Regions Financial Corporation (RF)
June 12, 2013 9:10 am ET
Executives
David J. Turner - Chief Financial Officer, Senior Executive Vice President, Member of The Executive Council, President of Central Region, Chief Financial Officer of Regions Bank and Senior Executive Vice President of Regions Bank
John B. Owen - Head of Business Lines and Senior Executive Vice President
Analysts
Betsy Graseck - Morgan Stanley, Research Division
Betsy Graseck - Morgan Stanley, Research Division
So we are pleased to have Regions with us today. Before I introduce David Turner, I did want to ask the audience for your view of Regions. The question that we have for the polling is, what would drive you to add to your Regions position? We have 4 choices: A, Southeast housing improvement; B, higher capital return; C, accelerating positive operating leverage; and D, accelerating loan growth. So A for Southeast housing; B for higher capital return; C for positive operating leverage; and D for loan growth. So if you could put in your thoughts and responses.
And the winner is D, accelerating loan growth. So we're delighted to have with us today David Turner, CFO of Regions Financial. David has been with Regions since 2006. And prior to taking over his role as CFO in 2010, he was Head of Regions Internal Audit Division.
Three key debates: Southeast housing, loan growth, capital return. Regions has one of the lower NIM pressures. They've got a better NIM outlook, we think, than peers, giving us ability to drive down funding costs and shift into higher-yielding assets. That's why we're overweight. And look forward to hearing from David. Thank you.
David J. Turner
All right. Thank you, Betsy, and good morning, everyone. I don't know if Dana and List voted on that loan growth. But I think that's probably what they would have elected as well.
Listen, we appreciate you having us here this morning to present at the conference. With me is John Owen, who heads our lines of business, as well as our geographies. And of course, List Underwood and Dana Nolan from our Investor Relations group.
Before we get started, I do want to remind you that in the presentation or in the Q&A that follows, we may make forward-looking statements in our disclosure related to the forward-looking statements. It's located in the Appendix to the presentation. So if you would take a look at that, I would appreciate it.
Over the past several years, this management team at Regions has really worked diligently to navigate through a challenging economic environment, as well as to strengthen the position of the company, whether that be through capital or liquidity or otherwise. And this slide really depicts some of the activities and improvements that we've seen since 2011.
If you look at it starting with deposit costs and funding costs, you can see the progress that we've made over a 2-year period driven by favorable shifts in our mix of deposits. So as we've discussed before, those of you that attended other conferences, we've spent a lot of time on our CD mix. Our CDs are down quite a bit, and I'll talk to you about that in just a moment. But that's really been a driver of the reduction in our deposit costs.
At the same time, mortgage revenues increased. And certainly, that's been supported by the low interest rate environment. But we've enjoyed the run with mortgage, and we continue to believe that mortgage will perform well in 2013.
Additionally, we experienced net interest margin expansion driven largely by our deposit repricing efforts. And also, I would like to mention expenses. As you know, we focus on expense management relentlessly even though we don't have a named program. But as a result of our continued focus on expense management and strategic initiatives, our efficiency ratio improved by almost 340 basis points.
From a credit standpoint, we've made great strides with respect to the credit risk profile. We reduced nonperforming assets by 54% and charge-offs by 63%, while our allowance to loan losses has remained -- or is today at 2.37%.
And finally, if you look at capital and liquidity, they've improved significantly. Our Tier 1 common ratio now stands at 11.2%, and our loan-to-deposit ratio is at 79%. Now taking the point that you just made with regards to what would move your decision would be loan growth, we'd love to have that loan-to-deposit ratio much higher than 79%, so we're working on that.
Our performance in 2013 thus far demonstrates we are successfully moving forward. And you've seen that theme for us in our annual report and certainly as a title of our slide today. We are looking forward to continue to grow and provide a reasonable return to our shareholders. We have emerged from the financial crisis stronger than before. And with a solid capital base and liquidity and the fact that we're in some of the fastest-growing markets in the country really sets us up for a positive return to our shareholders.
Let's take a look at some of the balance sheet items. We'll start with loans. At the end of the first quarter, total loan balances were almost $74 billion and remained steady from the prior quarter. Now we were down about $59 million in the quarter. We didn't quite grow loans, and we do know that the marketplace is looking for us to demonstrate our ability to grow loans, and we came very close in the first quarter. In particular, our commercial and industrial and indirect auto loan portfolios continue to produce solid results for us.
In addition, we experienced a slower pace of decline in the investor real estate portfolio, which, as you know, has been a headwind for us for a number of years. At quarter end, our investor real estate balances stood at $7.3 billion. That's down $2.8 billion from 1 year ago. So that's a pretty strong headwind that we had faced. We do estimate that we have about $800 million worth of investor real estate that needs to run off. It's in some form of troubled asset category. So roughly $400 million of that is in nonperforming category. Another $400 million of that is in a criticized category. So we believe we get that piece of the headwind dealt with to help us inflect in the investor real estate balances.
We've experienced another quarter of solid growth in our C&I portfolio during this quarter. And encouragingly, what we saw was a broadening of that commercial loan activity. We break our 16 states into 19 areas, and we grew loans in 10 of those. And so we're feeling good that we see this diversified base and geography. We also see a diversified base within the industry. So it's not all in energy or just healthcare or just franchise restaurant or transportation. It's really broader than that. Overall, our Business Services loans increased $268 million linked quarter.
Now we also saw an improvement in the utilization of our lines with 140-basis-point increase to 44.8% from the end of the prior quarter, and commitments were up 12% from the prior year. So we're poised for continued growth there.
Looking at the Consumer Lending. During the fourth quarter, we began the process of retaining our 15-year fixed rate performing residential mortgage loans on the balance sheet. We talked about doing that we [ph] changed in the fourth quarter. That impact to us in this first quarter was about $180 million, just to frame it up for you. And we will continue to retain these 15-year mortgages going forward.
Declines in our total home equity portfolio, which includes lines and loans, continue as customers take advantage of opportunities to refinance. However, we are encouraged by the results in our home equity loan portfolio primarily related to the introduction of a fixed rate loan product during the third quarter of 2012. And growth in this product is expected to continue to reduce the pace of the decline in our home equity portfolio.
Another bright spot, indirect auto loans increased 6% quarter-over-quarter, and total production is up 16% as we continue to expand our dealer network. We are at approximately 2,000 dealers today. We expect that to increase by about 300 by the end of the year. And our increase in volume has really been through this increase in dealer network versus going deeper in a particular dealer.
Although credit card balances were down this quarter, our production of new accounts was 7% higher than the prior year. Currently, our penetration rate is 12% of our households, and we expect this to increase to approximately 20% over time. It will take some time to get there. But we have increased our marketing efforts, and we will continue throughout 2013 to push on marketing to get -- to help us facilitate our growth and our footprint through our existing customers.
We are pleased with the progress made in the first quarter in holding our loans steady. As a result, we continue to believe and have confidence in our forecast that we've given you previously, which is to grow loans in the end [ph] during 2013 in the low single digits.
Another area of opportunity for improvement is our net interest margin. Despite another challenging year of low interest rates, we were able to modestly expand our net interest margin 4 basis points over the same period a year earlier. We have reduced the gap that you see there through our peers, from 43 basis points down to 26 basis points, and continue to expect our margin to remain relatively stable throughout 2013. Now of course, a rise in interest rates would further benefit us, our overall margin, whether it's stiffening or a parallel shift in the curve.
Let's move on to the liability side of the balance sheet and look at some of the key drivers on how we've been able to maintain our margins. Our deposit mix and cost continued to improve in the first quarter. Total average low cost deposits increased $375 million linked quarter, and time deposits fell to 14% of total average deposits. This positive repricing and mix shift resulted in deposit cost declining 4 basis points down to 18 basis points for the quarter and is now among the lowest of our peer group.
Now we do have another $5.6 billion worth of CDs that will mature in 2013. And those deposits carry an average rate of about 93 basis points. And we expect those will result in new deposits or new CDs, which today's going on rate is about 25 basis points.
Further, our overall total funding costs improved to 45 basis points, a decrease of 20 basis points over last year. Our recently completed liability management activities will help to further reduce our total funding costs, and we will continue to evaluate other liability management strategies. You've seen some of those -- some of those strategies have already been baked into our guidance on the margin, but we're going to continue to look at ways to reduce our long-term debt cost in particular.
Let's move on to expenses, which continues to be a good story for Regions. We are focused on creating positive operating leverage not only through revenue but also through expense management. Importantly, at Regions, we believe that expense management should be part of the culture. It's not a campaign. It's not something that you'll see from us in terms of a named expense program. And we believe this is the right strategy to have, and it's really yielded some very positive results.
At the end of the first quarter, noninterest expense as a percentage of average assets stood at 2.9%, which is the third lowest in our peer group. As evidence of the success of our efforts over the past year, we've reduced expenses faster than almost all of our peers. And looking ahead, overall, 2013 expenses from continuing operations are expected to be below those of 2012, illustrating our continued commitment to managing expenses.
Let's look at asset quality. We continue to make improvements in asset quality. The provision for loan losses in the first quarter, as you know, was $10 million or $170 million less in charge-offs. And charge-offs were down 46% compared to the first quarter of last year and was roughly 1%. Both nonperforming loans and nonperforming assets declined year-over-year. That's 26% and 32%, respectively. In addition, delinquencies declined 14%. And notably, criticized and classified loans, which is one of the best and earliest indicators of asset quality, continued to decline with commercial and investor real estate, criticized loans down 31% since the first quarter of 2012.
Now our coverage ratios remained strong. Our loan loss allowance, loan ratio at 2.37%, and our coverage to nonperforming loans is 110%, are quite solid. And based on what we know today, we expect continued improvement in asset quality going forward. And as this occurs, we anticipate that our allowance for loan loss ratio will continue to decline, aligning more closely with our peers. And in short, while we make great strides in this area overall, a significant credit leverage continues to exist for us.
Now let's look at capital and liquidity. Our Tier 1 common ratio continued to increase, ending the first quarter at 11.2% and approximately 160-basis-point improvement over first quarter 2012. And based on our interpretation, our Basel III estimate was 9.1%, which is above the requirements.
During the first quarter, our board authorized a new $350 million common stock repurchase plan, which we're in the process of executing. Our liquidity position also remained solid as our loan-to-deposit ratio, as I mentioned earlier, stood at 79% at the end of the first quarter compared to our peers, which is about 88%. Our loan-to-deposit ratio serves as further evidence that we're well positioned to take advantage of prudent lending opportunities when they arise.
I do want to mention one thing that came out yesterday with regard to the CFPB. As you know, they issued a white paper relative to NSF fees. And I think one of the things we want to make sure everybody is aware of is there are a lot of things that go on with evaluating the impact relative to NSF fees. Yesterday, it was nothing more than a fact-finding mission.
The CFPB went out, did a lot of surveys and gathered the facts and put the facts in the white paper. It was not guidance. It wasn't rules. But the things that you have to think about when you think about NSF fees is not just posting order, which is the first one that will come to mind, but funds availability is important. Company policies have -- that exist. So for us, we give our customers the first overdraft free. We also have a limit on the number of overdrafts that one can have. We also have a courtesy threshold, so if there were drafts not large enough, we don't charge an NSF fee.
So it's a little premature to evaluate what all this means because we don't have the rules, we don't have the guidance. But it will take some work when that comes out, if it comes out. And the impact that we will have and the industry will have will be solely dependent on what rules they may come up with, if there will be any impact at all or any changes at all. So there's still a lot more to come with regards to NSF fees. This is not something we think will change tomorrow, but we think it will take some time to roll out. But make sure you consider all those elements, as I mentioned.
Now to wrap things up, we have strong platforms across all of our lines of business and in the markets that we operate. And building on this foundation, the task before us now is to prudently grow our business. We have a program we call Regions 360, which is -- has been developed to helping us deepen our customer relationships and grow households. We will continue to increase loan production and leverage our Now Banking suite of products, which has a high adoption rate. We will make investments in technology that drive efficiencies, enhance productivity of our lower-cost delivery channels, as well as ourselves and service platforms. But we will continue to remain focused on opportunities to reduce expenses that lead to positive operating leverage.
And as we focus on moving forward, we believe that we are now positioned to compete even more effectively and are committed to creating shared value for our customers, our associates, the communities that we elect to serve and our shareholders.
And with that, I'll end and be happy to take your questions. Thank you.
Question-and-Answer Session
Betsy Graseck - Morgan Stanley, Research Division
Okay. Thanks, David. Well, I'll kick off the questions. Obviously, the group in the room is very much interested in the loan growth. And you did touch on several different drivers for loan growth and what you're investing in to accelerate the loan growth. Could you just give us a sense if you exclude the runoff portfolio, what core organic is doing and how that's been trending over the last couple of quarters?
David J. Turner
Sure. If you look at -- I'll answer a little broader question which you asked me. We were down about $59 million last quarter. We had $180 million of loans that we added as a result of retaining our 15-year mortgage loans. So without that, we would've been down 239. We are seeing great production and productivity in our indirect auto book. As I mentioned, balances were up about 6%, productivity up 16%. And that's coming from an increase in the number of dealers that we have. It's not because we're buying into -- going deeper in a given dealer. As a matter of fact, we originate about 2,000 loans per month. We have about 2,000 dealers. So that's an average of one loan per dealer per month. Now averages can be misleading. So some will have 0 and some will have more. But the point of that is as we get into this competitive rate environment, we are using that to buy into -- to having loan growth. So we're encouraged by that. And as I mentioned, we will grow indirect dealers by 300 during the year. Mortgage continues to be very strong for us. We know the rate environment will have some impact on that. Today, our close loans, as well as our application volume, is 50% purchased, 50% refi. We've been through that before and started to change the applications at the end of the first quarter. But it looks like it's continuing through the second quarter. But mortgage will be -- continue to be strong for us as well. C&I lending, the core C&I lending, is going well for us. As I mentioned, we're growing loans in 10 of our 19 areas. And it's not just one industry, it's a broader industry base. It's not just energy in Texas and Louisiana, but we have healthcare and franchise restaurant, transportation. So we feel good about C&I lending. I will tell you that our bread and butter, what we're all about at Regions on the Business Services side and small business and the lower end of the commercial middle market and those borrowers, we have not seen a demand from them that we would like to see. They aren't borrowing because of the massive amount of uncertainty that exists and it's -- whether it be taxes or healthcare or regulation, they just don't want to take the risk. And those are the folks that we really needed demand credit from us because those customers have a tendency to have better spreads than do larger corporate clients. We do have larger corporate clients that we've been lending to, but those spreads are tighter. Now I'll tell you that they hadn't collapsed, but they -- it is very competitive out there. But we continue to be able to make growth -- have growth in C&I even there, primarily through our relationship and specialty services that we have. So the places that we're really looking at, the owner occupied real estate, which has a tendency to be that small business customers, one of the headwinds that we're really facing. Other consumer loans, credit card. Credit card has not grown, but our balances haven't grown, but our number of accounts have. And so we're thinking this is a lag impact. We converted those loans on to our systems in the fourth quarter of last year. And our productivity out of our channels, in particular our branch channel, is up substantially this year than where it was. It's just going to take time to get there. As I mentioned earlier, we're only penetrating 12% of our households, and we think that will be -- closer to 20% in time. Home equity, home equity is done very well. We created a home equity loan product to take the place of customers who had first mortgages that did not want to refinance through the mortgage channel because it's too expensive. So we created a HELOAN loan product that mimics the mortgage. So this can be 7-year, 10-year, 15-year terms. And those are growing quite nicely for us, and think they're just about to offset the impact we're having on to HELOCs, which are getting refinanced away from us. John, I went through more than -- John is the man on loans. But anything you want to add to that?
John B. Owen
The only thing I wold add is -- I'll just summarize what David said. I mean, the bright spots for us are commercial, indirect auto, mortgage. And there's a lot of debate about mortgage rates going up. I'll tell you, mortgage production, our rates have gone from a low of 3.25 up to roughly about 4.1. What we're seeing is that's getting people off the sideline. So the thought of is this going to kind of slow things down, I think what you're going to see actually is a little bit of a surge, people coming off the sidelines to get in before rates do go up too high. We're seeing that in ad volume, and I think a lot of our competitors will see that as well. So I think you'll see mortgage perform quite strongly.
Betsy Graseck - Morgan Stanley, Research Division
Questions from the audience? Could we just dig in on a couple of things? One is on the auto side. The CFPB comes up in this topic as well with the question on how we compensate dealers. So can you just give us a sense as to what you have been doing, have you changed and what's the dynamic in the marketplace?
John B. Owen
Sure. In the indirect auto space, most -- all dealers where the process works today is customer walks in, sitting in front of an F&I manager. They spend that quote for a loan to multiple banks. We happen to be one of those banks. We'll send back a rate and say this is the agreed upon buy rate. And the dealer has the opportunity today to increase that rate by up to 200 basis points. So what the guidance, if you will, or white paper from the CFPB is around -- is really around that dealer markup and how do banks ensure that you are being fair and compliant to all customers in the marketplace. So what we have is a very robust monitoring process in place. We think our monitoring is very effective. We also allow -- for Regions, we allow 200-basis-point markup. Many banks allow 250 basis points. But what I think you will see over time or are already seeing some of the banks move to where we are, you'll see that 250 go to 200. And over time, you may even see that 200 go down to 175 or 150. But the point is we've really got to a good job monitoring. We've got a good dealer partnership. We have a lot of emphasis for our dealers on fair responsible lending. I think that as long as you do that, I think you're going to see that dealer markups stay for some time. We'll get pressure over time to come down on that, but I don't think it will happen fast. The only other thing I would add to just -- so we frame it, last year, there's 14.4 million automobiles sold in the U.S. The banks financed 41% of those. So the CFPB and the other regulators are going to have the think through what are the implications of putting pressure on this space because the banks were such a large part of providing automobile financing to our customers.
Betsy Graseck - Morgan Stanley, Research Division
And John, while you're up, could you maybe speak to what the Regions are that are generating the better loan growth in commercial, 10 out of 19 Regions, have a stronger loan growth. Can you speak to what the drivers behind that are and is it accelerating or not?
John B. Owen
Sure. We've seen really strong commercial loan growth. And the thing that has really made us feel better about that loan growth is over time, especially the last few quarters, we've seen it get more broad. So instead of it being a -- we've always had good production in Texas. So Texas has been strong market for us where we're seeing a more broad-based recovery. Parts of Florida are seeing strong recovery. Atlanta, we're seeing some recovery. Indianapolis market, we're seeing recovery. So really a much more broad-based production, which really is a better thing for overall loan portfolio to have balance. And I would tell you the same story for our auto business. We've got 5 or 6 states that drive the primary, both our auto business, same thing with most of our loan categories. But I think the good thing that we're talking, commercial or HELOANs or mortgage is getting more broad-based and more participation across the areas.
Betsy Graseck - Morgan Stanley, Research Division
Now you've got a more resilient NIM than some of your peers giving funding opportunity improvements, right, to drive a more stable NIM. Does that turn back into being able to be more competitive on the loan?
John B. Owen
What we've had to do on the loan pricing, I'll speak with one that -- with auto -- I'll stick with the auto for a minute. We've seen our spreads continue to improve on the auto business. And the reason we've been able to do that is we've got a pretty tight parameter around what type of business we'll take. We're taking super prime and prime business. We're being very selective and only go with franchise auto dealers. So the auto space, we're seeing spreads improve for us as opposed to some people getting compression. On the commercial side, there is pricing pressure. We see it. What we're doing is we are saying no to more deals. We're also being able to leverage our expertise in terms of we've got an Energy, a Transportation, a Healthcare team that are experts in those deals. And what we've found is when you can bring expertise to the customer and help the customer with their business, they'll pay you a fair price. But there is pressure, but we're holding our own for now.
David J. Turner
And I would add to that. We do have a stable NIM. But our NIM is not where we want it to be. It's at the lower end. We would like for that to be higher. Part of that is due to the mix of loans that we have, 61% Business Services, 39% Consumer. And our peers have a tendency to be closer to 50/50. Not all of them, but some of them do. And that drives a difference in the margin. You saw how we're getting closer to the peer median. And we want to continue to drive that gap out. And so -- and we also would love to grow loans, but we're not going to grow them unless we can make money.
Betsy Graseck - Morgan Stanley, Research Division
Okay. David, maybe you can speak a little bit to capital? You indicated the strong capital ratio. You've got 9.1% on Basel III. As you think through your positioning for next year, what did you learn from the CCAR? And how should we think about the ability for you to step up the payout ratio?
David J. Turner
Yes, it's a great question. We have a very strong capital base right now. You saw our change with our total payout and then the specific breakout of dividend and repurchase. And remember, when we filed CCAR, which is the first week in January, so we're really leveraging off the numbers at September. And at that time -- excuse me, at that time, we're trying to grow tangible book value. So mathematically [ph], if you think about where you should put your dollar, repurchasing shares versus the dividend was -- we thought was the right answer. We also had just come out of TARP just 1 year. So we want to be very careful what our total payout was. Nothing would have been worse than a rejection or an objection to our capital plans. So knowing what we know today and seeing where we are, maybe we're too conservative, but we'll take that bet. And over time, we'll get the payout more commensurate with what our peers are doing. What's going to be interesting is figure out where the capital ratios really end up. And we can speculate all day as to what we think those will be. But what we'd like to do is use our capital we have today to grow our bank, in particular grow our loans. What we have is securities book that's 25% of our earning assets. If we could redeploy that in a good old-fashioned loan growth and use capital to do so, that will be our best and that's where we're trying to go. Well, if we can't do that, we'll look at opportunities to buy things. So like our credit card book, we bought -- we purchased some mortgage servicing rights. We'll continue to look at M&A opportunities, whether it be product lines or banks themselves or nonbanks, we'll look at those. It's premature to talk about how active that can be, but we do look at things all the time. And then when those don't happen and it's not right, returning it to the shareholders, we think, is prudent. We'd like to get our dividend payout ratio closer to where our peers are. We know we're south of where everybody else is. And we don't want to keep accreting capital that can't can be utilized. So we'd like to have a return in the form of a stock buyback. That being said, we are subject to the CCAR process, and we have to abide by that process and be prudent about how we manage our capital. But those are really the 3 areas: internal growth, acquisitions and then return to shareholders in that order.
Betsy Graseck - Morgan Stanley, Research Division
Thank you very much, David. Thank you, John.
David J. Turner
Thank you. Thank you.
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