Regions Financial Corp (RF) — Q4 2018 Earnings Call Transcript

Thank you, Angie. Welcome to Regions’ fourth quarter 2018 earnings conference call. John Turner will provide highlights of our 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 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 pre-tax pre-provision 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 have 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 include 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 the 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 stated risk appetite. Total non-performing, 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 and our next three-year strategic plan period, our goal is to generate consistent and sustainable long-term performance. We achieved meaningful progress over the past year as we worked 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 three with average loans. Adjusted average loans increased 1% over the prior quarter, driven by broad-based growth across 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 three 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 define leverage lending primarily as commitments exceeding $10 million where leverage as a multiple of EBITDA or cash flow exceeds 3 times for senior debt and 4 times for total debt. These credits are subject to enhanced underwriting and monetary 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 costs 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. So, let’s take a look at fee revenue. Adjusted non-interest 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 incomes 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 the 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 leverage 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 the discontinuation of the FDIC surcharge, the increase in adjusted noninterest expense remains less than 1%. We achieved our efficiency target for the 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 non-performing loans excluding loans held for sale, decreased 0.60% of loans outstanding, the lowest level in over 10 years. Business serves as 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 resulted allowance totaled 1.01% of total loans and 169% of total non-accrual 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 24th, 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 29th. 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%. As of quarter-end, the Company remained fully compliant with the liquidity coverage ratio rule. Slide 11 reflects our 2018 performance against our targets and 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 remained 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. We do ask that you limit them to one primary and one follow-up question. We will now open the line for your questions.

This is actually Steve on for Jennifer.

Hello, Steve.

I just wanted to talk to you guys about your asset sensitivity. Any plans to hedge away any of this? It seems that that's going to be pausing, and then forward curve is actually looking for a decrease in 2020 right now.

Steve, it's David. We continue to look at our asset sensitivity and think about what the rate environment would be. We still are fairly asset sensitive at a little over $100 million over a 12-month period of time. We have put some hedges on, as we've discussed in 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 a year and change from here, such that we get to a point where we're getting more neutral at that time. We still think the Fed is going to be data-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, thanks. And then, as far as pay-downs in the fourth quarter, how do these compare to the first three quarters of 2018?

We didn’t see nearly the pay-down activity that we experienced, let's say, in the first two quarters, which were the most active. I think it was more of a normal quarter, I would characterize it.

Hi. Good morning, guys. I wanted to follow-up on loan growth. We saw the loan growth pick up for the industry in the fourth quarter, a 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 pay-downs 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 as you look at ‘19? Thanks.

We ended the year with 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 of the 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 industries. We grew our energy, our power and utilities groups, technology and defense, financial services, our government 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 has now been an important strategic initiative of ours. We're beginning to see a 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 little softer than we began 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. And if we do that, we can achieve all the financial objectives that we set out.

Hi. I was just wondering on the service charges, you had real nice growth year-over-year. And remind us if you had any price increases or was the year-ago level depressed or anything?

Hey, Matt, it’s David. No, really not price increases. Service charges have a tendency to follow our account growth, 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 now is 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 quickly on credit quality. The charge-offs did pick 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?

Let Barb answer that.

Yes. No, there's very little, if anything that came from the hurricanes this time which we were 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, it 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.

I know you're going to provide us more detail in a month and a half or so at your Investor Day. But, I'm wondering as we think about our two-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?

Hey, Erika, we’ve done a pretty good job of managing our expense base as well as growing revenue evidenced through our Simplify and Grow continuous improvement process. That is a journey. It’s not a program where we continue to look at every aspect of our business in terms of how we can improve every single day. We have a number of projects on the table today from which we will continue to benefit. Clearly, our goal is to improve our efficiency ratio. We have talked about over time getting into the mid-50s. We’re going to talk a little bit more about that at our Investor Day, as you mentioned. But clearly, there are 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. From a revenue standpoint, if it becomes more challenging, we’ll do something else on the expense side.

Erika, this is John. I’ll 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.

Thank you for that. And my follow-up question is, again, as the market seems to be pricing and set on hold for some time, how should we think about the margin trajectory 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, we anticipate that deposit costs will continue to rise, but there will be a slight lag effect as the year progresses. For the upcoming quarter, we expect to remain relatively stable given the current conditions. We still benefit from tailwinds due to the repricing of fixed-rate assets, loans, and securities this year, with about $12 billion in repricing expected. These adjustments are beneficial in the range of 30 to 50 basis points, possibly even better as the 10-year yield increases slightly. Regarding our pause strategy, we continue to benefit from what we see as our competitive edge — a very loyal customer deposit base, two-thirds of which is retail. Our deposit beta and total funding beta remain below that of our peers, which we believe positions us well to outperform through 2019 and beyond.

Good morning, Saul. We lost him.

Can you hear me?

I can now. Yes, we can now.

I apologize for the confusion. I need to get more comfortable with using this complex technology known as the telephone. I wanted to inquire about fees. How should we determine the appropriate starting point for the fee line? Clearly, there were several variables involved, such as market volatility, the $22 million you mentioned, and the $3 million from equity investments. Is it simply a matter of adding those figures back in, considering you've been operating around a $500 million to $510 million run rate in recent quarters? Should we just add those items back and is that a reasonable approach for future considerations?

I believe you should reintegrate those amounts. We are sharing this information to assist you with that. Our ongoing growth in net interest income will continue if you examine our core lines, with service charges growing alongside our account increases. Card and ATM fees follow the same pattern. We are seeing growth in card usage and accounts, leading to more transactions using those payment methods. Therefore, interchange fees should improve as well. This year, we invested in wealth management by hiring wealth advisors, which will aid our growth in that area. Capital markets have performed well, although there can be volatility in that sector. We ended the year strong, with capital markets reaching a $200 million business as previously mentioned, so I expect this sector to continue providing growth opportunities. Mortgage lending presents more challenges. We have performed slightly better than others because we primarily focus on purchases rather than refinances. While our production was down this quarter, we are also investing in this area by strategically placing mortgage loan originators in our regions, which we believe will enhance our growth. Market value adjustments can occur occasionally. This fourth quarter was particularly noisy, but we do not anticipate it recurring to that extent moving forward.

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

Yes.

Yes. And on capital, you've obviously drawn 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%?

We set the 9.5%, based on how we view our risk profile, obviously, starting with a 4.5% minimal threshold and adding in buffers and then looking at our risk. And that's where the 9.5% is. It doesn’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 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 be lower, but what's your projection when you kind of get to that 9.5% now?

Yes. It will 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 eased up a little bit in the capital. And at the rate that we're growing at, we could get there towards the middle of the year.

Good morning, John. Good morning. I understand you mentioned that the increased charge-offs this quarter are related to the normalization of consumer and indirect consumer charge-offs. Could you provide more details on the specific areas within consumer and indirect where you are observing this normalization? Additionally, what are your expectations for how these losses might trend throughout the year, especially in the consumer segment?

Yes. This is Barb Godin. The normalization that we're seeing is really across all products. Our residential mortgage is coming off some really low level, 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 in 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 off there. But, all-in, credit feels really good where we are right now in this cycle.

Okay. That’s helpful. My second question is also about credit, with two parts. First, I noticed that early stage delinquencies increased by 21% this quarter. I understand some of this is related to consumer accounts, but commercial delinquencies also rose. Could you provide some insight into what caused that? Secondly, how are you approaching the loan loss reserve overall? This quarter, it increased by about 2 basis points in the reserve to loan ratio. What is your outlook for that for the year? Thanks.

Yes. To begin with the allowance, it stands at 1.01%, which is a slight decrease. This is primarily due to loan growth. We anticipate that the allowance will likely remain around this level, possibly decreasing to 1%, but I don't expect it to drop below that. In terms of delinquencies, there was a slight increase. A significant factor in the 30-day plus delinquency rate was one large commercial and industrial credit that, in fact, made an immediate repayment right after the month ended, influenced by the holidays and postal delays. That has since been resolved. Overall, we consider delinquencies to be generally stable. Regarding the consumer book, delinquencies have risen slightly, which we attribute to seasonal factors that we observe every fourth quarter. There’s nothing concerning in that regard.

I have a couple of questions. First, regarding deposit betas. You've mentioned that it's been low compared to peers, including this quarter. Can you provide insight into whether any of that might be due to people shifting from market exposures to deposit exposures? Should we anticipate a slight increase in the first quarter? Additionally, could you clarify if there were any changes in deposit betas between the corporate and consumer sides this past quarter?

Yes. I believe you should anticipate that deposit betas will continue to rise. We have consistently exceeded expectations. Our team assessed the beta at 39, which is quite solid, or cumulative up 22 for this quarter. Therefore, I think we will see that gradually increase. Some of this will be due to changes in the mix. Regarding corporate betas, they have increased to about 81% from 72%. So, we are still observing a slight increase, as expected, and this has been factored into our margin guidance from the beginning.

Okay, thanks. And then, just separately, I know you talk 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 TC 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, everybody has to run their capital ratios based on their own risk profiles or what they perceive to be the risk. We think common equity Tier 1 is 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 closer to that 9.5%, we are solving a portion of our Tier 1 with common equity. We’ve had that in our plan; we've talked about that before. That's something that'll 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 stress test, if you don't have to do that this year, I guess that doesn’t really matter.

No, we conduct our own stress tests regardless. We will need to complete all associated forms, and this may be a year of off-cycle adjustments. However, we are actively working to get through the NPR to manage our capital in real-time. For instance, we aim for a common equity Tier 1 limit of 9.5%. If we were able to manage capital as intended, we would already be at that level. We do need to account for the time factor because when we submit a capital plan, we must implement dividend changes and share repurchases according to the timeline provided in our plan, which was submitted a year in advance, and circumstances may shift. As conditions evolve, we must adjust our capital management accordingly. We are hopeful for a positive outcome, but we will have to wait and see.

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?

There are many factors at play, but generally speaking, that's accurate. The growth of our balance sheet is going to be the key factor influencing our growth in net interest income. We believe that this year we have some support from fixed-rate assets repricing, with $12 billion in securities and loans allowing us to potentially increase net interest income by 30 to 50 basis points as they are processed. Ultimately, it's crucial for us to achieve the right balance sheet growth to continue increasing net interest income at our desired rate.

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, are there still levers to pull on the expense side? Are you close to exhausting those?

Peter, this is John. The whole purpose behind our Simplify and Grow initiative was the recognition that at some point, we would quit benefiting from rising rates, we would 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 it allows us to grow our business because we were easy 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 efforts to be more efficient and effective.

Thanks, guys. I just wanted to ask, Barb, about CECL 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 CECL looks for next year?

Yes. We're doing a lot of work on CECL as all of our peer banks. We are in great shape as far as I'm concerned, we're about to start running the parallel, the old process and the new process. So not much to disclose there in terms of what the numbers look like, but again, I feel good about the entire process, and we're going to be ready for it.

I think we're in really good shape. 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 become January 1, 2020.

John, when you think about the risks to the Regions’ earnings stream over the next year or two, 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've got to continue to grow our businesses and particularly those core businesses. So, demonstrating 1.3% or 4% consumer checking account growth, growth in consumer demand deposits, 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 risks and are we effectively managing those and reacting to emerging risks quickly and expeditiously and effectively? So, 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 a consistently performing and sustainable bank.

Very good and next question I guess is directed to Barb. Over the years, obviously you've had a 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 in the 2015-2016 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 believe that both the regulators and we are in a good position regarding the current state of the industry. We are monitoring normalization and its progression over time. There isn't a specific area of concern that they're focused on, similar to our focus on leverage loans. To elaborate, our primary definition of leverage loans aligns with inter-agency guidelines from 2013, which are three times senior and four times total committed debt-to-EBITDA, potentially not fully secured by margin collateral. There are different thresholds for certain industries like midstream, wireless, and towers. We don’t exclude borrowers from the leverage designation based on credit quality or borrower ownership for financing purposes. This leverage lending determination occurs during credit events such as refinancing or acquisition amendments. Each institution has its own policy for defining leveraged loans, which can make comparisons challenging. Overall, we feel confident about our leverage loan portfolio, as it has strong underwriting. We also have a dedicated team focusing on these deals and we stress test these loans to ensure they can withstand economic downturns. Many people are currently concerned about leverage loans, but we are reassured by the strong performance of our portfolio.

Yes. I would just add, Gerard, that it has been very diverse across a number of industry groups, largely aligned with our specialized industries, bankers, and their expertise. About 27% is sponsor-owned, which is down from the mid-30s. As we consider risk and managing risk in the business, we've been exiting some relationships that we regard as the most risky parts of that portfolio.

Okay. Well that ends the call. Thank you all for your participation. Again, we are 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 27th. Thank you.