Regions Financial Corporation (NYSE:RF)
Citigroup US Financial Services Conference
March 06, 2013 9:50 am ET
David J. Turner - Chief Financial Officer, Senior Executive Vice President, Member of The Executive Council, President of Central Region, Member of Operating Committee, Chief Financial Officer of Regions Bank and Senior Executive Vice President of Regions Bank
John C. Asbury - Head of Business Services Group, Senior Executive Vice President and Member of Operating Committee
Josh Levin - Citigroup Inc, Research Division
David J. Turner
Thank you and good morning, everyone. I appreciate the opportunity to present at the Citi conference this year. I do want to introduce John Asbury, who heads our Business Services Group; and all of you know List Underwood and Dana Nolan from our Investor Relations group down here in the front.
I do want to remind you that in our presentation and the Q&A that follows, we do make forward-looking statements and if you will make sure that you read that disclosure in the appendix, I'd appreciate it.
Today, I'd like to review our value proposition. Or to put more simply, why we believe that Regions continues to be a good investment. And we do recognize that our stock has outperformed the industry this year, but we think we have some opportunities for continued growth going forward.
For those of you that aren't familiar with our company, I'm going to touch briefly on a few things and review our market presence in the Southeast, which we think gives us a competitive advantage. I'll then cover our progress on several important fronts that we have covered over the past 3 years, which has made us a much, much stronger company today and has positioned us well for the future. And it really demonstrates that we do have the ability to develop a plan and execute against those plans. And then I'll speak to areas where we see opportunities for outperformance, including things like our efficiency ratio, net interest margin and the like. And then I'm going to share with you our plans for growth and delivering value in 2013.
So let's get started. As most of you know, we're headquartered in Birmingham, Alabama and we're among the largest U.S. banks with $121 billion in assets. We do operate in 16 states, but 85% of our market share and deposits located in 7 core Southeastern states. Now we have #1 deposit market share in Alabama, Mississippi and Tennessee; and we have fourth or better market share in Florida, Louisiana and Arkansas.
Our focus is really being a relationship bank, a bank that provides comprehensive set of financial products and financial advice that meets our customer needs in consumer, business and wealth lines of business. Those are our 3 lines and we'll talk about that a little more in a minute. If you all look at our market and our market share, our footprint gives us a couple of unique advantages. Now, the top 10 the markets in which we operate are characterized as either high market share, high growth, or both. And this is an important source for future growth for us and enhanced profitability.
In our core markets, we have the third-largest weighted average market share at 9.4%. So really, what this is trying to tell you is, with a strong market presence, a competitive product set, we have a great platform on which to build and grow our institution. In addition, our actions over the past few years have really significantly improved our financial position, which gives us the ability to deploy our capital. We'll talk about that in a minute, as well as our excess liquidity.
For the past 3 years, our management team has worked really hard to navigate through a challenging environment, as well as to strengthen the position of the company for future opportunities. And this slide illustrates significant progress we made on several of those key metrics.
Now to look at deposit and funding cost. You can see the progress we made in the 3-year period, driven in large part by the shift in the mix of our deposits from CDs to low-cost deposits. At the same time, mortgage revenue has nearly doubled, which is a reflection of the low interest rate environment. And we still have positive momentum in the mortgage market. We'll talk about that in a minute. Additionally, we've experienced net interest margin expansion, driven largely by our deposit repricing efforts. And as a result of our continued focus on expense management and strategic initiatives, our efficiency ratio has improved by over 350 basis points. And we're going to talk a little bit about how we think we can tighten up that efficiency ratio in a minute, too.
We also made great strides with respect to our credit risk profile, where we've reduced nonperforming assets by 57%, net charge-offs by 74% and yet we have a strong allowance for loan losses, improved 84 basis points, but we'll continue to have significant credit leverage left. And finally, our capital and liquidity have improved significantly. Our Tier 1 now stands at 10.8% and then our loan-deposit ratio is at 78%.
So our performance in 2012 demonstrates that we are successfully moving forward. That's really the theme that we want you to take away. We're moving forward and well-positioned for growth. We have emerged from the financial crisis stronger than before, with a solid capital base and a strong presence in some of the fastest-growing markets in the country.
Now let's look more broadly at our revenue growth. We've made progress over the past 2 quarters when you track our peers. Now if you look early on, on this chart, you'll see that our revenue growth was below our peers, which is a reflection of the de-risking efforts that we had relative to our Investor Real Estate portfolio. And we know we need to accelerate this growth. And it's one of the key themes we're going to talk about this morning. Now we are on a path to generate positive operating leverage. That's important for us. Clearly, the industry is facing challenges over the next few years, but we are committed to creating new and innovative products and to deepening customer relationships in order to drive that revenue growth that we want.
One example is our Now Banking suite of products. It's where we're growing our business and meeting customer needs. Now these products focus on the under-banked segment and meet a need in the marketplace. Already, we have more than 350,000 customers using these products and services, and half of those are new to Regions.
So as we shift our focus to revenue growth, we still are committed to expense management. We've made a lot of headway in this area and it continues to be a good story for us, as you see on Slide 7. We do believe that expense control needs to be part of our culture, and not just a campaign. We get asked that an awful lot. What's your Regions-branded expense initiative? We think that needs to be core to who we are. And so I never finish a presentation internally where I don't finish on expenses, which does not make me a crowd favorite. But nonetheless, we believe it's important for us to continue to stay focused on expenses.
If you look at our NIE to average assets, 2.8%, which makes us the second-lowest in that peer group. So expenses, we do a very good job. And if you look at the improvement we made during the year, you can see that we reduced expenses faster than almost any of our peers. Now we have given guidance, that we're sticking to, that we believe our expenses in 2013 will be lower than 2012. And that's illustrating our commitment to expense management, and again, our goal towards generating positive operating leverage.
If you look at the efficiency ratio, there are a couple of different themes here. We look for opportunities to continue to improve our efficiency ratio. So today, we're right at 63% at the end of the fourth quarter, slightly better than our peers. But we think there are opportunities to continue to improve efficiencies, which is related to our expense management. We do think there's room there in some environmental expenses. We continue to watch the key expense areas for us, it's hours and benefits and occupancy and furniture and fixtures. Anything related to those 3, we continue to look at very, very closely.
But there's also opportunities with respect to revenue and that needs to be really understood by the group. We do want to target our efficiency ratio in that mid-50 range, so 55%, 59%. I will acknowledge that it will be hard to get to 55% efficiency ratio without a rate increase, to have some further revenue growth. But we can continue to work down that efficiency ratio some in this environment.
I'll look at driving revenue. We'll start with net interest margin on Slide 9. So our net interest margin ended the quarter at 3.10%. We were up 2 basis points from the previous year and we're pleased with that performance. There were some temporary positive impacts, interest recoveries, an acceleration of deferred fees on loan payoffs. So that added about 2 points. So I want you to level set what our margin is at about 3.08% and we think there's -- in this low rate environment, there's still opportunities for us to protect the margin, in large part through our deposit costs that we'll keep under control. We have $8.3 billion of deposits maturing this year at a 1.17% rate, note today, our going-on average is about 20 basis points. So, leverage there.
And we have decided to retain our 15-year mortgage production starting this quarter, which also ate our margin. We do have opportunities to evaluate liability management, opportunities going forward, with the capital base that we have, with a tightening of our credit spreads, which have come in some, but not as far as we would like, but making progress there. We do have an opportunity to look at liability management. We won't be specific with an instrument, so I want to just leave it with you. You can kind of look at what we have out there as to what we might look at in 2013.
If you look at all those factors I just mentioned, that gives us the confidence that we will have a relatively stable margin for 2013. Now, if for some reason we did get our -- an increase in rates, that would be all the better for us. We're asset-sensitive and the right kind of rate increase would actually be beneficial to us.
Let's turn to asset quality on Slide 10. This is another area where we continue to make good progress. Our positive trends in several credit metrics continued during the fourth quarter, including criticized loans, classified loans, nonperforming loans, net charge-offs in particular. And this chart really shows you the net charge-off improvement. Net charge-offs were down 58% compared to the fourth quarter last year and total nonperforming assets decreased $1.1 billion or 36% over the prior year.
Now our loan loss allowance is 2.59%. We're about 70 basis points higher than our peer median, which is the credit leverage relative to our peers that we talk about. We do expect -- because criticized and classified is the area where we like to point investors to and analysts to. We think looking at that trend gives us confidence that asset quality will continue to improve going forward, the pace of which still continues to be uncertain. We do have a robust allowance to total loans and a good coverage to nonperforming loans as well. So we have made great strides in credit, but we're not done yet. And as I mentioned, we still have significant credit leverage remaining.
So before we talk about growth, let's talk about capital and look at our position. Our Tier 1 common, at 10.8%, an approximate 230 basis-point improvement over the fourth quarter of '11. And our Basel III estimate at 8.9%. Our liquidity position also remained strong, as our loan deposit ratio stood at 78% at the end of the fourth quarter. That's lower than what we would like. We'd like to deploy that liquidity in making good loans to creditworthy borrowers. Today, 25% of our earning assets are in investment securities. And we would like to, again, get that number down and get loan growth going, so we're looking for all the creditworthy borrowers that we can find.
Let's talk about how we're going to grow. So we recently announced an approach, an enhanced approach to serving customers based on creating shared value. Shared value really is defined as customers and associates and the communities and shareholders, those 4, how we really create a program to make sure we're mutually beneficial to all 4 of those. It does not do us any good to take advantage of any 1 of those for the short-term. We need to create a sustainable business model that really shares the value with those 4.
And we're using a program called Regions 360. And the objective of Regions 360 is to first, fully understand the customer's financial situation, and then provide appropriate services and products to meet their needs and assist them in achieving their financial goals. The rollout of Regions 360 is fast on track, with incentives for this program already in place. And we believe the new program will enhance our efforts to deepen and expand customer relationships going forward.
As part of this effort, we developed training that includes new techniques and technology that was developed to enhance cross-sell and referral opportunities. In addition, associates are required to complete an extensive certification program covering all products and services across their respective lines of business. This is not product pushing. This is about understanding what our customers' needs really are, and making sure we provide valuable products and services to them that they can use to help them financially.
We've demonstrated what it takes to be a leader in quality service. And now, our goal is to solidify our position as a leader in understanding and meeting our customers' financial needs. At the foundation is our long-term commitment, as I mentioned, to only sell products that meet specific needs in a manner that builds satisfaction, loyalty and trust with the customer. And as we move forward and transition to growth, the concept of creating shared value will serve as our guiding principle. As we discuss growth opportunities over the next several slides, you'll notice that we have built an integrated approach into how we view growth across all lines of business and markets.
So let's start with Business Services. Regions Business Services is composed of 3 primary Business Services groups serving small business, middle market and commercial real estate clients. At the end of the fourth quarter, Business Services comprised approximately 60% of our loan portfolio. Under John Asbury's leadership, we remain focused on middle market customers, which has contributed to our organic growth in the Commercial and Industrial portfolio.
This portfolio has performed very well, growing 9% last year on an average basis. Now most of this growth was driven by our specialized lending groups, which is comprised of 5 distinct specialized groups. Production in the C&I portfolio remains strong, ending the fourth quarter at $10.4 billion. Now our line utilization at the end of the year was 43.4%, which is lower than our historical average, which was right at 50%. But that tells you we have some opportunity for loan growth. In addition, our loan commitments increased 12% over the prior year.
And moving on to Investor Real Estate, that portfolio continues to decline and we are -- but we are actively lending in the Investor Real Estate space. We expect the pace of the decline to moderate over the next couple of quarters. And more specifically, as I mentioned before, we have about $1 billion of Investor Real Estate loans that we need to deal with. $400 million of those are sitting -- roughly, are sitting in nonperforming loans. $600 million are in a criticized or classified area. So with that, when that bottoms out, we'll be able to grow from there.
Moving on to Wealth Management. In 2012, we formed the Wealth Management Group that integrates institutional services, private wealth management, investment services and insurance into a single line of business within the bank. And establishing this line of business enables us to focus on key profitable customer segments with the goal of increasing noninterest revenue, deepening customer relationships, and ultimately, enhancing the value of the organization.
We've also partnered with Cetera Financial Services, allowing us to offer financial consultants in our branch network. And we believe there's an untapped demand for customers in this space that will drive expanded service and product offerings. Finally, enhanced services and technology platforms within the Wealth Management line of business also expected to contribute to the growth story as we better meet the needs of the mass affluent and private wealth customers in our markets.
Now let's conclude with Consumer Services. Our Consumer line of business provides a diversified product set through multiple channels. 1,700 branches, 2,000 ATMs, and as we move forward with the rollout of Regions 360, we see continued growth to this important line of business. For example, today, approximately half of our checking account households, half of our checking account households, have 1 product type with us, illustrating the opportunity for growth just from our existing customer base.
As I mentioned earlier, with the launch of our Now Banking suite of products, we're able to better serve those who have traditionally been underserved by the banking industry. Based on internal studies, the Southeast region has one of the highest concentrations of underserved individuals in the U.S., further illustrating our opportunities for growth. We also expect continued growth in our Indirect Auto portfolio in 2013, primarily due to the outlook for the auto industry, as well as an increase in our dealer network. So today, we have about 1,900 dealers. We're looking at growing those by about 300 or 400 during the year. And through those 2 things, we expect expansion of indirect outstandings.
Although consumer deleveraging continues to impact credit card balance, production in 2012 is up compared to 2011. And over time, we believe that we can increase that penetration rate. Today, 14% of Regions' checking account customers have a Regions-branded credit card, 14%. That number should be in the 20%, 25% range. So we think we have opportunities to grow there.
And finally, we'll continue to invest strategically in lower-cost delivery channels such as online, deposits-mart ATMs and mobile banking. And adoption rates in these channels have been high and led by mobile banking, which experienced an increase of 50% the last year alone.
So looking for areas of improvement in 2013, we have strong platforms across all our lines of business and in the markets in which we operate. In building on this foundation, the task before us now is to prudently grow our business. Through our Regions 360 program, we will deepen our customer relationships and grow households. We will continue to increase loan production and leverage our Now Banking suite of products. We will make investments in technology that drive efficiencies, enhance the productivity of our lower-cost delivery channels, as well as our sales and service platforms. But we will continue to remain focused on opportunities to reduce expenses as well. That doing all that will lead to positive operating leverage. And as we focus on moving forward, we believe that we are now positioned to compete even more effectively and are committed to creating shared value for our customers, our associates, our communities that we serve and our shareholders.
So we've accomplished a great deal in 2012 and have a proven track record of successfully executing our business plans. Although we consider these accomplishments to be significant, we do continue to strive to find better and more efficient ways to serve our customers and increase shareholder value.
And with that, I'll stop and take your questions. Thank you.
Josh Levin - Citigroup Inc, Research Division
Thanks a lot, David. Just a first question, I think, would be, in terms of loan growth, especially in the C&I bucket, if you look at the industry HA [ph] data and even some of your competitors at this conference, seem to be talking down loan growth a little bit, do you have any comments on that? And kind of what is Regions seeing?
David J. Turner
Let me talk about overall loan growth and I'll have John Asbury comment on the Business Service side. I think when you hear comments about, from others, on loan growth, you need to know their perspective and where they're coming from and what has occurred to them over the past year. Obviously, we've been different. Our loans declined last year, primarily due to our de-risking efforts that we had. We are standing behind our commitment that we gave you last time we spoke, which was to have loan growth this year in the low single digits. Part of that, we will have to overcome this $1 billion of Investor Real Estate runoff that we're talking about, which should happen earlier versus later. So you can kind of think about when that would fall in our quarters. But we are -- we're encouraged by the markets that we're in. It's clearly competitive. We are, in 1 segment, and I don't want to steal John's thunder, but our small business segment, those are customers that really aren't demanding credit today because of the uncertainty that exists, whether it be on sequestration or continuing resolution, budget, health care, taxes, you name it. They just don't want to take the risk. And so that's why our deposits in most of the institutions are as high as they are. We would love nothing more than that to get deployed. But we still feel comfortable with our commitment on growing loans at the top of the house in low single digits. You want to talk about Business Services?
John C. Asbury
Yes, I'll stand. HA [ph] data is puzzling at times, we don't always track it, so I won't really speak to that. What we've seen, and I'll speak to the 3 major segments, within the middle market, especially the upper end of the middle market, bear in mind, we are not a true large corporate bank. So when I say middle market, what I really mean would be up to the mid-corporate, say, companies with up to $2 million in sales. Performance has been pretty good there. Clearly, at the end of the year, there were some unusually large amount of activity. You always have the seasonal strong finish in December, as companies are cleaning up balance sheets, getting things done to conclude the fiscal year end. But that was even more pronounced because of tax-driven strategies, et cetera. Having said that, our pipelines are actually pretty good right now. Yes, activity did drop off in terms of loan production in January because it was probably the strongest in about 4 years in the month of December. And by the way, that was true also in small business and Investor Real Estate. So we're cautiously optimistic about our ability to continue to grow the commercial loan portfolio. The same pattern still applies, which it tends to be these midsized companies and up that are the most active. As you get into the lower middle market, the smaller the company, the more inclined they are to pile up cash, sit on the sidelines and are very reluctant to step out and make investments. Within the small business side, clearly that pattern is continuing. That is among the most hesitant client base that we have. They continue to build cash, they continue to be reluctant to make investment. Having said that, we did see a very strong finish to last year and we're off to a decent start this year. So much of what they do are amortizing term loans, especially owner-occupied real estate, which are commercial loans secured by real property and so you've got to overcome the amortization, the pace of repayment in that segment. Any improvement in business center confidence is definitely going to help us as you get into the lower middle market and small business space. Now within Investor Real Estate, that business is radically different today from what it used to be. Now we finished the year at $7.7 billion in loans outstanding to Investor Real Estate as a product type. We peaked around $26 billion in '06, which is a huge number relative to where we are today. We dropped $3 billion over the course of 2012. We originated in terms of new IRE commitments in 2011, $1 billion. We originated $2.2 billion in 2012 and we're confident we'll be well north of that in 2013. We had the best December that we had seen in 4 years, in terms of Investor Real Estate as well. Pipelines are good, production is good early into this year. And I think part of what you need to understand about IRE is simply we were largely out of that business for a period of time while we restructured it. Today, it's a much smaller, much more tightly focused, much more professionally managed, disciplined business, if you will. So bottom line, we are cautiously optimistic in terms of the outlook for loan growth. A lot of this is going to hinge on what's going on in Washington, overall business center confidence, et cetera. So I wouldn't necessarily talk down what our expectations are right now. I hope I don't sound bullish. I just simply want to convey that we are cautiously optimistic based on what we're seeing.
David, this is about Investor Real Estate. I recognize that there are still runoff portfolios that at the same time that you're still engaged in lending. Just given the less-than-desirable experience in Investor Real Estate over the last several years, what is it about the new lending that you're making that will ensure that the future experience in credit loss for this asset class is going to be a whole lot better than before?
John C. Asbury
Yes, I'll speak to that. A very different business. If you were to rewind back to 2006, '07, '08 timeframe, what you would have found is you would have seen a lot of echoes of our prior organizational design, if you will. Meaning we were really 3 banks that came together pretty quickly just before the crash. So community bank-like, a lot of decentralized credit decisions going on. In some cases, real estate loans being originated by part-timers, people who spent part of their time originating commercial loans, part of their time originating Investor Real Estate. Also, we had an outsized amount of raw land. That was the scene of the crash by the way. By far the worst asset class we had was simply raw land lending. And so what you have today is a much smaller professional group of real estate bankers, much more selective in terms of the types of developers that we deal with. They tend to be midsize and up. They tend to be much more strongly capitalized. The bank is much more selective in terms of the credit risk profile that we will take on, the types of developers that we'll take on and all of the new Investor Real Estate lending that goes on, goes on within what we call real estate banking. So we are highly confident in terms of the credit policies, the procedures, the personnel, sort of everything we have to make certain that what we are originating is of quality, is something that we fully understand. We certainly understand concentration limits like we never did before. Much of the Investor Real Estate exposure that was so harmful to us was concentrated in Florida, and to a lesser extent, metro Atlanta. So again, much more professionally run, much more selective, much more tightly focused and we have a very strong eye toward concentration, making certain that we're not putting too many eggs in the same basket. And by the way, within the real estate banking business, they're really 5 business units. Real estate corporate banking, which never blew up and has been a good business for us through the cycle. They tend to deal with real estate investment trusts, which you normally think of, I'll call project finance, which is really among the more impacted. Homebuilder finance, we used to have homebuilder bankers in virtually all markets. That is not true today. It is a much smaller business than it used to be and it only operates in select markets. Our affordable housing group, which originates investment tax credits for the bank, never blew up, it's been a very good business. And then lastly, what we call local real estate. We did have, in our small business group, a lot of kind of small dollar Investor Real Estate loans that were originated out in the various community bank areas to very small developers, business owners who had operating companies that had side investments. And all that is now really contained within a small group that's managing that as a portfolio. So it's just night and day, it's a very different business model. We're highly confident this is the right business model for us. And having been through a radical restructuring, we are now on offense. Meaning, we went through a very long period of time where we were originating very little by design as we rebuilt the thing, and that is no longer true today.
Just more generally speaking, what would the ideal Regions loan book look like by loan type? Such as C&I versus CRE versus Investor RE?
David J. Turner
Yes, I think I can give you some global on -- between -- we're 61%, Business Services; 39%, Consumer. We would like that to be more 50-50. We're not sure we can get to 50-50 anytime soon, but we think we can get to maybe 55% Business Services, 45% Consumer. And that shift is really important to us. So over time, you'll see us -- we still want to emphasize both. But we would like to grow certain things in our consumer space like credit card. Today, we're about 1.5% of our portfolio is credit card. That number could be a lot higher than that. Indirect, we like that product, we're good at it. We got a good dealer network. But we're still in the Business Services side. So if we get to 55-45, we would then probably come back to you and say, well, now we really want to be maybe closer to 50-50 to kind of balance out where we are. John...?
John C. Asbury
David, I would add within the Business Services group, next level down, to kind of stack rank in terms of size. Where we are today and what you will see will be middle market commercial, one; small business, two; Investor Real Estate, three. We are committed to the Investor Real Estate business. But by design, we see that as being really the smallest of the 3 components.
[indiscernible] look at commercial real estate versus credit card versus residential mortgages, home equity loans. Could you break it down that way as far as what your ideal percentage would be?
David J. Turner
Yes, we really hadn't -- we hadn't broken it down that granular in terms of target just yet. Look where we've come from to try to get on offense. And so our next strategy would be more granular in terms of where we want to go. Round numbers, obviously, so we can go to in a 3% range on credit card portfolio. We're at 1.5%, so we can double that. There's not 1 area where you'll see dramatic change either way, it's tweaking now for us. So we hadn't had -- we haven't developed the specific percentages.
John C. Asbury
Of course that'll be a relative question to the absolute size of the bank. So here we are today at about $7.7 billion, we've not given specific guidance in terms of exactly where we would expect that to bottom. We are not at bottom yet, although we're certainly getting a lot closer. Just to throw a number off the cuff, could you see something in excess of $10 billion again, perhaps. Would you ever see anything that looked like $15 billion or $20 billion, absolutely not. Not unless something were dramatically different in terms of the overall scale of the bank. So here's how -- I want to be careful how I say this -- I see Investor Real Estate as being strategically important to the company. I don't really see it as a strategically important growth opportunity. It's just something that is a core level of investment for us. We don't want to shrink it. Yes, we would like to grow it. And we're going to see relatively more opportunity in the commercial businesses and small business over time.
Also looking at the competitive environment, especially in the C&I space, a lot of your Southeastern competitors have been talking about not only pricing pressures in 1Q intensifying, but also other things like term and structure. Do you have any comments surrounding that?
John C. Asbury
Yes, I'll speak to that. The pricing has been under pressure for a while across all of the commercial businesses to include quality Investor Real Estate deals. If you look at objective third-party data, S&P for example, Standard & Poor's, we subscribe to a pricing service they offer and they'll go back 10 and 15 years. And what they'll tell you is that on the whole, in what we call the bilateral or non-syndicated market, which is most of what we do -- I'll speak to syndications in a second. Pricing there is relatively stable. Any given day, you're going to have anecdotal comments about sort of unusual situations, surprisingly low credits that are out there in the market. But what I would say is that it's relatively stable. It's in a sort of a slow grind, if you will. I would imagine, as long
as this environment continues and we have, what's on the whole, relatively weak lending opportunities for bank, that will continue to apply a little bit of downward pressure. We are way off the peaks in terms of what we saw in say the 2009 timeframe for commercial loan pricing. Truth of the matter is we're still not at any sort of historic low, which would have been probably late 2007. And this pricing right now looks relatively normal to me for a very competitive environment. And it's not inconsistent with what you would've seen, say from the 2000 -- 2005 timeframe, if you will. So it just kind of varies, if you will. I do not see a cliff from here in terms of commercial loan pricing. And it varies on the mix. As you get into the larger high-quality companies, they obviously are able to command better pricing than smaller ones. Syndicated loan markets are showing similar behavior. If you stay within kind of that mid-corporate and down, yes, pricing has come down, it is not at any sort of outrageous low. By definition, syndicated loans must clear market. It must be enough of a price in order to attract enough banks within the syndicate to make it attractive to them. I think the same thing will apply. I think that you'll continue to see a little bit of steady downward pressure on pricing, but nothing dramatic. Once you get into the large corporate institutional market, where there are institutional players, where you have large nationals and investment banks selling off most of the paper, the institutional types of investors, there are all kinds of interesting things going on there that I can't really explain or speak to. But then that's not really where we play either.
David J. Turner
And structure, that's really what's important, is who's making those comments. Because the tendency is, if you're playing with a larger corporate institutional-type client, pricing pressure has been intense because they have alternatives. The middle -- lower end of the middle markets, small business, which is where our competitive advantage is, while there has been declining pricing, it is still strong, where we can make money. But we really want those small business customers to really start borrowing because they are less price-sensitive, and that's really where we make most of our spread in that product. So we feel okay competitively where we are.
John C. Asbury
It's competitive. But again, it's -- we're not really that different from where we had been for a while now. Structures have pushed out, terms have pushed out. If you get into sort of a midsized commercial company, it used to be that most of what they would do would be, say, a 3-year revolving credit. Today, that's probably a 5-year revolving credit because they can command that within the market. Things like financial covenants and just the overall structure of the loan itself, the requirements the banks are putting on, are more flexible, certainly, than they were a couple of years ago. They're certainly not unprecedented. It is true that when we set financial covenants, there's more headroom, if you will, between where the company is today and what the bank minimums are that are required. But that in and of itself is not that problematic, especially given just sort of the overall economic backdrop. Credit quality among the middle market is pretty good right now. We're not seeing anything that I would describe as crazy. You're not going to see covenant light-type deals in the middle market. And if that comes, I think certainly we would just say no. We say no every day, obviously. But again, I would describe the market as being consistent with just a typical, very competitive environment.
You guys mentioned at Goldman, I think, that you're pushing some of your rainmakers on the leading side, to do a little more lending to loosen the restrictions a little bit. Have you seen any early results there? Or is that just kind of part of the overall plan? In fact, would you give us an update on what you're seeing in mortgage?
David J. Turner
Yes, I would say that we clearly -- we had 3 goals and I kind of finished at the end, and that is to grow loans, grow our households and watch our expenses. Very simple. And we have an all-out assault on growing loans appropriately, appropriately priced, appropriately structured, in our footprint with the customers we want to do business with. And we set incentives to align to that strategy and which is not just production-based, it's profitability-based. Which is a difference from when we had $26 billion of Investor Real Estate. We're starting to see that it's a little early here to call victory on it, but we're feeling good about what we've done there. From a mortgage standpoint, last year, we had about $8 billion worth of production. Clearly, that's going to be down some this year. But we still feel good about it, in large part due to our HARP 2 -- we're only through about 25% of our customers who are eligible for HARP 2 refinancing. And you may ask yourself, well, how can that be? And you would be surprised that a lot of people just aren't aware that they get this refinancing opportunity if they're underwater, that their loan's with one of the agencies. So we're trying to do an outreach program to get them. We still feel good, gain on sale clearly coming down some. Last year, our 15-year product that we talked about, we were selling that, we're retaining it. If we would've retained all of those last year, it would have been $1.2 billion worth of added loans for us. Now that number this year is probably going to be lower just looking at the macro data. I don't know what it will be, but I think that overall mortgage still feel reasonably good.
Josh Levin - Citigroup Inc, Research Division
Thanks a lot, David and John. Thanks to Regions for joining us. I think that's all the time we have.
David J. Turner
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