Regions Financial Corp (RF) 2018 Q4 法說會逐字稿

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

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

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

Thank you, Angie.

Welcome to Regions Fourth Quarter 2018 Earnings Conference Call.

John Turner will provide highlights of our full year financial performance, and David Turner 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 on 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 now turn the call over to John.

Thank you, Dana.

Good morning, and thank you for joining our call today.

Let me begin by saying we're very pleased with our fourth quarter and full year 2018 results.

We reported record full year earnings from continuing operations of $1.5 billion, reflecting an increase of 28% compared to the prior year.

Importantly, we grew loans, net interest income, noninterest income and households.

We delivered positive operating leverage and markedly improved efficiency.

Of note, adjusted pretax preprovision income increased to its highest level in over a decade.

David will cover the details in a moment.

I'm very proud to announce we effectively achieved all of our 2018 targets as well as our long-term targets laid out at Investor Day in 2015.

We achieved these targets despite a market backdrop that was significantly different than we anticipated.

It's important to note our financial accomplishments took place against a backdrop of substantial transformation for the company.

In 2018, we successfully navigated significant leadership changes and undertook one of the most significant organizational realignments in the company's history.

With most of the organizational changes behind us, we've intensified our focus on building a culture of continuous improvement.

Improvements which reflect our efforts to make banking easier for our customers and associates, accelerate revenue growth and drive greater efficiency and effectiveness.

These efforts includes investments in technology where we've expanded the use of artificial intelligence and machine learning.

As of year-end we rolled out Zelle, giving our customers industry-leading person-to-person payments capabilities.

We also rolled out our new e-signature platform, completing our first end-to-end fully digital consumer loan closings.

With respect to markets, recent volatility has only heightened our focus on the fundamentals of our business and things that we can control, providing customers with quality advice, guidance and financial solutions, while maintaining appropriate risk adjusted returns and unwavering credit discipline.

On that note, recent credit quality continues to reflect a relatively strong economy and is performing within our standard risk appetite.

Total nonperforming criticized and troubled debt restructured loans all continued to decline in the fourth quarter, while net charge-offs increased.

The increase in net charge-offs is driven by higher consumer net charge-offs attributable to fourth quarter seasonality, continued normalization and an expected increase associated with growth in consumer indirect categories.

As we talk to our customers, they feel good about their businesses and remain encouraged about their outlook for 2019.

On the retail side, consumer sentiment is also positive as unemployment remains low and wages continue to increase.

As we enter 2019, in our next 3-year strategic planning period, our goal is to generate consistent and sustainable long-term performance.

We achieved meaningful progress over the past year as we work to create a more efficient and effective organization.

We have a variety of work streams still in progress and believe we're only beginning to realize the benefits that will ultimately be derived from our efforts.

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

Thank you, John, and good morning.

Let's begin on Slide 3 with average loans.

Adjusted average loans increased 1% over the prior quarter, driven by broad-based growth across the consumer and business lending portfolios.

On a full year basis, adjusted average loan growth was 2%, in line with our expectations of low single digits.

Once again, all 3 areas within our Corporate Banking group, which include large corporate, middle market commercial and real estate experienced broad-based loan growth across our geographic markets.

Total average loan growth was led by C&I, where well-diversified growth was driven by our specialized lending, government and institutional businesses and REIT lending portfolios.

In addition, the investor real estate portfolio grew 3%, driven by growth in term real estate lending, primarily within the office and industrial property types.

Average owner-occupied commercial real estate loans declined modestly.

There's been a lot of industry focus on leverage lending of late.

We defined leverage lending primarily as commitments exceeding $10 million, where leverage, as a multiple of EBITDA or cash flow, exceeds 3x for senior debt and 4x for total debt.

These credits are subject to enhanced underwriting and monitoring standards.

The portfolio is well diversified and aligned to our specialized industry verticals with dedicated teams of bankers, underwriters, credit officers and enterprise valuation specialists.

During the fourth quarter, these outstanding balances declined modestly.

With respect to consumer lending, loan growth remained consistent across most categories led by indirect other consumer as well as increases in residential mortgage and consumer credit card lending.

Consistent with forecasted GDP growth, we expect to grow full year 2019 adjusted average loans in the low single digits.

Let's move on to deposits.

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

Total average deposits declined less than 1% compared to the third quarter.

However, ending balances increased $1.2 billion or 1% as we've experienced success growing interest-bearing checking, money market and time deposit balances.

Importantly, our bankers continue to grow new consumer households, wealth relationships and corporate customers.

On a full year basis, average deposits, excluding retail brokered and wealth institutional services deposits, decreased less than 1% in line with our expectation of relatively stable.

Our large, stable deposit base continues to provide a significant funding advantage.

Cumulative deposit betas through the current rising rate cycle remained low at 18%.

Fourth quarter deposit betas increased modestly to 39%.

This supports a low cumulative overall funding beta of 22%.

Our large retail deposit franchise differentiates us in the marketplace and positions us to maintain lower deposit and total funding cost relative to peers.

So let's see how this impacted our results.

Net interest income increased 2% over the prior quarter, and net interest margin increased 5 basis points to 3.55%.

On a full year basis, adjusted net interest income grew 5.4%, in line with our expectation of 5% to 6%.

Both net interest income and margin benefited from higher market interest rates, partially offset by higher funding costs.

Net interest income also benefited from higher average loan balances.

Let's take a look at fee revenue.

Adjusted noninterest income decreased 7% from the third quarter.

Service charges increased 3% and capital markets income increased 11%.

The increase in capital markets income was primarily attributable to higher loan syndication income, fees generated from the placement of permanent financing for real estate customers, and merger and acquisition advisory services, partially offset by lower customer swap income.

Swap income declined approximately $6 million in the quarter, entirely due to negative market value adjustments at year-end.

Offsetting these increases, market volatility in the fourth quarter also drove significant valuation declines in assets held for employee benefits and negatively impacted bank-owned life insurance income.

Revenue associated with market value adjustments on total employee benefit assets decreased $22 million and bank-owned life insurance income decreased $6 million.

Mortgage income decreased 6%, primarily due to seasonally lower production and sales revenue, partially offset by higher hedging and valuation adjustments on residential mortgage servicing rights and increased servicing income.

Continuing with our strategy to leverage our mortgage servicing advantage and capacity, we completed the purchase of rights to service another $2.7 billion of residential mortgage loans during the fourth quarter.

The decrease in other noninterest income was primarily attributable to a net $3 million decline in the value of certain equity investments in the fourth quarter compared to a net $8 million increase in the third quarter.

In addition, $4 million of third quarter leveraged lease termination gains did not repeat.

On a full year basis, adjusted noninterest income grew 3.8%, excluding the impact of fourth quarter market value declines on employee benefit assets, bank-owned life insurance and customer swaps, full year adjusted noninterest income grew 5.2%, in line with our expectation of 4.5% to 5.5%.

Let's take a look at expenses.

On an adjusted basis, noninterest expense decreased 1% compared to the third quarter.

Excluding the impact of severance charges, salaries and benefits decreased 1%, reflecting the benefit of staffing reductions.

This decrease was partially offset by one additional workday in the fourth quarter and an increase in incentive-based compensation.

Professional fees decreased 16%, attributable to lower legal expenses and FDIC insurance assessments decreased 36%, reflecting the discontinuation of the FDIC surcharge.

Partially offsetting these declines, occupancy expense increased 5%, attributable to storm-related charges associated with Hurricane Michael.

On a full year basis, adjusted noninterest expense increased less than 1%, in line with our expectation of relatively stable.

Excluding the benefit from market value adjustments on employee benefit assets and a discontinuation of the FDIC surcharge, the increase in adjusted noninterest expense remains less than 1%.

We achieved our efficiency target with a full year adjusted ratio of 59.3%.

The adjusted efficiency ratio for the fourth quarter was 58.1%, providing good momentum for 2019 and beyond.

We expect full year 2019 adjusted expenses to remain relatively stable with adjusted 2018 expenses.

Additionally, we generated adjusted full year positive operating leverage of 3.6%, in line with our expectation of 3.5% to 4.5%.

The fourth quarter effective tax rate was approximately 17% and reflects favorable retrospective tax accounting method changes and adjustments for certain state tax matters.

Full year effective tax rate was approximately 20%, in line with our expectation of approximately 21%.

We do expect the full year 2019 effective tax rate to be in the 20% to 22% range.

Let's move on to asset quality.

As John noted, overall asset quality continues to perform in line with our expectations.

Total nonperforming loans, excluding loans held for sale, decreased to 0.60% of loans outstanding, the lowest level in over 10 years.

Business services criticized and troubled debt restructured loans decreased 5% and 14%, respectively.

Net charge-offs increased 6 basis points to 0.46% of average loans, driven primarily by seasonality within our consumer portfolios, normalization of consumer charge-offs and the growth in indirect consumer loans.

The provision for loan losses approximated net charge-offs and the resulting allowance totaled 1.01% of total loans and 169% of total nonaccrual loans.

On a full year basis, adjusted net charge-offs totaled 39 basis points, in line with our expectation of 35 to 50 basis points.

Given where we are in the cycle and the continued normalization of certain credit metrics, we expect full year 2019 net charge-offs to be in the 40 to 50 basis points range.

Let me give you some comments on capital and liquidity.

During the quarter, the company repurchased 22 million shares of common stock for a total of $370 million and declared $144 million in dividends to common shareholders.

On October the 24, 2018, our accelerated share repurchase agreement transaction closed and final settlement resulted in an additional delivery of 8.75 million shares of common stock on October 29.

This brought the total shares repurchased under the ASR to 37.8 million.

The loan-to-deposit ratio at the end of the quarter was 88% and as of quarter-end, the company remained fully compliant with the liquidity coverage ratio rule.

Slide 11 reflects our 2018 performance against our targets.

We've also provided you a select group of full year 2019 expectations that were previously mentioned throughout the presentation.

We will provide additional 2019 and long-term expectations at our Investor Day next month.

So in summary, we're very pleased with our 2018 financial results.

We generated record earnings, grew loans, checking accounts, households, wealth relationships and corporate customers.

We also generated almost 4% of adjusted positive operating leverage and improved our adjusted efficiency ratio by 210 basis points.

As John mentioned, these accomplishments remain while our company has undergone significant change.

Changes that have positioned us well for 2019 and beyond.

With that, we're happy to take your questions, but do ask that you limit them to one primary and one follow-up question.

We will now open the line for your questions.

(Operator Instructions) Your first question is from the line of Jennifer Demba with StarTrust (sic)

[SunTrust]

It's actually Steve on for Jennifer.

I just wanted to talk to you guys about your asset sensitivity.

Any plans to hedge away any of this?

Seems the Fed is going to be pausing and then the forward curve is actually looking for a decrease in 2020 right now.

Steve, we've -- it's David.

We continue to look at our asset sensitivity and think about what rate environment would be.

We still are fairly asset sensitive, up 100 as -- a little over $100 million over a 12-month period of time.

We have put some hedges on as we've discussed previous quarters that we have forward starting to help us manage what we think the rate environment might look like out a couple of years from here or year and change from here.

Such that we are getting to a point where we're getting more neutral at that time.

We still think the Fed is going to be dated dependent in terms of what they may do on raising rates in the short term.

So we think still being asset sensitive at the moment is the right place for us to be.

And so we're gauging how much of that we want to take off in the future.

Perfect.

And then as far as paydowns in the fourth quarter, how do these compared to the first 3 quarters of 2018?

We didn't see nearly the paydown activity that we experienced, let's say, in the first 2 quarters, which were the most active.

I think it was more of a normal quarter would be what I would characterize it.

And your next question is from the line of John McDonald with Bernstein.

Wanted to follow up on that loan growth.

We saw the loan growth pickup for the industry in the fourth quarter, number of banks have talked about that kind of accelerating.

So just kind of wondering, did you see this fourth quarter loan growth demand pick up?

As you mentioned, the paydowns were a little bit better, and I guess, my follow-up I'll ask that at the same time.

What kind of pipeline momentum do you enter 2019 with?

And could you see loan growth be a little stronger for Regions in '19 versus '18?

What are the puts and takes that you have, in particular, if you look at '19?

Yes.

We entered the year with a really very strong quarter particularly on the wholesale side of the business.

And as a result, you saw an increase in ending loan balances because quite a bit activity was toward the end of the year.

The loan growth was really well balanced as we referred to earlier across most of our segments within the industries.

We grew our energy, power utilities groups, technology and defense, financial services, our government and institutional banking group.

So a number of areas where we have specialized expertise across both our Corporate and our Commercial Banking platforms grew during the quarter.

Within real estate, we grew our term lending portfolio, which is, as you know, been an important strategic initiative of ours.

We're beginning to see much better balance between term lending production and construction originations.

And within that category of term lending, we grew office and we grew industrial broadly across our geographic footprint.

So it was a good quarter.

Production was up significantly over the prior quarters.

As a result of that, we ended the year where the pipeline is a little softer than we began in the fourth quarter with.

We're guiding toward low single-digit loan growth again, given that we'll have puts and takes within the portfolio.

We continue to focus on portfolio optimization, on risk-adjusted returns and improving the quality of the portfolio.

And so we don't expect, John, to grow much more than GDP plus possibly a little.

That's our plan.

If we do that, we can achieve all the financial objectives that we set out.

And your next question is from of Matt O'Connor with Deutsche Bank.

I was just wondering on the service charges.

You had real nice growth year-over-year.

And remind us, was it to have a price increases or was the year ago level depressed or anything?

Matt, it's David.

No, really not price increases.

Service charges have a tendency to follow our account group and our focus on growing core checking accounts has really been a hallmark of our franchise and we continue to see that.

And as a result, service charges have responded favorably.

Consumer checking growth, Matt, was up about 1.3%.

And as David says, with that comes service charge activity, debit card usage and other things all of which have been very positive.

Okay.

And then just separately on credit quality.

The charge-offs did tick up a little bit, I think some of it was coming from home equity.

Is there any noise from recent hurricanes that might be distorting that?

I'll let Barb answer that.

Yes.

No, there's very little, if anything, that came from the hurricanes this time, which we're blessed on.

The charge-offs that we saw, the increase between this quarter and last quarter, quite frankly, was expected given the seasonality in the consumer portfolio and reflects our focus in the past several quarters on some of the higher-yielding products that we have in consumer.

We're getting appropriately paid for the risk.

So again, we feel pretty good about the credit quality.

(Operator Instructions) Your next question is from Erika Najarian with Bank of America.

I know you're going to provide us more detail in a 1.5 months or so at your Investor Day, but I'm wondering as we think about our 2-year earnings outlook for Regions, should we look forward to continued efficiency improvement, and can that efficiency improvement occur even if the revenue environment becomes more challenging than budgeted?

Erika, we've done a pretty good job of managing our expense base as well as growing revenue evidenced through our simplifying growth, continuous improvement process.

That is a journey, It's not a program.

We continue to look at every aspect of our business in terms of how we can improve every single day.

And we have a number of projects on the table today that we will continue to benefit from.

Clearly, our goal is to improve our efficiency ratio.

We had talked about over time getting into the mid-50s.

We're going to talk a little bit about that at our Investor Day, as you mentioned.

But clearly, there's aspects of revenue growth and expense management in that.

As revenue becomes more challenged, we have to continue to look for ways to get to that efficiency ratio.

We feel pretty confident we can get there.

And so from a revenue standpoint, if it becomes more challenging, we'll do something else on the expense side.

And Erika, this is John.

I'd just reiterate that commitment to continually improving our efficiency ratio.

We think it's fundamental to our long-term performance and to building a consistently performing sustainable bank.

And that's our intention.

So we are very committed to that.

And my follow-up question is, again, as the market seems to be pricing in a Fed on hold for some time, how should we think about the margin trajectory for 4Q -- sorry, for 2019 under that scenario?

And also how should we think about the delay in terms of repricing?

Or how long do deposits reprice after the Fed pauses?

Yes, I think you'll continue to see deposit costs increase a little lag effect as things go through for the year.

We think for the quarter, this quarter coming up, we could be relatively stable given everything that's going on.

We do have tailwinds still from repricing of fixed-rate assets, loans and securities that will be coming through this year, about $12 billion repricing.

Those repricings benefit us in, call it, 30 to 50 basis point range, maybe a little better today as we continue to see the 10-year move up a bit.

So from a pause standpoint, we still benefit from our -- what we believe is our competitive advantage and that's our very loyal customer deposit base, 2/3 of which is retail.

And if you look at our deposit beta and our total funding beta, continues to be below peers.

So we think that gives us an opportunity to continue to outperform through 2019 and beyond.

And your next question is from Saul Martinez with UBS.

We lost him.

Can you hear me?

Yes, I can now.

Yes, we can hear you now.

Sorry about that.

I need to learn how to use this fancy technology called the telephone.

So I wanted to ask you about fees.

How do we think about what the right jump-off point is for the fee line?

Obviously, you had a lot of moving parts in there with the market volatility, the $22 million that you called out, $3 million of equity investments.

Is it as simple of just adding those back in because you kind of have been in sort of about $500 million to $510 million run rate in recent quarters.

I mean, is that -- is it -- should we just kind of add back those items in?

Is that a reasonable way to think about it looking on a go-forward basis?

Yes, so I do think that those are things that adding those back, we're trying to give you the information where you could do that.

Our continued growth in NII -- I mean, NIR will come through if you just look at our core lines, our service charge line continuing to grow along with the account growth that we have.

Card & ATM fees is the same way.

We continue to grow cards and accounts, more transactions are moving to that mode of payments.

So the interchange should continue to improve there as well.

We made investments in Wealth Management this year in the form of hiring wealth advisers or we will be doing that to help us grow there.

Capital markets has been a good growth rate from us.

There's volatility in that business, from time to time.

They finished up well.

We've talked earlier about that being a $200 million business and that's where we finished for the year.

So I look at capital markets continuing to add a little bit of growth opportunities.

Mortgage is the one that's a little bit more of a challenge.

We perform a tad better than others because we're primarily a purchase shop versus a refi shop.

Our production was down this quarter, but we are making investments there as well.

Those investments are in mortgage loan originators that we'll strategically place in the parts of our footprint that we think can give us additional growth there.

So the market value adjustments happen from time to time.

As you know, this fourth quarter was unusually noisy, and we don't think recurs at least to that extent going forward.

Okay.

So other than the market value adjustments, it's -- in the equity impact, it's kind of steady as she goes and seeing growth in your fee lines?

We need to grow it, yes.

Yes.

And on capital, you've obviously drawn that -- the CET1 down to 9.8%.

You've guided to 9.5%.

Is the idea still that you get to the 9.5% in 2019?

And beyond that, I mean, how are you thinking about potentially maybe bringing that down further, obviously, with the regulatory backdrop NPR out there?

Is there scope to reduce your target CET1 beyond the 9.5%?

And you know we set the 9.5% based on how we review our risk profile, obviously, starting with the 4.5% minimum threshold and adding in buffers and then looking at our risk.

And that's where the 9.5% is.

It didn't have anything to do with the regulatory regime and CCAR.

So hopefully, we get a little bit of relief to manage our capital a little more freely than we have been, which we would see as a big plus, so that we can optimize our capital and keep our capital at that 9.5% level.

I mean, mathematically, given our risk that we have today, we could operate a little less than that, but we are choosing not to do so.

We think that's the best thing for us to give us a little bit of dry powder and be able to take advantage of opportunities to invest that in organic growth and just be prepared should anything happen.

But we think that 9.5% is also a capital level that allows us to provide an appropriate risk-adjusted return to our shareholders in the form of return on average tangible common equity that they expect and so we don't see taking that down.

Okay.

And the buybacks in the first and second quarter, obviously, would be lower.

But, like, what's your projection when you kind of get to that 9.5% now?

Yes, it'll be towards the middle of the year.

And of course, it's all dependent on what loan growth.

So we had pretty good loan growth in the fourth quarter that used up a little bit of the capital.

At the rate that we're going at, we can get there towards the middle of the year.

And your next question is from the line of John Pancari with Evercore ISI.

I know you had indicated that the higher charge-offs in the quarter were some of the normalization of consumer -- indirect consumer charge-offs.

And I want to see if you can give a little bit more color on what exact areas within consumer and indirect are you seeing that normalization and what are your expectations in terms of how that those losses can trend through the year particularly in consumer?

Yes, this is Barb Godin.

The normalization that we're seeing is really across all products.

Residential mortgage is coming off some really low levels, running 4 to 6 basis points of loss, which again is not normal.

So that will raise just a little bit.

Home equity is doing very well.

Home equity will move up just a little bit.

Indirect auto has been behaving well for us, so we see that holding pretty steady.

Some of the third-party relationships that we have, again, they are performing as expected.

So where we see on the consumer portfolio overall, we do see things as being pretty straightforward.

Our indirect balances have gone up.

And that's created a little bit, again, in terms of a little more marginal loss there, but all-in, credit feels really good where we are right now in the cycles.

Okay.

That's helpful.

And then my second one is also on credit.

Two parts here.

One, your delinquencies -- your early-stage delinquencies were up 21% this year -- this quarter, and some of that is consumer and I get it, the -- but if commercial was up -- so wanted to get some color on what drove that?

And then separately, how you're thinking about the loan loss reserve overall here?

You bled it by about 2 basis points on a reserve-to-loan ratio this quarter.

So what's your outlook there for the year?

Yes, let me start with the allowance.

You're right, we came in at 1.01%, which is down just a tad.

A lot of that is due to the loan growth.

We think that allowance will probably hover right in that area, might go down to 1%, but I don't see it going sub-1 on the allowance.

Relative to delinquencies, yes, we did move up just a tad.

One of that was 30-day plus delinquency, quite frankly, was due to one large C&I credit that, by the way, repaid us immediately after -- they made the payment immediately after the end of the month, especially given the holidays, et cetera, got caught up in the mail.

So that one is cleared.

So again, on the delinquency front, we see those as being generally stable.

And again, we look at the consumer book where the delinquencies did go up a tad.

Again, that seasonality, we see that every fourth quarter.

So nothing there that we're concerned about.

Your next question is from the line of Betsy Graseck with Morgan Stanley.

A couple of questions.

One on deposit betas, I know you talked through how you've -- it's been low relative to peers and also this quarter.

Could you just give us a sense as to whether or not you think any of that was impacted by people moving from maybe market exposures to deposit exposures?

Should we expect to see a little bit of a pickup in the first quarter?

And if you can give us a sense as to whether or not there was some change in deposit betas on the corporate versus the consumer side this past quarter?

Yes, I think, Betsy, you should expect the deposit betas to continue to move up.

We've continued to outperform.

Our cumulative beta at 39% is in pretty good shape -- or 39% for the quarter, I'm sorry, cumulative of 22%.

So I think that we -- and you're going to see that continue to trickle up a bit.

Some of that will be due to mix change.

And as we think about corporate betas, corporate betas had moved up to about 81% from 72%.

So continue to see that increase a bit as expected.

And that's really been baked into our margin guidance all along.

Okay.

And then just separately, I know you talked through the 9.5% on the CET1.

I guess, a couple of questions there.

One, does it matter if you don't have to do the CCAR this year?

Two, is there a triangulation that you're doing between CET1 and maybe other ratios, like, TCE to TA or other ratios that the rating agencies have out there that you're thinking about that ends up with what looks to me like it might be a little bit on the high end of the range relative to your competitors and relative to the risk in your own book?

Well, we -- everybody has to run their capital ratios based on their own risk profiles for what they perceive to be the risk.

We think Common Equity Tier 1, our most expensive form of capital, it behooves us to optimize all of our capital elements, but that one in particular given how expensive it is.

As we move down close to that 9.5%, we are solving a portion of our Tier 1 with common equity.

So we will have to backfill the common equity piece for Tier 1 with preferred stock.

We've had that in our plan.

We've talked about that before.

That's something that will happen most likely in the middle of the year.

We're evaluating how much of that and when we want to put that on.

So there are a lot of moving parts there, but you're exactly right.

We're going to have to bolster Tier 1. One for regulatory purposes, but also for rating agency purposes.

And they know what our capital plan is, and they know what our optimization plan looks like.

And then on the stress test if you don't have to do that this year, does that -- I guess, that doesn't really matter?

No, we do our own stress test anyway.

We will have to fill out all the forms that are associated with it.

And may get -- this may be the year of the off cycle.

But we're really looking forward and hope we get through the NPR as relief to manage our capital real-time.

So we have espoused -- as an example, we've espoused a 9.5% limit where we want to be on Common Equity Tier 1. If we could manage capital the way we wanted to, we would be there right now.

We wouldn't have to wait for time because when we submit a capital plan, you have to execute dividend changes and share repurchases along the time line that you provided in your plan, which you filed a year before and things change.

As things change, we need to be able to maneuver our capital appropriately.

So hopefully, we'll get that, but we'll have to see.

Your next question is from Peter Winter with Wedbush Securities.

I was wondering, the net interest income outlook for 2019, is it fair to assume it should grow at a similar pace to the loan growth?

Given there are a lot other moving parts, but generally speaking, that's accurate.

As the balance -- the balance sheet growth is depending on what rates do is going to be the bigger determinant of our growth in NII.

We do think, as I mentioned earlier, we have a little bit of a tailwind with just asset reprice -- fixed-rate assets repricing this year, $12 billion between securities and loans that we can pick up 30 to 50 basis points in NII as they come through the pipe.

So -- but yes, I think it's going to be important for us to get appropriate balance sheet growth to continue to grow NII at the pace we want.

Okay.

And then just a big picture question with expenses.

You guys over the years have done a very good job holding expenses flat and still investing in the business for a number of years.

If we look beyond 2019, is there still levers to pull on the expense side or you're kind of close to exhausting those?

No, I' think -- Peter, this is John.

The whole purpose behind our Simplify and Grow initiative was the recognition that at some point we will quit benefit from rising rates.

We will quit benefiting from improving credit and we would have to be operating more efficiently and effectively.

We'd have to be operating in a way that allows us to grow our business because we were easier to do business with.

And so our commitment to continuous improvement is based upon the belief that we can continue to find ways to be more efficient and effective to invest in our business, whether it's hiring more bankers, spending money on technology, building some branches in markets.

We've got to continue to grow our business through reinvestment, which we largely want to pay for through our effort to be more efficient and effective.

Your next question is from Christopher Marinac with FIG Partners, LLC.

Just wanted to ask Barbara about CECIL and sort of her thoughts on how this will play out the rest of the year, and to what extent you will disclose, maybe in a couple of quarters, how CECIL looks for next year?

Yes, we're doing a lot of work on CECIL as are all of our peer banks.

We are in great shape as far as I'm concerned.

We're about to start running parallel the old process and the new process.

So not much to disclose there in terms of what the numbers look like, but again, feel good about the entire process and we're going to be ready for it.

Yes, I think we're in really good shape.

And we've committed to our board to report to them on a quarterly basis as to just how the parallel reporting manifests itself and what the impacts will be.

And as Barb said, I think we're in really good shape and will be come January 1, 2020.

And your last question is from Gerard Cassidy with RBC.

John, when you think about the risks to the Regions earnings stream over the next year or 2, aside from a recession, which we all know would bring on the credit provision risk.

What do you worry about when you go home at night about your outlook for the company going forward?

Well, obviously, first and foremost, we want to protect and continue to grow our core deposit base and we think that's really the strength of our franchise and I think, we have demonstrated at least over the last 24 months or so, the power of that deposit franchise, much of which wasn't being valued prior to rates beginning to rise, and so that would be first and foremost.

We got to continue to grow our businesses in particularly those core businesses.

So demonstrating 1.3% or [1.4%] consumer checking account growth, the growth in consumer demand deposit, growth in consumer savings, really, again, core to our business and to what I think makes our franchise valuable and allows us to build that consistently performing and sustainable bank.

And then the other piece is credit.

Are we focused on the credit risk appropriate in our business?

Are we managing concentrations?

Are we building diverse books of business?

Do we understand the risk and are we effectively managing those and reacting to emerging risks quickly and expeditiously and effectively?

Those are the things I think about when I think about what does it mean to be a good banker and how do you build consistently performing and sustainable bank.

Very good.

And this question, I guess, is directed at Barb.

Over the years, obviously, you've had good understanding of what the regulators are thinking about in terms of risks in the industries portfolio as well as your own portfolio.

We all remember the 2015, '16 time period with energy credits.

Can you share with us when you talk to them today, what's their kind of focus in terms of worry on credit?

And if you could also tie in, I apologize if you've already addressed this, your leverage loan exposure and what you guys are doing in that area as well?

Yes.

I think the regulators and us, we're all in a good place.

What's happening, as you know, in the industry is, they're looking as we're looking at normalization and where does that go to and over what period of time.

So there's nothing in particular that they're really focused on.

Like us, we're focused on and you mentioned it, leverage loans.

And let me just kind of comment on that in general, I know David already did, but our primary definition for leverage loans in the company is consistent with the interagency guidelines from 2013 that's 3x senior 4x total committed debt-to-EBITDA, that may or may not be fully secured by margin collateral.

Of course, there's some different thresholds based on certain industries, such as midstream, wireless, towers, et cetera.

But we don't exclude borrowers from the leverage designation based on credit quality, on borrower ownership or the purpose of the financing.

And we make this leverage lending determination at the time of any credit event, such as refinancing, renewal acquisition, amendments and all that.

And as you know, I guess, the difference is every institution has their own policy quite frankly, on how they call out the loan leverage.

And so it gets a little difficult in terms of comparability.

So all-in, as we think about the leverage loan book, we feel very good about this book, it's got strong underwriting.

We have a dedicated team, by the way, Gerard, that's focused on these deals.

And on top of that, we stress test these loans to ensure that they're going to perform at a downturn economy.

So all-in, yes, leverage loans are right now on top of a lot of people's minds.

But we feel, again, really good about that book.

It's a really strong, good, well-performing book.

Yes, I would just add, Gerard, diverse -- very diverse and spread across a number of industry groups largely aligned with our specialized industries, bankers and their expertise.

About 27% is sponsor-owned and that's down from the mid-30s.

So as we think about risk and managing risk in the business, we've been exiting some relationships that we think are the most risky parts of that portfolio.

And if I could sneak just one last question in on leverage loans.

One of your peers announced earnings this week and pointed out that they had a pickup in their criticized loans, and one of their individual credits was a borrower who went out in the nonbank market and obtained leverage loans and it alarmed them.

So they put -- they had to criticize the loan.

What techniques or what monitoring technology do you have?

Or how do you figure out who of your good borrowers who don't have leverage loans with you, but could actually go out and do something like that and then you guys have that indirect exposure?

We're actively servicing those credits on our quarterly basis generally sometimes less frequently, sometimes more depending upon the risk in the particular credit relationship.

And so as the credit profile or the risk profile changes because the company takes on additional debt either in the bank environment or nonbank environment, we'll pick that up as a risk factor and a consideration as how we think about the credit.

Thank you.

I would now like to turn the call back to John Turner for closing remarks.

Okay.

Well, that ends the call.

Thank you all for your participation.

Again, we're very pleased with our 2018 results, and I think we have a very solid plan for 2019 and look forward to seeing all of you hope at our Investor Day on February 27.

Thank you.

This does conclude today's conference call.

You may now disconnect.