Regions Financial Corporation (RF) Q4 2014 Earnings Report, Transcript and Summary

Good morning, and welcome to the Regions Financial Corporation's Quarterly Earnings Call. My name is Paula, and I'll be your operator for today's call. I would like to remind everyone that all participant phone lines have been placed on listen-only. At the end of the call, there will be a question-and-answer session. [Operator Instructions] I will now turn the call over to Mr. List Underwood to begin.

Thank you, operator, and good morning, everyone. We appreciate your participation on our call this morning. Our presenters today are Grayson Hall, our Chief Executive Officer; and David Turner, our Chief Financial Officer. Other members of our Executive Management Team are present and available to answer questions as appropriate. Also, as part of our earnings call, we will be referencing a slide presentation that is available under the Investor Relations section of regions.com. Finally, let me remind you that in this call and potentially in the Q&A that follows, we may make forward-looking statements, which reflect our current views with respect to future events and financial performance. For further details, please reference our forward-looking statement that is located in the Appendix section of the presentation. Grayson?

Thank you, List, and good morning, everyone. We're pleased you could join us for this morning as we review our fourth quarter and our full year 2014 results. This quarter we reported $195 million of net income available to common shareholders, bringing our full year results to $1.1 billion of net income available to common shareholders and earnings per diluted share of $0.80, an increase of 4% over 2013. Included in the earnings were some unusual items which David will address in his remarks. Overall these results reflects steady progress in 2014 as we continue to focus on the fundamentals of banking and meeting customer needs through service and innovation, while maintaining a prudent and disciplined risk culture. In 2014, we grew loans and deposits. We expanded our customer base. We prudently managed expenses. We improved asset quality and improved our capital ratios. Loans increased to a total of $3 billion or 4% during 2014. Importantly, this growth was broad based with both the business and consumer loan portfolios increasing. In 2014, deposits increased $2 billion or 2%, while deposit cost reached historic lows. Through the successful execution of Regions360, which is our prescriptive approach to relationship banking, the number of quality households increased and we grew the number of checking, savings, credit card and wealth management accounts. We believe this growth positions us well as we head into 2015. We remain focused on achieving operational efficiencies and reduced full year expenses on an adjusted basis by 2% from the previous year. An example of our efforts during the fourth quarter, we made a decision to consolidate 50 branch offices or approximately 3% of our network in locations across our markets. Over time, we expect to add branches in higher opportunity markets such as St Louis, Atlanta, Houston and New Orleans. Through improved technology, these smaller branches will employ different staffing models and will be far more efficient. In 2014, our asset quality continued to improve, reflecting our continued, prudent risk discipline practices. In fact, all our credit metrics experienced improvement in 2014. As a result of this progress and citing improvement in our overall risk profile, we received positive rating actions from four major credit rating agencies this past year. Also during 2014, our capital returned to shareholders totaled approximately $500 million. This included and increased our quarterly dividend as well as share repurchases. With respect to future capital deployment, as you are aware, we submitted our capital plan earlier this month and expect to receive the result sometime in March. Clearly we believe that our capital position is sufficient to support both the return of capital and strong organic growth. With that said returning capital to shareholders is a top priority and given the strength of our current capital levels we believe is appropriate to increase our total payout ratio. In 2015, in addition to effectively deploying capital, we remain committed to generating positive operating leverage and keenly focused on revenue diversification. Shifting to the economic environment, I want to talk briefly about the recent declines in oil prices and its impact on our energy lending portfolio. We're closely monitoring the price declines for direct and indirect impacts to our overall loan portfolio quality. Our bank has extensive energy lending expertise dating back multiple decades and through numerous energy cycles. Our core exploration and production loans at present are well secured and provide a collateral cushion to withstand price declines. In terms of broader impact, we have been monitoring markets such as Texas and the Gulf Coast for signs of weakness in employment and housing. However, we're not seeing any material weakness past this point in time. We have provided additional detail regarding our energy portfolio in the appendix of the earnings presentation. As we look ahead, we expect improved growth in the U.S. economy in 2015. Low energy prices should provide a tailwind to consumer spending and the manufacturing sector. However, an uncertain global growth environment does pose some risk. As a result, we continue to expect an increase in short-term rates in the latter part of 2015. With that, I'll turn it over to David, who will cover the details of the fourth quarter. David?

Thank you. And good morning, everyone. I'll first take you through the fourth quarter details and then wrap up with expectations for 2015. Loan balances totaled $77 billion at the end of the fourth quarter, up $700 million or 1% from the end of the previous quarter. Business lending finished the year strong, totaling $48 billion at the end of the quarter. This was an increase of $524 million or 1% from the third quarter as production increased 18%. Commercial and industrial loans grew $875 million or 3% from the prior quarter. This growth was driven by our specialized industries group, as well as Regions' business capital. Importantly, line utilization increased 40 basis points. Commitments for new loans increased 3% and our pipelines remain strong. Regarding investor real estate, ending balances were relatively steady from the previous quarter at approximately $7 billion. As we have previously stated, investor real estate remains an important part of our corporate bank strategy, given our market presence in the South East. Moving to consumer lending, loans in this portfolio increased 1% linked quarter. Growth in the consumer portfolio was led by indirect auto lending as balances increased 3% from the prior quarter. While we benefitted from the robust market for auto sales, process improvements instituted earlier in the year also contributed to the growth. Credit card balance has increased $45 million or 5% from the previous quarter. This improvement was driven by a 6% increase in spending as well as a 3% increase in active card holders. Mortgage balances were up modestly. Meanwhile total home equity balances were down slightly as the pace of loan payoffs was slightly higher than new production. Total home equity production increased 10% from the previous quarter as customers continued to take advantage of lower rates on variable home equity lines of credit. This quarter other consumer loans were up just over 1% as a result of the introduction of several new products and improved customer delivery. Let’s take a look at deposit. Supported by our multichannel platform, total deposits continued to grow increasing $70 million during the fourth quarter. Of note, low-cost deposits grew by $242 million and continued to account for 91% of total deposits. Deposit costs remained at historically low levels and totalled 11 basis points, while total funding costs declined to 29 basis points in the quarter. Let's take a look at how this impacted our results. Net interest income on a fully taxable basis was $87 million. Net interest margin was 3.17%, a decline of one basis point from the third quarter. Despite a continuation of low rate environment which exerted pressure on asset yields, both net interest income and net interest margin remained relatively stable with the previous quarter. Stability in both measures was largely attributable to higher average loan balances and lower cash balances. Total non-interest income declined $30 million or 6% in the fourth quarter. Services charges declined $40 million from the previous quarter and this was primarily due to a $4 million decline in fees resulting from a product discontinuation in the fourth quarter. Additionally there was an $8 million reduction in revenue related to customer reimbursements. Mortgage income was down $12 million from the previous quarter, primarily due to lower gains from loan sales and a decline in the market valuation of the mortgage servicing portfolio, net of hedging activity. In the fourth quarter we purchased servicing rights on $833 million of loans, bringing our total servicing portfolio to $40 billion. We have the operational capacity to take on additional servicing volume and we’ll continue to look for opportunities to add volume to our servicing portfolio. While mortgage production declined in 2014, the pace of our decline was less than the industry. Originations continue to be driven by new home purchases and represented on average 70% of total originations in the fourth quarter. Based on what we know today, we expect mortgage production in 2015 to exceed that of 2014. Capital markets income decreased $4 million quarter-over-quarter driven primarily by credit valuation adjustments on interest rate swaps. Absent these adjustments, capital markets income increased slightly from the prior quarter. As we continue to build out our capital markets capabilities, we believe that’s it indications in real estate capital markets represent opportunities for us. Card and ATM fees increased as a result of higher spending and transaction volumes. And wealth management income also increased and as a company continues to expand and deepen relationship with new and existing customers. While we had experienced headwinds as it relates to non interest income growth, we have several initiatives currently underway to offset these pressures. As Grayson mentioned throughout 2015 we will focus on diversifying our revenue. Let's move on to expenses. Total expenses in the fourth quarter were $969 million, an increase of $143 million which included some unusual items. As a reminder, there in the third quarter we benefited from the recovery of expenses related to unfunded commitments of $24 million. This was partially offset by expenses related to Visa Class B shares sold in prior years which resulted in $7 million of additional expense in the third quarter. As Grayson mentioned, we intend to consolidate 50 branches in 2015 and incur related expense of $10 million during the fourth quarter. We expect to incur additional related expenses of approximately $15 million in the first quarter of 2015 related to this consolidation. Also at the end of the quarter, we recorded an accrual of $100 million for contingent, legal and regulatory items related to previously disclosed matters. And although you may have additional questions, please recognize that we cannot comment beyond this disclosure at this time. Salaries and benefits remain flat from the previous quarter, although headcount increased 124 positions. Importantly, the majority of these positions are revenue generating or revenue support roles and drive future growth in revenue. Additionally, we had incremental hires and capital planning and risk management this quarter. However, at this juncture we believe that, hires of this nature are substantially complete. Total credit expenses remained low. However, fourth quarter expenses increased slightly as a benefit related to gains from our held for sale portfolio diminished as balances declined along with the seasonal uptick in OREO property tax expense. Outside services increased due to third party engagements to support risk management and capital planning functions. However, these third party expenses should begin to subside and I’ll talk about that in just a minute. We remain diligent with respect to expense control but we have opportunistically invested in talent and technology to further accelerate our momentum to grow revenue. Let's move on to asset quality. Our overall asset quality remained solid as most credit metrics improved in the quarter. Our nonperforming loans, excluding loans held for sale, declined 1% linked quarter. In addition, at quarter end, our loan-loss allowance to nonperforming loans or coverage ratio was 133%. Compared to the third quarter, total delinquencies declined 11% and troubled debt restructuring or TDRs declined 6%. In addition, both criticized and classified loans declined from the prior quarter. Net charge-offs totalled $83 million representing 42 basis points of average loans. The provision for loan losses was $8 million or $75 million less than that charge-offs. And based on what we know today, we expect favorable asset quality trends to continue. However at this point of cycle, volatility and certain metrics can be expected. Let's move on to capital liquidity. We continue to maintain industry leading capital levels. At the end of the quarter, our estimated Tier 1 ratio stood at 12.5% and our estimated Tier 1 common equity ratio was 11.6%. Further, we estimate our fully phased in Basel III common equity Tier 1 ratio to be 11.1%. During the quarter, we repurchased $248 million of stock as far as the Board approved program that totalled $350 million dollars. We expect to complete this program during the first quarter of 2015. The liquidity at the bank and the holding company remains solid with a low loan deposit ratio of 82%. In regarding the liquidity coverage ratio, Regions remains well positioned to be fully compliant with the January 2016 implementation. Now, throughout 2015 we will update customer agreements to include LCR friendly language, to modify existing deposit products and we also plan to create new products and services to compliment our strong position of high quality liquid assets and it's important to note, that no major balance sheet initiatives are necessary in a order for us to be compliant. And now I want to take a few minutes and touch on our expectations for 2015. We expect total loan growth in the 4% to 6% range. Commercial investor loans are expected to drive the loan growth with the business lending portfolio - within the business lending portfolio. Also we believe that investor real estate portfolio has reached a point of stabilization. However, growth will be limited as we remain committed to our risk tolerance levels, as it relates to this portfolio. Looking at the consumer lending book, we expect continued growth from indirect auto lending. We plan to continue to focus on driving better pull through rates, increasing margins and improving overall credit profiles. Additionally we are focused on expanding lending through online and point of sale financing alternatives directly and through partnership with third parties. As a result, we expect to pace our growth in the other consumer category to accelerate in 2015. And moving onto credit card, today our marketing efforts have primarily targeted our existing customer base. As a result, our penetration rate is up 190 basis points over the last year. This increase coupled with an increase in sales of new cards, should drive balanced growth in the near term. We expect incremental growth and mortgage balances during 2015 as the pace of production should more than outpace refinancing activity. From a production perspective, consumer lending closed the year on a strong note. In fact, December was a strongest single production month of the year. With respect to deposits, balances should grow at similar rates as 2014. As a reminder, a significant portion of our deposits were made up of individual deposits, which turn to be more granular, smaller in size which based on our research should be more stable and less rate sensitive in a rising rate environment. With deposit cost, deposit and funding costs expected to remain stable at historically low levels, there is limited ability to offset the continued effect of the low rate environment on margin. That being said, the net interest market would be expected to remain stable to trending higher in a moderately rising rate environment in 2015. And if current market conditions prevail, then net interest margin is expected to relatively stable next quarter. However, with rates at current levels, the net interest margin would experience gradual pressure over the year. For example, if the ten year treasury yield would remain in the 175% to 2% range throughout 2015, we would expect 10 to 12 basis points of margin pressure. From an NIR standpoint, we expect this line item to grow in 2015 resulting from our investments that we have made in wealth management and in our corporate bank. Specifically, we made investment in insurance, investment services, institutional services and private wealth management. Additionally, our investments in capital markets, Fannie Mae just is an example. And new hires related to our power and utilities in financial services team and treasury management corporate banks are expected to pay off in 2015. And finally, mortgage should have a stronger 2015 than 2014. From an expense standpoint, we will continue to focus on our cost. Our largest categories, salaries and benefits, occupancy, and furniture and fixtures will be areas of focus in 2015. In addition, third party consulting cost is another area where we have opportunity to reduce those expenditures. All-in-all, we expect to generate positive operating leverage for 2015. Now let me close by saying that 2014 was the year of solid progress and we are diligently focused on executing our strategies as we head into 2015. With that, we thank you for your time and attention this morning and now I'll turn it back over to List for instructions on the Q&A portion of the call.

Thanks David. We are ready to begin the Q&A session of our call. In order to accommodate as many participants as possible this morning, I would please ask each caller to limit yourself to one primary question and one related follow-up question. Now let's open up the line for questions.

[Operator Instructions] Your first question comes from Erika Najarian of Bank of America.

Good morning. Just I heard you loud and clear in terms of your NIR guidance for the year. But I was wondering if we could get a little bit of clarity on the starting point. This is the first question. Is the $4 million decline in fees resulting from product discontinuation the final impact from that discontinuation? And is it fair for us to add back the customer reimbursements of $4 million and the CVA adjustment - the customer reimbursement of $8 million and the CVA adjustment of $4 million, back to the 448.

Erika, the discontinuation $4 million just about $3.5 million left there and that will be done. And yes, the $8 million should be non-recurring, so that is - your conclusion is appropriate there.

In terms of your guidance of positive operating leverage, if the ten-year does stay between 1.75% to 2% range, and the Fed doesn’t move, can you continue to chop away at the efficiency ratio, I think on a core basis I calculated 66.8% this quarter.

Erika, I think that if rates were to stay where they’re at, and that the Fed does not raise rates this year, obviously we’ve got to manage through that possibility and as David said earlier, we’re focused on remaining very disciplined and very keenly focused on opportunities to continue to rationalize our expenses across the company. We’ll have to continue to do that and we think we’ve proven that if you look backwards in terms of how we’ve managed expenses. Moving forward, obviously in this rate environment it means that we’ve really got to raise the bar if you will on that activity and I think you should continue to see us look at ways to rationalize expenses across the franchise as we had mentioned we had announced the closure and consolidation of 50 offices, I think since - if you look back over the past few years, we’ve reduced our physical footprints some 20%, as well as attacked expenses across the franchise and across channels. David, anything to add?

I think we have to continue to look at our total business in terms of expense management under any scenario, any rate environment. We do believe that there is a tendency to have short term rates go up towards the back end of the year still, we believe that's what the Fed wants to do. We have to be prepared in case that's not the case, and so we’re committed to seeking positive operating leverage in any scenario. It gets harder if rates stay lower.

Thank you for taking my questions.

Your next question comes from John Pancari of Evercore ISI.

Wonder if you can give us a little more color on the 2015, margin outlook. Is that expectation for 10 to 12 basis points of compression, is that incremental off of the fourth quarter margin number? In other words, from this fourth quarter till the fourth quarter of 2015, or is that full year 2015 margin on an average basis versus the full year 2014 margin?

That’s really leveraging, John, of the fourth quarter where we are right now, and that would be - the impact of that really would be felt later in the year versus the earlier in the year. Again, to the extent that that’s a sustainable 1.75% to 2%, throughout 2015.

And you just alluded to what my follow was going to be on the margin, so therefore, if that's the case, the Fed does nothing, next quarter you’ve got a flattish margin, however from the second, third, and fourth quarter, for 2015, you expect 10 to 12 bps of compression during that period, so what is implying that drop-off? Because that does imply pretty good down tick from here.

Well, I think we’d continue to see the negative impacts of lower rates on reinvestment yields in particular where we’re having to put to work $300 million, $400 million of cash every month. And you continue to see the rollover effect of lower rates in the loan book as well. So, we think that if you look at where we think the Fed's going to be towards the middle of the year, we think you’ll start seeing some pressure to increase short term rates, and so we haven’t abandoned that, what we wanted to try to do is put some sensitivities and some extent that that does not happen. And at the – ten-year [Inaudible] rates also stay lower. So, we’re not saying that’s what will happen or that we expect that to happen, we were just trying to give you a little bit sensitivity of possibly what could happen.

Thank you.

Your next question comes from Ken Usdin of Jefferies.

Good morning. David, just to follow up on the expense side, understanding the clear focus on operating leverage. Last year you were able to also help us understand the directional dollars on the expense side - and you did a really good job of getting it down two and change percent. So with all these pushes and pulls and wanting to leave the door open on investments, so can you help us frame an understanding of where you think expense dollars can go given that premise of uncertainty on the revenue side?

We think, Ken, we’ve made investments in a number of areas this year because we believe growing revenue is important for our franchise, we’ve hired people to do that. We’ve hired some late in the year that will have full run rate going forward. We have the negative impact of tension that will hit us for 2015, that’s about $25 million in total for the year. So, call it $6 million per quarter. So with that and the investments we’ve made - we’re talking about expense management and revenue together in terms of positive operating leverage versus a commitment on just expense levels because we’ve needed to make these investments to grow revenue. We think they’ll pay off and so I guess the best I can do to describe where you want to go is that positive operating leverage is something that we should be able to achieve in 2015.

Okay, got it. And then, on the C side, just coming back to - also expecting growth there, I am assuming that’s off of your adjusted 17.84 base. But what I wanted to dig down into is that, I am assuming that's inclusive of the $3.5 million of that lingering deposit advance run off. And then also, can you just remind us, is it also inclusive of the expected overdraft charge changes as well?

It does include both of those.

And then my last one just on that last point is, any update or changes with regards to the numbers you’ve tried to put around your – that potential delta on deposit - on overdrafts? Thanks.

No. We're doing some pilots right now on that posting order, and nothing's come to our attention that calls us to want to change that guidance we gave you 10 to 15 per quarter, when implemented.

Thanks David.

Your next question comes from Betsy Graseck of Morgan Stanley.

Hi, one clarification question just on NIM outlook, I just want to make sure - in your second bullet point where you say, if the ten year yield were 1.75% to 2%, that would drive 10 to 12 basis points of NIM pressure throughout 2015. Does that scenario also include your base case scenario for the front end moving up in the middle of the year?

We have incorporated - we have our base case in terms of the front end moving up, and what we’re trying to say is that we have - this risk would be on top of what we already project for that, so you could take our base case and then take 10 to 12 basis points on top of that. But that really is - the 10 to 12 - we think we’ll have relatively stable margin like I said in the first quarter even in low persistent rate environment. The impact starts - it could be felt later in the year. Really in the third and fourth quarter it’s more pervasive.

Right, so then if there’s no rate hike at the front end of the curve, does that - how does that impact your outlook, would that be incremental negative or not material?

It would be, but that impact would be felt later in the year as well. We didn’t really have a full effect until the end of the year anyway.

Got it. Okay, and then just on the branch consolidation, the 50 branches in 2015, could you give us some color as to have extensive the review was of the branch network, and is this a beginning of consolidation or does this get you largely through what you intend to do on the network?

Thus we've been -- we've been very disciplined about doing an annual review of our multi-channel delivery system, branches being part of that. When we look at investments that we're making in branches, our ATMs, mobile homeland contact center, we look at across the channels, we may convert irrational decision on what we're investing in there. If you look at what we've done on physical branch presence, as I mentioned over the past, five, seven years we've probably consolidated over 20% of our franchise. From a branch account standpoint, we're around 1,666 offices today. We continue -- we will continue to look at that on an annual basis. It's an ongoing process for us. It's not a one-time and done, but it's rather part of how we think about our customer deliver points and so you should anticipate we will continue to do this each and every year.

All right. And the cost of closing the branches is in line with what you've done previously. I am just wondering if…

Yes, we've got pretty good experience based on this and not only from a estimating the cost -- the cost reductions that come out of those branches, but just as importantly is retention of customer relationships as we close with branches and so we think we -- from an modeling standpoint, we think we've got pretty good model and we understand how to execute on branch consolidations and closures.

Okay. And then I guess just a last follow-up here is on the online product that you indicated in the prepared remarks that in the other consumer category should expect to accelerate in part from the online lending focus. Could you give us some color on what you mean by that, what you're investing in and how any pilots are going?

The conclusion -- we continue to look at both online and mobile, both of those channels have very strong growth rates year-over-year and most of those, most of that activity as you are well aware is around fairly routine bank transactions, balance inquiry, funds transfer, bill payment. But all the things we've discovered through some of the product innovation we've had over the two last two or three years is that the desire for customers to also have the ability to borrow money online and also borrow money at point of sale and so we are introducing a number of new online capabilities as well as some partnership capabilities we have on a sale. That's an activity that we'll be making announcements on as the year progresses and it's just a way to extend our brand further into market places that we are as dominant today.

Okay. Thanks for the color there.

Your next question comes from Bill Carcache of Nomura Securities.

Good morning, Bill.

Good morning. Thank you. I had a question on asset quality remained strong, but I am trying to get a sense for how we should think about the trajectory of your net charge-off rate. It looks like it troughed at 35 basis points in the second quarter and it's been rising three to four basis points since per quarter. And I guess as we look ahead, should we continue to expect that kind of similar level of quarterly increase over the next few quarters as credit normalizes? I guess at what point does it level out assuming credit conditions remain favorable? Any color around that would be helpful.

One of the things we're going to leave in our prepared comments is when you get this down to this level of charge-offs in particular, you can see volatility in any given quarter. We're trying to leave you with you the conclusion that in particular if you look at criticizing Class 5 loans, that's one of the earliest indicators of where your credit quality is going. That would imply that over time, we see the charge-off rate continuing to come down. Where it settles out we'll have to see, but we don't believe that the level it's at now is fixed. We believe that does come down. Assuming that condition, economic conditions continue to perform where they are now. So you have to make your own assessment as to where that might -- that terminal value would be, but it should -- it should be lower than what it is over time.

Okay. I think -- separate question on auto, can you talk about the nature of your relationship with your dealer partners in the indirect auto lending side of your business and address specifically how dealer participation works. In particular I wondering how much freedom your dealer partners have to charge auto loan customers rates that are above and beyond the rate at which you're willing to underwrite a loan?

So we have almost 1,700 dealers today. We have -- I didn't see the -- to work with large dealer groups where understanding the dynamics and the changes that are going on in the industry are in terms of pricing and trying to be fair to customers and transparent to customers. We like virtually everybody in the industry do give opportunities for dealers to mark-up the rate. Today it's up to 200 basis points. We know that that's being evaluated by regulatory supervisors in the industry and we're going to stay connected to what that looks like. We think there is a chance the whole industry might move in a given direction, but we think we're spot on with what others are doing in the industry.

But Bill we have a -- we have very rigorous monitoring program of our dealerships and to monitor their activities and to make sure that we're confident in their capabilities for underwriting and pricing. We also have a single price grid, franchise-wide, and are very, very disciplined about maintaining that pricing grid in exactly where our approval rates are if what FICO scores they were delivering on a monthly basis. Now we continue to tighten up the rigor around our credit practices in that segment making improvements literally on a continuous basis.

Okay. Can you say finally on that point whether any of the changes to the practices that you've made have been prompted by your discussions with regulators or have kind of regulators been more kind of on a fact finding -- fact gathering kind of mode and haven’t necessarily been asking for any changes to be made, just that…

Bill really only I can say is we continue to have very detailed and productive conversations with our regulatory supervisors. We have decisions where changes where we believe they're necessary in order for the business to perform better and it's a longstanding relationship and so we feel we'll account for where we're at today. As David said earlier, there are tremendous debates in the industry about how these products are delivered. As those rules changes occur, we will adjust to that.

Understood. Thank you for taking my questions.

Your next question comes from John McDonald of Sanford Bernstein.

Good morning, John.

Hi. Good morning. On expenses, David any ballpark numbers for what kind of savings you could get from the new branch rationalizations that you took the charge for this quarter and next quarter?

Well I'll tell you that generally speaking when we take charges, we like to target the payback period to be somewhere in the three to five year range. This is on the lower end of that and we continue to evaluate our whole footprint and to the extent that we can consolidate -- every time we consolidate braches, we lose revenue. The idea though is to be able to adjust expenses -- run rate expenses faster than the revenue that we're losing. And so as we look at these last 50, we're closer to that three-year payback range and as Grayson mentioned earlier, we will continue to evaluate all of our branches and rationalize those and make investments in others.

Okay. And just take you to that item on the operating leverage goal for positive operating leverage, I assume that's on an adjusted basis year-over-year, that you should infer wouldn't include like the legal charge this quarter?

That's correct.

Okay. And is there any efficiency goal aside to that just to issue?

We've talked about our efficiency ratio over long term to be in that 55% to 59% range. We need a rate increase for that to happen. While we wait, believe we can drift down into the lower 60s of efficiency ratio. 2015 we're targeting to be better than we are in 2014 and all that's on an adjusted basis.

Okay. And then just for a follow-up on a payout, how you're thinking about what's the right kind of payout ratio for regions? You've got a lot of capital. Given how much this year's buyback was backend loaded on a quarterly basis, you're now actually returning on a high percentage of your earnings this quarter and hopefully next. I guess just kind of as you went through CCAR, how did you approach thinking about where the payout ratio should go broadly over the next year or two?

Yes so as a result of us being in the middle of a regulatory submission, we need to be careful exactly with what we're saying, although the answer and sometime in March we will let you know. But the way we thought about capital was first off we wanted to get our dividend closer to where peers and market expectations were. We clearly wanted to use our capital to grow our business. Organically we think that's important. When you look at our capital ratios that we have, we have more common equity Tier 1 than most of our peers and we believe we needed to be a little more forward leaning in terms of putting that capital to work. So you should expect that ratio to be higher. We don't necessarily target a total payout ratio per se. We look at optimizing, excuse me optimizing our capital stack in terms of what's in the capital stack and the sheer dollar amount to become as efficient as we can be and we realize we had more capital our Tier 1 common or common equity Tier 1 on Basel III in most. That's why we think we can do the things we need to do to get the dividend up, to get the investments made to grow our business and serve our customers and return appropriate amount to our shareholders and that's what we did.

And I guess one of the concerns some shareholders have is that you're aligned to a bank acquisition that's dilutive and you don't have a currency to your stock right now in terms of a multiple to do a bank deal. And I guess could you just give us your thoughts about being disciplined on that in terms of using capital given where you trade today and your appetite to do a bank deal or opposed to doing some kind of cash deal to increase your fee income and how you're thinking along those lines?

So you pointed out rightly. We also look at our currency. We think strategically about acquisitions, but I think you bring up a great point in terms of where we are from a currency standpoint. We do have a capital that we can put to work in terms of the organic growth and returns to shareholders and use that excess capital on appropriate acquisition whether it be a bank or non-bank where you're using cash as a currency versus your stock. And so that's a little more available to us today given our capital position, but we're well aware of expectations on dilution and being able to payback that dilution in a reasonable period of time and we're not in the mode of doing an acquisition just to do an acquisition. We will be very thoughtful and we need to get our currency up and we will do that by executing our business plan and executing our strategy first and foremost and there will be plenty of time for acquisitions after we get that dealt with.

Okay. Thank you.

Your next question comes from Paul Miller of FBR.

Yes. Thank you very much. On the $10 million of increased expenses that you said really it's I guess for outside consultants and I guess it's really -- it's some of the regulations for Dodd-Frank, CCAR what not. Is that a one-time charge or should we model that going forward into the models?

Are you speaking of the $10 million for the branch consolidations or…

Maybe I am misreading, but I thought there was a $10 million of increased consultants.

Its $5 million Paul. If you look at outside services, it went up about $5 million.

I am sorry.

That was related to third party consultants and our capital planning process and certain risk management initiatives. Those are areas reasonably we point that out, those are areas where -- that we have a chance to cut those back and become more efficient on, but that is unrelated to the branch $10 million charge that we took.

Okay. So that's an area that you think you can get down over time, but we should be modeling that in for the short term?

Well we think we can get that down and third parties are one of the easiest -- third party expenditures are one of the easier ones to deal with because you don't have to sign a contract. So we should -- we expect and you should expect over time that we work on third party cost and get those down to -- at level that is appropriate for our institution.

And then you might not have these numbers. You don't -- you usually can have somebody give me a call back, but what exactly -- I couldn’t really calculate, what is your capitalized cost of servicing because you did take it right down to the MSR, but what did you take it down to on a capitalized cost of servicing number?

I don't have that. We'll get -- Paul, we'll get that -- get back…

If you can give me a call back that would be great. Hey guys, thank you very much.

Thank you.

Thank you.

Your next question comes from Eric Wasserstrom of Guggenheim.

Good morning, Eric.

Hi, good morning. I just wanted to follow-up on a couple of topics that have been addressed, but as I think about everything that you've said about your net interest margin and assuming that the forward curve is still correct in terms of implied midyear hike and given your fairly robust loan growth guidance, how should I think about sort of the geography of net interest income dollars over the next few quarters here?

Well Eric to the extent that we can give a rising rate, what we will say is that we can have modest improvement to our overall net interest income and resulting NIM if that occurs. We do believe we will have an increase in the shorter rates. We don't believe it will start through mid year. So we expect that to be an opportunities for us in terms of revenue growth if the loan growth will pan out like we've talked about and if the rate environment works like we've talked about, we think that's an area where we can grow revenue. We've had a pretty resilient margin relative to our peers and so we're looking forward to that. We will try and give you the -- if that doesn’t happen, here is what the risk is relative to that expectation and that's what the 10 to 12 basis point is all about.

All right and in that scenario, does your loan growth result in flat net interest income dollars or is there some downward risk in the lack of -- in the 175 to 200 basis point tenure scenario?

Well if you're adding interest earning assets, we should be able to grow with that incrementally our NII. The issue is that at what margin will that ultimately result in. So you could have a growing NII and a decline in the resulting margin that's been at where you put assets on the books.

Got it. And just to follow-up on asset quality for a moment, how should we think about your reserve adequacy at this stage given that the reserve releases have moved, not necessarily entirely with the direction of net charge-offs on a sort of quarter-over-quarter basis.

Yes, so the question is really where we think overall allowance levels would trend? We have a pretty sophisticated allowance methodology. We're getting the question where do you think that will ultimately be? As charge-offs continue to come down, as criticized and classified levels come down, as non-performers come down, then you have a tendency to expect and lower allowance to loan ratio. I can't tell you where that terminal value is. I think what's going on the books today is some of the most pristine, incredibly we've had in a long time and I think that each quarter as charge-offs come down, we do believe we have some leverage in our allowance, which helps us keep the provision down lower for a longer period of time, but at some point, that runs out and you have to start providing for whatever your charge-offs are. So the question that was asked earlier in terms of where that charge-off maybe is something we needed to look at and think through, but the allowance is going to be what it's going to be and I think there is an ability for that to come down to some degree.

But Eric, when you look at the net charge-offs, you just have to keep reminding yourself, there is some residual effect of credits that we've had on our books for a long time that are getting resolved. In addition, the granularity of our loan portfolio does require some level of volatility from quarter to quarter on charge-offs, but when you look at the charge-off in relationship to the provision, the provision really is driving our allowance as a reflection of the overall quality of the portfolio. And as you see from the numbers, the overall quality of our loan portfolio continues to improve. We've got modest loan growth build in through our projections, but a lot of where that provision and resulting allowance winds us trending in large parts tend to pin down loan growth and in what segments that loan growth occurs.

Great and then just last one for me, your go-forward tax rate, what you're expecting there?

If you right-size for the impact of the legal and regulatory charge, you saw us in that roughly 29% range and you would expect that fairly similar to 2015.

Great. Thanks very much.

Your next question comes from Matt O'Connor of Deutsche Bank.

Good morning, Matt.

Hi guys. Just a follow-up on the energy theme, I guess first in terms of your exposure that you laid out on Page 12, which is very helpful, how do you think about how long oil prices need to stay where they are before we see some cracks just kind of generally speaking in your portfolio?

Matt, let me if you would, we've prepared that in the appendix to give you a little more data analytically on sort of our exposure in the -- I've got John Turner in the room with me today who manages our energy segment. So John, if you would speak to this for a second.

Happy to, in terms of how long the prices can stay down, I would say, if you look at the material we've provided, the majority of our exposure is centered either in our exploration production or our oil field services portfolios and if we have a concentration in oil field services that's in marine transportation companies that are serving the deep water, we think that those companies are operating in an environment that has a much longer to play out. Our portfolio is comprised of relatively small number of companies that are located in Louisiana and Texas. They're led by seasoned management teams, have really good liquidity both in the form of cash and credit available to them. They've operated through volatile cycles before. Have good access to capital and so we feel good about our portfolio. We've got a seasoned team of bankers and risk managers. In terms of how long the price can stay down, I don't think we have a sophisticated approach to data to know how long that is because we don't know where the price will end up. A lot of it has to do with where the price ultimately bottoms out and then the length of time that it will stay there, but based upon again good liquidity, good experience amongst our management teams, access to different forms of capital and just the credit profile and small number of customers that we have, we say, we feel pretty good about our exposure today.

Okay. That's helpful and then just on the flip side as I think about your consumer, from a geographic point of view, you operate in some lower income areas and I would think some of those customers are going to benefit much more from lower gas prices, potentially lower home energy cost. So just talk about some of the dynamics on the consumer side both in terms of maybe some relief on the credit and whether there might be some boost on the lending and spending volumes as well.

Yes, I think it's a little early to call, but clearly the reduction in price of a gallon of gasoline at the pump has had a material impact on disposable income of a number of our customers and we do operate a number of -- in a number of markets that, that will really play to as an advantage. We continue to see from a consumer lending standpoint, consumer's credit metrics continue to improve and we would anticipate that if oil prices and conversely prices at pump stayed as low for an extended period of time, it will see a strengthening not only in the credit, the credit of those consumers, but also the spending behaviors of those consumers. And we -- you see a number of different scenarios about a penny drop at the pump and how many dollars that actually puts back into the consumer's pocket and those numbers are just startling in size, but I would say that you it's early to see the results of that, but clearly it's occurring and clearly we will see strengthening. I would say that in the fourth quarter we did see really strong results in the activity of both debit and credit card transactions, both in a number of transactions and in the dollar value of those transactions. And as you saw a modest increase in outstanding balances in the credit card portfolio. So maybe those are early signs, but I do think it's still all early for us to decide what the marked improvement will be.

Okay. Thank you very much.

Your next question comes from Marty Mosby of Vining Sparks.

Good morning, Marty.

Hey thanks for taking the questions. One is to ask you David a little bit about the prepayment speeds, if you had any impact in the security yields this quarter may be from the premium bonds being written down a little bit more? And then also you did have a big impact on the write down in the mortgage servicing rights. Does that encompass a big pick up in prepayments already? So just wanted to see the two impacts in those areas of prepayment speed.

Yes, I think Marty, I think there is really unrelated at this point. We did see a very small amount of pick up in pre amortization. It was about $2 million impact to this negatively in the quarter. So I think our total premium amortization was $42 million up from $40 million in the quarter before. Mortgage was just a little different. Obviously we had a lot of volatility in rates and we obviously have hedges on the hedge as much as the change in fair value as we can. We're a little less effective in those hedges and that was part of the decline in the MSR and then total mortgage we had just lower deliveries into the secondary market that we believe real more of a timing issue for us. So we think those were a little more anomalies that occurred in the fourth quarter than we should hopefully see going forward?

And would it be fair to reflect that if you look at the amortization, it didn't really accelerate any other future prepayments it may happen, yet if you look at the bag on the servicing rights, maybe you have accelerated some of the impact there?

Yes, I think so and also we need to look at what's happening right now with rates -- mortgage rates continuing to come down. We could see -- we could see an opportunity for refinance activity helping our mortgage business, but also that negatively impacts us on the mortgage services rights. So we have a little bit of a built in economic hedge to some degree there. We need to still see how that plays out over the course of the year.

And just lastly, when you talked about the modest rise in interest rate, holding margins flat to pushing it up, you would still expect if you had a short term rise in interest rates, does that eventually kind of pull through positively on your net interest margin. So I just want to make sure of when a structural change that was somewhat pulling that benefit down a little bit.

No, we continue to be asset sensitive along the curve and short-term rates, medium term, long-term, all those benefit us. I think our last disclosure on F100 was about $160 million, $170 million, which is almost split a third, a third, a third in that scenario. So we benefit from that increase at any level.

Thanks.

Your next question comes from Matt Burnell of Wells Fargo Securities.

Good morning, Matt.

Good afternoon, gentlemen. Just a couple of very quick follow-ups, it sounds from your answers to Matt's -- Matt O'Connor's prior questions that you have not really incorporated much in the way of increased provisions against the oil exposure that you have or the energy exposure you have in the fourth quarter provision. Is that a reasonable assumption?

When you look at our fourth quarter provision, we're not saying any adverse impacts yet in that part of the portfolio that would be included in the quantitative part of our allowance methodologies. In the qualitative part, obviously any market uncertainties in oil and gas being one of those, is included in that quantitative analysis and there would be some consideration given to the fact that oil prices have dropped, but an explicit special reserve we did not do that. We let our methodologies process the way they are built to be modeled and we believe we have taken the right stance on that.

And just following up on that exposure, have you said publicly what the losses have been back in other periods of declining oil prices or perhaps what the non-performing asset levels rose to just to get a sense of sort of what the potential risk might be?

We have not, but Barb Godin, our Chief Credit Officer will have this. Now I'll ask Barb to make a few comments.

We can't go back and actually reproduce those numbers at this point in time, but again going from experience those numbers were very small. Again being very active in that space, as we mentioned, we've been doing this for 40 years and so we have run through some ups and downs and know it has not impacted our books significantly.

Okay. And then just finally David, a question on cards, you sound quite optimistic about your ability to continue to drive card acceptance and card usage from your customers and the branches, did I get the sense from your comments that you're thinking about potentially broadening the offering of those cards outside the branches and possibly outside your footprint?

Our focus really has been our customer base. If you -- and the reason for that is our penetration on our customer base has been right at 16%. We expect that to be in the lower 20s intact and so that's really where our focus has been. We have from a strategy standpoint thought about expanding outside of our customer base and we think right now spending the time to again serve our existing customers is probably the best route to go at this time, but it is on the drawing board for us.

Well we think that's progress. We've looked at different strategies, but again cross-selling our current customer base continues to be our number one priority and we've got better at executing on that strategy. We've had -- our results continue to build momentum. We've got more active cards, more card transaction and had more success in penetrating our book and in the past and so we're encouraged by our early results and that remains our strategy.

Makes sense. Thank you for the color.

Your next question comes from Chris Mutascio of KBW.

Good morning, Chris.

Good morning. Thanks for taking my question. David, just a quick question, your positive operating leverage commentary clearly implies pretax, pre-provisioning earnings growth in '15, over '14. But I guess can you achieve pretax earnings growth if in indeed the provision expense inevitably reflects off the low level in fourth quarter?

Well, our goal is to constantly grow our earnings for our pretax and after tax basis. So we're working hard to grow all areas revenue, control our expense base and we think net, net we can do that from an operating leverage standpoint, but we haven’t given explicit guidance as to what that pretax move will be. As we go through the year, we will give you a little more clarity on that, but we're going to stick to positive operating leverage right now is the guidance.

Okay. And then just one follow-up on the positive operating leverage guidance, that includes the branch closing cost in both fourth quarter of '14 and the potential for another $15 million first quarter '15? Is that correct?

It includes the benefit of having that out in the expense run rate, but the actual charge, the $10 million and the $15 million are adjusted out.

Okay.

So it does not include those.

Great. Thank you very much.

Your next question comes from Vivek Januja of JPMorgan.

Hi, thanks for taking my questions. Couple of them. Oil and Gas. Can you just talk about your originations during the course of 2014 and also how much do you have in commitments over and above 3.35 or 3.35 billion of academics?

The answer to your first or second question is commitments. We currently have 6.9 billion in commitments to the sector and 3.4 billion outstanding which represents about 4.4% of the portfolio. Further originations we grew both around $200 million year-over-year. It was fairly diverse group of originations both in the E&P sector and in auto services driven through the cross both states in terms of geography and through our Regions Business Capital Group which has strong relationships with private equity sponsors in that space and have pretty good year in originations as well.

So would you say then - chunk of the growth came from the private equity related loans?

I don't have the mix exactly. So we’ll say that those relationships were certainly important to some of the growth that we generated through our Regions Business Capital Group.

Okay, thanks. And one more question qualitative reserves you mentioned earlier, what is the amount of - what percentage of your loans are - what percentage we had loan last reserves qualitative reserves?

We have not disclosed that.

But is that something that's changed in the fourth quarter? Did it go up, down, flat any context around that?

Relatively stable.

All right. Thank you.

Your next question comes from Michael Rose of Raymond James.

Good afternoon. Just two quick ones from me. What is the reserve on the loan book - on the energy book today and maybe what was it if you know going back to 2009 when we had a similar decline in oil prices? And then just secondarily, what's the expected impact in dollars if you have it around the seasonal FICO costs that you expect in the first quarter? Thanks.

This is Barb Godin. If we look at the energy book we don't have it specifically that way. We do have - we look at very detail and acquire particularly if it’s a non performing loans for good specific reserve. Other than that, we look at it improved loans, so we don't have competitive status, but we can is we feel very comfortable with what our book looks like, again remembering that we do a few things. We do sensitivity analysis on that book. We have a price deck. We do that pretty well in the quarterly basis but the price deck we press it down and then we pick an additional haircut on that. We also do reserve calculations with those 65% advanced rate on our reserved calculations. And last but not least we also have hedging on that book. So all in we feel pretty good about that book but again getting back to your comments both specific reserves or reserving we don’t have them so we can provide you.

Michael I'll take the second question. So, if you look at prior year it should be relatively consistent for file the taxes and 401-K match and those kinds of things that happened in the first quarter. They are almost up around $12 million and then remember that our pension cost increased about $6 million for quarter that you'll, that’s new.

Okay. That's helpful. And just one more back to the energy book. What percentage of your book is hedged through 2015 and through 2016 if you have that? Thanks.

About 41% through 2015 and an additional 17% I think through 2016.

Great. Thanks for taking my questions.

Your next question comes from Gerard Cassidy of RBC Capital Markets.

I apologize if you’ve addressed this question, I need to jump off. If you look at your total energy portfolio, what percentage of that would be designated as leverage loans?

We currently have seven leverage loans in our energy portfolio. Five of those are managed through our Regions business capital group and so it would be a modest percentage of our total exposure.

Okay. And is there any talk, I haven't heard this, but has there been any talk amongst the OCC or the regulators to do for the industry and not just for you folks of course, targeted energy credit exams this year.

We haven't heard of any that -- I would believe that they probably would just given the where things are in the energy sector, we would not be surprised. The other comment I would also make on the leverage loans we just ask that question is recognizing that definition of leverage within the overall space and how we define leverage is different. So typically as you know, leverage is defined as non-investment grade and again that is -- that's what banks our side do as we land in the non-investment grade space.

And then finally and again I apologize if you've addressed this, as you of course is very, very strong. Do you guys get a sense that there will be at some point in the future where the regulators will allow you to reduce that to a more manageable level, so that your return on equity can obviously go higher?

Yes, Gerard, this is David. There hasn’t been any explicit guidance coming from regulatory supervisors on that. I think it's incumbent upon us to ensure we have an appropriate amount of capital for the risk in our business. We clearly think we do. We think we have capital that can be more effectively deployed and I weren’t on the call, we talked about easing that capital really for first off getting our dividend up to kind of our more consistent with expectations. Using that capital to grow organically using excess capital to the extent that there was an acquisition to pay cash for whether it be a bank, non-bank and they are returning in appropriate amount of capital to our shareholders. We think we have the kind of capital position and we think we have a really good understanding of the risk attended to our company and therefore, we think over time you will see those drift down. Where the terminal amount is, is everybody's guess. And so I think we need not get ahead of ourselves on that, but I do think capital levels do rationalize over time. The amount of time -- when that is, is anybody's guess.

I appreciate that. Thank you. And one follow-up to your comments David, on acquisitions, not to say that you're looking at anything right now, but some of the bigger banks have commented that the BSA/AML internal reporting has been a obstacle to getting deals announced. How do you guys feel about your BSA/AML condition in terms of your systems? Obviously M&T is still struggling to close its deal that was announced over two years ago because of BSA/AML issues. Can you give us some color on where you guys think you stand in that arena?

Well I think ensuring that you have all of your key processes in order to participate in acquisitions is important. BSA/AML has been imported to our country for a long time. It will continue to get the time and attention and it's incumbent upon us to have all the controls in place. We invest an awful lot of time and attention in ensuring that and we feel like we have a very robust program relative to BSA/AML and -- but that mean we can't stop here. We have to continue to invest and continue to be diligent in terms of those processes, but we think we have a solid program today.

Again, thank you.

You bet.

This concludes the question-and-answer session of today's conference. I'll now turn the call back over to Mr. Hall for closing remarks.

Thank you very much. We appreciate everyone's participation today and thank you for your questions and we'll stand adjourned.