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Regions Financial (RF) Earnings Report: Q1 2016 Conference Call Transcript


The following Regions Financial (RF - Get Report) conference call took place on April 15, 2016, 11:00 AM ET. This is a transcript of that earnings call:

Company Participants

  • Dana Nolan; Executive Vice President, Head of Investor Relations; Regions Financial
  • Grayson Hall; Chief Executive Officer; Regions Financial
  • David Turner; Chief Financial Officer; Regions Financial
  • Barb Godin; Chief Credit Officer; Regions Financial
  • John Turner; Head of Corporate Banking; Regions Financial

Other Participants

  • Michael Rose; Raymond James; Analyst
  • Bill Carcache; Nomura; Analyst
  • Tim Hayes; FBR & Company; Analyst
  • Christopher Marinac; FIG Partners; Analyst
  • David Eads; UBS; Analyst
  • Stephen Scouten; Sandler O'Neill; Analyst
  • John Pancari; Evercorse ISI; Analyst
  • Ryan Nash; Goldman Sachs; Analyst
  • Jennifer Demba; Suntrust; Analyst
  • Geoffrey Elliott; Autonomous Research; Analyst
  • Marty Mosby; Vining Sparks; Analyst
  • Chris Mutascio; KBW; Analyst
  • Gerard Cassidy; RBC Capital Markets; Analyst
  • Peter Winter; Sterne Agee; Analyst
  • Jason Harbes; Wells Fargo; Analyst
  • Jack Micenko; Susquehanna; Analyst
  • Jesus Bueno; Compass Point; Analyst
  • Jill Shea; Credit Suisse; Analyst

MANAGEMENT DISCUSSION SECTION Operator: Welcome to the Regions Financial Corporation's quarterly earnings call. (Operator Instructions) I will now turn the call over to Ms. Dana Nolan to begin. Dana Nolan (Regions Financial): Thank you, Paula. Good morning and welcome to Regions' first-quarter 2016 earnings conference call. Participating on the call are Grayson Hall, Chief Executive Officer; and David Turner, Chief Financial Officer. Other members of management, including John Turner, our Head of Corporate Banking, and Barb Godin, Chief Credit Officer, are also present and available to answer questions. Throughout the call we will be referencing a slide presentation. A copy of this presentation as well as our earnings release and earnings supplement are available under the Investor Relations section of Also, let me remind you that during today's call we may make forward-looking statements, which reflect our current views with respect to future events and financial performance. You should be mindful of the risks and uncertainties that can cause actual results to vary from expectations. These factors are described in the cautionary disclaimer regarding forward-looking statements in our earnings release and in other reports we file with the SEC. I will now turn the call over to Grayson. Grayson Hall (Regions Financial): Thank you, Dana; and good morning and thank you, everyone, for joining our call today. First quarter's results reflect a strong start to 2016 and demonstrate that we are successfully executing on our strategic plan. We are pleased by our continued progress despite a challenging and somewhat volatile economic backdrop. For the first quarter we reported earnings from continuing operations of $257 million, and earnings per share totaled $0.20. These results reflect growth in total revenue, lower adjusted expenses, and positive operating leverage. Importantly, we continued to deliver results in the areas we believe are fundamental to future income growth, by expanding our customer base as we grew checking accounts, households, credit cards, and wealth accounts. A key driver to this success is our ability to leverage our approach to relationship banking. We are pleased that once again we received external recognition for building a strong customer experience at Regions. This quarter, both the Temkin Group and the Greenwich Associates recognized Regions for providing industry-leading customer experiences. Looking at our results further, we achieved total average loan growth of 5% compared to prior year. Consumer lending is off to a solid start, as loan balances exceed $30 billion. We have introduced new initiatives to expand our consumer product offerings, which led the year-over-year growth in consumer lending of 5%. Our new point-of-sale initiative within indirect lending led this growth, with more loans that doubled over the prior year, exceeding our internal expectations. We do expect continued growth in this product category in 2016. Indirect auto lending continues to grow as balances increased over 9% compared to last year. Credit card balances increased modestly as we remain focused on expanding a number of customers that carry and utilize a Regions credit card. We have experienced success on this front as our penetration rate of deposit customers has increased 140 basis points from one year ago and now stands at 17.5%. We are also focused on expanding our direct consumer lending capabilities, as we recently announced an agreement with Avant. This arrangement allows us to offer additional alternatives to create stronger digital experiences for our customers and prospects. We also had an encouraging quarter in business lending, with total average loans up 4% over the prior year. All of our business lending areas -- corporate banking, commercial banking, and real estate banking -- achieved growth over the prior year.


Total adjusted revenue increased 7% over the first quarter of 2015, reflecting effective execution on our strategic plans to grow and diversify revenue. Investments within capital markets are clearly demonstrating progress, as capital markets income more than doubled versus first quarter of 2015.

Importantly, our efficiency initiatives are allowing us to self-fund these investments, as adjusted expenses declined 2% from the previous quarter. We ended the quarter with an adjusted efficiency ratio of 60.6%, an improvement of 280 basis points compared to the fourth quarter of 2015. With respect to the current environment, we continue to expect the US economy to demonstrate progress, but at a measured pace. The global and macroeconomic environment remains a concern, but we do expect modest improvement. Low oil prices continue to create challenges for certain industry sectors, while benefiting others. Consequently, we continue to closely monitor our direct energy portfolio as well as portfolios subject to contagion. As expected, there continues to be downward migration in risk ratings. We are supporting and working closely with our customers as they take appropriate and constructive actions to lower costs, reduce debt, and improve liquidity. We do anticipate continued stress in this sector and will make appropriate adjustments. Additionally, we have established appropriate energy reserves, which now stand at 8% of our direct energy exposure. But more broadly, excluding energy and related industries, we do see continued favorable credit quality in the wholesale and consumer portfolios. Turning to capital deployment, as you're aware, we submitted our capital plan earlier this month. We continue to deploy our capital effectively through organic growth and invest strategically and initiatives to increase revenue or reduce expenses. But we will also return an appropriate amount of our capital to shareholders. In closing, our solid first-quarter results provide evidence that we are successfully executing our strategic plan, with a continued commitment to our three primary strategic initiatives, which are: grow and diversify our revenue streams, practice disciplined expense management, and effectively deploy our capital. These are all integral to the successful execution of our strategic plan, and we are on track to deliver our long-term performance targets. With that I'll turn it over to David, who will cover the details for the first quarter. David Turner (Regions Financial): Thank you. Good morning, everyone. Let's get started with the balance sheet and a recap of loan growth. Average loan balances totaled $82 billion in the first quarter, up $750 million or 1% from the previous quarter. Business lending average balances increased to $51 billion, up 1% from the previous quarter and 4% over the prior year. Commercial loans grew $373 million or 1%, and was driven by corporate banking and real estate banking. Specialized lending also contribute to loan growth, driven by new relationships in technology and defense, restaurant, as well as an increase in line utilization in energy and natural resources. Commitments were flat linked-quarter, and line utilization increased 110 basis points to 47.8%, primarily driven by energy lending, which increased from 53% to 56%. Total production declined 26% from the prior quarter. We are beginning to experience softer pipelines in some areas due to less optimistic and uncertain macroeconomic conditions. However, consumer lending had another strong quarter, as almost every category experienced growth and total production increased 3%. Average consumer loan balances were $31 billion, an increase of 1% over the prior quarter and 5% over the prior year. Indirect auto lending increased to 2%, and production increased 4% during the quarter. Other indirect lending, which includes point-of-sale initiatives, increased $76 million linked-quarter or 15%, as production increased 120%. Looking at the credit card portfolio, average balances increased 2% from the previous quarter, and our penetration into our existing customer base currently stands at 17.5%. Mortgage loan balances increased $75 million. Total home equity balances were relatively flat, up $8 million from the previous quarter. Let's take a look at deposits. Average deposit balances increased $262 million from the previous quarter, and increased $2 billion over the prior year. Deposit costs remained at historically low levels, at 11 basis points; and total funding costs remained low, at 28 basis points. With respect to deposits, we are primarily core deposit funded, with 67% of our deposits coming from consumer and wealth deposits. Low-cost deposits make up 92% of our total deposits, and approximately half of our deposits come from cities with less than 1 million people. Additionally, 50% of our deposits are from customers with $250,000 or less in their account. This is why we continue to believe our deposit betas will be a competitive advantage for us as rates rise.

So let's see how this impacted our results. Net interest income and other financing income on a fully taxable basis was $883 million, up 3% from the fourth quarter. However, excluding the impact of the fourth-quarter lease adjustment, net interest income and other financing income on a fully taxable equivalent basis increased $12 million or 1% for the quarter, and increased $51 million or approximately 6% compared to the prior year.

Higher loan balances and increases in short-term rates, along with items that are unlikely to repeat -- including lower premium amortization and higher dividend income related to trading assets -- were the primary drivers behind the linked-quarter increase. This increase was partially offset by lower dividends recognized on Federal Reserve stock, higher debt interest expense, and one less day in the quarter. The resulting net interest margin for the quarter was 3.19%. Excluding the impact from the fourth-quarter lease adjustment, the net interest margin increased by approximately 6 basis points. Now, 5 basis points of this increase was attributable to the impact of day count during the quarter and the previously mentioned items that are unlikely to repeat. Total noninterest income increased 1% on an adjusted basis from the fourth quarter, driven by growth in our revenue diversification initiatives as we successfully execute our strategies. In particular, capital markets income was strong on a linked-quarter basis, up 46%. This was driven by contributions from the recently expanded mergers and acquisition advisory services group; additionally, revenue was bolstered by fees generated from the placement of permanent financing for real estate customers as well as syndicated loan transactions. Due to the nature of the business and the fact that we are building out our capabilities, capital markets income will likely experience some movement from quarter to quarter. However, we are very pleased with the impact our added capabilities are producing. Wealth management also experienced a strong quarter despite a challenging market environment. Income was up 6% quarter-over-quarter due to higher seasonal insurance income and the impact from recent acquisitions. Investment services income was up 7%, attributable to an increase in annuity sales. However, investment management and trust fees were negatively impacted by market conditions. Seasonality and posting order changes that went into effect in early November last year impacted service charges, which declined 4% from the fourth quarter. Now, looking ahead, we expect modest growth in service charges, as we benefit from last year's 2% checking account growth and continued account growth in 2016. In addition, seasonal declines in consumer spending drove a decline in card and ATM fees for the quarter. However, on a year-over-year basis card and ATM fees increased approximately 12%. Other noninterest income included reductions to revenue of $12 million, reflecting market decreases in relation to assets held for certain employee benefits, which is offset in salaries and benefit expense. Quarter-over-quarter mortgage revenue was up 3%. Additionally, in the quarter we purchased the rights to service approximately $2.6 billion of mortgage loans, bringing our total residential servicing portfolio to $40 billion. We'll continue to explore and evaluate opportunities to expand our mortgage servicing portfolio. During the quarter, we also had a $14 million increase in income related to bank-owned life insurance. This was primarily attributable to claims benefits as well as a gain on exchange of policies. We expect the run rate going forward will be in the $18 million to $20 million quarterly range. Let's move on to expenses. Total reported expenses in the first quarter were $869 million. On an adjusted basis, expenses totaled $843 million, representing a decline of $18 million or 2% quarter-over-quarter, as we implement our efficiency initiatives. As previously noted, in the fourth quarter of 2015, we announced plans to consolidate 29 branches as part of our strategic plan to close 100 to 150 branches. In the first quarter of 2016, we recorded $14 million of property-related expenses, primarily related to the branch consolidation and additional occupancy optimization initiatives. In addition, we incurred $12 million of severance expense related to staffing reductions. Excluding the impact of severance charges in the current and previous quarter, salaries and benefits decreased $9 million or 2% linked-quarter. This decrease was primarily due to a 2% reduction in staffing, as well as lower expenses attributable to market decreases in relation to assets held for certain employee benefits that I just discussed. This was partially offset by seasonal increases in payroll taxes of $12 million and increased incentives related to fee-based revenue growth. Professional and legal expenses declined primarily due to a favorable legal settlement of $7 million, which is not expected to recur going forward. FDIC fees increased $3 billion from the previous quarter; and as previously disclosed, we expect FDIC fees to increase by approximately $5 million on a quarterly basis when the FDIC assessment surcharge is implemented.

Our adjusted efficiency ratio was 60.6% in the first quarter, driven primarily by growth in new revenue initiatives, which have been funded by expense eliminations. Our plan to become a more efficient organization is well underway.

Let's move to asset quality. Total net charge-offs decreased $10 million to $68 million and represented 34 basis points of average loans. The provision for loan losses was $113 million. Our allowance for loan losses as a percent of total loans was 1.41% at the end of the quarter, which compares to 1.36% of total loans outstanding at the end of the fourth quarter. The increase in the allowance is primarily attributable to an increase in direct energy-related loan reserves. Total loan loss allowance for the energy loan portfolio was 8% at the end of the first quarter, compared to 6% at the end of the fourth quarter. Beginning primarily in the third quarter of 2015, low oil prices began to drive the migration of a number of large energy credits into criticized loans, primarily in the exploration and production and oilfield services sectors. Continued low oil prices prompted further migration of some of those credits into classified loans this quarter. As a result, total business services criticized and classified loans increased $254 million, including an increase in classified loans of $703 million and a decrease in special mention loans of $449 million. Total nonaccrual loans, excluding loans held for sale, increased $211 million from the fourth quarter. At quarter end, our loan loss allowance to nonaccrual loans or coverage ratio was 116%. Additionally, troubled debt restructured loans, or TDRs, declined 2% from the prior quarter. Now regarding our energy portfolio, while oil prices remain volatile, exposures remained manageable. Should prices remain in the $30 to $45 range, we continue to expect losses in the $50 million to $75 million range in 2016; and should oil prices average $25 per barrel through the end of 2017, we would expect incremental losses in the $100 million range. In addition, weakness in energy, mining and metals, and agriculture are starting to put some pressure on certain commercial durable goods companies. However, we believe our allowance for loan losses is adequate to cover inherent losses in our loan portfolio. Given where we are in the credit cycle and fluctuating commodity prices, volatility in certain credit metrics can be expected, especially related to larger-dollar commercial credits. Let's move on to capital and liquidity. During the first quarter we returned $255 million to shareholders, including the repurchase of $175 million of common stock and $80 million in dividends. Under Basel III, the Tier 1 ratio was estimated at 11.6% and the Common Equity Tier 1 ratio was estimated at 10.9%. On a fully phased-in basis, Common Equity Tier 1 was estimated at 10.7%, well above current regulatory minimums. Let me provide an overview of our current expectations for the remainder of 2016, which remain consistent with those we delivered at our Investor Day last fall and also on our earnings call in January. We expect total loans to grow 3% to 5% on average basis relative to fourth-quarter 2015 average balances. Given current softer market...