RF
#Thank you, <UNK>, 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 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
Further, 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%, as a number of active cards increased 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 <UNK> mentioned, we experienced elevated loan payoff and pay downs
In particular, many customers in the large Corporate space access 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 paid off prior to maturity, reflecting the impact of low capitalization rates and a modest increase in mergers and acquisitions was 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 these strategies are working include, continued declines and expected loss estimates across all business lending categories, improving our relevance and profitability within the shared national credit book or capital recycling efforts have also reduce 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 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 borrowing 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 the 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 cost 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
And 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 are 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
It is 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
Further, 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 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 sensitive, 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 position 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 $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, as the estimated impact of fee waiver was approximately $1 million in the quarter
However, service charges increased $6 million or 4% during the quarter, aided by continue 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 best-in-class online experience, while also increasing operational efficiencies
Similarly, in an effort to improve our customer experience through innovation, we were in the process of rolling out a new iTreasury platform
This should enhance the customers 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
Provision for unfunded credit losses also decreased $5 million during the quarter
These declines were partially offset by $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 and adjusted total revenue of 1.5%, offset by 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 the credit perspective
Non-performing, criticized and trouble debt restructured loans continue to improve
Non-performing loans decline $63 million, resulting in an NPL ratio of 0.96%
We also reported a 10% and 8% decline in business services criticized and total trouble 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 <UNK> 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 you would expect, 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 match 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 is stable
However, volatility from quarter-to-quarter in certain credit metrics can be expected, especially as it relates to 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 ratios 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 are able to 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 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 remained focused on continuing to execute our strategic plan to drive growth and shareholder value
And to end, as <UNK> mentioned, we expect to achieve the majority of the $400 million expense eliminations by 2018, one year ahead of schedule and 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
With that, we thank you for your time and attention this morning
And I’ll now turn it back over to <UNK> for instructions on the Q&A portion of the call
And in ---+ so in indirect auto, that runoff usually takes about two and half years runoff
It cost us somewhere in the $500 million range as we mentioned, so we just now finished about a year, so we have about a year and half round number, <UNK>
So we think about repurposing, we got ---+ round numbers we had 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 continue to come through and mature, and 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
I will answer the last question
We really want to reserve that <UNK> for December, because we are continuing to finalize our budget, 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, 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 product and service
Our goal is really to simplify how our customers bank with us and how our associates serve our customers
So it is a broad base initiatives that we will be looking at how we can leverage technology to get more efficient and to have a more effective responses in many areas, and so we continue to look at branches as we’ve done, we have consolidated more branches and any peer since the crisis and we look at a lot of square footage even outside of the branch in terms of opportunities for saving
So it’s is pretty broad base
<UNK>, let me add one another thing, you know what our goal is with regards to efficiency in 2018. And as <UNK> just mentioned, our expectations are to do what we have to achieve that ---+ those expectations that we laid out at our Investor Day, regardless of the environment that might be ahead of us in a slow growth whether rates are up or down or whether they are up or flat, and so that that’s what our reason for focusing on the expense initiative
I do thank…
…for Barb comments that, every day we are learning a little bit more from our customers and obviously the more information that we get from customers and communities, the more refined our estimates are for those losses
And historically, as Barb mentioned, within about a nine month period we got a great degree of certainty about what that potential is
We’ve taken what we believe to be disciplined and prudent approach of what we’ve done this quarter, but for certainty we have got a lot of play out
So, I think, that, 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, as well as the non-credit side
We will have some adjustments in the fourth quarter
I don’t expect those to be many great magnitude thus far based on what we know today
And as we think about expenses, we still are within our guidance that we provided at the end of the year that we would be less than 1%, we have given you a guidance that we believe our operating leverage for the year will be approximating 2%
So, I think, your questions also leading into what it’s look like for ‘18 and I am just going to ask you to be little patience until we get to December and we will give you a better net number for both ‘18, ‘19 and ‘20.
Yeah
So 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 as we have fixed rate loans maturing that and securities are rolling over that we can reinvest to have some accretion in net interest income and resulting margin
We do believe if we mentioned that we will grow loans in the fourth quarter we will give you guidance in terms of loan growth relative to 2018 again in December
But we expect to continue to benefit without a rate increase and of course, the probability of December increase is in the plus 80% right now which is why we gave you the guidance on NIM in the fourth quarter to be up modestly
The actual balance is effectively unchanged
I think our commitments are in the range of $38 billion, outstandings roughly $19 billion, commitments are up modestly, outstandings are down a little year-over-year, couple $100 million, but we have generally tried to hold those balances about flat and are again remixing the business exiting some relationships, as <UNK> pointed out, entering others as we see opportunities to be more relevant and to gain more of our customers’ share wallet
So we’ve mentioned quite a few technology investments in our prepared comments in terms of helping our customers, helping guess our customers bank easier with us and helping our associates serve our customers
So you are going to continue to see investments in digital, will be a big investment that we need to have
And I think the whole simplify and grow the bank, again a lot of initiatives there in terms of process
So 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 answer the question for ‘18 just yet
Yeah
<UNK>, it’s actually both of those
We are looking at the total portfolio, the fixed rates that are ---+ that exist on both in consumer and in the business side, as well as the securities book that rolls over every month, and 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
Well, we’ve ---+ so we do believe that as rates continue to increase in the face of that, those rates increase deposit betas will also increase
We’ve been fortunate thus far our deposit beta is around 10% thus far, quarter-over-quarter we were about 14%, but like beta about 10%
We believe this is a unique advantage for Regions and that our deposit base SKUs to our retail depositors where in smaller markets we’re in those markets where deposit costs or deposit pricing is less sensitive and that we will have a better deposit beta relative to our peers consistent with what we experience last up cycle
So we think there’s continued benefit for us to actually extract the value out of our deposit franchise as we finally getting rate increase
And if you look at, I mean, over the last several quarters we really strengthen the composition of our deposit base and we think it’s more of the core strength of the company and we have rationalized some of our higher cost deposit that whether it be collateralized deposits or public funds deposits
And under these liquidity rules, we want to make sure that we’re building high quality deposit base that we can depend on quarter in and quarter out and so we feel very good about the deposit base we have built obviously in this environment
We have been able to really make that composition ship very gracefully and feel good about where we are at today on deposits
So, <UNK>, what we recently changed was, when we added the $100 million, so we had an original $300 million plan
We added $100 million earlier and said we would find that through 2019. We have now adjusted that extra $100 million and say, we find the majority of that in 2018. So, not much of that component is actually in our current run rate
And we will give you better guide as to what that means in December
That would be fair
Yeah
So we continue to evaluate the risk-adjusted returns on all of our businesses, we evaluate diversification of our businesses and geographies and as it relates to insurance you’re quite right, industry has had a down on a premium market for some time, that starting to reverse actually recently
And so, but we continue, we are going through our strategic planning process, where we look at all of our businesses as we speak and we will give you again more guidance as to what that looks like for our next three years, we will lay that out in December
Yeah
So we backed off that a little bit, you know that 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
So what you have really seen it later are really smaller acquisitions of producers that we put into that business and but it’s really right this minute cost prohibitive for us to spend the type of cash flow
It’s going to be required to do the deal
So we have laid out a target 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 kind of 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.
That’s correct, <UNK>
So we have kind of 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
