Regions Financial Corporation (RF) Q1 2016 Earnings Report, Transcript and Summary

Good morning and welcome to the Regions Financial Corporation's Quarterly Earnings Call. My name is Paula and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to Ms. Dana Nolan to begin.

Thank you, Paula. Good morning and welcome to Regions first quarter 2016 earnings conference call. Participating on the call are Grayson Hall, Chief Executive Officer and David Turner, Chief Financial Officer. Other members of management, including John Turner, our Head of Corporate Banking and Barb Godin, Chief Credit Officer are also present and available to answer questions. Throughout the call, we will be referencing a slide presentation. A copy of this presentation as well as our earnings release and earnings supplement are available under the Investor Relations section of regions.com. Also let me remind you that during today’s call, we may make forward-looking statements which reflect our current views with respect to future events and financial performance and you should be mindful of the risks and uncertainties that can cause actual results to vary from expectations. These factors are described in the cautionary disclaimer regarding forward-looking statements in our earnings release and in other reports we file with the SEC. I will now turn the call over to Grayson.

Thank you, Dana and good morning and thank you everyone for joining our call today. First quarter’s results reflect a strong start to 2016 and demonstrate that we are successfully executing on our strategic plan. We are pleased by our continued progress, despite a challenging and somewhat volatile economic backdrop. For the first quarter, we reported earnings from continuing operations of $257 million, and earnings per share totaled $0.20. These results reflect growth in total revenue, lower adjusted expenses and positive operating leverage. Importantly, we continue to deliver results in areas we believe are fundamental to future income growth by expanding our customer base as we grew checking accounts, households, credit cards and wealth accounts. A key driver to this success is our ability to leverage our approach to relationship banking. We are pleased that once again, we’ve received external recognition for building a strong customer experience at Regions. This quarter, both the Temkin Group and the Greenwich Associates recognized Regions for providing industry leading customer experiences. Looking at our results further, we achieved total average loan growth of 5% compared to prior year. Consumer lending is off to a solid start as loan balances exceed $30 billion. We have introduced new initiatives to expand our consumer product offerings, which led to year-over-year growth in consumer lending of 5%. Our new point of sale initiative within indirect lending led this growth with more loans that doubled over the prior year, exceeding our internal expectations. We do expect continued growth in this product category in 2016. Indirect auto lending continues to grow as balances increased over 9% compared to last year. Credit card balances increased modestly as we remain focused on expanding a number of customers that carry and utilize Regions’ credit card and we have experienced success on this front as our penetration rate of deposit customers has increased 140 basis points from one year ago and now stands at 17.5%. We’re also focused on expanding our direct consumer lending capabilities as we recently announced and agreed with Avant. This arrangement allows us to offer additional alternatives to create stronger digital experiences for our customers and prospects. We’ve also had an encouraging quarter in business lending, with total average loans up 4% over the prior year. All of our business lending areas, corporate banking, commercial banking and real estate banking achieved growth over the prior year. Total adjusted revenue increased 7% over the first quarter of 2015, reflecting effective execution on our strategic plans to grow and diversify our revenue. Investments within capital markets are clearly demonstrating progress as capital markets income more than doubled versus fourth quarter of ‘15. Importantly, our efficiency initiatives are allowing us to sub-fund these investments as adjusted expenses declined 2% from the previous quarter. We ended the quarter with an adjusted efficiency ratio of 60.6%, an improvement of 280 basis points compared to the fourth quarter of 2015. With respect to the current environment, we continue to expect the US economy to demonstrate progress but at a measured pace. The global and macroeconomic environment remains a concern but we do expect modest improvement. Low oil prices continue to create challenges for certain industry sectors while benefiting others. Consequently, we continue to closely monitor our direct energy portfolio as well as portfolios subject to contingent. As expected there continues to be downward migration in risk rates, we are supporting and working closely with our customers as they take appropriate and constructive actions to lower costs, reduce debt and improve liquidity. We do anticipate continued stress in the sector and will make appropriate adjustments. Additionally, we have established appropriate energy reserves which now stand at 8% of our direct energy exposure. But more broadly excluding energy in related industries, we do see continued favorable credit quality in the wholesale and consumer portfolios. Turning to capital deployment, as you are aware, we submitted our capital plan earlier this month, we continue to pull over capital effectively through organic growth and investing strategically in initiatives to increase revenue or reduce expenses. But we also will return an appropriate amount of capital to shareholders. In closing, our solid first-quarter results provide evidence that we are successfully executing our strategic plan with a continued commitment on our three primary strategic initiatives which are grow and diversify our revenue streams, practice disciplined express management, and effectively deploy our capital. These are all integral to the successful execution of our strategic plan and we are on track to deliver our long-term performance targets. With that I’ll turn it to Dave who will cover the details for the first quarter.

Thank you and good morning everyone. Let's get started with the balance sheet and a recap of loan growth. Average loan balances totaled $82 billion in the first quarter, up $750 million or 1% from the previous quarter. Business lending average balances increased to $51 billion, up 1% from the previous quarter and 4% over the prior year. Commercial loans grew $373 million or 1% was driven by corporate banking and real estate banking. Specialized lending also contributed to loan growth driven by new relationships in technology and defense, restaurant as well as an increase in line utilization in energy and natural resources. Commitments were flat linked quarter and line utilization increased 110 basis points to 47.8%, primarily driven by energy lending which increased from 53% to 56%. Total production declined 26% from the prior quarter and we are beginning to experience softer pipelines in some areas due to less optimistic and uncertain macroeconomic conditions. However, consumer lending had another strong quarter as almost every category experienced growth and total production increased 3%. Average consumer loan balances were $31 billion, an increase of 1% over the prior quarter and 5% over the prior year. And direct auto lending increased 2% and production increased 4% during the quarter. Other indirect lending which includes point-of-sale initiatives increased $76 million linked quarter or 15% as production increased 120%. Now looking at the credit card portfolio, average balances increased 2% from the previous quarter and our penetration into our existing customer base currently stands at 17.5%. Mortgage loan balances increased $75 million and total home-equity balances were relatively flat, up $8 million from the previous quarter. Let's take a look at deposits. Average deposit balances increased $262 million from the previous quarter and increased $2 billion over the prior year. Deposit costs remained at historically low levels at 11 basis points and total funding costs remained low at 28 basis points. With respect to deposits, we are primarily core deposit funded with 67% of our deposits coming from consumer and wealth deposits. Low cost deposits make up 92% of our total deposits and approximately half of our deposits come from cities with less than 1 million people. Additionally, 50% of our deposits are from customers with $250,000 or less in their account. This is why we continue to believe our deposit betas will be a competitive advantage for us as rates rise. So let's see how it has impacted our results. Net interest income and other financing income on a fully taxable basis was $883 million, up 3% from the fourth quarter. However, excluding the impact of the fourth quarter lease adjustment, net interest income and other financing income on a fully taxable equivalent basis increased $12 million or 1% for the quarter and increased $51 million or approximately 6% compared to the prior year. Higher loan balances and increases in short term rates along with items that are unlikely to repeat including lower premium amortization and higher dividend income related to trading assets were the primary drivers behind the linked quarter increase. This increase was partially offset by lower dividends recognized on Federal Reserve stock, higher debt interest expense and one less day in the quarter. The resulting net interest margin for the quarter was 3.19%. Excluding the impact from the fourth quarter lease adjustment, the net interest margin increased by approximately 6 basis points. The 5 basis points of this increase was attributable to the impact of day count during the quarter and the previously mentioned items that are unlikely to repeat. Total non-interest income increased 1% on an adjusted basis from the fourth quarter driven by growth in our revenue diversification initiatives as we successfully executed our strategies. In particular, capital markets income was strong on a linked quarter basis, up 46%. This was driven by contributions from the recently expanded mergers and acquisition advisory services group. Additionally, revenue was bolstered by fees generated from the placement of permanent financing for real estate customers as well as syndicated loan transactions. And due to the nature of the business, and the fact that we are building out our capabilities, capital markets income will likely experience some movement from quarter to quarter. However, we are very pleased with the impact our added capabilities are producing. Wealth management also experienced a strong quarter despite a challenging market environment. Income was up 6% quarter-over-quarter due to higher seasonal insurance income and impact from recent acquisitions. Investment services income was up 7% attributable to an increase in annuity sales. However, investment management and trust fees were negatively impacted by market conditions. Seasonality and posting order changes that went into effect in early November last year impacted service charges which declined 4% from the fourth quarter. Now, looking ahead, we expect modest growth in service charges as we benefit from last year's 2% checking account growth and continued account growth in 2016. In addition, seasonal declines in consumer spending drove the decline in card and ATM fees for the quarter. However, on a year-over-year basis, card and ATM fees increased approximately 12%. Other non-interest income included reductions to revenue of $12 million reflecting market decreases in relation to asset sale for certain employee benefits which is offset in salaries and benefit expense. Quarter-over-quarter, mortgage revenue was up 3%. Additionally, in the quarter, we purchased the rights to service approximately $2.6 billion of mortgage loans bringing our total residential servicing portfolio to $40 billion and we will continue to explore and evaluate opportunities to expand our mortgage servicing portfolio. During the quarter we also had a $14 million increase in income related to bank-owned life insurance. This was primarily attributable to claims business as well as a gain on exchange of policies. We expect the run rate going forward will be in the $18 million to $20 million quarterly range. Let’s move on to expenses. Total reported expenses in the first quarter were $869 million. On an adjusted basis, expenses totaled $843 million, representing a decline of $18 million or 2% quarter-over-quarter as we implement our efficiency initiatives. As previously noted, in the fourth quarter of 2015, we announced plans to consolidate 29 branches as part of our strategic plan to close 100 to 150 branches. In the first quarter of 2016, we recorded $14 million of property related expenses, primarily related to the branch consolidation and additional occupancy optimization initiatives. In addition, we incurred $12 million of severance expense related to staffing reductions. Excluding the impact of severance charges in the current and previous quarter, salaries and benefits decreased $9 million or 2% linked quarter. And this decrease was primarily due to a 2% reduction in staffing as well as lower expenses attributable to market decreases in relation to assets held for certain employee benefits that I just discussed. This was partially offset by seasonal increases in payroll taxes of $12 million and increased incentives related to fee-based revenue growth. Professional and legal expenses declined primarily due to a favorable legal settlement of $7 million, which is not expected to recur going forward. FDIC fees increased $3 million from the previous quarter and as previously disclosed, we expect FDIC fees to increase by approximately $5 million on a quarterly basis when the FDIC assessment surcharge is implemented. Our adjusted efficiency ratio was 60.6% in the first quarter driven primarily by growth in new revenue initiatives, which have been funded by expense eliminations. Our plan to become a more efficient organization is well underway. Let's move to asset quality. Total net charge-offs decreased $10 million to $68 million and represented 34 basis points of average loans. The provision for loan losses was $113 million and our allowance for loan losses as a percent of total loans was 1.41% at the end of the quarter, which compares to 1.36% of total loans outstanding at the end of the fourth quarter. The increase in the allowance is primarily attributable to an increase in direct energy related loan reserves. Total loan loss allowance for the energy loan portfolio was 8% at the end of the first quarter compared to 6% at the end of the fourth quarter. Beginning primarily in the third quarter of 2015, low oil prices began to drive the migration of a number of large energy credits into criticized loans, primarily in the exploration and production and oil field services sectors. Continued low oil prices prompted further migration of some of those credits into classified loans this quarter. As a result, total business services criticized and classified loans increased $254 million, including an increase in classified loans of $703 million and a decrease in special mention loans of $449 million. Total non-accrual loans, excluding loans held for sale, increased $211 million from the fourth quarter. At quarter end, our loan loss allowance to non-accrual loans or coverage ratio was 116%. Additionally, troubled debt restructured loans or TDRs declined 2% from prior quarter. Now, regarding our energy portfolio, while oil prices remained volatile, exposures remained manageable. Should prices remain in the $30 to $45 range, we continued to expect losses in the $50 million to $75 million range in 2016. And should oil prices average $25 per barrel through the end of 2017, we would expect incremental losses in the $100 million range. In addition, weakness in energy, mining and metals, and agricultural are starting to put some pressure on certain commercial durable goods companies. However, we believe our allowance for loan losses is adequate to cover inherent losses in our loan portfolio. Given where we are in the credit cycle and fluctuating commodity prices, volatility and certain critical metrics can be expected especially related to larger dollar commercial credits. Let's move on to capital liquidity. During the first quarter, we returned $255 million to shareholders including the repurchase of $175 million of common stock and $80 million in dividends. Under Basel III, the Tier 1 ratio was estimated at 11.6% and the common equity Tier 1 ratio was estimated at 10.9%. On a fully phased-in basis common equity Tier 1 was estimated at 10.7%, well above current regulatory minimums. So let me provide an overview of our current expectations for the remainder of 2016, which remain consistent with those we delivered at our Investor Day last fall and also on our earnings call in January. We expect total loans to grow 3% to 5% on an average basis relative to fourth quarter 2015 average balances. Given current softer market conditions in the commercial space, we could track towards a lower end of that range. Regarding deposits, we continue to expect average deposit growth in the 2% to 4% range compared to the fourth quarter of 2015 average balances. Now commensurate with loan growth projections, we expect net interest income and other financing income to increase 2% to 4% on a full-year basis. Should we experience no additional rate increases, we expect to be at the lower end of that range. In addition, the higher end of the range is more challenging due to the lower dividends on the Federal Reserve stock. Now with respect to the net interest margin, we will likely experience modest pressure if rates remain low. However, further increases in short-term rates will serve to stabilize the margin. As a result of our investments, we continue to grow adjusted non-interest income and expect that in the 4% to 6% range on a full-year basis. We will continue to make investments in 2016. However, our plan to eliminate $300 million of core expenses is underway and we expect to achieve 35% to 45% of that number in 2016. Therefore, we expect total adjusted non-interest expenses in 2016 to be flat to up modestly from the level in 2015. We expect to achieve a full-year adjusted efficiency ratio less than 63% and positive adjusted operating leverage in the 2% to 4% range in 2016. We also continue to expect net charge offs in the 25 to 35 basis point range. However, given the volatility and uncertainty in the energy sector, we would expect to be at the top end of that range this year. In closing, the first quarter was a strong start to the year and we are encouraged by our results. The investments made in 2015 and before position us well for 2016 and beyond and we look forward to updating you on our progress throughout the year as we continue to build sustainable franchise value. With that, we thank you for your time and attention this morning and I will turn it back over to Dana for instructions on the Q&A portion of the call.

Thank you, David. Before we begin the Q&A session of the call, we ask that you please limit your questions to one primary and one follow-up in order to accommodate as many participants as possible this morning. We will now open the lines for question.

[Operator Instructions] Your first question comes from Michael Rose of Raymond James.

Maybe we can just start on the energy portfolio, can you give us a sense for kind of how much, how far you’re through the kind of the spring borrowing base redetermination, I assume you’re just kind of in the earlier stages. And now that we’ve seen the rebound in oil, I mean, how confident would you be if oil stayed around these levels that you might come in closer to the lower end of your kind of charge-off range for the year, about $50 million to $75 million related to energy? Thanks.

Michael, it’s Barb Godin. I’ll go ahead and answer the question in terms of our spring redetermination. We’re roughly 25% of the way through and so far to date, we’ve seen roughly 20, perhaps 25% reduction in the oil base is our expectation and in terms of the guidance that we’ve given relative to charge-offs for the rest of the year, again, we’ve run our models. We feel very good about where our numbers are. We do still anticipate that there will be volatility in the oil prices. And again, that’s the reason that we’re looking at $25 a barrel over the next two years, which would again create $100 million of incremental loss we think next year and $50 million to $75 million this year.

Michael, we’re continuously working with our customers and monitoring their financial situations as they’re trying to rationalize their expenses, their spending base as well as trying to restructure their capital base. Obviously, if we saw stability of oil prices at this low, it will be a benefit to those customers, but as we go through our credit analysis, we aren’t making that assumption. We continue to stress our portfolio to what we think the possibilities of the volatility are and so if it turns out to be stable at a higher point, then I think that’s a good day for our customers and a good day for us, but we aren’t necessarily trying to anticipate that in our credit review process.

Okay. And that’s helpful. And then maybe as a follow-up, it looks like the unfunded commitments were down about $150 million quarter-to-quarter, are you guys actually trying to grow new credits at this point and where should we expect maybe that unfunded balance to close out over the next year or so? Thanks.

Again, Michael, it’s Barb. As we look at the unfunded balance, you’re right, it was down $165 million. A lot of that was paid down at the lines. They were a handful of draws that we saw, not that many and there was a little bit of new business that was primarily in our midstream section. Midstream continues to perform well and even in a down industry, there are some very good customers out there and the credits that we put on the books, those are four credits, three of them in fact, which is existing relationships. We knew those customers very well. One was a new customer that we’ve been quoting for a while. Very pleased with the quality of the credits that we’ve done. We don’t see a lot of additional credit, but again, we will continue to look for opportunities in the segment, if they present themselves and if they meet our credit quality guidelines.

And Barb, if you could just comment on level of commitments year-over-year and where we see that going forward?

Certainly. We started January of ‘15 with commitments at $6.9 billion and we right now sit at $4.8 billion. So we’ve come down a fair bit on commitments. If I do the same comparison for you on outstandings, those outstandings went from $3.3 billion down to $2.7 billion at that same timeframe. So again, as we think about utilization, what happens as you know is as we do our borrowing base redeterminations that reduces our outstanding commitments and just as a general rule of thumb for every $100 million that we reduced at our commitments, that will naturally, just favor to your math, increase your utilization rate by 85 basis points.

Okay. That’s really helpful. And maybe just one follow-up for me David, just to clarify, I think you said that there is no more rate increases this year that you’d expect to be at the lower end of the NII guidance, did I hear that correctly?

That’s correct.

Okay. Thanks for taking my questions.

Your next question comes from Bill Carcache of Nomura.

Good morning. Thank you for taking my question. I wanted to follow-up on some of your -- the comments you just made, can you share with us what kind of utilization rate assumption is implicit in your current allowance and the methodology that gets you comfortable with that?

Yeah. We don’t really use a utilization rate per se. What drives our allowance is our risk rating process. The risk rating process takes into account all the information that we know about the customer, what’s going on in the industry. Looking at their financials deeply and again, yes, we do refer to what they would have for example in their borrowing base, what our petroleum engineers say about it. So again, we don’t have a specific number that we use, what I can tell you about the draws and the utilization is as we look at the energy and production customers, the E&P customers, again they are governed by borrowing base, so we see some natural ability for draws not to happen there. And then as we look at our oil field services customers, we have a number of covenants, a number of leverage covenants that are there. We also have anti-cash hoarding provisions that we have been putting in for the last several months as accounts have been coming up for renewal. So again that will naturally reduce their ability to draw on those lines.

I see. That’s helpful. So under this stress scenario that you guys lay out, where you show that if oil prices average $25 a barrel through 2017, the expectation that will result in additional $100 million of charge-offs in that kind of stress environment, it would seem that there may be more draws on existing unfunded lines, but I was trying to understand to what extent that was being captured in the methodology, but it sounds like the increase in draws under stress scenarios is not something that is captured. So maybe if you could just give a little bit of commentary on that.

Yes, there is a difference between how we reserve and how we do our stress testing. And on our stress testing, we are actually looking at our entire committed book and reviewing that and finding all the various stresses against the committed book.

Okay. Thank you very much.

Your next question comes from Paul Miller of FBR and Company.

Good morning, Paul.

Hey, guys. This is Tim Hayes for Paul Miller. First off, in regard to your Avant relationship, where do you see annual originations trending there and where exactly on the balance sheet of those loans being held?

So as you have seen, we have invested in a number of digital partnerships to try to improve our offerings to customers, predominantly consumers and small businesses in the digital space. We have announced a partnership with Avant. That partnership while communicated will not launch until third quarter. So we have not provided any forecast on revenues and originations to the market at this day.

Understood. And then you had just mentioned that barring any type of interest rate hikes this year that you will stay at the low-end of your NII guidance. Where do you see NIM tracking barring any hikes, are you able to sustain the current level of your abnormality [ph] see any type of deterioration?

Yes, thanks. So we had a couple of things in the quarter on my prepared comment, take out the end piece of that, and we had some things won’t repeat. So we said five points of that really are things that you won’t see going forward. After that, if rates continue to stay where they are right now, we will see our net interest margin continuing to decline, so we do need some rate lift to stabilize the net interest margin. As most of us in the industry have been focusing on NII growth, it’s really the guidance that we have given you that 2% to 4% and we think is more meaningful, but margins will come under pressure if rates stay here.

Understood. Thanks for the color.

Your next question will come from Christopher Marinac of FIG Partners.

Thanks, good morning. I want to get back to the energy commitments and I was curious if the case of the decline in the commitments could accelerate just naturally as the business flows for the rest of the year?

Again, it’s Barb, and again, if you do just a back of the envelop and assume that 25% reduction in the borrowing bases, again, that would naturally translate into roughly a $1.2 billion in reduction on existing commitments taking them down from 4.8, somewhere down to the 4.5, 4.6 range, so yes, it will reduce.

Okay. And then Barb, is the ongoing SNC exam going to influence the criticized numbers come out had we seen a lot of that change already this last quarter.

Yes, we have fully incorporated the Shared National Credit exam into our results this quarter.

Okay. Very good. Thank you.

Your next question comes from David Eads of UBS.

Hi, good morning. You made some comments at the beginning about seeing a little bit of softness in from commercial side in terms of demand for loan. I was curious if you could flush that out a little bit. Is that related – you also talked about some pressure on some of the ancillary energy companies, is it related to those type of companies or more broad based and are there any specific areas where you are seeing some softening loan demand?

I think if you look at what we’ve started seeing in the fourth quarter and certainly carrying into the first quarter, while we’ve seen good growth in balances in our wholesale book and our consumer book, we have seen some softness in demand when you look at our sales pipelines for wholesale credit. Clearly the industry segments that are energy related are energy dependent in particular metals, minings and assorted commodities. Those industry segments obviously are very soft, but we’ve seen a general slowdown or softness, if you will, in wholesale credit demand. We don’t know if that is a sustainable trend or whether that’s sort of a first quarter anomaly, but at this point in time we were just signaling that we see demand just a little softer, still very competitive market and we are still able to find ways to serve our customers and extend credit. We feel good about our level of engagement with our customers, but I think given the market volatility since the first of the year, we are just seeing customers be a little bit more reserved, if they will, in terms of accessing credit facilities.

All right, thanks. And then maybe just I am curious if you have any color on – you’ve got the final DOL fiduciary rule, if that’s going to have any real impact on your wealth management business? I am just curious whether – how that interaction kind of plays?

Well, I mean, I think it’s a great question and one that as the rule has come out, out team is working on, but I think the positive news is we’ve been working under a fiduciary model in our wealth management group for a very, very long time. We are very familiar with the fiduciary model and comfortable with it. We feel like we know how to operate in that environment. We do think that given the rules, we’ve got a year to implement rules as they proposed and our teams are working closely with that, but given the history and the makeup of our book, we think it’s a very manageable process for us.

All right, thanks.

Your next question comes from Stephen Scouten of Sandler O'Neill.

Hey, guys, good morning.

Good morning.

Question for you on the kind of the efficiency ratio and the continued operating leverage. I mean, obviously you had a great quarter here in 1Q and well positioned for the rest of the year, but can you kind of give me some thoughts about the – on the sub-63% guidance relative to how you are already at the kind of 60.6% level today and what the trends might look like?

Yeah, it’s great question. So we want certainly guidance factor this just under 63% as we shared with you before because we are continuing to also make investments to grow revenue. There is timing differences that can get in our numbers. If you read our supplement carefully, you will see there is some timing differences there as well. We are very pleased with the progress we’ve made on controlling our expenses in this first quarter and see that continuing throughout the year and frankly for years to come as we have $300 million expense program. But remember the point of that is not just to improve efficiencies, it’s really to make room for the investments we want to make to continue to grow and diversify our revenue steam and you will see continued investments there. There is some new things like our M&A advisory group that just came onboard in the fourth quarter. They had a pretty solid first quarter as we mentioned. We expect that to continue to grow and you will see their revenue growth, but you will see expenses associated with that business continue to grow as well. So we think it is more appropriate to go back to the 63% in the last efficiency ratio versus leveraging the 60.6%.

Okay, that makes a lot of sense. Thanks. And then maybe one follow-up on the NIM conversation, so if I understand it properly, we are kind of using maybe 3.14 as a real starting point as we look into the subsequent quarters, I know you're trying to focus more on NII but as I look at that NIM, I mean do you think that could be a 2 to 3 basis points a quarter kind of compression at higher rates?

Yeah I think so, you start point is fair. So there are five points in there that we want to reset down from 3.19 to your 3.14 number. And there it's really kind of rate depended, I think if we stay at low rates, you’ll see that coming down some. If you get an increase maybe that stabilizes a bit. So I think you'll have margin pressure unless we get the move - get a move sometime in 2016.

Your next question comes from John Pancari of Evercore IS.

On the color that you gave around the NIM this quarter and some of those items, on the premium am, I just want to if you can clarify that you know the tenure was down through the quarter and mortgage rates saw a little bit of that. So how do you actually see lower premium am, I would think it would be higher?

Well it's a little bit of, John stated, there is little bit of a lag effect there, you’re right we actually saw the other way half our premium amortization was a little lower in the first quarter than it had been in the fourth quarter, so to the tune of about $5 million. And that's as we see the tenure drop, you would expect more activity coming through in the second quarter and more premium amortization and that's part of what we are trying to signal that won't recur from an NII standpoint. So you have a $5 million, $7 million roughly of NII benefit in the first quarter, all things being equal that you won't see in the second quarter.

Then secondly, on the loan loss reserve for energy, I know you gave us the direct energy reserve of now it's 8% versus 6% before. What is the energy reserve for the total energy book, so direct energy and the indirect, what is the reserve for that because you gave us the criticize for that but not the reserve.

And we don't reserve it that way, again they fall into different categories, so as we look at both the individual customers et cetera, they roll up differently, don't have that detail but remember that the reserves that we have in total is available to absorb all loan losses irrespective of if they were in energy or not.

And then lastly, on expenses just want to see if I can get a little more color on the comp expense this quarter came in lower than expected and just want to see if you can give some color on the outlook there. Thanks.

Yeah, so our comp expense was down even though we had favorable taxes, there are some things that as I mentioned we are continuing to make investments. And I do think that we have our marine increase that happened kind of mid-quarter, we have our certain incentive grants, they are long-term grants that start in the second quarter but you will see expenses coming through on that too. So I think that we are off to a good start, we are down 538 full-time equivalents start to finish in the quarter. You’ll see some run on benefits because all then happened January 1. But, you should see us, you don’t see that pick up a bit even though we have favorable tax benefit that won't repeat. We do have some investments and what I mentioned on the compensation increases that will come through in second and later quarters.

And then related to that, sorry one more thing just around, I wanted to get your updated thoughts on operating leverage for the full year given your NIM expectation and spread revenue expectation that you mentioned but also what you just said here around expenses where they're trending?

So we are guiding you to 2% to 4% operating leverage. I think if rate stay flat and we have NII close to that 2 or below or end of the range that’s a big driver of our operating leverage. And so you would expect to be at the lower range on operating leverage. We feel pretty confident that we’ll be within that, I know we are well ahead of that range in this first quarter but we think it's more appropriate to guide you towards the 2% to 4%.

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

Hi. This is Rob from Matt’s team. I was just curious how, have you guys disclosed how much energy charge-offs were this quarter, did you guys take any?

Yeah. This is Barb again. We had no energy charge-offs this quarter.

Okay. So as we think about the $50 million to $75 million of losses for the rest of the year, any additional granularity you can give around what segments you expect those losses to come from and timing of those losses?

Yeah. I would primarily see the losses coming from by and large the oilfield services segment. The E&P segment, we know our collateral is, it doesn’t go bad on us, not like it’s been and is in a truck that we have to worry about. And again these are customers that we’ve worked with for a long time and so we’re going to continue to work with those customers. Some of the oilfield services customers are getting pressure, getting squeezed as the E&P customers reduce their CapEx, reduce their cost structure. So that’s really where it’s coming from.

Got you. And just secondly, I was wondering if you can give an update on credit trends you’re seeing in the energy heavy markets, Texas, Houston, Louisiana?

In general, in terms of what we’re seeing there, I’ll start with Texas. Texas, in particular Houston is pretty well diversified. We’ve got some information as to how all breaks out in the supplement as well for the four gulf states but we’re seeing good things in Texas still, things aren’t as robust as they were, but they’re not doing badly. On the consumer front, we’re really not seeing much. We’re actually looking at all of our consumer portfolios and our customer assistance programs in particular to say, are any customers calling relative to being dislocated from their unemployment or having an issue because they’re either in the energy sector or things such as restaurants and they go to a restaurant and the restaurant business is now down, because of people in the energy sector not going as often. We have seen virtually things are stable, since the beginning of the year, we’ve had 39 customers across all of our states calling, saying that they’re somehow tied to the energy sector and that they’re looking for some customer assistance and this is primarily around the auto sector and again, that is up probably maybe 1% over what we would normally assume.

Okay, thanks.

Your next question comes from Ryan Nash of Goldman Sachs.

Good morning, guys. Maybe I can follow-up a little bit on the last question, Barb, you talked geographically, but I just wanted to ask a little bit of the question you said earlier about seeing [indiscernible] metals and mining and agriculture and putting some pressure on durable goods companies, can you just help us understand how big a portfolio that is and if we don’t see a pickup in oil, are you expecting to actually see losses in some of these portfolios or is it more that you’re seeing negative migration?

Thanks for the question. Firstly, in total, the metals and mining is about an $800 million portfolio with durable goods about $110 million and primarily metals just under $500 million, $480 million and we’re seeing some pressure in terms of migration into other asset classes. And again that’s tied, some of it to energy and as I think of customers who build specifically manufacture the pipeline, those customers clearly have reduced demand. Of course, you’ve got the pressure because of the strong US dollar and the pressure of what’s going on in places like China. So we do see more of that migrating over into the non-past weighted categories. Again, our sense around losses on that still comes back to our overall range of 25 to 35 basis points for the year and that would appropriate the use on that. Our ag portfolio is roughly $800 million as well, primarily in low crops and what we see there again is pressure on those commodities, again given what’s going on globally.

Got it. David, maybe I can ask a question on the non-interest income, if I look in the first quarter, you’re growing at about 10% as a percent of a clip on an annual basis and I’m just wondering given the fact how strong it’s been and the fact that, you’re now articulating service charges are likely going to be up for the year, given customer growth, could we actually see our non-interest income growing at the high end, or maybe even a little bit above again, just given the fact that you’ve done acquisitions, the customer growth is coming in very strong, and there hasn’t been -- there don’t seem to be that many headwinds in terms of the fee income.

Yeah, I think, Ryan, that we have a shot at being at the high end of that. I’ve cautioned you to extrapolate what you are seeing for the full year. I would like to say we could get above the 6%, but we are going to guide to the 4% to 6% right now, because there are certain things, capital market’s revenues have a tendency to move around a bit, just depends on when transactions get closed. So you could see that move somewhat. Mortgage is susceptible to the rate environment as we see. We feel good and second, third quarters are always strong quarters in mortgage. So we feel good there, but you have things like - from a trust standpoint it continues a little bit on where the market goes. And of course we had the bank-owned life insurance, so I think we carved that out. That’s not going to recur. So I think that we feel good about the investments that we made. We feel good about the performance of those investments, but we need – this is one quarter, we need to get few more under our belt before we can call it above the 6%.

Got it. If I could just squeeze in one last quick one, if I look the capital payout was almost 100% this quarter, clearly the stock is trading at or below tangible book value, so I appreciate you wanting to be tactical, but can we continue to return capital at this kind of pace and as you think out over the next couple of quarters assuming if the stock continues to trade in this range, do you think we can get more aggressive from the 2015 CCAR level?

So we’ve made our submission, we can’t talk specifically about what’s in it. But I think if you look at our capital where we are today from capital ratio standpoint, it was an expectation over time that we could expect to move our common equity tier 1 into that 9.5% range. The question is what pace will we have to get there. So if you just think about our payout being in the mid-90s last year and growing our loan portfolio 5%, let’s just call that $4 billion for easy math, that’s about 40 basis points of capital. So do what we are doing right now, we will continue get our capital ratio down and for us we want to make appropriate investments. We understand we trade below tangible book value. It is pretty good investment to buy your shares back which is why we’ve been doing what we are doing and you should continue to expect that we have an appropriate return to our shareholders, although our focus really is to use our capital for organic growth. Our capital is to be used to expand our business to grow new revenue to make investments in technology and process improvements and of course pay an appropriate dividend to our shareholders. And then after that if there is excess capital and earnings and it’s repurchasing share from our shareholder which is what we did last year and you should expect that same approach this year.

Thanks for taking my questions and great quarter.

Thank you.

Your next question comes from Jennifer Demba of SunTrust.

Good morning, Jennifer.

Good morning. You just covered my question. Thank you.

Thank you.

Your next question comes from Geoffrey Elliott of Autonomous Research.

Hi, Geoffrey.

Hello, thank you for taking the question. On the capital markets business, can you give us a bit more color on what drove that doubling in revenues from last year, what the areas are, where you’ve been making investments and how much you think you can continue to grow the business?

Geoffrey, so we made a number of investments over the past couple of years and the most recent one was our M&A advisory firm that we acquired in the fourth quarter last year. They really are just getting going, so they had a little bit of activity in the first quarter that was nice to see. We expect that business to continue to ramp up and grow over time. We had made investments to get a license under the Fannie Mae DUS program for placement of real estate loans and we had a good quarter there as well. Loan syndication, we have built that out a bit by hiring Stifel and that continued to benefit. So capital markets had a very good quarter and as I mentioned earlier is that that can move around on you from quarter to quarter, but what we see from those investments we are very encouraged.

I mean, Jeff, that’s a momentum business. We are very pleased with how they performed this quarter. We obviously feel like we invest a lot in people and product and technology in that space, but today this point, earnings in that business can move around from quarter-to-quarter. But we believe we are on a very positive trajectory and we are continuing to look for opportunities to make more investments in that part of our business. And so we anticipate over time of becoming more and more important to our franchise.

And thinking out longer term, what are the sort of capabilities that you might like to add to that business?

Well, I think what we are going to be careful of is not getting ahead of our sales too much. We have made quite a few investments in capital markets and really have brought on some very talented people, and I think our focus is to continue to execute and grow what we just discussed. I think the purpose of expanding our capital markets is for two primary reasons. One, we want to grow and diversify our revenue and this gives us a chance to grow non-interest revenue. But maybe the most important component of that is we want to be able to bring the entire Regions to our customer to be able to help our customer to succeed. So we have made investments in capabilities that we think can do that. We didn’t have -- our capital markets business has been part of Morgan Keegan for a lot of years and when we disposed of that, we disposed the capital markets opportunity. So we are having to rebuild that and we made the investments to do it by acquiring the talent that we need to have and we want to be careful not to go too fast and like I said, we are encouraged by where we are.

And just to be clear, our focus is on debt capital markets platform, David mentioned, Morgan Keegan. There are a number of things that we used to do that we don’t aspire to do, but I would say that as we think about building our debt capital markets platform with a focus on meeting customer needs, other capabilities are fixed income, sales and trading. Today, we participate in fixed income underwritings. We would like to lead those opportunities. Just as our syndications revenue is growing. As we win more lead roles, we want to build – lead those fixed income underwrites as well, so that’s one capability we don’t have today, we will have hopefully in the near future. Low income housing tax credit is a really good business for us, we would like to have some syndication capabilities as we think about building out our origination and distribution model. And so we see a lot of upside in capital markets and debt capital markets revenue over time. But we will be thoughtful in that regard. We are trying to diversify our revenues across a lot spectrum of services for our customers. And to David’s point, most important part is to build capability to service our customers.

Great, thank you.

Your next question comes from Marty Mosby of Vining Sparks.

Good morning. I wanted to kind of go on the other side of the capital markets equation, which is as you saw the uptick in the revenues, typically that business has corresponding uptick in expenses, which would accentuate to drop that you saw this particular quarter. So just wanted to kind of see if there was any other way that you’re approaching it or was that already embedded in the expense number we saw this quarter?

Marty, what we saw along is we really are trying to focus on expense initiatives, so that not only can we improve the overall financial performance of the company and create positive operating leverage, but we also want to do it in a way that allows us to make investments we need to make in other parts of our business. And as David mentioned a moment ago, we had a substantial reduction in workforce over the last quarter. That’s helped us mitigate a lot of the expense growth, but at the same time, make some of these investments. And I will ask John Turner to expand and get a little more color on capital markets and what the expenses there may hold. I would just say that recognizing that our primary investment is in people and people with significant skillset, so to your point there is cost associated with that. I think we are trying to be very thoughtful about the businesses that we enter and the returns that we get in this business making sure that while we are really compensating our associates, we are also earning a fair return for our shareholders as well and to Grayson’s point, in order to make those investments, we’ve got to reduce expenses elsewhere which we’ve been successful doing thus far.

David, when you said lower expenses associated with liabilities on employee benefits, was that the BOLI impact or was there something else maybe in the pension plan that you made adjustments to that you may have a sustainable benefit going forward and can you put a little number around that, if that is that?

So, Marty, if you go back, I mentioned the non-interest revenue income was down because truck related trading assets associated with certain of our benefit plans, offset to that was your – the expense you are talking about, so it’s virtually a one for one. It’s in the $10 million, $12 million range.

Thanks.

Your next question comes from Chris Mutascio of KBW.

Good morning. Thanks for taking my question.

Thank you.

Hey, David, I’ve just got some follow-up. I just want to clarify couple of things, make sure I have it right. The dollar amount of the, I won’t call non-recurring, but the things you mentioned that benefitted net interest income in the quarter, was that the $5 million to $7 million I think when you are discussing the premium amortization or was it higher than that including the dividend income from the trading assets?

It’s both. The 5% to 7% takes both of those. It’s 4% to 5% on premium amortization, another 2% to 3% on the dividend.

Okay. I kind of backed into it. I think that was the total amount of the two when I looked at the margin. The second one, just to clarify, I think I had this right too. So you are resetting kind of bar if you will for second quarter for those on the margin, so instead of 3.19 maybe you are looking at adjusted 3.14, but any type of margin compression due to the lack of rising interest rates would be off of the resetting 3.14 number, not the 3.19 number?

That’s correct.

Okay, great. Thanks for the clarification.

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

Good morning, Gerard.

Can you hear me now?

Yeah.

Thank you. Okay, great. Thank you, guys. Can you guys share with us what you are seeing in spreads on your corporate loan book or have they – some of the banks have reported that they seem to be stabilizing. Are you guys seeing that in the C&I portfolio or the commercial real estate mortgage portfolio?

Gerard, this is John Turner. We are seeing stabilization in pricing still very competitive market and I would say we are competing more on tenure and structure than we are on price. It has been nice to see some stabilization in pricing over the last quarter or two.

Very good. And then in regards, I just want to go back, I think you guys mentioned about the special mention loans coming down as the energy portfolio has migrated to different classes, was the drop in special mention entirely energy or were there some others that cause that number to decline.

It’s Barb again. Pretty broad based decline, in fact if you look at our delinquencies, 30-day delinquencies were down, 90-day delinquencies were down and action what we did in energy all of other credit metrics would be down as well including our reserve. We would not have built as much reserve, we may – we even had a small release had it not been for us providing for energy.

I see. And were the actions you’ve taken in energy this quarter as a result of the Shared National Credit exam as well as your own internal observations or what’s going on with the portfolio?

As we mentioned, we did incorporate the Shared National Credit exam, but again looking at these credits on a daily, weekly, monthly basis, we are in constant contact with our customers. Our portfolio is very granular. Between oil field services and the E&P customers there is less than 80 customers in total, so we are staying in constant contact with them, working with them and real understanding of what’s going on with them and that’s one of the reason that we moved credits into various classifications as we’ve got better information from them.

Great. And just last question, I apologize if you have addressed this already. In terms of the loans that went into non-performing status, the energy loans, what percentage of those loans were part of syndicated credits were you were participant versus loans that you may have originated on your own?

That would be the majority of them. I don't have an exact percentage for you but it would be the majority of them.

Your next question comes from Peter Winter of Sterne Agee.

When I look at the balance sheet, it tends to be more levered to the long end of the curve then most of your peers. And with the tenure really coming down so much during the quarter, I’m just wondering if the tenure were to move back up, would that help stabilize the margin. And then secondly, is there anything you can do in terms of like remixing the balance sheet to be a little bit more reliant on the shorter end of the curve?

Well, so you’re exactly right, if you look at our sensitivity, our sensitivity is more so to the back end to the long end than the short end. And as tenure does pick back up then you would see that manifests itself in two ways, one better reinvestment rates and two lower premium amortization. And we’re forecasting our premium amortization to go up because of the reduction in the tenure but that can be short lived as you know pretty volatile and we’re positioned exactly where want to be. It was intentional and we think it was the right thing to do for us.

And then just one quick follow-up. On the loan portfolio commercial real estate, the owner occupied that continuous to decline and I'm just wondering if there is light at the end of the tunnel where it starts to flatten out maybe you can get a little bit growth going forward?

Yes, I mean if you look at our loan portfolio, almost every category is now growing and the vast majority of the markets we operate in are showing that loan growth but the one lending segment that's been slow to demonstrate growth has been the only occupied space which is predominantly small to medium size businesses and a lot of that is in amortizing portfolio that’s used to expand plant and equipment. We still not seen that small business owner return to the market with courage to invest and expand. We keep thinking, we’ll reach a pivot point in that business. Production is remarkably strong in that part of the business over the last couple of quarters but you know outstanding on a net basis is still continues to decline. We still think our expectations are that it will pivot at some point but we still think we’re ways away from that.

Your next question comes from Jason Harbes of Wells Fargo.

Most of my questions has been answered but just wanted to follow up on the coverage ratio guidance, I think you guys gave back at the Investor Day, you said you know 120 to 140 basis points is about the right range this quarter pretty much the high end of the range with the energy-related reserve built. Just wanted to get a feel for it, is that still kind of the right way we should be thinking about in light of some of the makeshift with the greater focus on card and some of the other peer-to-peer lending activity.

And again 120 to 140 that we touched on back then you know that's just a general rule of thumb, you’re going to see some of our peer companies still lower than that, some go higher than that. So there is more specific sweet spots that we’re looking for regarding our process play out each quarter and if we did look at the higher end, a little over as 140 this time but again that will be different each quarter as we taken in all of the information that we have.

Your next question comes from Jack Micenko of Susquehanna.

Most of my questions have been answered but wanted to ask about auto, it's been a bright spot for the portfolio has grown nicely. Have you made any changes there around underwriting a product type with some of the concerns that are sort of cropped up at the lower end of the market? And then I guess secondly, do you think if SAAR is down something modestly make sure you can continue to grow that portfolio?

Well, I mean I think it's been a very good as you say, it's been a good growth market for us and if we’ve shown some fairly good growth rates, albeit from a fairly low level of outstandings that we had in the balance sheet. It’s a business we reentered a few years ago. We have continued to adjust our credit underwriting standards on that business overtime as we’ve seen the market change. We tried to stay very rigorous and disciplined in that regard. We have modified some of our adjustments to try to reduce the duration of the portfolio. We’ve made some adjustments that have tried to narrow the part of the market that we’re willing to lend into. I think that our actions have, to a certain degree for all of the amount of volume that we get, but volume that we’re getting is of a quality that we feel good about and the performance that we see is strong. I just remind you that we only deal with preferred dealers, we don’t anticipate in the subprime market, to any great extent, and we do not have any leasing products. So we feel, we’re pretty plain and simple in how we approach the auto market and trying to stay disciplined in how we participate. I do think the latter part of your question is depending on what sales volumes are for that industry will clearly drive what opportunities we have for origination growth.

Your next question comes from Jesus Bueno of Compass Point.

Hi, everyone. Thank you for taking my questions. Very quickly, you touched on small business lending, do you have any update on the foundation partnership and perhaps how that did and now that you have one kind of full quarter of that and perhaps even expectations for this year?

I would say it’s still too early to call. We’re pleased with the early results of that partnership. We’ve not publicly released any of those performance metrics, but I would say that while we’re pleased, it’s still too early for us to make any sort of public announcement on where we think that’s going and it’s still relatively small contributor to our origination, you’ll see us doing a number of these innovative partnerships. In aggregate, they should be very meaningful, but on an individual basis, they’re all incremental.

Great. Thank you. And just again on the reserve build for energy this quarter, approximately how much of that, kind of 2% increase in the energy reserve was directly related to the results of that exam, would you say primarily the whole thing or was there a large portion of it?

Well, again, as Barb Godin had said earlier, we’re not going to comment directly on that exam. What we’ll tell you in general is that we use all input that we get, both internally and externally in talking to our customers and all of the input we’ve gotten from all sorts and have been accounted for in how we reserve this quarter.

Fair enough. And I’ll just slip one more in. On mortgages quickly, I guess the volumes were pretty solid this quarter and looked to be better than I guess what was anticipated, I guess how do you feel kind of in the first three weeks of the second quarter, I guess going into this quarter, how are your pipelines and I guess have you also had any lingering effects from trades still in the first quarter and anticipating that for the second quarter?

Well, I would tell you, first quarter, we’re very encouraged by how the fundamentals of the company are performing. We are seeing good solid results across almost all of our businesses, and almost all of our geographies and so if you look at the fundamentals of the company and how we performed, I think we think we had a good solid quarter. We do have some headwinds in the energy portfolio and metals and mining and we are addressing those in a very rigorous and disciplined manner, but on a net basis, we feel pretty good about it and we think that the fundamental performance that we’re seeing in the first quarter should continue into the second quarter. As we mentioned earlier, we have seen a softness in our sales pipelines in the first quarter, which should make second quarter a little more uncertain than we would like. But I would say that we continue to be encouraged by the progress we are making. We don’t think there has been any impact of TRID at this point in time and don’t anticipate that in the second quarter, but continuing to make mortgage – continuing to make progress. And as David said earlier, if you look at our mortgage business in particular, second and third quarters always seasonally the best quarters we have of the year and so we do anticipate second quarter being better in that regard.

Great. Appreciate the color. Congrats on the quarter. And thanks for taking my questions.

Thank you.

Thank you.

I believe we have more questions.

We have one more question. Your final question comes from Jill Shea of Credit Suisse.

Good morning. Just on the deposit service fees, I mean, held up quite well in the quarter just given the seasonality and the full quarter impact of the posting order changes. Can you just talk about the underlying account growth momentum you’re seeing and sort of how that ties into the outlook for fee growth going forward?

So as I mentioned in the prepared comments, we actually had grown checking accounts last year about 2%, we have grown checking accounts this year, and we have our full quarter service charges from the posting order impact that started November last year, so we kind of got a mid-quarter last quarter, full quarter this quarter, we think we are off to seeing service charges increase modestly as we go throughout 2016. A big driver of that is our ability to grow customer accounts, both last year and this year.

Jill, I would tell you that the account growth has been very steady and very solid and broad across our franchise footprint. Really encouraging is that consumers continue to build liquidity. We are seeing very strong liquidity metrics on the consumer side. And we are also seeing the number of active cards, both debit cards and credit cards, number of active cards are up as well as the number of transactions for cards are up. I would comment that credit card balances are up modestly, it’s usually the seasonal time of the year, but we saw average credit balances up 2% to 3%. We are probably up 8% year-over-year. But that’s in the face of strong double-digit transaction activity on cards. But customers are being fiscally conservative and we are not seeing balances go up remarkably, but we are seeing go up modestly. But transaction activity is very strong and so we are encouraged.

Great, thanks.

Well, if that’s a last question, we appreciate everyone attending our call today. We thank you for your time and attention. And we look forward to seeing you next quarter. Thank you.

Thank you. This concludes today’s conference call. You may now disconnect.