Regions Financial Corp (RF) — Q3 2016 Earnings Call Transcript

Thank you, Paula. Good morning and welcome to Regions' third quarter 2016 earnings conference call. Participating on the call are Grayson Hall, Chief Executive Officer and David Turner, Chief Financial Officer. Other members of senior management are also present and available to answer questions. A copy of the slide presentation referenced throughout this call as well as our earnings release and earnings supplement are available under the Investor Relations section of regions.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risk and uncertainties. And we may also refer to non-GAAP financial measures. Factors that may cause actual results to differ materially from expectations as well as GAAP to non-GAAP reconciliations are detailed in our SEC filings including the Form 8-K filed today containing our earnings release. I will now turn the call over to Grayson.

Thank you, Dana. Good morning and thank you for joining our call today. Our third quarter results reflect continued momentum in 2016 and demonstrate that we are successfully executing our strategic plan. We are pleased with our continued progress on fundamentals despite a challenging operating environment. Dave is going to take you through details shortly, but let me just provide a few highlights. For the quarter, we reported earnings available to common shareholders of $304 million and earnings per share of $0.24. There are a number of items that impacted the quarter, which we will address as we review the results, but all in all, a good quarter and solid quarter for Regions. We delivered solid revenue growth by increasing deposits and non-interest income; total adjusted revenue increased 5% over the third quarter of 2015, driven by strong adjusted non-interest growth of 12%. Clear evidence that our investments are paying off, notably capital markets and wealth management both produced record quarters. As part of our continuing efforts to grow and diversify revenue, we recently announced the acquisition of low-income housing tax credit corporate fund syndication and asset management business of First Sterling Financials. This acquisition complements our existing low-income housing tax credit origination business and further expands our capital market capabilities and our ability to serve our customers. With respect to market conditions, the global macroeconomic environment continues to remain somewhat challenging. As such, it's critical that we focus on things that are within our power to control. And to that end, we remain committed to disciplined expense management and are on pace to achieve our 2016 efficiency and operating goals. Our plan to eliminate $300 million of core expenses over the next three years is clearly underway. However, based on current expectations for continued low rate, low growth environment, we have determined that additional expense eliminations are necessary to operate in this environment, to go beyond the $300 million amount. To that end, we have targeted additional $100 million, which we expect to achieve by 2019. In total, this $400 million represents 11.5% of our adjusted expenses base. Turning to asset quality for just a moment, we continue to see some stress in certain segments given where we are in the cycle, but we view our overall asset quality as stable today. In addition, the continued stabilization of oil prices has positively impacted certain credit metrics. With regards to loans, we continue to exercise caution and remain focused on prudent and quality loan growth.

Thank you, and good morning, everyone. As Grayson noted, several items impacted the third quarter, now I’ll speak to each of them as we move through the results. So let’s get started with the balance sheet and look at average loans. Average loan balances totaled $81 billion in the third quarter, down 1% from the previous quarter. Consumer lending experienced another solid quarter of growth as average consumer loan balances increased $302 million or 1% over the prior quarter. This growth was led by mortgage lending as balances increased $259 million linked quarter, reflecting another seasonally strong quarter of production. We continue to have success with our other indirect lending portfolio, which includes point of sale initiatives. This portfolio increased $93 million linked quarter or 14%. Average balances in our consumer credit card portfolio increased $44 million or 4% as penetration into our existing deposit customer base increased to 18.2%, an improvement of 50 basis points. Now turning to the indirect auto portfolio, average balances decreased $36 million during the quarter. We continue to focus on growing our preferred dealer network, while exiting certain smaller dealers. In addition, we remain focused on achieving appropriate risk-adjusted returns in this portfolio. And average equity balances decreased $94 million as the pace of run-off exceeded production.

Yes, thank you, Grayson. We've said as we think about our strategy that we're under-penetrated in certain markets, businesses, and portfolios. We have, we think too many single-service kind of credit-only relationships. We've been good about client selectivity, but not as focused on returns. And so as we think about our businesses and our desired credit better mix of revenue, we've talked about real estate and our desire to manage that carefully given where we are in the cycle. Within our larger credit exposures, our corporate banking business again we want to be thoughtful about that business has been growing over the last few years, but it grows with large exposures. And so we're mindful of the total free risk and mindful of the returns that we're getting in that business.

So if you exclude the impact of the $7 million leverage lease residual value adjustment and the expected $4 million premium amortization improvement, net interest income and other financing income for the third quarter would have been approximately $867 million on a fully taxable equivalent basis, and a margin of 3.09%. And we believe the fourth quarter will approximate these amounts. Non-interest income increased 14% in the quarter and included the impact of $47 million of insurance proceeds associated with the previously disclosed settlement related to FHA insured mortgage loans.

Thank you, David. As we look for the fourth quarter, we think production bodes well, but we do anticipate stability. I would just ask John Turner who heads up that group for us to add a little bit more color. Because I think this is an important question.

Yes, that’s right, and that’s why I tried to enumerate some of the unusual things that occurred. The current quarter charge primarily relates to a class-action settlement that was overturned on appeal and we would not expect this level of expense to repeat. For the first nine months of 2016, our adjusted efficiency ratio was 63.3%, and we have generated 3% positive operating leverage on an adjusted basis.

But again, to Barbara's point very good quarter from a credit quality standpoint this quarter. Had a lot of things moving around, but at the end of the day we think we're in a good place.

I will discuss the reserve first. We have a careful approach to reviewing it consistently, and we also evaluate our reserves. The numbers will clarify our position. However, I do not anticipate returning to the previous situation of having coverage below 1%.

As we look at the fundamentals, the fundamentals are posting some very good numbers in particular on the consumer side of our house, but really across the board. And so, that focus on execution is a key point of what we are doing. And the other side is innovation. I think in this market you got to be able to execute, which is also you got to be able to innovate.

So, when we talk about strategy, it would be the thing like we saw yesterday with our announcement of First Sterling continuing to make any type of investments that are helping us to serve our customers to give us more fulsome offering to our customer base as we seek to meet their need.

In closing, our third quarter results reflect continued execution of our plans and our commitment to our three primary strategic initiatives which are; number one, grow and diversify our revenue streams; two, is to practice discipline expense management; and three, to effectively deploy our capital.

Thank you, David. Before we begin the Q&A session of the call, we ask that you please limit your questions to one primary and one follow-up to accommodate as many participants as possible this morning. We will now open the line for questions.

Good morning. I was hoping to follow-up on the expenses of debt and couple of questions, I guess one anymore color or can you frame how much of the $400 million of cost saves will fall to the bottom-line or what it means to expenses overall?

Yes. So, Matt, we have some more work to identify what the additional $100 million will be and in which year it will be realized. We did extend that component of the cost elimination program to 2019. That being said, as I mentioned, we are trying to bring forward as much as we can.

Good morning. Back to expenses, I just want to get a little bit feel how this impacts your efficiency ratio, I mean if you look at it, you’re running year-to-date around 63.5 or so and so, and you came in around 65% for the third quarter, I just want to just get some color on how you are confident that you’re going to come in below 63% for the full 2016.

Yes so kind of consistent with Matt’s question we believe the adjusted number of 912 was higher than the run rate that you'll see in the fourth quarter and into 2017. We still need some more work around the 2017 numbers. We'll highlight that in the first part of December at our next conference in terms of what we think we'll do over the next three years on a number of metrics.

Yes, I mean John if you look at our reported earnings for the third quarter, clearly consumer was very strong quarter. We're very encouraged by what we saw on the consumer not only for a loan growth standpoint, but from an asset quality perspective continues to be very good and very stable.

So, I’ll start with obviously the still just a notice to proposed rulemaking, so we still need finalization there. But based on what is out there I think it’s constructive for the industry, for the regional bank space. As that being said, we manage our capital in the manner we’ve laid out a capital planning process and all the governances and none of that’s going to change.

No further remarks. Just want to thank you for your time and your participation and your comments, questions. Thank you we look forward to speaking to you again next quarter.