Regions Financial Earnings Call Insights: Calling Long-Term Debt and Capital Return Priorities
Calling Long-Term Debt
Erika Penala – Bank of America Merrill Lynch: My first question is one on your margin outlook. You’ve spoken in conferences in the past about being open to using some of your excess capital to call some of your long-term debt. I guess the first question is; A, are you still open to that in 2013; and B, does your margin guidance for stability include potentially calling some long-term debt?
David J. Turner, Jr. – SEVP and CFO: Erika, this is David. We have consistently – want to fit ourselves in a position to optimize our balance sheet structure in terms of its cost on the liability side. We’ve been doing that through our deposit side as you’ve seen. And from a debt side, you’ve seen some of our utilization of our excess capital, if you will, to rightsize and adjust the funding. We do have other opportunities. Without going into specifics, I think if you evaluated what we have outstanding, you could probably glean what would be some potential targets. We do have elements of that, not all, but elements of rightsizing our liability structure baked into our margins. But we want to see how things play out during the year; there is still uncertainty with regards to the economy. So, we hadn’t baked in all the potential opportunities that we do have, but some are.
Erika Penala – Bank of America Merrill Lynch: I’m sure you will be asked this question several ways, but let me be the first to attempt it. Your adjusted expenses were $3.471 million this past year, and I guess as we’re thinking about the magnitude of decline, will it be similar to the 2% decline that you talked about in 2012, or is there an efficiency ratio that you can point us to as a target? I guess it’s the one question I am getting from investors in terms of magnitude of that outlook.
David J. Turner, Jr. – SEVP and CFO: Yeah, we have not quantified that yet. We kind of gave broad guidance that we would be down in ’13 from ’12, just like guidance we gave you last year this time. Things that we can point to there is, there is no one particular silver (board) in that expense number. If you look at our expense run rate, you will see that, obviously, our largest expense is in the bank salaries and benefits and occupancy, and we think those are two areas that we will continue to work on to bring those down even further. We moved our credit card servicing in-house from paying a third party that we think will have some savings. I talked earlier about the savings related to one of our REITs. So, again, there is no one place that we can point to credit-related expenses another that as we continue to improve non-performing balances and levels; we have some opportunity there. So, I think net-net we can see that being down. As we get closer and go through the year, perhaps we can put a finer point on that.
O. B. Grayson Hall, Jr. – President and CEO: And Erika, we’ve really tried to build a strong expense culture over the last few years and have, to David’s point, when you look at our two predominant expenses which really have been personnel and also in facilities, we continue to rationalize both. Last year we were down on a net basis some 280 positions, but we actually had added back over double that number that we had added back as we brought in our credit card processing. We had to have a number of people added there as well as we’ve added people in risk management, and quite frankly we’ve added people, bankers that are in customer-facing positions, but we’ve been able to offset that through efficiencies in other parts of the Company. We’ve invested an awful lot in technology, in our branches, to improve the efficiency of that entire branch channel. We continue to think branches are an important part of our distribution strategy, but we’re trying to rationalize the (expense) of that channel to try to improve the efficiency of that channel. But as David said, our expense management strategy is really not a branded program, but it’s just a way of making sure we’ve got a strong culture that is focused on efficiency improvement across all of our businesses and continues to look for ways to reduce our overall expenses and we did that successfully in ’12. We believe we’ll be successful again in ’13 and have guided to that point.
David J. Turner, Jr. – SEVP and CFO: Erika, I should have added, I guess, about target. We think we can have an overhead ratio still in that mid-50 to upper-50 range and so we still have some work to go…
O. B. Grayson Hall, Jr. – President and CEO: Over time.
David J. Turner, Jr. – SEVP and CFO: Over time. And of course, we need revenues of components of that too and we need more revenue to get us to those levels.
Capital Return Priorities
Kevin St. Pierre – Sanford Bernstein & Co., LLC: As we think about potential capital return in the CCAR process, you’re over a percentage point higher on Basel I Tier 1 common than you were the last go-around in the CCAR, and Basel III by your estimate seems to be already where it would need to be, if not higher. Could you talk to us about your capital plan, and what your capital return priorities would be?
David J. Turner, Jr. – SEVP and CFO: Sure, Kevin. We like being in this position a lot more than going into where we were a year or so ago, which gives us an opportunity to do different things. Obviously, we would like to use, first and foremost, our capital base to grow organically. We think we – as I mentioned, we think we can grow our loan book in ’13, but that’s really number one. Number two, we do believe that we have a capital base and profitability where we’re accreting capital that allows us to return more to the shareholders than we have in the past. We, as you know, submitted our capital plan in the first part of January, and we’ll be discussing that with our regulatory supervisor. So, it’s a little too early to be able to talk about what that looks like. But having an appropriate returns to the shareholders in the form of dividend and share buybacks clearly is something that we think makes some sense. As you know, we acquired our credit card portfolio about a year and a half ago. We look for opportunities with asset classes like that to use our capital as well. So, that’s kind of the four things that we really think about in terms of positioning ourselves from a capital standpoint. We do know and acknowledge where we are with regards to Basel III and our Tier 1 common under Basel I, and we think that gives us optimal flexibility to work with our shareholders and to grow our Company.
Kevin St. Pierre – Sanford Bernstein & Co., LLC: And similar question on the loan loss reserve side. You’ve got – no matter how we look at it, whether it’s reserves to NPLs or reserves to annualize charge-offs; high levels. Do you think that there is a floor to the reserve to loan or reserve to NPL levels, or how much of that can we expect to see flowing through earnings in 2013?
O. B. Grayson Hall, Jr. – President and CEO: Kevin, this is Grayson and I will make few comments and I’ll ask Matt and Barb if they’d like to comment on this. But we try to stay very disciplined to our process. We’ve had a methodology that we’ve been following on calculating our allowance. It’s a very analytical process and we’ve been confident in that process. We continue to believe this as credit improves that you will see that allowance moderate closer to what peers have given the relative mix of our portfolio. If you saw this quarter continued improvement and absent any economic shocks that we don’t anticipate today, we think that pace of recovery continues. That being said, we have to let our process work and we have to be very disciplined in that regard. Matt, Barb?
C. Matthew Lusco – SEVP and Chief Risk Officer: The only other thing I’d add is, I think, as we’ve stated before, we certainly do not see levels reserves thinking to the levels that once were, something that once upon a time when they were in the 1% of our outstanding-type range. We think that will settle out industry-wide at a floor that’s something north of probably 1.5%. So, I think times have changed in that regard. Of course, the new FASB statement out there that we certainly don’t anticipate coming into the play for quite a while, but I think that does show prevailing change of thought as it relates to where levels of reserves go. Certainly, concurrent with everything Grayson said about our methodology and its consistent application, and that methodology and our processes together with the pace of our improvement will dictate those reserves as we go forward.
O. B. Grayson Hall, Jr. – President and CEO: Barb, anything you’d like to add?
Barb Godin – SEVP and Chief Credit Officer and Head of Credit Operations: Nothing to add.
A Closer Look: Regions Financial Earnings Cheat Sheet>>