Regions Financial Corp (RF) — Q3 2017 Earnings Call Transcript

Thank you, Paula. Good morning. And welcome to Regions’ Third Quarter 2017 Earnings Conference Call. Grayson Hall, our Chief Executive Officer, will review highlights of our year-over-year financial performance; and David Turner, our Chief Financial Officer, will take you through the details compared to the prior quarter. Other members of management are also present and available to answer questions. A copy of the slide presentation referenced throughout the call, 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. I will now turn the call over to Grayson.

Thank you, Dana. Good morning and thank you for joining our call today. Before we get started, I want to take a few minutes to speak about the hurricanes that significantly impacted our footprint. I am immensely proud of our team for responding and meeting the needs of our customers, fellow associates, and our surrounding communities. Due to our market locations, we unfortunately have substantial experience dealing with severe weather-related events immediately following the storms. Our first priority was ensuring the safety of our associates in the impacted areas. While several associates were personally affected, we are extremely grateful that none were injured. In total, 482 banking offices across 100 counties and six states were impacted by the storms. But because of our strong processes and experienced teams, we reopened 95% of them within three days following each storm. With the exception of one branch that sustained significant damage, all banking offices are open and conducting business. Our focus remains on helping our customers, associates, and communities begin to recover and rebuild. While we are still evaluating the financial impact of these storms, David will provide you with our related loss estimate shortly. Keep in mind that historically, following similar weather events, we typically experience a pickup in economic activity associated with reconstruction efforts along with overall deposit growth. Despite the impact from the hurricanes, we reported solid earnings available to common shareholders from continuing operations of $296 million during the quarter, with earnings per share of $0.25, while generating positive operating leverage, expanding our net interest margin, and producing solid growth in pretax pre-provision income. Importantly, we remain focused on expanding our customer base, as we believe this is fundamental to future income generation. This quarter we grew checking accounts, households, credit cards, Wealth Management relationships, total assets under management, and consumer loans. We continue to benefit from our asset-sensitive balance sheet, as reflected in a strong deposit franchise, which drove an 8% year-over-year increase in net interest income and a 30 basis point increase in net interest margin. We are making strides in our efforts to control expenses; adjusted non-interest expenses decreased $32 million or 4% year-over-year as efficiency remains a top priority of our team. Concerning our loan portfolio, several factors impacted balances this quarter. New and renewed loan production increased 9% year-over-year. However, consistent with the rest of the industry, borrowers accessed capital markets to a larger degree this quarter, which led to elevated loan payoffs and loan pay downs. Furthermore, we continue to execute our deliberate diversification strategy focused on achieving appropriate risk-adjusted returns. While these decisions pressure loan growth in the near term, we believe it is the right long-term strategy and a prudent approach to creating a balanced portfolio, positioning us well for future loan growth. With respect to asset quality, our disciplined approach to credit continues to deliver positive results. Although uncertainty regarding the impact of the hurricanes remains, we continue to characterize overall credit quality as stable. We recognize that the slow growth environment could persist for some time; therefore, we remain focused on what we can control. Our plan to eliminate $400 million in expenses is well underway. However, we now expect to achieve the majority of these eliminations by 2018 rather than 2019. Through our work in this area, we are implementing steps to simplify and grow the bank, which will allow us to significantly improve efficiencies and effectiveness throughout the organization. We believe there is an opportunity for expense eliminations beyond the $400 million. Additional efforts are underway and we will provide more information later this year. With that, I will turn it over to David to cover details of the third quarter.

Thank you, Grayson, and good morning, everyone. Now let’s get started with the balance sheet and take a look at average loans. In the third quarter, average loan balances declined to $79.6 billion as growth in the consumer lending portfolio was offset by declines in the business lending portfolio. Total new and renewed loan production remained strong for the quarter and approximated $16.2 million. Within Consumer, we continue to reshape our indirect lending portfolios with a focus on increasing overall risk-adjusted returns. This is evidenced by our decision to exit a third-party indirect auto contract while expanding our indirect other Consumer portfolio through point-of-sale offerings. As a result, average balances in the consumer lending portfolio increased $180 million or 1% quarter-over-quarter, despite the strategic runoff in the indirect vehicle portfolio. Excluding this runoff, average Consumer loans increased approximately $385 million. Average indirect vehicle balances declined $180 million or 5% during the quarter. Runoff in the third-party portfolio of $205 million was partially offset by an increase of $25 million in our dealer financial services portfolio. The full-year average impact of the runoff portfolio is expected to be approximately $510 million. Our other indirect lending portfolio, which includes point-of-sale lending initiatives, continues to experience growth. Average balances increased $257 million or 26% linked quarter, aided by the purchase of approximately $138 million of unsecured consumer loans late in the second quarter. Average mortgage balances increased $171 million or 1% during the quarter. However, growth continues to be constrained by a lack of housing supply across our footprint. With respect to home equity lending, average balances continue to decline during the quarter, decreasing $134 million or 1% as growth in average home equity loans of $44 million was offset by a decline of $178 million in average home equity lines of credit. Furthermore, average line utilization decreased 68 basis points compared to the second quarter. Average balances in our consumer credit card portfolio increased $36 million or 3%, with the number of active cards increasing approximately 2.5%. Turning to the business lending portfolio, average balances totaled $48.3 billion in the third quarter, a 1% decline from the second quarter, despite a 1% increase in total new and renewed production. As Grayson mentioned, we experienced elevated loan payoffs and pay downs. In particular, many customers in the large Corporate space accessed the fixed income market, taking advantage of favorable pricing spreads, using those proceeds to pay down or payoff bank debt. The level of payoffs and pay downs was 1.5 times higher than the previous quarter and just over 50% higher than the third quarter of last year. A number of investor real estate loans were paid off prior to maturity, reflecting the impact of low capitalization rates and a modest increase in mergers and acquisitions observed in the middle market space, further contributing to elevated loan payoffs. In addition, the decline in average owner-occupied commercial real estate loans reflects continued softness in demand and competition for middle market and small business loans. As part of our risk mitigation strategy, we continue to reduce exposure in certain industries and asset classes. For example, average direct energy loans decreased $52 million or 3%, ending the quarter at $1.9 billion or approximately 2.4% of total loans outstanding. Average multifamily loans decreased $58 million or 4% during the third quarter, and average medical office building loans decreased $24 million or 8%. In addition, average investor real estate construction loans declined $195 million, due in part to our ongoing efforts to improve diversification between construction and term lending. While these risk mitigation strategies have impacted average loan growth, we believe they are appropriate and will position us well for prudent and profitable loan growth in the future while maintaining an appropriate credit risk profile. Evidence that these strategies are working includes continued declines in expected loss estimates across all business lending categories, improving our relevance and profitability within the shared national credit book, as our capital recycling efforts have also reduced both the probability of default and expected loss estimates by approximately 10%. The company has reviewed approximately $33 billion of large shared national credit exposures since 2016, and as a result, we exited $4.2 billion of credit and added new or expanded existing relationships of $4.6 million. These expanded relationships provide average trailing annual revenues that are 51% higher than all other shared national credit relationships, average trailing annual non-interest revenues that are 123% higher, and average risk-adjusted returns on capital that are 252 basis points higher. With respect to loan growth, while current pipelines are higher than they have been all year, line utilization reductions and payoffs experienced during the quarter have tempered expectations. As a result, full-year average loan balances excluding the impact of third-party indirect vehicle runoff are expected to be down slightly. However, based on what we know today, and barring another quarter of elevated payoffs, we expect loans to grow in the fourth quarter on an end-to-end basis. Let’s move on to deposits. Similar to loans, we also continue to execute a deliberate strategy to optimize our deposit base, focusing on valuable low-cost Consumer deposits while reducing higher-cost brokered and collateralized deposits. Total average deposits decreased less than 1% during the quarter, primarily due to our strategic decision to reduce higher-cost deposits. Average deposits in the Wealth Management segment declined $276 million or 3% as a result of ongoing strategic reductions of collateralized deposits. Certain institutional and corporate trust customer deposits, which require collateralization by securities, continue to shift out of deposits and into other fee income-producing customer investments. Average deposits in the other segment decreased $220 million or 7%, driven primarily by our strategy to reduce retail broker suite deposits. Average deposits in the Consumer segment experienced a seasonal decline of $153 million, while average Corporate segment deposits increased $23 million. We continue to expect full-year average deposits to remain relatively stable with the prior year. Let’s take a look at the composition of our deposit base. Third-quarter deposit costs remain low at 17 basis points, and total funding costs were 37 basis points, illustrating our deposit advantage. As a reminder, our deposit base is more heavily weighted towards retail customers; approximately 75% of average interest-bearing deposits and 51% of average interest-free deposits are considered retail. In addition, we have a loyal customer base, as more than 43% of our consumer low-cost deposits have been deposit customers at Regions for more than 10 years. Finally, approximately 50% of our deposits come from MSAs with less than 1 million people, and approximately 35% from MSAs with less than 500,000 people, both being in the top quartile versus our peer group. For these reasons, we believe that our deposit base is a key component of our franchise value and serves as a competitive advantage in a rising rate environment. Now, let’s take a look at how this impacted our results. Net interest income on a fully taxable equivalent basis was $921 million, representing an increase of $17 million or 2% from the second quarter. The resulting net interest margin was 3.36%, an increase of 4 basis points. Interest recoveries continued to benefit net interest income, adding $4 million and 2 basis points of net interest margin relative to the second quarter. After normalizing for recoveries, net interest margin and net interest income benefit primarily from higher market interest rates driven by the June Fed funds rate hike, partially offset by a decrease in average loan balances and higher interest expense associated with our holding company debt issuance early in the third quarter. Furthermore, one additional day in the quarter benefited net interest income by approximately $5 million but negatively impacted net interest margin by approximately 2 basis points. Looking forward to the fourth quarter and excluding the impact of interest recoveries, we expect net interest income and net interest margin to grow modestly, in line with market expectations for a December Fed funds rate increase. For the full year, we continue to expect net interest income growth in the 3% to 5% range. Before we move on, I want to make a couple of points about our asset sensitivity. Given the extended low rate environment, the majority of our balance sheet has essentially re-priced. As a result, our natural reinvestment of fixed-rate loans and securities, even at current interest rate levels, will be accretive from here. So even if interest rates remain low, our balance sheet is positioned to deliver continued growth in net interest income. Let’s move on to non-interest income. Adjusted non-interest income decreased $13 million or 3% during the quarter, driven primarily by declines in mortgage and capital markets income, partially offset by an increase in service charges. In addition, the company incurred $10 million of operating lease impairments during the third quarter, compared to $7 million incurred in the second quarter. Year-to-date, we have incurred $22 million in operating lease impairment charges, primarily attributable to oilfield services customers. Mortgage income decreased $8 million or 20% during the quarter. Despite a 9% decline in mortgage production, sales revenue increased $1 million or 4%, primarily due to improved secondary marketing gains. However, this increase was offset by a $9 million reduction in the valuation of residential mortgage servicing rights. Capital markets income decreased $3 million or 8%, driven by lower merger and acquisition advisory services and loan syndication income, partially offset by higher revenues associated with debt underwriting. Card and ATM fees were negatively impacted by the hurricanes; the estimated impact of fee waivers was approximately $1 million in the quarter. However, service charges increased $6 million or 4% during the quarter, aided by continued checking account growth, new now banking accounts, and higher mobile deposit revenue. Wealth Management income remained relatively unchanged during the quarter. Of note, our wealth team recently launched the Regions’ wealth platform through its partnership with SEI Global Services. This new and enhanced platform is expected to benefit all customers across the wealth space, including private wealth, institutional services, and asset management, with a best-in-class online experience while also increasing operational efficiencies. Similarly, in an effort to improve our customer experience through innovation, we are in the process of rolling out a new iTreasury platform. This should enhance the customer experience and further expand our product capabilities. We also announced this week plans to expand person-to-person payments and account-to-account transfer solutions through our partnership with Fiserv. We will add Turnkey Service Brazil and Transfer Now capabilities in the first half of 2018, providing an enhanced and seamless customer experience across all payment types. With respect to future non-interest income, we expect growth in capital markets revenue next quarter as several transactions originally expected to close in the third quarter are now expected to close in the fourth. In addition, we expect a modest increase in Mortgage, Wealth Management, and card and ATM fees to collectively contribute to overall growth in adjusted non-interest income during the fourth quarter. We continue to expect full-year adjusted non-interest income to remain relatively stable with the prior year. Let’s move on to expenses. On an adjusted basis, expenses were well-controlled in the third quarter, decreasing $19 million or 2%, compared to the second quarter. Total salaries and benefits decreased $14 million or 3%, primarily due to reduced pension settlement charges and lower health insurance costs. Professional fees decreased $7 million during the quarter, associated with lower legal and consulting costs. The provision for unfunded credit losses also decreased $5 million during the quarter. These declines were partially offset by a $5 million increase in occupancy and a $7 million increase in other real estate expenses related to branch damage, hurricane preparedness, and other storm-related charges. Despite the impacts of operating lease impairments, pension settlements, and hurricane-related charges, the adjusted efficiency ratio improved 150 basis points to 61.7% during the quarter. We continue to expect the full-year adjusted efficiency ratio to be approximately 62%. The company also produced solid growth in pretax pre-provision income, increasing 4% compared to the second quarter and 12% compared to the third quarter of the prior year on an adjusted basis. For the first nine months of 2017, the company generated positive operating leverage on an adjusted basis of just over 1%, reflecting growth in adjusted total revenue of 1.5%, offset by a 0.3% increase in adjusted non-interest expense. We expect full-year adjusted operating leverage of approximately 2%. With respect to taxes, the effective tax rate increased 140 basis points in the quarter to 30.9%, and our full-year guidance for the effective tax rate remains unchanged in the 30% to 31% range. Shifting to asset quality, excluding the impact of the hurricanes, we experienced another good quarter from a credit perspective. Non-performing, criticized, and troubled debt restructured loans continue to improve. Non-performing loans declined $63 million, resulting in an NPL ratio of 0.96%. We also reported a 10% and an 8% decline in business services criticized and total troubled debt restructured loans, respectively. These declines were primarily driven by improvement in commercial loans. Net charge-offs totaled $76 million in the third quarter or 38 basis points of average loans. This represents an $8 million increase over the second quarter and includes the impact of two large energy credits. For the first nine months of 2017, net charge-offs represented 41 basis points of average loans. We continue to expect full-year net charge-offs to be in the 35 basis point to 50 basis point range. As Grayson mentioned, it’s too early to assess the full impact of the hurricanes; generally, it takes up to nine months to fully evaluate storm-related losses. We are still gathering available intelligence, including direct communications with customers where possible, to determine potential losses resulting from the storms. As expected, our loss estimate includes a significant amount of uncertainty. Based on our current evaluations, we have provided for an incremental reserve of $40 million for loan losses. Including the incremental reserve, the provision for loan losses matched net charge-offs for the third quarter. The resulting allowance for loan losses at quarter end increased 1 basis point to 1.31% of total loans outstanding. We continue to characterize overall credit quality as stable. However, volatility from quarter to quarter in certain credit metrics can be expected, especially regarding large dollar commercial credits, fluctuating commodity prices, and further analysis and revisions to hurricane-related exposures. Let’s move on to capital and liquidity. During the quarter, we repurchased $500 million or 34.6 million shares of common stock and declared $105 million in dividends to common shareholders, an aggressive start to our recently approved capital plan. We see the compounding benefit of executing repurchases early, but also understand the need to retain some flexibility throughout the year. Our resulting capital ratios remain robust. Under Basel III, the Tier 1 capital ratio was estimated at 12.1%, and the fully phased-in common equity Tier 1 ratio was estimated at 11.2%. Finally, our liquidity position remains solid, with a low loan-to-deposit ratio of 81%, and we were fully compliant with the liquidity coverage ratio rule as of quarter end. Regarding expectations, while 2017 has been challenging in many respects, we still expect to meet our overall profitability targets for the year. We can accomplish this because our asset-sensitive balance sheet continues to benefit from increasing interest rates, including the benefit of our core deposit base, and at the same time, we are continuing to exercise solid expense management. I have provided an update on each of these targets on the previous pages of the deck. Those updates are summarized again on this slide for your reference. So, in conclusion, despite the negative impacts from recent hurricanes, we reported solid third-quarter results and remain focused on continuing to execute our strategic plan to drive growth and shareholder value. To end, as Grayson mentioned, we expect to achieve the majority of the $400 million in expense eliminations by 2018, one year ahead of schedule, and we are committed to achieving additional expense reductions over and above the $400 million amount, and we look forward to providing additional details to you later this year.

Thank you, David. Before we begin the Q&A, as a courtesy to others, please limit your questions to one primary and one follow-up to accommodate as many participants as possible. We will now open the line for your questions.

Good morning, Peter.

Good morning. I was just curious how much is left in terms of the balance sheet repositioning on the commercial side and in indirect auto?

In indirect auto, that runoff usually takes about two and half years. It costs us somewhere in the $500 million range as we mentioned, so we just finished about a year, so we have about a year and a half round number, Peter.

Okay. And on the commercial side?

So we think about repurposing; we talked about another $1 billion that we were looking at. The truth is we continue to see opportunities to look at all of our relationships as they come up for renewal, so it’s hard to explain to you exactly how much, in terms of runoff would occur; it’s really the opportunity to look at a lot of large corporate relationships as they come up for renewal.

Yeah. Peter, this is John Turner. I would say that our expectation was that we would begin to see an inflection point in the third quarter and fourth quarter. Obviously, we were surprised by the amount of pay downs in the third quarter and just the amount of liquidity that has flowed into the bank. The timing of the transition from building or from becoming less dependent on construction lending, particularly in real estate, and matching that with an increase in term lending has been slower than we thought. We do see that pipeline now building and believe that we will grow loans in the fourth quarter based on what we know today. Our pipelines are stronger, our production has improved quarter-over-quarter and year-over-year, so we believe we are beginning to see some momentum building in the loan portfolio.

Got it. And just a quick follow-up: of the $400 million in planned expenses, how much have you realized so far?

We previously mentioned a $300 million amount that we discovered, along with an additional $100 million, bringing the total to $400 million that we expect to identify by 2019. We have now updated our guidance to indicate that we anticipate locating most of that extra $100 million in 2018. However, we prefer to hold off on detailing what 2018 will look like until later in the year, as we have ongoing investments, particularly in technology. We will provide clearer guidance in December regarding the implications for 2018. Additionally, we are looking beyond the $400 million for the next three years, specifically 2018, 2019, and 2020, and will also offer guidance on that in December.

Okay. Thank you.

Good morning, Michael.

Hey. Good morning. Just a follow-up on the expense question; can you just remind us what areas of the expense base the $400 million is going to come from? Then maybe just a follow-up on that $400; how much do you think will be on a net basis when you mentioned some investments? Thanks.

I will answer the last question. We really want to reserve that for December because we are continuing to finalize our budget and our strategic plan for the next three years. So we will have a better net response to you then. As we think about how we are going to simplify and grow our bank, we are really looking at all processes that we have, starting with how we serve the customer all the way to how back office enables the front office to deliver our products and services. Our goal is to simplify how our customers bank with us and how our associates serve our customers. So it is a broad-based initiative that we will be looking at how we can leverage technology to get more efficient and to have a more effective response in many areas, and we continue to look at branches as well as we’ve done. We have consolidated more branches than any peer since the crisis, and we are looking at a lot of square footage even outside of the branch in terms of opportunities for saving. So it’s pretty broad-based.

Michael, I think that just to reiterate what David said, we continue to look at how we can do business more efficiently while ensuring we are doing business effectively. As David mentioned, part of that strategy has been in our channels, in our culture channels. Year-over-year our branches are down almost 7%. We’ve been aggressive in trying to rationalize our physical points of presence. We’ve also been judicious in looking at all of our operational processes to try to streamline those to make them more efficient. We just invested in some technologies that have allowed us to continue to reduce our staffing levels to be more efficient. We work very diligently with all of our vendor partnerships to rationalize our expenses with third parties, and you will see us continue to keep expense management at a very high level of focus and priority over the next several quarters. It’s imperative in a slow, low-rate, slow-growth environment.

Yeah. Michael, let me add one more thing: our goal is regarding efficiency in 2018. As Grayson just mentioned, our expectations are to achieve those expectations that we laid out at our Investor Day, regardless of the environment that may be ahead of us in a slow growth cycle, whether rates are up or down or whether they are flat. That’s the reason for focusing on the expense initiative.

Thanks, David. That’s actually what I was trying to get at. And maybe just my follow-up; you guys have a decent provision for the hurricanes this quarter. If I go back to Katrina, Regions took about $100 million and the loss came in a lot less than that. Should that same dynamic occur here? Should we think about the future pace of provisioning to be more in line with loan growth and you basically growing to that excess provisioning? Is that the right way to think about it?

Yeah. This is Barb Godin. I wouldn’t call it excess provisioning. What we do is we take a very methodical approach to sizing up our exposure. Our exposure could be to the hurricanes, not just on the physical exposure. We reach out to customers, we use a third-party service to help us do some reconnaissance work, et cetera. We come up with what our best estimate is, recognizing the hurricane came in at the end of the quarter. The best estimate at this point, as you know, was about $40 million. We will continue to refine that. As David said, it will take us roughly over the next nine months to fully get that number right.

I do thank Barb's comments that every day we are learning a little bit more from our customers. The more information that we gather from customers and communities, the more refined our estimates will be for those losses. Historically, within about a nine-month period, we typically gain a great degree of certainty about what that potential is. We’ve taken what we believe to be a disciplined and prudent approach this quarter, but for certainty, we have a lot of play out.

Okay. That’s helpful.

Good morning, Matt.

Good morning. This is Rob from Matt’s team. Just on expenses versus your adjusted expense number of $80 million, I was just curious how should we think about the 4Q level and how much of the specific items that you called out this quarter should we expect to be repeated this quarter and thereafter, specifically the hurricane-related expenses, branch consolidation charges, et cetera?

Yeah. We had a very solid quarter from an expense management standpoint. I think you got a look at the hurricane-related expenses that we incurred both directly and through the expense categories addressing the hurricanes, but also the provisioning we took as well. So, David, if you want to try to frame that.

Yeah. So, I think, clearly, as we mentioned, the hurricanes, three of them happened right here at the end of the quarter, so we did our best to estimate losses both on the credit side and the non-credit side. We will have some adjustments in the fourth quarter, but I don’t expect those to be of great magnitude based on what we know today. As we think about expenses, we are still within our guidance that we provided at the end of the year that we would be less than 1%. We have given you guidance that we believe our operating leverage for the year will be approximately 2%. Your questions also lead into what it will look like for ’18, and I am just going to ask you to be a little patient until we get to December when we will give you a better net number for both ’18, ’19, and ’20.

Just to look at the third quarter and when we have hurricanes like this, we dispatched off a lot of our team members with supplies and generators and so forth. We have a lot of expenses that occur when these events happen, and our response to them, and then we’ve also taken a very supportive stance on waiving fees and so forth during the event period to accommodate our customers getting through these tough situations. But in spite of that, we still posted a really solid quarter from an expense management perspective.

Okay. And then just separately with regard to the NIM and net interest income beyond 4Q, how are you thinking about your ability to grow net interest income dollars next year, excluding the benefit of any additional rate hikes?

Yeah. Provided a little bit of guidance in terms of where our balance sheet is currently positioned right now with regards to even rates where they are. Our fixed-rate loans and securities are rolling over, and we believe these will be accretive in terms of net interest income and resulting margin. We do believe we will grow loans in the fourth quarter, and we will provide guidance on loan growth relative to 2018 again in December. But we expect to continue to benefit without a rate increase, of course, the probability of a December increase is above 80% right now, which is why we gave you the guidance on NIM in the fourth quarter to be up modestly.

Okay. Thank you very much.

Good morning, Geoffrey.

Good morning. Thanks for taking the question. Maybe back to the efficiency ratio, because I think it’s important to clarify. The target from the Investor Day of adjusted efficiency ratio less than 60%. You said that that still stands for the full year 2018; just wanted to make sure everyone’s on the same page on that?

Yeah. That’s correct.

Great. And then in terms of the expense initiatives that you’ve run so far, I guess there is always a trade-off between saving expenses and avoiding a negative impact on revenues. Is there anything that you’ve done so far that stands out as having been particularly effective in that trade-off? Just some color around that might help us think about how we look at expenses going forward and where most savings can come from.

Yeah. Probably the biggest impact has been how we have sort of rationalized not only our physical footprint in terms of the number of branches but also how we format those branches from a staffing perspective. I will ask John Owen to speak to that for a moment.

Sure. Our Investor Day a few years ago we laid out a plan to consolidate say 100 to 150 branches over a three-year period. We beat that. We are about 163 branches right now at the end of two years, so we are ahead of that. As Grayson said, at the same time, we have also rolled out a new online and mobile banking platform. The good thing I point out is that in face of consolidations on the consumer side, we continued to grow revenue from customer accounts, grow deposits, and grow loans. So even with the branch consolidation, I think we are having a very balanced approach both on the digital side and with the physical branch side.

Great. Thank you very much.

Good morning, Steve.

Good morning. I was wondering on your end-of-period loan growth commentary if you could help give some color around what your expectations of the drivers are for the fourth quarter growth here?

Yeah. This is John Turner again. I would say, first of all, our markets were probably some of the slowest to recover in the country when we look at GDP. Over the last two years, we’ve had some headwinds as we thought about trying to remix our business. We have also had to deal with the energy recession, concerns about multifamily, and our desire to change our mix of business. All that came together to have a larger-than-might-be-expected impact on loan growth. As we look forward, what we are beginning to see is market strengthening. In the core businesses, our portfolios are improving, and some of our specialized businesses, like tech and defense, and financial services, we are seeing a good bit of activity in those markets; thus, pipelines are strengthening and our Regions business capital asset-based lending platform is active. We expect to have a good year in 2018. As we look at our pipelines and across our markets, we are seeing strengthening in those economies and we are seeing better execution among our teams, which we believe is going to lead to, again, some positive momentum, given what we know today.

That’s helpful. And then, what’s the balance of your shared national credit as of September 30th?

The actual balance is effectively unchanged. I think our commitments are in the range of $38 billion; outstandings are roughly $19 billion. Commitments are up modestly; outstandings are down a little year-over-year, a couple hundred million, but we have generally tried to hold those balances about flat and are remixing the business, exiting some relationships, as David pointed out, entering others as we see opportunities to be more relevant and to gain more of our customers’ share wallet.

And one last one, if I may, just wondering where you are looking to invest in the franchise in 2018 as we think about expenses here?

Yeah. We’ve mentioned quite a few technology investments in our prepared comments in terms of helping our customers bank with us, and helping our associates serve our customers. You are going to continue to see investments in digital be a big investment that we need to have. The whole simplify and grow the bank, again, many initiatives there in terms of our processes. We think technology will enable us to have more efficient and effective processes through that implementation, which is going to cost us a little bit of money, which is why we don’t want to tackle the question for ‘18 just yet.

But you will see us, as we go through our simplify and grow initiatives, we will try to continue to enhance and strengthen the customer experience. We also want to find more ways to create more effectiveness and efficiency in the back office, particularly in risk and compliance, and we believe there are technology solutions that will allow us to do a better job in risk and compliance through robotics and artificial intelligence. We believe some of those investments we are making will enable us to streamline our processes.

Thank you very much.

Good morning, Betsy.

Hi. Good morning. I had a follow-up on the discussion; I think, David, you were mentioning how the front book is coming in better than the back book. Were you speaking about the overall portfolio, so that would reflect some mix shift of where you’re generating some of your incremental assets? What was that more specific around? What you’re seeing in your securities book at current yields and what you’re seeing in C&I and CRE? Can you just give us some color there on that, would be helpful.

Yeah. Betsy, it’s actually both of those. We are looking at the total portfolio, the fixed rates that exist on both the consumer and in the business side, as well as the securities book that rolls over every month. So it is a combination of those two or literally three things that we believe will help us be accretive in terms of net interest income, even if rates stay kind of where they are.

And how are you thinking about NIM in that situation? I mean, obviously, we’ve got deposit betas that are beginning to rise here, so what’s your thought on that?

We believe that as rates continue to rise, deposit betas will also increase. So far, our deposit beta is around 10%, with a quarter-over-quarter figure of about 14%. We consider this a unique advantage for Regions, especially since our deposit base is primarily composed of retail depositors. In smaller markets, where deposit costs are less sensitive, we expect to achieve a better deposit beta compared to our peers, similar to what we experienced in the last up-cycle. We see a continuing opportunity to maximize the value of our deposit franchise as we experience rate increases.

And then just on, again, the front book, back book question, are you also suggesting that spread in C&I and CRE and three other asset classes are stabilizing here or is there yield enough to offset any spread compression?

Yeah. It’s a great question. Spreads clearly have tightened up since a year ago. That’s why you saw not just with Regions but a lot of our peers with access to the capital markets; that’s why you saw our $1 billion issuance in the third quarter, a little earlier than we had originally intended, because of that spread tightening. I don’t think there’s still a lot of competition out there. Spreads are down, not down dramatically from a year ago, call it 9 basis points across the board, in different asset classes, and I think we don’t have an expectation that that will continue to grind down, but I don’t see it evident of massive reversal either.

Okay. And then just lastly, NIM, your commentary about 4Q going up, not making any commentary about NIM for 2018 yet, but NII moving higher; that’s the takeaway?

That’s correct. Consistent with the expectation of a December rate increase, that’s right.

Thanks. Good morning, guys. Understanding your comments about potential volatility to come post-hurricane on the credit front, just given that this quarter was the biggest energy charge-off quarter you had, you had 10% reductions in almost every metric of non-performers, classifieds, TDRs, et cetera. Could you just help us understand what your underlying trajectory looks to be for losses? Any reason to expect any change in the loss rate? Can we still continue to see ongoing reserve releases from here given all that?

Good morning, Ken. It’s Barb. Relative to the charge-offs, you are right. We did have a $28 million energy charge-off quarter. That was oilfield services primarily. We are seeing an end coming to that book. I think you will start to see that over the coming quarters, but the energy itself in E&P and other sectors is really played itself out a little bit; of oilfield services left. Relative to the credit quality cases, again, the only key step: we really still think a fair amount of time and attention on is on the oilfield services piece. That too again, as I mentioned, this quarter we saw a lot come through this quarter, and I think that too is resolving itself pretty quickly.

My question really revolves around the energy book. Barb, do you think that energy book has bottomed out at this point or do you think we will continue to see some contraction?

In terms of outstandings, I think you will see some decline in our oilfield services loan balances. However, we are pleased with our midstream sector and expect to see growth in that area. The same applies to exploration and production; there are opportunities there. Regarding credit quality, it appears that oilfield services will remain a concern for us, and we will continue to focus on addressing that in the coming quarters.

Good morning, John. I wanted to ask about capital deployment and how you prioritize mergers and acquisitions in your overall strategy. Additionally, how do you view whole bank mergers compared to non-bank deals? Lastly, what would be your target for potential deals on the bank side? Thanks.

John, first of all, our focus right now is primarily on executing on our fundamentals, growing the bank organically, managing expenses with a focus on delivering the numbers that we have tried to project to you in our Investor Day. As David mentioned, we will give you an idea of what we think 2018 looks like in December. When you look at the options we have in deploying our capital, we first and foremost would look to deploy into loan growth. As Barb had mentioned earlier, John Turner and John Owen are both pushing hard inside the company to do that and do it prudently. We have executed on several non-bank acquisitions that we believe have been of a size and nature that are accretive to our portfolio. We continue to look for those where they are. We also monitor the bank M&A market very closely. We look at that, and when the economics make sense for our company, but for right now we don’t see that wonderful opportunity at this juncture. That could change, the landscape could change. The economics can change, but for right now we don’t see that as a tremendous opportunity for our company.

Okay. Thanks, Grayson. And then on the margin front, the deposits that you’ve been allowing to runoff the higher-cost deposits. Sorry if I missed this, but what is the average cost of what you have been running off? Thanks.

Hey. I don’t have that in front of me. What we think about though is we have collateralized deposits that don’t provide us much liquidity value at all because we’ve had to post securities for that, giving us a little bit of diversification away from things like the FHLB. But we have let retail broker suite deposits go where our customers are looking for a better deal, and we are willing to give them that. We don’t want that deposit; that really is going to show a more than 100% beta as rates move, and so we are sitting here with a loan-deposit ratio of about 81%, and it just doesn’t make sense for us to continue to hold on to those types of deposits. We will continue to let those roll off.

If you look at, I mean, over the last several quarters, we have really strengthened the composition of our deposit base, and we think it’s a core strength of the company. We have rationalized some of our higher-cost deposits, whether it be collateralized deposits or public funds deposits. Under these liquidity rules, we want to ensure that we’re building a high-quality deposit base that we can depend on quarter in and quarter out. So we feel very good about the deposit base we have built, and in this environment, we have been able to streamline and improve the composition gracefully, and we feel good about where we are with deposits.

Okay. Thank you. And just one more, back to Steve’s question around the shared national credit. Thanks for giving us the number. What portion of that portfolio of $19 billion in outstandings are you the lead arranger? I know you’ve done a fair amount of repurposing with that exposure, so curious where you stand now in terms of which relationships you lead?

So, John, we would say that we have a lead position right now on about 10% of the opportunities that we are currently seeing. We don’t have a number right now.

Good morning. Just want to follow up on that cost savings, just to take that back a little bit further. You are expecting $400 million through the end of ‘18. Where are you thus far in that number? How much of that $400 have you achieved thus far?

Yeah. So, Vivek, what we recently changed was when we added the $100 million, so we had originally a $300 million plan. We added $100 million earlier; we would find that through 2019. We have now adjusted that extra $100 million and say we’ll find the majority of that in 2018. So, not much of that component is actually in our current run rate.

Okay.

We will give you better guidance on that in December.

So, what you're saying is that not all of the remaining $300 million is accounted for, considering that there's only one more quarter left in ‘17. Is it reasonable to think that you're still expecting to add something less than just one quarter's worth?

Yeah. That would be fair.

Okay. Second thing, insurance fees have been coming down the last three quarters; trying to understand just what your plans are for the business?

Yeah. So we continue to evaluate the risk-adjusted returns on all of our businesses and the diversification of our businesses and geographies. As it relates to insurance, you’re quite right; the industry has had a downward trending premium market for some time, that is starting to reverse actually recently. We continue to go through our strategic planning process, where we look at all of our businesses as we speak, and we will give you more guidance as to what that looks like for our next three years, as we will lay that out in December.

What about acquisitions on that one? Haven’t seen you do anything much; is that just lack of opportunities or have you decided to step off that a little?

Yeah. So we backed off that a little bit. You know the industry very well; the multiples of cash flow became very expensive, and it was hard for us to justify the type of investment it was going to take us to get any type of sizable acquisition done. What you have really seen late are smaller acquisitions of producers that we put into that business, but it’s really right at this minute cost-prohibitive for us to spend the type of cash flow it’s going to require to do the deal.

Okay. And one last thing: what is your target for CET1 and by when do you plan to achieve it?

Yeah. So we have laid out a target for common equity Tier 1 in the 9% range. We had originally targeted that for the end of 2018. We can’t quite get there by the end of 2018. It will be in 2019 before we get there given where our loan growth and our capital plan are laid out. We will update that as we do our CCAR next April, but we expect that to approach that sometime in 2019.

Yeah. Thank you.

Good morning, Saul.

Hi. How are you? I want to clarify the cost savings mechanics. At the Investor Day, you mentioned $300 million over the next three years, with about 35% to 45% of that occurring in 2016 and the rest allocated to 2017 and 2018. Essentially, are you confirming that this still holds true, and that the additional $100 million will mostly be realized in 2018? Am I understanding this correctly?

That’s correct, Saul.

Okay. Okay. Great. Just the final question: if the 10 years kind of stays where we are at 2.4, even gravitate that, what does that mean for premium then going forward?

Yeah. So we have got to the point where our premium amortization is really not as important to us in terms of what our ultimate net interest income and margin are; we are sitting here in the mid-30s in terms of amortization. That might drift a bit lower, but not appreciably, so we are looking at maybe it bottoms out in the low 30s to high 40s. Yeah.

Got it. So not really much of a change. All right.

Yeah.

No. Thank you. We very much appreciate your time and your interest in Regions and look forward to speaking to you at the end of next quarter. Thank you.