiencies, expanding the use of technology and ultimately further improving the customer experience.

Through this continuous improvement process, we aim to deliver consistent and reliable results over the long term.

For a while now, we've been speaking about 4 key strengths, we believe, provide considerable momentum for Regions.

First is our asset sensitivity and funding advantage, driven by our low cost and loyal deposit base.

This provides significant franchise value and a competitive advantage, particularly in a rising rate environment.

Second relates to asset quality.

We experienced another quarter of broad-based improvements in credit quality and continue to expect modest improvement throughout the remainder of the year.

Further, we believe that derisking and portfolio shaping activities we have completed, combined with our sound risk management practices, have positioned us well for the next credit cycle.

Third, our capital position supports additional capital returns as we move toward our target Common Equity Tier 1 ratio, the execution of which was again validated through the recent CCAR process.

And finally, we expect additional improvements in core performance over time through our Simplify and Grow initiative, which is well underway as evidenced by our actions to date.

As we look ahead, Regions is well positioned and we're building momentum every day.

We have clear plans and a strong team, and our focus on effectively executing our plans, while adapting to the ever-changing environment remain steadfast.

We do not anticipate major changes to the company's strategic direction.

Going forward, we will build on the solid foundation already established, delivering consistent and reliable financial results and creating a culture of continuous improvement are priorities.

Providing best-in-class customer service and an unwavering commitment to our associates and communities will not change.

Grayson Hall led the company through one of the most challenging periods in our industry's history.

His leadership and commitment has positioned the company well for the future.

On behalf of our associates, we thank Grayson for his 38 years of dedicated service.

And I personally want to thank him for his guidance, counsel and support.

With that, I'll now turn it over to David.

Thank you, John, and good morning.

Let's begin with average loans.

Adjusted average loan balances increased $382 million over the prior quarter, driven by modest growth in both the consumer and business lending portfolios.

Growth in the consumer portfolio was driven primarily by our expanded point-of-sale partnerships as well as residential mortgage and indirect vehicle lending.

Average loan growth in the business lending portfolio was again driven by C&I lending, primarily from our specialized lending areas.

Consumer lending should continue to produce consistent loan growth across most categories, and C&I should continue to lead growth within business lending.

Headwinds associated with previous derisking efforts and our investor real estate portfolio has slowed.

And as a result, we have begun to see a little growth on an ending basis, largely in our term real estate product.

Let's move on to deposits.

We continue to execute a deliberate strategy to optimize our deposit base by focusing on valuable low-cost consumer and business services relationship deposits, while reducing certain higher-cost brokered and collateralized deposits.

As a result, total average deposits declined modestly during the quarter.

However, average consumer segment deposits experienced solid growth of over $1 billion, consistent with our relationship banking focus.

Our deposit advantage is generated from our granular and loyal deposit base.

During the second quarter, interest-bearing deposit cost totaled 38 basis points, while total funding cost remained low at 52 basis points, illustrating the strength of our deposit franchise.

Cumulative deposit betas through the current rising rate cycle are only 14%.

And importantly, consumer retail deposit betas remained low at approximately 1%.

As expected, commercial deposits have been more reactive with a cumulative beta of approximately 44%, driven primarily by large corporate and broker deposits.

We believe our large retail deposit franchise differentiates us in the marketplace.

As such, we are in a position to maintain a lower deposit beta relative to peers.

Our customer base is also highly engaged with over 55% of consumer checking customers utilizing multiple channels, and more than 75% of all interactions are now digital.

The number of active mobile banking customers has increased 12% compared to the prior year, and active mobile deposit customers has more than doubled.

We continue to focus on being our customers primary bank, as 93% of our consumer checking households include a high-quality primary checking account.

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

Net interest income increased 2% over the prior quarter and net interest margin increased 3 basis points to 3.49%.

These increases were driven primarily by higher market interest rates and prudent deposit cost management.

With respect to full year 2018, the current market expectation for the Fed to continue increasing rates, combined with better-than-forecasted deposit pricing, will likely push NII towards the upper end of our 4% to 6% guidance on a non-fully taxable-equivalent basis.

Specific to the third quarter of 2018, current market expectations for a rate increase in September, along with similar deposit betas to what we've experienced in recent quarters are expected to result in another solid quarter of growth in net interest income, along with modest net interest margin expansion.

Remember the third quarter will have one additional day that will benefit net interest income, but reduce net interest margin.

We also experienced a good quarter as it relates to fee revenue.

Adjusted noninterest income increased 2% with growth across most noninterest revenue categories during the quarter.

Keep in mind, the first quarter benefited from net gains associated with the sale of certain low-income housing investments and deposit valuation adjustment associated with a private equity investment totaling $13 million that did not repeat this quarter.

These gains were included in other noninterest income.

With respect to corporate fee revenue categories.

The company's investments in capital markets continue to pay off as the business delivered another record quarter.

Revenues totaled $57 million, with all businesses within capital markets contributing.

The second quarter increase was led by merger and acquisition advisory services and customer derivative activity.

Consumer categories remain an important component of fee revenue.

To that point, service charges in Card & ATM fees grew by 2% and 8%, respectively.

This growth has been aided by year-to-date checking account growth of approximately 1.2%.

In addition, revenue growth was supported by an increase in debit transactions of 9% and an increase in credit card spending of 10% during the second quarter.

Mortgage income remained stable during the quarter despite seasonally higher production, due primarily to a 25 basis point reduction in gain on sale.

While production is lower across the industry, we continue to expect better performance relative to peers due to our historically higher mix of purchase versus refinance volume.

We continue to evaluate opportunities to grow our residential mortgage servicing portfolio.

And during the quarter, we reached an agreement to purchase the rights to service approximately $3.6 billion of mortgage loans with an expected close date of July 31, 2018, and is subject to customary closing conditions.

Increasing servicing income is expected to help offset the impact of lower mortgage production.

Wealth management income was up modestly in the quarter, driven by a 12% increase in investment services fee income.

Let's move on to expenses.

On an adjusted basis, noninterest expense increased approximately 2%, attributable primarily to increases in professional fees and expense associated with Visa Class B shares sold in a prior year.

Excluding the impact of severance charges, salaries and benefits decreased approximately 1%, reflecting staffing reductions and lower payroll taxes, partially offset by annual merit increases.

As a result of our efforts to rationalize and streamline our organization, staffing levels declined by 340 full-time equivalent positions compared to the prior quarter and approximately 1,100 full-time equivalent positions compared to the second quarter of the prior year.

Year-to-date full-time equivalent positions have declined by approximately 700 positions.

Further salaries and benefits expense reductions are expected in the third and fourth quarters, as approximately 500 additional position reductions will benefit the run rate.

Keep in mind, these numbers do not include the 644 position reductions associated with Regions Insurance.

In addition, we continue to take a hard look at occupancy expense, and will exit approximately 500,000 square feet this year, benefiting 2019 and beyond.

This amount does not include another 200,000 square feet of reductions associated with Regions Insurance.

The adjusted efficiency ratio was 60.4%, down slightly from the prior quarter.

And through the first 6 months of 2018, the company has generated 2.7% of adjusted positive operating leverage.

For full year 2018, we continue to expect adjusted positive operating leverage of 3% to 5%, relatively stable adjusted expenses and an adjusted efficiency ratio of less than 60%.

Let's shift to asset quality.

Broad-based asset quality improvement continued during the quarter.

Nonperforming, criticized and troubled debt restructured loans as well as total delinquencies all declined.

Nonperforming loans, excluding loans held-for-sale, decreased to 0.74% of loans outstanding, the lowest level since 2007.

Net charge-offs totaled 32 basis points of average loans, an 8 basis point decline from the prior quarters adjusted ratio.

The provision for loan losses approximated net charge-offs during the quarter and included the release of our remaining hurricane-specific loan-loss allowance of $10 million.

The allowance for loan losses totaled 1.04% of total loans outstanding and 141% of total nonaccrual loans.

Let me give you some brief comments related to capital and liquidity.

As John mentioned, we are pleased with our CCAR results and remain committed to maintaining prudent capital ratios, while thoughtfully investing in our businesses for future growth and delivering a solid return of capital to our shareholders.

On July 2, we completed the sale of our Regions Insurance subsidiary.

The after-tax gain associated with the transaction was approximately $200 million, and Common Equity Tier 1 capital generated was approximately $300 million.

Our capital plan incorporates the capital generated from this transaction and is included in our board-authorized share repurchase program for up to $2.03 billion in common shares over the next 4 quarters.

Subject to our board's approval, the plan also includes a 56% increase in Regions' quarterly common stock dividend to $0.14 per share beginning in the third quarter.

Regarding 2018 expectations, our full year expectations remain unchanged and are summarized again on this slide for your reference.

So in conclusion, we are pleased with our second quarter results, and believe our Simplify and Grow strategic initiative along with other opportunities and competitive advantages position us well for the remainder of 2018 and beyond.

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

Thank you, David.

(Operator Instructions) We will now open the line for your questions.

(Operator Instructions) Your first question comes from John Pancari of Evercore ISI.

On the loan growth front.

I wanted to see if you can give us a bit more color on the -- where you see the drivers of loan growth through the back half coming from?

And your full year outlook of low single-digits, it seems like at this point you might be trending at the lower-end of that.

Do you see it that way or do you think it can break to the upside a little bit through the back half?

Well, I'd say, first of all, we are affirming our current guidance for low single-digit loan growth, excluding the runoff that's targeted in the indirect portfolio and the TDR sale, obviously.

If I focus on the consumer side of the business, we feel pretty good about our forecast.

We look at mortgage.

We expect it to generally be flat, I think.

We see runoff in the HELOC portfolio, and the balance of our consumer business should grow modestly, we believe, across most of the sectors and the remaining part of the year.

On the corporate side of the business, our pipelines are good.

They have improved since the first quarter, and they continue to be pretty solid.

Our customers are optimistic.

But I'd say, they're still a bit cautious.

We are seeing customers use a lot of their liquidity to fund their additional borrowing needs or what would have traditionally been additional borrowing needs.

And you can see that in some of the runoff in our deposit balances.

But generally if you think about our business in the 3 segments that we think about them, the Corporate Banking business, I think, will grow modestly through the balance of the year, largely as a result of activity within our specialized industry's group and a more narrow targeted focus by our diversified industry bankers.

And we've seen both those teams have some success in the first part of the year.

In the traditional middle market commercial banking and smaller business banking, we have renewed focus there that we're beginning to see really get some traction.

Owner-occupied real estate, which had been running off at a pretty rapid rate through the, I guess, over the last 10 years, has really begun to slow.

And that will help us, we believe, to see some additional loan growth through the balance of the year.

And then finally, in real estate, we had indicated we thought in the second quarter we would begin to see some modest growth.

If you remember that we had been derisking that portfolio, exiting many of the multifamily construction loans that we had in the books, and that has been successful, I think.

Term lending, while it's very competitive has begun to have a positive impact on our portfolio.

And so we saw some nice loan growth at the end of the quarter in real estate banking.

So all in all, I think our guidance is solid.

I would not say that we, at this point, would guide toward the upper end of the range.

I think it would be lower-end to the middle of the range.

But we do believe that we will achieve those objectives.

And if we do, we will meet all of our other targets as a result of that.

Okay, that's helpful.

Then in terms of your margin, saw some pretty good expansion again this quarter and probably would have even been higher, if not for the leverage lease transaction, but just want to -- or the impairment, that is.

I want to get your updated thoughts on the sensitivity to ongoing Fed moves, but also rising betas.

What's your updated sensitivity to each incremental 25 basis point Fed hike?

I think, John, our -- this is David.

Our expectation for the year is, our beta thus far is 14%, as I mentioned earlier.

We do think that picks up at the back half of the year.

But if we look at 2018, we think a beta in the 30% range is what's baked into the guidance that we've given you.

Thus far, we've outperformed our expectation on beta, and rates have come in faster than we had anticipated as well.

And so we're reiterating our guidance on net interest income growth this year to the higher-end of that 6% -- 4% to 6% range.

We think we can get to the higher-end of that.

As it relates to next quarter, we think we'll have another solid quarter of growth in NII, and we think our margin will grow modestly because it has to overcome about 2 points of -- for the next quarter for day count.

So I think that we feel very good about our expectations.

Our next question comes from Jennifer Demba of SunTrust.

Just wondering if you could clarify what your M&A interest and capacity is at this point?

Sure.

We have an M&A team.

They are charged with finding both bank and non-bank opportunities.

And we've had some success acquiring non-bank businesses, mortgage servicing rights and other loan portfolios.

In fact, we point to BlackArch Partners and that investment as being a real high point in the quarter in terms of their contribution.

And we'll continue to look for those kinds of opportunities, because non-bank opportunities help us fill gaps in our capabilities, meet customer needs and importantly, grow and diversify revenue.

Bank M&A is a good bit more challenging.

When we think about where Regions trades relative to our peers, we're trading -- or relative to targets, I would say, likely targets.

We're trading at a discount.

And as a result, the economics just don't work for us.

We look at our plans and our opportunities, and we think they are significant.

We benefit from rising rates.

We have a good plan to return capital to our shareholders, which should generate outsized returns.

We think, through our Simplify and Grow initiative that there is a real opportunity to improve our core business.

And so we're just not going to do a transaction that would be significantly dilutive to our shareholders in this environment.

And that's not to say that we're not going to continue to look.

We will do that.

We learn as we do.

But I think we're going to be very conservative, very thoughtful.

We'll seek to build relationships with potential sellers.

We'll watch the market.

But we're going to be very disciplined in that regard.

Principally because, again, we have the opportunity, we think, to take advantage of a number of other levers that will drive outsized returns for our shareholders.

Your next question comes from Ken Usdin of Jefferies.

In terms of the balance sheet mix, you haven't had a lot of earning asset growth, which has allowed you to be, I think, in part, so disciplined on the deposit side.

How much more shrinkage do you think you could see in terms of the interest-bearing -- sorry, the non-interest-bearing deposit side?

And at what point do you think that you might have to just go out into the market, just to keep up with what hopefully is now a better trajectory on the loan growth side?

Again, this is David.

So you mentioned us being disciplined on pricing on the deposit side, but I would tell you, we've been very disciplined on the left side of the balance sheet.

We want to grow loans, we did grow loans this quarter.

But we are going to remain very disciplined, making sure that when we lay out capital to our customers to serve their needs, that we're paid and we have an appropriate return on that capital that we put out.

We have a low loan deposit ratio relative to our peers.

And staying disciplined on the left side of the balance sheet lets us be even more disciplined on the right side.

You're correct to say that noninterest-bearing deposits have been put to work.

A lot of that has been on the Corporate Banking side, where corporate banking customers are looking for alternatives to generate yield.

Some of that's gone into interest-bearing accounts with us.

Some of that's been utilized, as John mentioned earlier, to fund capital expenditures and put the excess cash to work.

But at some point, we believe, those actions will dissipate and we'll be able to grow loans.

We are constantly looking for relationship deposits, whether it be on the consumer side or the business service side.

That will always be important to us.

But we don't see any need in the near-term to have to go out and bid up deposit from a cost standpoint.

That being said, we do have promotions like others do, and we'll look at opportunities to strengthen the market leveraging that.

But wholesale changes in our deposit structure is not in order at this point.

Yes.

I'll just make another, maybe 2 points, Ken.

One is, if you look at growth in consumer deposits, we grew demand deposits on the consumer -- in the consumer business by 6.4% year-over-year and continue to see good growth in checking accounts and households.

And so we believe that we'll see nice steady growth on -- in consumer deposits.

The second thing I'd say is, we are again reiterating our guidance for low single-digit deposit growth through the end of the year.

And so we do expect that we'll continue to grow deposits and finish the year with a little growth.

Next question comes from Steve Moss of B. Riley FBR.

On the commercial real estate growth here, I was just wondering, we've heard more comments around competition and tighter spreads.

Wondering, what you guys have seen as it relates to that and what types of properties are driving growth?

So great question.

We are seeing a lot of competition, particularly in that term lending product.

Spreads have compressed 50 basis points or more since the beginning of the year.

We've had to be very selective in seeking out opportunities in the space.

The growth we've had, though modest, has been in multifamily and office primarily, where we think we have good expertise.

Just [keep in mind] the audience that -- we have been managing that portfolio very actively for quite some time.

And today, it represents about 7% of our total loan portfolio, down from at onetime bar...

30%.

In the 30% range back during the crisis.

So we believe it's a business that we can and will continue to grow modestly.

It provides really nice fee income opportunities for us.

And you see that in our capital markets business and is improving.

Also presents an opportunity for us to grow deposits, as we begin to develop more relationships with the owner-operator customer, who is the term lending customer.

So we'll grow it modestly, but carefully.

And again, manage it, I think, very judiciously.

Okay, that's helpful.

And then, on the securities portfolio here, wondering what your thoughts are on balances going forward as the yield curve has narrowed?

And what are your thoughts if it inverts here in the next couple of quarters?

Yes.

So in terms of the level of securities as a percentage of earning assets, we don't anticipate any significant change there.

If we do get some liquidity, LCR relief, we may change out some Ginnie Mae securities and put them to work more effectively.

But right now, we think that just continuing to manage the book like we are with the same duration, we have a lift coming from our fixed rate lending and our securities book even if rates stay flat to where they are right now, as we re-rate some $12 billion to $14 billion worth of assets over a given year.

So an inversion that you spoke of, we think would be more Central Bank driven than a precursor to a downturn.

And even with that as rates have shifted up and repricing comes through, we still have a very significant tailwind to help us continue growing NII.

Your next question comes from Saul Martinez of UBS.

Wanted to ask about loan yields.

Your C&I yield, obviously, picked up with the higher rates.

But significantly less, I think, than a lot of other banks who benefited from this blowing out of LIBOR relative to the Fed funds rate.

Maybe the leverage lease trend write-down had maybe on the margin something to do with it.

But I'm curious, why you are not seeing a bit more of a yield pickup as some of your -- as some of your competitors have?

And does it have to do with hedging strategy?

Does it have to do with the structure?

But it's been over the last few quarters about 10 bps sequential with every rate hike.

So I'm curious why, if there's something there that is different about your C&I book or how you manage through the portfolio?

I'll take a shot at that and maybe David could follow.

Typically, our C&I business has been very much a relationship-oriented business going back a very long time.

It's generally built around our core markets Alabama, Mississippi, Tennessee, where we have very long and deep relationships.

We enjoy significant demand deposits associated with those relationships in that business.

And while we don't -- as we look at our peers typically, don't get the same yield on the loan side of our business.

We enjoy, we think, greater demand deposits.

And so view it from a relationship perspective, we think that there is fair trade-off there.

That's part of it.

Another part of it is that we have been seeking to grow both our government and institutional banking business, which is a little more competitive and yields are narrower.

And separately, we've been working hard to stem the tide of runoff in our owner-occupied real estate portfolio.

And so yields there have been compressed a bit too.

I'll add another thing.

Really, you got to look at the whole relationship versus taking apart loan side versus deposits.

But we did have the leverage lease impairment of $5 million, you pointed out.

That's about 3 basis points of that change too.

So that's the other piece of this.

Yes, it's just kind of hard to triangulate though with some of your peers having 30 basis points, 40 basis points, 30-plus bp yield pickup sequentially pointing to the higher LIBOR.

And you guys have been pretty consistent at 10 basis point per quarter when you have a rate hike.

So is it -- everything you said makes sense.

But I wonder if there is anything that has anything to do with how you -- is it hedging strategy, the structure of the loan?

Because it seems like there is a bit of a disconnect versus what we've seen some of the other banks report.

Yes, there's a -- so you got to look at mix.

You have to look everybody's hedging strategy.

But if you look at our asset sensitivity, 25% of it's on the short-term, 25% of it's on the middle term and 50% is on the long end.

So that will have a little bit of a dampening impact in terms of rate increases that move up.

And so I think that it's really hard to compare peer to peer.

There are a lot of puts and takes on it.

Fair enough.

If I could just get in a quick one.

The indirect other consumer, obviously, growing pretty well, the GreenSky.

But where do you think -- can you remind us where you think that book can grow to in terms of absolute size over the next year or 2?

Yes.

We do have limits in terms of how much we want our indirect other to get to.

Right now, our indirect other consumer is about $1.7 billion.

We're looking at that number to be in that $2 billion range.

So some growth there, but not an extraordinary growth.

$2 billion by year end?

I would say over time, yes.

Your next question comes from Geoffrey Elliott of Autonomous Research.

Maybe following up on the earlier discussion on M&A.

Can you kind of outline both on the non-bank side and the bank side either from a product point of view or a geography point of view, are there areas where if the price was right and the economics were right, you'd be particularly interested from a strategic perspective?

Happy to.

With respect to non-bank, I think our focus has been on, as I said earlier, adding capabilities.

So whether it be in capital markets or in wealth management, as an example, adding products and capabilities that help us fill gaps to meet customer needs.

We've been acquiring loan portfolios, mortgage servicing rights and those things, and we'll continue to do.

We have capacity within our mortgage servicing operation.

We think we do that well.

And so we'll continue to likely add to that portfolio.

On the bank side, I think typically our interest is going to be in footprint.

We talk about size, and I think that ranges.

But our conversations have been in the $3 billion to $15 billion kind of range.

We are not interested, as I said earlier, in doing a transaction that would be significantly dilutive to tangible book value and earn-backs are important to us.

I hope that gives you a little bit of perspective.

Got it.

That does.

And then, a quick one on CCAR.

It looks from the CCAR results like there is some preferred issuance baked into the ask, and I think there was last year as well.

Could you discuss a little bit -- well, firstly confirm that's the case?

And then discuss the circumstances when you'd be expecting to issue preferreds?

Yes.

So Geoffrey, originally, we had a preferred issuance built in, but it was in 2019.

We do need to continue to watch changes, regulatory changes with regards to the SCB: in terms of how that might impact our capital ratios; in terms of will it have us have more common and therefore, negate the need to have preferred stock over time.

There is more to come there.

But we want to make sure that, obviously, we have an appropriate amount of capital Tier 1 and Common Equity Tier 1. Our focus right now in the short-term has been to get our common equity down to our 9.5% target range.

And as we do that, we need to make sure we backfill appropriately for Tier 1. And if we don't get relief through the SCB, then we'll have preferred issuance in there, right now pegged in '19.

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

I was wondering if you could talk about the kind of relationship of provision expense to charge-offs looking out the next few quarters?

Obviously, this quarter, it was very close to matching after a couple of quarter of release, but with loans starting to grow again here, wondering if you could give some color on that?

Barb?

Yes, I think you'll continue to see us match provision to charge-off, and there could be a slight build relative to loan growth as one would expect.

Okay.

And in terms of the loans that you're adding now, say the indirect consumer, which isn't that big, but the growth that you are getting there from some of the other portfolios, are they -- do you think a large content of what's being added is higher than what's running off?

Or is there still some kind of underlying derisking as, say, home equity runs off and things like that?

I think we're going to continue to see some modest improvement in our numbers across all of our portfolios over the balance of the year, definitely.

And what we're putting on the books is of very high quality, very happy with it.

What we're seeing with those loans is in fact they are performing very well and we would expect them to continue to perform well, including better than those that are writing off.

Your next question comes from Betsy Graseck of Morgan Stanley.

I know that there is -- you mentioned briefly some -- what the trajectory of Simplify and Grow is.

But maybe you can give us a little bit of color as to the kinds of actions that have been taken over the past quarter or so?

And how you expect the operating leverage trajectory to shift from here?

Is it at the run rate that we've been seeing over the last year or so or do you feel that we're moving into a period where there could be a little bit more acceleration in that trajectory?

John Owen is leading that work.

I ask him to answer your question and maybe David can follow on as well.

Good morning, everyone.

We're making good progress on Simplify and Grow initiative.

As we said earlier we got about 40 initiatives that are underway.

We started this about 7 months ago.

And I think we're off to a really good start.

Let me give you a couple of examples of projects we have underway.

I think that might provide some color and background.

First one I'd focus on would be our consumer lending space.

We've got a team working on how do we take all of our consumer lending categories and make them fully 100% digital, meaning a customer can come in, start a digital channel whether it's a mobile device, iPad or laptop, start there and finish that loan completely digital.

We're going to do that for all consumer loan categories.

We're well down the road in that process.

I would tell you by the end of 2018, we'll have the majority of that work done.

There will be some things that will spill over into 2019.

But example of some of the changes we've made, I'll take the mortgage application process.

We've reengineered that process.

We've gone through and taken about half of the data requirements for the application.

And it has taken the application time down from over 15 minutes to under 5 minutes.

The other thing we're seeing is a huge shift in adoption in terms of filling out your application in the digital format.

In December, only about 20% of our apps were filled out in the digital space.

We're now about approaching 60% of our applications filled out in that digital space.

The other one I would point out, another initiative is in our commercial lending process.

We've gone through and really put a dedicated team focused at how do we reengineer that process really with the goal being for us to get a faster answer back to the customer.

So from application time to a yes or a no to a customer, we've dropped that by about 70%.

And so the team has done a great job of making banking much easier for our commercial customers.

The last one I would point out would be in our contact center area.

We've gone through and used IBM Watson in our contact center really to provide some assistance to our reps so they can better assist our customers.

Couple of use cases that we have deployed, the first being, for certain call types Watson will actually take the call, handle the call with the customer, and service that call right there with Watson.

We've had about 700,000 calls already year-to-date that Watson has handled that call from start to finish.

And that's equivalent to about 55 contact center reps in that initiative alone.

The other thing we've done is we've gone through and really tried to arm our reps with -- to be able to have quick fast answers back to customers, and we have Watson set up almost in a chat mode.

So a customer -- I mean, a rep can actually ask Watson a question when they have a customer on the phone.

They've done that 700,000 times year-to-date.

And so a lot of good work there, lot of good energy.

David mentioned earlier about headcount.

And one of the things that, when you think about headcount and I'll say corporate real estate, those are 2 big indicators that you can watch to see us, are we making progress on our Simplify and Grow strategy.

We're down about 770 positions through June, and that's a direct result of management actions that have been taken with these 40-plus initiatives that are out there.

Also, Regions Insurance closing on July 2, that's about 644 positions eliminated there.

And in the balance of the second half of the year, you'll see Simplify and Grow impact probably another 500 positions in the second half of this year.

That's over 1,900 positions.

What I would tell you is, that will really show up in 2019 when we get the full run rate.

And the last point I would make would be on the real estate side.

We've got a good opportunity to continue to reduce our space across the bank.

We'll be down about 700,000 square feet this year, and we expect that trend to continue.

So Betsy, I'll add to that.

So our operating leverage to date is 2.7%.

We are reiterating our guidance of 3% to 5% for the year.

We get there both by having improvements in revenue, whether it comes from rate, balance sheet growth, Simplify and Grow initiative helps revenue.

And then, continuing to watch our cost for the remainder of the year.

You'll see the benefits of that as John just mentioned, really ramp up in the third and fourth quarter, such that it gives us confidence that not only are we going to meet our operating leverage target, but we will also get our efficiency ratio below the 60% level.

Got it.

That was really helpful color.

It sounds like you were well prepared for that question.

Yes, that's right.

Yes, exactly.

One other, just a separate topic.

But David, on the capital.

I know we talked a little bit about capital and capital return already.

Just -- especially since the insurance acquisition -- or insurance, I'm sorry, sale is happening this year.

Is there any opportunity to do a mid-quarter ask or a de minimis as well in terms of capital return?

Well, so we had baked into our submission to the extent we generated capital that we were also going to be able to include that, and that is in the numbers that you see.

So that $300 million has already been asked for.

So there is no need to go back.

There is always an opportunity to go back on a de minimis.

The de minimis is a fairly small number now.

And we'll have to see if circumstances changes.

We do not anticipate that, but it's always an option.

Your next question comes from Peter Winter of Wedbush.

I just want to follow up on the efficiency ratio.

Looking out longer term, if you're still targeting bringing it down to the mid-50s and over what time frame do you think you can get there?

Yes, Peter, that's a good question.

So we've been pretty focused on our '18, to kind of make sure we meet that.

It's the third year of our 3-year plan we laid out at Investor Day in November of '15.

We are going to have our Investor Day in February of '19, where we will have our scorecard on what we told you we were going to do, and that we're going to laying out the expectations for the next 3 years.

You've heard me mention before, I think our industry is going to have to become more efficient over time.

And I think we will certainly do that.

And I think targeting something in the 50 -- mid-50s to maybe even better than that overtime is on the table.

I think you should see us through Simplify and Grow initiatives to get just a little better each quarter.

But when can we hit that mid-50s?

We haven't really gone out and said that.

You're going to have to wait and show up in February to hear it.

But I think in the not too distant future, we could actually get there.

Yes.

I would just reiterate that.

I think we're very focused on continuing to improve the efficiency of our operation.

And we make the point that our Simplify and Grow initiative, we've tried to be clear that it is not a program, it's really about making a cultural shift here at Regions.

It's about developing a culture of continuous improvement.

We've got to always be looking for how do we make it easier for our customers and bankers to do business?

How do we improve our processes?

How do we drive efficiency to be more effective and deliver more value for our shareholders.

So we're very committed to doing that.

That's really helpful.

And just a follow-up.

If I look last year, the share buyback coming out of CCAR, you front-end loaded that buyback.

Should we expect kind of the similar type trend this year?

Well, we haven't laid out our timing, Peter.

But we have a pretty tall order to get that done as soon as possible, and that's our goal.

We're carrying excess capital right now.

That's really been an anchor from a return standpoint, and we would like to get that capital right-sized sooner rather later.

And so I'll leave it at that.

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

Just one follow-up question from me.

You mentioned that 93% of your consumer deposits have high-quality checking accounts tied to them.

Obviously, the consumer beta stands at 1% on a cumulative basis.

I guess, I just wanted to make sure I'm understanding the message correctly.

A lot of your peers are starting to guide towards more aggressive betas going forward.

Is it that a lot of your consumer retail accounts are transactional and don't have that excess cash that potentially could rotate away from Regions into some of these online offerings?

Are we reading that correctly?

That's a big piece of our deposit base, and that's why it's been fairly stable.

That's why it was our -- our beta was low last time.

That's why we think it will be low this time.

And we have the core checking account of our consumer base, and that is really, really important, very granular, average deposit of about $3,500 an account.

So that's what makes us unique, and that's how we'll win from a beta standpoint.

Your next question comes from Christopher Marinac of FIG partners.

David, I had a similar question as Erika, but just want to look at it from the angle of the nonmetro markets.

To what extent does that keep working for you as we get further along in the rate cycle?

Is that still a benefit that you have?

Yes, absolutely.

We think it's foundational to who we are and nonmetro markets, that's a big part of our deposit base.

It's not just deposits, but it's the whole relationship that we have with these customers that are very loyal to us.

And we dominate in those markets.

So it's important for us to continue to provide good, solid customer service.

And we will retain those deposits, which we think again, is foundational and really is the differentiator.

We've had this strategic advantage for a long time.

But without rates rising some, we couldn't extract the value until now.

And so we think that continues on in the future.

Now the offset to that is our deposit growth relative to some of those smaller markets isn't as robust as some of the major metros, which is why you see us -- you have seen us make some investments in major metros like Atlanta, where we can capture some of that faster growth.

But we don't want to abandon that core customer base in the smaller markets.

So that's really our strategy on both sides.

That's very helpful.

Is there a way to pinpoint the kind of rate advantage between metro versus nonmetro even in just the big picture context?

We can get back to you on that, Christopher.

Your final question comes from Gerard Cassidy of RBC.

David, can you share with us -- in the securities portfolio, I think, you said that about $12 billion to $14 billion reinvests every year.

Did I hear that correctly?

That's total assets, Gerard.

It's probably $2 billion, $3 billion in the securities book and about $10 billion, $11 billion in the loan book.

Okay.

In the securities book, what yields are you giving up when it rolls off and what are you reinvesting it in?

And what is the duration in that portfolio as well?

Yes.

So our duration really hadn't changed over time.

We are in 4, 4.5 years in terms of duration.

What's rolling off is in the 250 range.

And what's going on is about in the 315 range.

So that's where -- that was one of the benefits of, if rates just stayed here, that reinvestment of maturities, again, both in securities and loans is a big benefit to us.

Very true.

And then circling back to deposits.

One of your peer banks talked about they're seeing their commercial customers using their cash to -- for capital expenditures, which is one of the reasons they felt their commercial loan growth was a bit modest.

Is there any evidence with your corporate and commercial loan book in talking to our customers that they are drawing down on their deposits for capital expenditures?

And down the road you might see the loan growth as they use up those excess deposits?

Gerard, this is John.

Yes, we think that is exactly the case.

And we would point to $500 million more or less in deposit declines that we think have been directly related to customers putting that to work.

That's a more specific number than -- it ought to be more of a round number, I guess.

But that kind of the runoff that we've seen has, I think, largely been, we believe, used by customers to invest in their businesses.

And as a result, at some point we think that will translate into additional loan growth.

Right, okay, thanks.

And then lastly, David.

You mentioned that you're outperforming on the beta.

Have you guys figured out why the beta so far this year has just moved so slowly?

Is it just the nominal rate of interest rates being so low or is there another factor?

Well, I think for us, if you look at our retail base -- betas of 1%, it gets back to the makeup of our deposit base and who our customers are, which was really, Chris's first question I was trying to answer.

If you go to the business side, we've had a cumulative beta of about 44%.

Those are oftentimes large corporate customers that are looking every time rates go up for their fair share.

And I think that we have to be prepared for that just like we are on competitiveness from a loan pricing standpoint.

But what differentiates us is our intense focus on relationship banking, whether it be on the consumer side, the business services side or the wealth side.

It's really important for us to maintain a relationship and have all the products and services delivered to our customers.

And we think that's what helps keep us -- keeps our beta down as well.

I will now turn the call back over to John Turner for any closing remarks.

Just thank you all for participating today.

I appreciate your time.

Thanks for your interest in Regions.

This concludes today's conference call.

You may now disconnect.