Regions Financial's (RF) CEO Grayson Hall on Q2 2016 Results - Earnings Call Transcript

| About: Regions Financial (RF)

Regions Financial Corporation (NYSE:RF)

Q2 2016 Earnings Conference Call

July 19, 2016 11:00 AM ET

Executives

Dana Nolan - IR

Grayson Hall - CEO

David Turner - CFO

Barbara Godin - Chief Credit Officer

Analysts

Marty Mosby - Vining Sparks

Jennifer Demba - SunTrust

Geoffrey Elliott - Autonomous Research

Matt Burnell - Wells Fargo Securities

Ken Usdin - Jefferies

David Eads - UBS

Stephen Scouten - Sandler O'Neill

Michael Rose - Raymond James

Erika Najarian - Bank of America

John Pancari - Evercore ISI

Paul Miller - FBR and Company

Matt O'Conner - Deutsche Bank

Vivek Juneja - J.P. Morgan

Gerard Cassidy - RBC

Christopher Marinac - FIG Partners

Presentation

Operator

Good morning and welcome to the Regions Financial Corporation quarterly earnings call. My name is Paula and I'll be your operator for today's call. I would like to remind everyone that all participants online have been placed on listen-only. At the end of the call there will be a question-and-answer session. [Operator Instructions]

I will now turn the call over to Ms. Dana Nolan to begin.

Dana Nolan

Thank you, Paula. Good morning and welcome to Regions’ second quarter 2016 earnings conference call. Participating on the call are Grayson Hall, Chief Executive Officer and David Turner, Chief Financial Officer. Other members of senior management are also present and available to answer questions. A copy of the slide presentation we will reference throughout this call as well as our earnings release and earnings supplement are available under the Investor Relations section of regions.com.

I'd also like to caution you that we may make forward looking statements during today's call that are subject to risk and uncertainties. Factors that may cause actual results to defer materially from expectations are detailed in our SEC filings including the form 8-K filed today containing our earnings release.

I will now turn the call over to Grayson.

Grayson Hall

Good morning and thank you for joining our call. Second quarter results reflect continued momentum in 2016 and demonstrate that we are successfully executing on our strategic priorities. We are pleased by our continued progress despite a challenging and somewhat volatile economic backdrop. For the second quarter, we reported earnings available to common shareholders of $259 million and earnings per share of $0.20. We continue to deliver results in areas we believe are fundamental to future income growth. We expanded our customer base as we grew checking accounts, households, credit cards and wealth relationships.

Our approach to relationship banking and customer service is excellence is instrumental to our success and we are always pleased to receive external recognition in these efforts. In that regard the Reputation Institute and The American Banker magazine recently ranked Regions as the most reputable U.S. bank overall and for the second consecutive year, the most reputable among customers. We are honored to again receive this top ranking as it recognized the efforts from all Regions associates in identifying and meeting the needs of our customers and communities we serve.

Another outstanding recognition came from Temkin Group which ranked Regions among the top 10% of companies they rated in 2016 as we ranked second in the nation for online experience. Looking further at our results we achieved total average loan growth of 4% compared to the prior year, despite market uncertainty the overall health of the consumer remains a bright spot. To that end consumer loans increased 5% year-over-year with loan balances up in every asset category and our consumer credit metrics continue to improve.

Consumer net charge offs decreased [ph] 5% from the second quarter last year, non-accrual consumer loans decreased 16%, delinquencies decreased 5% and troubled debt restructured loans decreased 4%, active credit cards increased 12% year-over-year, all active debit cards increased 4%. Total transactions owned cards increased 6% and total spend is up 5%. Further average consumer deposits were up 3% year-over-year including savings deposits were up 9%.

Turning to business lending, average loans increased 3% over the prior year. As we indicated last quarter we are experiencing some softness in our commercial lending pipelines, still strong but soft. In some areas customer sentiment continues to reflect less optimism and more uncertainty in the economy and we have yet to see small business owners really return to market with confidence to invest and expand. We are also exercising caution and discipline as we approach internal concentration risk lending limits with certain segments and certain geographies and as we highlighted recently at Investor Day we continue to strengthen our loan portfolio in our focus on migrating credit only relationships recycling that capital into more profitable and deeper relationship that resulted in better portfolio overall. As a result, and as previously disclosed we expect to attract towards the lower end on a 3% to 5% average loan growth for 2016.

Despite softer business loan demand total adjusted revenue increased 4% over the second quarter of 2015 reflecting the effective execution of our strategic plan to grow and diversify our revenue. Our investments are clearly paying off as capital markets increased 41% and wealth management increased 6% on a year-over-year basis. With respect to market conditions, the global and macroeconomic environment does remain challenging as such it's critical in this operating environment that we focus on what we can control. To that end we remain committed and focused on discipline, expense management and are on pace to achieve our 2016 efficiency and operating goals.

For the first six months of 2016 our adjusted efficiency ratio was 62.3% and we have generated 4% positive operating leverage on adjusted basis. With respect to energy lending, while our oil -- oil prices have improved, lower prices continue to create challenges for certain industry sectors while benefitting others. On a point-to-point basis our directly energy loans have declined $324 million, are 12% from the first quarter and currently stand at $2.4 billion or 2.9% of total loans.

Additionally, we continue to maintain appropriate energy reserves which now stand at 9.4% of our direct energy exposure, up from 8% last quarter. The percentage increase is primarily due to the decline in direct energy loan balances. Further, we are substantially complete with our spring redetermination which as to date resulted in a 22% decline in customer borrowing bases.

Turning to capital deployment, we successfully completed the annual comprehensive capital analysis interview process or CCAR and received no objection to our planned capital actions. As in last week, our Board of Directors approved a $0.065 on common shares and $640 million share repurchase plan. We remain committed as a team to deploying our capital effectively through organic growth and strategic initiatives that increase revenue or reduce ongoing expenses while returning an appropriate amount of capital generated to our shareholders.

In closing, our second quarter results reflect the successful execution of our strategic priorities and our continued commitment to our three primary initiatives which are rolling and diversifying our revenue streams, practice disciplined expense management and effectively deploy our capital. These are all integral to our success and we remain on track to deliver our performance target.

With that I will turn it over to David who will cover the details for the second quarter.

David Turner

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 second quarter, up 1% from the previous quarter. Consumer lending had another strong quarter as almost every category experienced growth and total production increased 20%. Average consumer loan balances were $31 billion, an increase of $303 million or 1% over the prior quarter. This growth was led by mortgage lending and balances increased $162 million linked quarter reflecting a 49% seasonal increase in production.

Indirect auto lending increased $93 million and production increased 4% during the quarter as we continue to focus on growing our preferred dealer network. Other indirect lending which includes point-of-sale initiatives increased $87 million linked quarter or 15%. Turning to the credit card portfolio, average balances increased $16 million from the previous quarter and our penetration into our existing deposit customer base increased to 17.7%, an improvement of 20 basis points. Total home equity balances decreased $87 million from the previous quarter as the pace of runoff exceeded production.

As Grayson mentioned, we continue to experience softer pipelines in the commercial space. As a result total business lending average balances were relatively stable with the previous quarter. Average commercial loans grew $178 million linked quarter inclusive of a $64 million decline in average direct energy loans. The net increase in average commercial loans was driven by corporate banking as our specialized industry segments added new relationships within technology and defense and financial services and commitments in line utilization were relatively flat with previous quarter.

Let's take look at deposits, total average deposit balances decreased $253 million from the previous quarter. Deposit costs remained near historically low levels at 12 basis points reflecting the strength of our deposit base and total funding cost continued to remain low, totaling 29 basis points in the second quarter. With respect to deposits, loan growth expectations provided the opportunity to accelerate our planned reduction of certain deposits within our wealth management and corporate segments which contributed to the overall decline in deposit balances.

Within wealth management certain trust customer deposits which require collateralization by securities were moved into other fee income producing customer investments. Average deposits in the consumer segment increased $1.2 billion or 2% from the previous quarter reflecting the strength of our retail franchise, the overall health of the consumer and our ability to grow low cost deposits. Our liquidity position remains solid with the historically low loan to deposit ratio of 84%.

Let's see how this all impacted our results. Net interest income and other financing income on our fully taxable basis was $869 million, decreasing 2% from the first quarter but up 4% compared to the prior year. The resulting net interest margin for the quarter was 3.15%. As you recall the first quarter benefited from items that were not expected to repeat which partially contributed to the linked quarter declines in net interest income and other financing income as well as the net interest margin.

Recent long term debt issuances, lower loan fees and less favorable credit related interest recoveries along with reduced dividends from training assets that benefited the first quarter were the primary drivers behind the linked quarter decrease. Now these were partially offset by higher loan balances. Noninterest income growth was strong in the second quarter reflecting our deliberate efforts to grow and diversify noninterest revenue. Total noninterest income increased 2% on an adjusted basis from the first quarter driven by growth in service charges, mortgage income and card and ATM fees.

Service charges increased 4% in the second quarter reflecting the benefit of 2% growth year-to-date in checking accounts again, highlighting the strength of our retail franchise. Mortgage income increased 21% driven by a seasonal increase in production. Of note within total mortgage production 75% related to purchase activity and 25% related to refinancing. Additionally, during the quarter we entered into an agreement to purchase mortgage servicing rights on a flow basis. As a result we expect the purchase to rights [ph] to service approximately $40 million to $50 million of mortgage loans per month on a go forward basis. Card and ATM income increased 4% during the quarter driven by 1% increase in active debit cards and an 8% increase in transaction volume.

We had another good quarter in capital markets with increased fees from merger and acquisition advisory services. Linked quarter results declined 7% relative to the prior quarters strong results, the decline was primarily due to reductions in fees generated from the placement, the permanent financing for real estate customers and syndicated loan transactions which were especially strong in the first quarter.

Wealth management income decreased 3% primarily due to seasonal decreases in insurance income. This decrease was partially offset by increased investment management [indiscernible] fees. Importantly despite our reduction in the wealth managements deposits total assets under administration increased 2% quarter-over-quarter. Noninterest income was also impacted by market value adjustments related to assets held for certain employee benefits which increased $20 million compared to the first quarter, however this has offset salaries and benefits with no impact to pretax income. Bank owned life insurance decreased this quarter primarily due to $14 million in claims benefits and a gain from an exchange of policies recognized in the first quarter.

Let's move on to expenses. On an adjusted basis expenses totaled $889 million representing a 5.5% increase quarter over quarter. During the second quarter of 2016 we incurred $22 million of property related expenses in connection with the consolidation of approximately 60 branches as well as other occupancy optimization initiatives. These branches are expected to close in the fourth quarter of 2016. Including these 60 branches Regions has announced the consolidation of approximately 90 branches as part of the company's previously disclosed plans to consolidate 100 to 150 branches through 2018 and we continue to expect to be at the higher end of the range. Total salaries and benefits increased $5 million from the first quarter and as previously noted includes $20 million in additional expense related to market value adjustments associated with asset held for certain employee benefits which are offset in other noninterest income as I mentioned.

In addition, severance related expenses declined by $11 million quarter-over-quarter. Excluding the impact of the market value adjustments and severance charges, total salaries and benefits would have declined compared to the first quarter. Year-to-date staffing levels have declined 4% serving to lower base salaries and fully offset the impact of the annual merit increase. Professional and legal expenses increased $8 million, primarily due to $3 million in lieu and regulatory charges incurred during the second quarter related to the pending settlement of previously disclosed matters, as well as the impact of the $7 million favorable legal settlement recognized in the first quarter.

FDIC insurance assessments decreased $8 million from the previous quarter, primarily due to a $6 million refund related to overpayments in prior periods. As previously disclosed we expect FDIC insurance assessments to increase by approximately $5 million on a quarterly basis associated with the FDIC surcharge, and we anticipate this will be implemented in the third quarter resulting in a quarterly FDIC run rate in the $27 million to $30 million range. Other expenses increased $25 million including an $11 million increase to the company's reserve for unfunded commitments as well as $9 million of credit related charges associated with other real estate and held for sale loans.

Our adjusted efficiency ratio was 64% in the second quarter and 62.3% year-to-date. As Grayson mentioned in this uncertain market environment we are focused on what we can control and to that end disciplined expense management is paramount. Our plan to eliminate $300 million in core expenses through 2018 is well underway. We're also evaluating opportunities to pull forward some of the identified savings as well as challenging our team to thoughtfully identify additional expense eliminations beyond the $300 million previously announced.

Let's move onto asset quality. Total net charge offs increased $4 million to $72 million and represented 35 basis points of average loans. The provision for loan loss essentially matched charge offs in the quarter and our allowance for loan loss as a percent of total loans remains unchanged at 1.41%. Total non-accrual loans excluding loans held for sale increased 3% from the first quarter and troubled debt restructured loans or TDRs increased 4%. Total business services criticized loans increased 1%. These increase reflect global market uncertainty and a strength of the U.S. Dollar along with continued volatility in commodity prices. At quarter end of our loan loss allowance to non-accrual loans or coverage ratio was 112%. We continue to see credit improvement within the consumer portfolio as net charge offs decreased 24% from the prior quarter. Additionally, consumer TERs improved link quarter while total delinquencies remained relatively stable.

Within business services, we experienced $17 million worth of net charge offs within the energy portfolio during the quarter. Approximately half were attributable to Oil & Gas and half were attributable to coal. While oil prices have recently traded around $50 per barrel and are showing signs of stabilization, uncertainty remains. Should prices fall and consistently trade in the $35 to $45 range we expect additional losses between $50 million and $75 million. However, the time frame for these losses now extend through 2017 as we expect resolution will take longer for certain customers in the portfolio. And should oil prices average below the $25 per barrel through the end of 2017 we would expect incremental losses of $100 million.

In addition, weakness in energy, mining and metals and agriculture continues to put some pressure on certain commercial durable goods companies. We also continue to monitor investor real estate in energy related markets. We continue to believe our total allowance for loan losses is adequate to cover inherent losses in these portfolios. Now given where we are in the credit cycle and fluctuating commodity prices, volatility in certain credit metrics can be expected especially if related to larger dollar commercial credits.

Let’s move on to Capital and Liquidity. During the second quarter, we returned $258 million to shareholders including the repurchase of $179 million of common stock and $79 million in dividends completing our 2015 CCAR capital plan. As Grayson mentioned, we successfully completed our 2016 CCAR process and received no objection to our planned capital actions. And last week our Board of Directors approved a $0.065 quarterly dividend on common shares and a $620 million share repurchase plan and 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 you an overview of our current expectations for the remainder of 2016. We continue to expect total loan growth in the 3% to 5% on an average basis relative to the fourth quarter of 2015 and given current softer pipelines in the commercial space, we expect to track towards the lower end of that range. Regarding deposits, softer loan growth expectations coupled with a strategic reduction of certain deposits within our wealth management corporate banking segments will result in total average deposits remaining relatively stable with fourth quarter 2015 average balances. Our expectation for net interest income and other financing income remains unchanged, assuming no rate increases for the remainder of the 2016, we expect to be at the midpoint of our 2% to 4% range.

As result of our investments, we continue to expect to grow adjusted non-interest income in the 4% to 6% range on a full year basis and given our year-to-date performance we would expect to be at the higher end of that range. Our plan to eliminate $300 million of core expenses is on track and we continue to expect to achieve 35% to 45% in 2016. Therefore total adjusted non-interest expenses in 2016 are expected to be flat to up modestly from 2015. We also expect to achieve a full year adjusted efficiency ratio of less than 63% and adjusted positive operating leverage in the 2% to 4% range in 2016.

Full year net charge-offs should be in the 25 to 35 basis point range and given the volatility and uncertainty in the energy sector, we continue to expect to be at the top end of that range. So in closing, we are pleased with our second quarter performance and we believe our results demonstrate that we're effectively executing our strategic plan in the context of a difficult operating environment. We look forward to updating you on our progress throughout the remainder of the year as we continue to build sustainable franchised value.

With that, we thank you for your time and attention this morning and I will turn the call back over to Dana for instructions on the Q&A portion of the call.

Dana Nolan

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. We will now open the lines for question.

Question-and-Answer Session

Operator

This floor is now open for your questions. [Operator Instructions] Your first question comes from Marty Mosby of Vining Sparks.

Marty Mosby

I want to ask a question about the other expenses, not that they were unusual but there was some credit related to the unfunded commitment as well as some other credit related expenses, I looked about $20 million higher than a run rate, just wondered if that was something that elevated that this particular quarter?

David Turner

Yes, Marty, this is David. So from the time-to-time, we'll have some credits that go sideways on us, this particular quarter we had really one large credit in the unfunded commitment that caused $11 million increase there and the charge for that we run through non-interest expense, and you'll see over quarters the volatility that can have, pluses and minuses, we expected that credit would fund in the third quarter, but believed it was important for us to continue to have an unfunded reserve for that today.

From an Oreo and Health for sales [ph] standpoint again just a couple of credits that happen to be large and we had some write-downs that we believed needed to take place, so we kept valuation adjustments in total of that $9 million. So you're spot on, between the two there was about $20 million of charge that we had to take during the quarter.

Marty Mosby

But thinking about that and then your tangible book value grows, been created by the 2% or better consistent growth. You know as you're looking premium shareholder value, one of the things that's probably -- what you've been able to de-risk because of just getting credit for the tangible book value growth would be an upward momentum for the overall valuation. So just wanted to see if as you think about where you're at today versus where you were at as it went in the last downturn, what makes Regions different from just a risk profile, so significant changes it’s been able to address that should at least make investors comfortable with tangible book value.

David Turner

Sure, so I mean we’ve -- over the past six years we've made a lot of changes and people and process, content of our whole balance sheet has changed dramatically. The most obvious one is the decline in investor real estate which represented almost 30% of our loan portfolio at one time. Today it's about at, call it 9% -- right at 9%. The credit discipline that we have with regards to how we approach business is very different and you know we feel good, we have our hands around our loan portfolio, energy has been a challenge for our industry and those of us that participate in it, but our concentration risk management program that we have in place has reduced the impact -- negative impact we've otherwise have had.

Being the largest bank headquarters in the Gulf State we have now about 3% of our loan portfolio in energy and we've talked about the reserves, the 9.4% reserves so we believe we have that covered. There's some volatility and uncertainty there, we feel like we're on top of that. As we think about our commitment to continue to grow our cash flow, our PP&R, look at the investments that we've made over time, those investments are paying off as we continue to grow and diversify our revenue stream and we've had a fairly consistent margin if you look at that.

And then I'll wrap up with expense management. We have a $300 million target out there, where we said we'd take 35% to 45% of that in the first year, we're on track with where we want to be and I gave you guidance as to where we thought we'd finish the year. So it's very different regions and a very different approach to business and the stability of growth in tangible book value. We've been leveraging our earnings well and returning mid 90% of our capital back to our shareholders in the form of a dividend around 30% of that earnings and you know 60 plus percent in terms of share buyback.

So we think we're deploying our capital effectively. So good business, good markets, good customers and executing against the strategic plan that we laid out in October for our board and at investor day.

Marty Mosby

Thanks, David.

Operator

Your next question comes from Jennifer Demba of SunTrust.

Jennifer Demba

Question on your capital markets revenue, what do you think the potential is for this feed line over the next two to three years it's been growing at a rapid pace for a few quarters now?

Grayson Hall

Yes, I mean as David mentioned earlier we continue to see some softness in our wholesale sales pipeline and if you look strategically what we try to do with that business is to build out a lot of the product offerings we have primarily in capital markets and also in treasury management.

So that we can generate a very reasonable return on invested capital in that business and the capital markets group is a place that we've made significant investments, we continue to believe that those have been thoughtful and smart investments, we have demonstrated a very strong growth this year, we continue to challenge the team and in terms of what the growth capabilities are of that activity. We're coming from a relatively low base so the percentage is remarkably high, but we have not publicly stated a percentage increase goal, but we do believe strongly and confidently that that’s a business that we can continue to grow overtime at an above rate level to other parts of our business.

Operator

Your next question comes from Geoffrey Elliott of Autonomous Research.

Geoffrey Elliott

When I look at the criticized loan balances you're giving overall on Page 8, I see an increase and then when I look at Page 12, just specifically the energy balances I see a decrease. So I wondered if you could elaborate on what's driving the increase outside of energy.

Barbara Godin

Yes, this is Barbara Godin. Energy as you said did go down, we saw some other movements as we look at some of the other areas that we have considered to be a little soft that would be agriculture, some transportation and primary metals. So, we're keeping an eye on that, we're being very cautious. In those categories we're watching them and as we see signs that there is any deterioration, we’re immediately [ph] moving it into a special mention category and so that's -- that accounts for the increase there.

Geoffrey Elliott

And just a quick follow-up, I didn't catch earlier, but I think you said the non-interest income growth you thought should be at the higher end of the 4% to 6% range? I just wanted to check I heard that right.

David Turner

That's right, just taking kind of where we are today and looking at the investments we've made and what’s in the pipeline, we feel that we will most likely be at the higher end of that, we'll give you a better guidance one more quarter out, but we feel confident to be able to lean towards the higher end of the range.

Operator

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

Matt Burnell

David maybe a question to you, just following up on your comments about $300 million cost reduction in the 35% to 40% specifically you're targeting for this year, is it reasonable to assume that the pace of that 35% to 40% reduction will be largely back end loaded or could it be perhaps a bit more evenly spaced over the course of this year?

David Turner

Well, you can have -- we haven’t placed it in any given quarter, we really are trying to guide more to the full year than any given quarter. You can have at times spikes in expense from one quarter to the next, but we'd rather just stick with the guidance for the full year than -- more expensively [ph] -- flat modestly from 2015.

Matt Burnell

Okay. And then just on the, what sounds like a little bit of softness in the commercial pipelines particularly in CNI are there, outside of energy are there specific industries where you are seeing particular softness or is it more of a broad based greater level of caution on your borrowers part given economic uncertainty?

Grayson Hall

I think where we try to compete is in the lower end of the commercial market and you are seeing a lot of our competitor demonstrate growth, a lot of that growth has been in the higher end of commercial into the corporate space. But, when you look at that middle market CNI customer we are seeing a lower level of demand for lending to support capital spending. I would tell you that in energies, is an obvious place where that has occurred, but you do see it, you do see that spread across a number of different commercial industries as there has been obviously a strengthening of the U.S. dollar and some uncertainty created by a lot of events, both globally and domestically.

So I wouldn't say it's limited to one particular industry it seems to be more broad based than that. But yes, if you look at credit quality, commercial is still very good. We've had a really good experience now for several quarters in a row. We still expect it to be good, but it's modestly slow, modestly weaker than what we saw a quarter ago and at the same time we’re just not seeing the new and renewed production that we were seeing this time last year.

Matt Burnell

Okay. That's helpful. And David may be just another quick one for you, in terms of the bank-owned life insurance numbers, you mentioned one of the -- couple of reasons why that had moved around over the last couple of quarters. Guess I’m just trying to get level set on what a reasonable run rate would be for the second half of the year.

David Turner

Yes, so the first quarter did benefit from a couple of things. We exchanged the policy into the different product and we always had a plan. Where we are right now is about where you ought to expect that for the rest of the year.

Operator

Your next question comes from Ken Usdin of Jefferies.

Ken Usdin

On net interest income, wanted to just understand, you got the purpose full decline in the whole sale balances, so the balance sheet looks to have shrunk and with the offset being a little bit better NIM. Can you just walk us through how you kind of expect that trade off to go going forward? Do we see not as much growth in earning assets but a lesser decline in the NIM in terms of growing NII?

David Turner

Certainly, from a NIM standpoint we are really trying to growth NII, but NIM will be continued pressure at this rate environment stays where it is and I would expect you can have four to six more points of compressions for the remainder of the year. But as we think about growing NII, we do it from a couple of different spots, one growing earnings assets which is really on the funding side, deposit side and then putting those that growth into -- in good solid loan growth where we can get compensated for the risk that we are taking, where we can get compensated for having a full customer relationship versus just renting out the balance sheet from a credibility standpoint.

It’s very hard to make money if you're just making loans only. So, we're challenging our teams where we have relationship that’s a credit only relationship to figure out how we recycle that capital into a more fulsome relationship with a customer. So, just because we don't have the loan growth doesn't mean we can't continue to grow NII if we execute that program appropriately. So that's kind of how we think about NII going forward.

Ken Usdin

Yeah, and Dave. Go ahead Grayson I am sorry.

Grayson Hall

I would just reiterate, we continue to see solid loan growth opportunities on the consumer side of our balance sheet and we expect that to continue, we don’t see a reason at this point in time to not believe that continues and the health of that consumer customers continue to be remarkably strong.

Now on the wholesale side, our focus continues to be in the lower end of that commercial middle markets space and we're trying to be much more regress, much more thoughtful and certainly more disciplined at this point in the credit cycle to make sure that what we're putting on our balance sheet make sense, that it has a reasonable return and a full relationship as David said.

Ken Usdin

And my just one follow-up on that David, so you're getting to 3% year-over-year NII growth, It’s almost basked in the cake even if you don't grow it sequentially from here, but are you confident though that you still can envision an x-rates growth in NII from the second quarter point?

David Turner

Again we've landed on 3% for the full year and we're working hard to take where we're right now to continue to grow. It's obviously very challenging given the rate environment, what’s rolling off versus what's going on flattening of the yield curve. So we have some reinvestment risks with regards to the securities portfolio, but we think if we will execute, we can continue to have some modest growth in NII and again we believe strongly in the 3% growth for the year.

Operator

Your next question comes from David Eads of UBS.

David Eads

Maybe just following up on the last point about the reinvestment risks in AFS [ph] portfolio with the tenure where it is, is there any change to your -- how come you're basically just looking to replay maturities and pay downs at current prices or anything you would look to change on that perspective?

David Turner

We don't have any major change anticipated. We haven't extended integration [ph] in little over three year right now. It's been that way for a while. We don't look to make that change. We have a risk profile in the securities book like we want it to be, so we haven't look for a lot of wholesale changes from basically the mortgage backs that we have there today. So as you're pointing currently the risks versus that reinvestment yield going as tenure continues to have pressure on us, we will put pressure on our return on the securities book, but we don't believe the risk of trying to change that dramatically is worth it to us right now. So you've kind of answered I think your own question.

David Eads

Right, that makes perfect sense and maybe on a related point, it's a good quarter from mortgage revenues and you guys have made a point that it was mostly purchase related, do you have expectations for how that business is going to shape out over the next couple of quarters and whether it gets a little bit more refi heavy and whether I guess revenues can kind of stay in your -- stay high, nearly seasonally high levels for a couple of quarters?

Grayson Hall

I think that we were pleased with the performance of our mortgage claim this quarter, again the mix of business that we placed on the books this quarter about 75% repurchased in about 25% refinanced -- purchased and refinanced. We do expect to have a good third quarter based off what we're seeing today. We have seen a shift in the application volume. I would tell you that instead of being about 75-25 it appears to be shifting more 60-40 in terms of purchase versus refinance, so we should see that shift in this quarter, but think we'll have a good quarter. Traditionally if you look at our numbers, second and third quarter are always our strongest mortgage origination quarters. So absent any change that we don't see today we think we outta have good progress going forward.

Operator

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

Stephen Scouten

I had a question for you on the previously announced relationship with Avant and where that's at and if there is any changes given kind of their volume cuts and their business or what that's going to look like for you guys moving forward.

David Turner

Yes, so you know Avant is still in the early stages, we'll launch that in August. So it's premature for us to comment, we think it can be accretive to us over time, but the way we're treating some of these investments that we're making is, we're not taking a lot of risk, we're trying some things, we're seeing what we can learn, we're seeing how we can better serve our existing customer base with these opportunities so we think it'll work for us, but you know again too early to tell, we'll update you as we go through the third quarter and into the fourth.

Grayson Hall

I mean we've been getting a good feedback from our customers on our own line experience and you know we mentioned earlier in the call we've gotten some recent recognition in that regard and ironically we're in the process even as we speak refreshing our own line and mobile experiences for our customers. We're launching that as we speak and then Avant will be in August as David said. We think it's just one more way of trying to provide a better experience for our customers in both the online and mobile channels, but it'll be incremental to what we're doing. Good consumer numbers, I think we were extremely pleased overall with consumer numbers this quarter across all channels, one of the better quarters we've had.

Stephen Scouten

Sounds good, and I guess maybe as a follow up do you have any trepidation on either you know from the standpoint of giving away customer data or losing customer contact in a relationship such as this and also just you mentioned the growth in consumer as a whole, any trepidation there in terms of increasing that exposure and what ultimate losses could be on the consumer side even as I know credit metrics on the consumer side have been good here as of late.

Grayson Hall

I mean well, first of all foundation of our business is built off customer trust, without customer trust our business model doesn't work and so we are very sensitive to anything we do that involves customer data and the privacy of that data, the confidentiality protection of that data. So we have very extensive risk management reviews, our due diligence process is very rigorous and will continue to be. That being said cyber security is an area that we're all challenged with today, but spending an awful lot of resource and time on it, but there's nothing more important to us than the trust of our customers, with their information and their assets.

Operator

Your next question will come from Michael Rose of Raymond James.

Michael Rose

David just one for you, just going back to energy right at this scenario if oil was $35 to $45, but what if we’re tracking above that into the back half of the year, what would that imply for total losses and maybe any updated commentary into '17?

David Turner

So, we have as you now see reserves of about 9.4%, those reserves are established based in large part due to the risk ratings we assign, they come from our work and our credit team’s work and also evaluated by our regulatory supervisors. In terms of what ultimate losses are? We'll have to see if we continue to get stabilization in higher oil price than that reduces are pressure and risk of ultimate charge offs, but I would say that given the volatility that we see in the prices it'd be premature to see how those reserves would come back into income in the short term. I think we need to let that play out over a little longer period of time.

Barbara Godin

This is Barbara, I will say Michael that with oil even at $50 or higher a barrel, that certainly helps the E&P companies first, but the oil field services company they can't delay, so again the reason for us putting out the 50 to 75 between now against next year.

Michael Rose

And maybe just a quick follow-up, the reason that's charged off this quarter, obviously I understand the volatility with oil and the lack of service companies, but is the way to think about that is the provision should match pretty closely to charge offs moving forward?

David Turner

We have a process that we go through, [indiscernible] anything unusual that's a pretty good yes, that being said as credit continues to improve across the board and risk ratings change then you don't have to provide for those losses and that would be the indicator of where the provision could be less in charge offs. We need to let our model run and trying to forecast that out is probably not the best thing for us to do.

Operator

Your next question comes from Erika Najarian of Bank of America.

Erika Najarian

You had two of your peers give guidance on dollar expenses beyond '16, in fact going out all way out to 2018, in a bid to tell investors that they can support efficiency gains without rates and I'm wondering if we think about 2017, you're guiding that we should enter the year with a base -- a natural expense base of let's say 3.45 billion and I'm wondering if how you're thinking about some of the cost savings that you've already identified to go into that 2017 number and whether they can overwhelm some of the investments, in other words is there room to cut that 3.45 billion number to support efficiency if we don't get the help from the rate environment?

David Turner

So Erika it’s a good question, I tried to address a little bit of that in the prepared comments. When we -- so we have the $300 million expense elimination program, we're on track with that, we're really are challenging ourselves, if you think of a couple of a things, one, how do we -- some of those savings actually through our model started 2018 and so the question is what can we do that’s prudent, makes sense to move into 2017? That'll take some work, we'll come back as we get later in the year and start giving you a little better guidance of the '17, we'll give you an update on that.

The second would be, there's a -- we have a lot of rationale that went around the $300 million, it was roughly 9% of our expense base. But we're going to go back and challenge ourselves to think through how we might change that over time. Again we need to be very thoughtful, we need to make sure we don't benefit the short term at the expense of the long term. The franchise building that we are trying to do. We want sustainable franchise value, we don't want just short term.

So its get trickier as we start thinking in these terms, but we believe rates, you have to have the mindset that rates are going to be lower for longer and this is something we can't control. So, we have more work to do here and we’re look forward to the challenge.

Grayson Hall

We have been in this environment for a good long while and we've learned how to manage through it. We've had to really defend our margin, defend the credit culture that we're trying to build in terms of how we grow and build our loan portfolio and managing expenses in this lower for longer environment has just got to be a skill set that we continue to exercise and deploy.

We've been very aggressive on branch consolidations, we think we know how to do that and do it well. But, I think that as David said is that in a lower than longer forecast and we have to go back and just continue to re-challenge ourselves and redefine how we manage through this for a longer period of time.

Erika Najarian

Thank you. And I just have a follow up question to Barb. You mentioned something about how energy prices impacts different parts of your energy portfolio from a different timing perspective. And the question really here is investors are starting to wonder, what type of oil price level do we need to see to see that 9.4 reserve ratio start getting released or going down, appreciating that this reserve is built on a loan by loan basis. But is there any external factor that we can look to say, okay, that's now done and we can now expect to release some of those reserves into the rest of the book?

Barbara Godin

Yes Erika, I think you hit the nail on the head relative to the reserve, it’s made up of different groupings. Of course E&P as I said will benefit from higher oil prices where we see them in the $60 to $70 a barrel range that's great for the E&P Company, but again even at that level oil field services companies will continue to be challenged, it takes them longer to restructure and get back on their feet. So again, the extended tail on the oil field services and as we think of our provisions roughly two-thirds of our provision right now is established against the oil field services sub sector in our book.

Operator

Your next question comes from John Pancari of Evercore ISI.

John Pancari

Regarding the loan growth, on the commercial side I know you indicated some of the weakening of the pipeline but also some of the intentional pull back in the single relationship credit. How would you split that up in terms of the impact on second quarter and the period loan growth from the commercial side? How much of that weaker than expected or how much of that weakness should we say came from the intentional pull back versus the softening demand?

Grayson Hall

That’s a great question, it’s one we've spent some time ourselves internally sort of discussing and debating and clearly part of the weakness we're seeing is just general market demand for credit and if you look at top of company and domestic U.S. numbers the level of fixed capital spending by wholesale customers continues to be below historical proportions and we're seeing net end demand for credit, but at the same time you also hear us talking about making sure that we got full relationships and we are getting paid a reasonable return for providing banking services to our clients. So we need a full relationship to do that.

The return on the credit only relationship is just not sufficient, but we also have been very disciplined in making sure that we have diversity in our balance sheet and so there are certain asset categories that our risk appetite is full filled on and so we've been more judicious about not adding more of that product type to our balance sheet and we're absolutely committed to staying diversified.

I think if you look at it today, we would say it's about half and half, about half of it’s the market and about half of it is disciplined that we're invoking. I'd also remind you that when you look at our loan growth for this quarter, keep in mind the reduction in energy loans that we've achieved over the past quarter then it's been a -- there is a story there that without that reduction in energy growth in our wholesale book would have been much stronger.

John Pancari

Okay that’s helpful and then real quick Barb on credit, did you say that both the criticized balance increases as well as the NPA increase were attributable to the other areas that you sited agricultural metals and transportation?

Barbara Godin

No, NPA was primarily an energy story, [indiscernible] the other groups that I talked about.

John Pancari

Okay got it and then lastly in terms of the margin impact of putting on less of the more thinly price relationships that are single relationships type of credits that you're deemphasizing, just trying to put a number around it or in terms of yield, what yields are some of those loans running off that you're deemphasizing as a single relationship and then how's that compared to new production yield on what you are putting on your book?

David Turner

Well it really just depends John in terms different products. On the C&I space, we haven't seen spreads changed dramatically there, but if you are 225 over you're working against yourself that portfolio yielding yields today about 3.5%, and so as we think about how to combat some of this, wanted to get deeper relationship, we're not often having to look just at spread because the spread is only a component part of the income we get from the customer basis. The other is NII sources that helped rounded out. So it's in fact we had a lower spread asset we look for relationship, we can do with that, it's having a low spread without the relationship that’s the problem.

So I think that also how to combat this would be the consumer growth, we grew consumer loans about $300 million, we've had nice production in consumer where we're getting paid for that risk and that's helping to combat the downward pressure on loan yields. So our loan yields from the first quarter we’re only down 2 basis points, that’s the mixed shift and remixing of business that we're trying to make in our total balance sheet to be more profitable to get better return to our shareholders.

Operator

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

Paul Miller

Thank you very much, most of my questions are answered, but I do have one on non-interest income. You gave a I think range of 5% growth there and over the last year most of your growth has come from either card and ATM fees, or capital markets. Is that what we should be modeling in, is that what most of the growth's going to come from or is there some categories that you've been investing and you should start seeing some growth there.

David Turner

If you look at that we've made lots of investments in capital markets you see in the growth there, but also in terms of service charges and credit card, ATM card kind of growth, all that's really coming from poor consumer household growth [ph]. We're seeing better consumer growth across the communities we serve, more broadly than we've seen in the past. We really are pleased with the progress we've made in the customer experience in our consumer business and the results really are starting to come through and we think that that continues to be a good story.

Additionally, we've made several investments in our wealth management offerings, you know wealth management had a good quarter this quarter, we think that continues and has the prospect of even improving. So you know overall very good story this quarter.

Paul Miller

And you're saying, where do you see most of the growth. I know you've invested in Florida pretty heavily over the years, is it coming across your geographic footprint or is it coming in certain states?

David Turner

It's more broad than it’s been in the past and you know you're correct and historically we had a very strong growth out in the state of Florida, that -- Florida continues to be a very critical market for our franchise, but growth is much more broad than it's ever been historically in the company that's been purposeful on our part, we very much try to make sure that we're not only diversifying our business by product but we're diversifying it by geography and we've made very conscious investments to improve the production of our consumer and our wealth management business as well as wholesale across all the communities that we serve.

Operator

Your next question comes from Matt O'Conner at Deutsche Bank.

Matt O'Conner

Any update on the CRA downgrade from earlier this year in terms of what you're doing to remediate that and if there's any impact that's having on kind of day-to-day operations [indiscernible]?

David Turner

Yes, Matt it's David, so you know we have to go back to kind of the exam that we had the results our core CRA program continues to be robust, we have a lot of assessment areas specially relative to anybody else in the country and we do a good job, our team is really committed to the customers and communities that we serve and we feel like we're doing a pretty good job there. We did have an issue that was outstanding from another regulatory fee was considered and so we're going through, we had to go through another exam cycle for that to get cleared up, the timing of which is completely dependent on our regulatory supervisors and we believe we've done everything we need to continue to work through this and we hope that the conclusion is favorable when that is concluded upon by our regulatory supervisors.

Matt O'Conner

And then just separately if you look at the indirect consumer bucket I think which includes the POS loans the $600 million to $700 million of loans, you've had good growth there, it seems like there's kind of the typical beginning of the seasoning of that portfolio from a credit quality perspective, obviously very small numbers, but do you have a sense of what losses in that book may get to? It's a good yielding book and you've been growing it a lot.

Grayson Hall

I mean that, we look at the indirect portfolio we’ve been growing it quite steadily, starting off from a relatively small base, we've been very selective on where we participate in that market, we've been very selective in the auto space and we've been very selective in a number of point of sales spaces that we participate in and we continue as to test the production that's going on the book and we do believe that expected losses in this portfolio we're targeting them to be less than 2.5%.

Operator

Your next question comes from Vivek Juneja of J.P. Morgan.

Vivek Juneja

Couple of questions please, MBS premium amortization, can you just give us some nitpicky ones? What was the amount in the second quarter, when do you expect it to go in the third quarter?

David Turner

So, Vivek this is -- we've had in kind of the mid 30s in terms of premium amortization, we do expect that to increase modestly over the second half of the year, maybe up $5 million to $7 million each of the quarters, third and fourth quarter, just dependent on prepayments that come in, we see the refinance activities that’s occurring through pipelines and at volume for us so we can project that out a little bit in terms of prepayment fees and expect it will tick up just a bit. Now that being said that is embedded in our forecast of our NII growth which we say would be somewhere in the right at the 3% range for the year.

Vivek Juneja

So, it didn't go up, David in the second quarter, you're waiting for prepayments to show the path before you increase in the third quarter?

David Turner

Yes, correct.

Vivek Juneja

And capital, a bigger picture question, how do you get it down, for both of you? You've got such a high level, you’re close to 100% payout, what do you do to bring this down? Obviously long term it’s not -- you're not growing that any faster based on all the other factors that you're taking into account.

David Turner

So, we've -- like over time we've mentioned to get to our capital targets and bring those down over time, if you look at the CCAR continuing to address a couple of things there, one, the stress is in each of the portfolios, we have some learning's that we can take from that as we reshape certain of our businesses to take out risk which then reduces the amount of capital you need to have in particular in a stressed environment.

We did not have -- go over a 100% of earnings, we did have a couple of regional players that did for the first time. For us, we want to make sure we optimize our capital structure in terms of the nature of the components, so preferred stock and common stock alike and make sure that that's optimized and overtime we will do that to reduce our cost of equity. But I think working on the stresses is apparent [ph] in the balance sheet which we've done and you've seen that come down in places like commercial real estate losses came down quite dramatically. But still high. And so how do we change our business model overtime to reduce the amount of capital we have to have so that we can either put it to work if there is opportunity to grow loans and when there is not returning that capital to our shareholders especially when you've traded it, when we traded at tangible book value.

Operator

Your next question comes from Gerard Cassidy of RBC.

Gerard Cassidy

Can I question your loan to deposit ratio upticked a little bit this quarter to 84%. What's the optimal level for that loan-to-deposit ratio for you folks and how do you plan to reach that level?

David Turner

Yeah, Gerard it's a good question. So, we've been one of the lower loan deposit ratios. I think getting up a few more points perhaps in the upper 80s, lower 90s is the right place for us to be. In the good old days it would be over a 100% when you could rely on wholesale funding and that you could take money out every night, that really -- that market doesn't operate that way.

So, I would say upper 80s lower 90s. I do think the construct and the deposits we have given the LCR framework deposits, certain deposits are as useful to us and in particular as we think about liquidity. Those process that are collateralized provide little liquidity value to us and that value really stems from the diversification of funding more so than actual liquidity because we’re having a most [ph] of our best security for it.

So, I think you will see that drift up a bit overtime, the pace of which is hard to tell.

Grayson Hall

And Gerard if you look at our deposits this quarter, core deposits is really a very good story. We've created a much more favorable mix of deposits and we've reduced some of our deposits to David's point they are less attractive under LCR, but also less attractive at the end of the day from a liquidity perspective and so while our deposits were down modestly at the top of the company this quarter actually core deposits, core deposits that we find attractive were actually up and the liquidity in the company actually improved.

And so we continue to believe that the core value this franchise really is a deposit gatherer and we continue to have a very good story there and a good message back and so I think that to David's point there was a time when you could fund loans in a very different way, but today best way to fund loans is with core deposits and we think in that high 80s low 90s would optimize the earnings power of this company. But we're going to need good solid organic loan growth to make that occur.

Gerard Cassidy

Thank you. And regarding the consolidation of the branches, have you guys done any work to measure when you consolidate or shut down a branch? What percentage of the customers stay with you? Yeah, go ahead I was going to follow up, but go ahead David.

David Turner

Go ahead and finish.

Gerard Cassidy

Yeah, okay. And then with the advent of the mobile technology you all have today versus 15 years ago when if you shut down some branches the numbers may have different, have you've noticed, is there a differential meaning you're keeping more than today because of the mobile technology?

David Turner

I think, one, is since I guess since 2007-2008 we've closed the consolidated over 500 branch offices. We have a very good process for that. I think that from our perspective, we continue to see that how do the process for consolidating those offices really have to do a lot with customer communication and how you equip and train and staff the receding offices. And to the extent, if the receding offices is at relatively close proximity and we would say that close proximities within 10 miles of the other branch that you're seeing very-very good success with virtually no losses in customers in that regard.

We do think that alternative channels ATM, call center, mobile, online all of those other channels provide us an opportunity to provide strong connectivity to the customer and while we're seeing branches losing traffic in the sort of 3% to 5% a year range, we're seeing tremendous growth in the online and mobile channels. So we think continuing to add functionality there enhances the customer experience, it enhances the retention of those customers. But I would say all of it has to be done, you have to do all those things well in order to have a successful consolidation. But great question is one that we continue to adjust and fine-tune on a regular basis.

Operator

We have time for one more question. Your final question comes from Christopher Marinac of FIG Partners.

Christopher Marinac

I wanted to ask about Slide 14 which has gone into the loans split in Texas and Louisiana, I guess I am curious with energy prices trying to stabilize, does that pertain that you would want to see those markets to be stabilized in terms of loan balances or could we actually see growth on those areas?

David Turner

I think if you look at Texas and Louisiana on those slides, very important markets for us and a much more diversified market than you would have seen a few years ago and even though we're seeing obvious stress from our customers that are directly or indirectly tied to the energy business. We're seeing an off a lot of strength in other industries, we're seeing an off a lot of opportunities that still provide banking services in those markets and so we're still very confident about our ability to grow there.

Operator

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

Grayson Hall

Thank you very much for your attendance and participation today, really appreciate your questions and your interest and thank you, we strand adjourned [ph].

Operator

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