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Regions Financial Corporation (NYSE:RF)
Q2 2018 Earnings Conference Call
July 20, 2018, 11:00 a.m. ET

Contents:

  • Prepared Remarks
  • Questions and Answers
  • Call Participants

Prepared Remarks:

Operator

Good morning and welcome to the Regions Financial Corporation's quarterly earnings call. My name is Shelby and I'll be your operator for today's call. I would like to remind everyone that all participants on lines have been placed on listen-only. At the end of the call, there will be a question and answer session. If you wish to ask a question, please press *1 on your telephone keypad. I will now turn the call over to Dana Nolan to begin.

Dana Nolan -- Head of Investor Relations

Thank you, Shelby. Welcome to Regions' second quarter 2018 earnings conference call. John Turner, our Chief Executive Officer, will be providing highlights of our financial performance and David Turner, our Chief Financial Officer; will take you through an overview of the quarter. A copy of the slide presentation, as well as our earnings release and earnings supplement, are available under the investor relations section of regions.com.

Our forward-looking statements disclosure and non-GAAP reconciliations are included in the appendix of today's presentation and within our FCC filings. These cover our presentation materials, prepared comments, as well as the question and answer segment of today's call. With that, I will turn the call over to John.

John Turner -- Chief Executive Officer

Thank you, Dana. Good morning and thank you for joining our call today. Let me begin by saying that we are very pleased with our second quarter results. Our performance clearly demonstrates that we're continuing to successfully execute our strategic plan, building long-term sustainable growth while delivering value to our customers, communities, and shareholders. Our reported earnings from continuing operations of $362 million reflect an increase of 21% compared to the second quarter of the prior year. Importantly, we delivered solid revenue growth while maintaining a focus on disciplined expense management.

Of note, adjusted pre-tax pre-provision income increased to its highest level in 10 years. In addition, this marks another very strong quarter with respect to asset quality as virtually every credit metric improved. In terms of the overall environment, we remain encouraged by improving economic conditions as well as continued improvement in customer sentiment. We remain focused on generation prudent and profitable long growth while also meeting the evolving expectations of our customers.

Once again, we are proud of our robust capital planning process. Our planned capital actions receive no objection in the recent CCAR results and we're set to deliver a robust return of capital to our shareholders while maintaining appropriate levels to meet customer needs and support organic growth. With respect to our business strategy, we're committed to the diligent execution of our plan and are making notable progress with respect to our simplified gross strategic initiative. While much has been accomplished, the process is ongoing and we currently have approximately 40 initiatives under way and an accelerating revenue growth driving operational efficiencies, expanding the use of technology, and ultimately further improving the customer experience.

Through this continuous improvement process, we aim to deliver consistent and reliable results over the long-term. For a while now, we've been speaking about four key strengths we believe provide considerable momentum for Regions. First is our asset sensitivity and funding advantage driven by our low-cost and loyal deposit base. This provides significant franchise value and a competitive advantage, particularly in a rising rate environment. Second, relates to asset quality. We experience another quarter of broad-based improvements in credit quality and continue to expect moderate improvement throughout the remainder of the year.

Further, we believe that de-risking and portfolio shaping activities we have completed combined with our sound risk management practices have positioned us well for the next credit cycle. Third, our capital position supports additional capital returns since we moved toward our target common equity tier one ratio, the execution of which was again validated through the recent CCAR process.

And finally, we expect additional improvements in core performance over time through our simplify and growth initiative, which is well under way as evident by our actions today. As we look ahead, Regions is well positioned and we're building momentum every day. We have clear plans and a strong team and our focus on effectively executing our plans while adapting to the ever-changing environment remains steadfast. We do not anticipate major changes to the company's strategic direction.

Going forward, we will build on the solid foundation already established. Delivering consistent and reliable financial results and creating a culture of continuous improvements are priorities. Providing best in class customer service and an unwavering commitment to our associates and communities will not change. Grayson Hall led the company through one of the most challenging periods in our industry's history. His leadership and commitment has positioned the company well for the future. On behalf of our associates, we thank Grayson for his 38 years of dedicated service and I personally want to thank him for his guidance, counsel, and support. With that, I'll now turn it over to David.

David Turner -- Chief Financial Officer

Thank you, John, and good morning. Let's begin with average loans. Adjusted average loan balances increased $382 million over the prior quarter driven by modest growth in both the consumer and business lending portfolios. Growth in the consumer portfolio was driven primarily by our expanded point of sale partnerships as well as residential mortgage and indirect vehicle lending. Average loan growth in the business-lending portfolio was again driven by CNI lending, primarily from our specialized lending areas. Consumer lending should continue to produce consistent loan growth across most categories and CNI should continue to lead growth within business lending.

Headwinds associated with previous de-risking efforts in our investor real estate portfolio has slowed and as a result, we have begun to see a little growth on an inning basis largely in our term real estate product. Let's move on to the projects. We continue to execute a deliberate strategy to optimize our deposit base by focusing on valuable, low-cost consumer and business services relationship deposits while reducing certain higher cost brokered and collateralized deposits.

As a result, total average deposits declined modestly during the quarter. However, average consumer segment deposits experienced solid growth. However, $1 billion consistent with our relationship banking focus. Our deposit advantage is generated from our granular and loyal deposit base. During the second quarter, interspersing deposit costs totaled 38 basis points, while total funding costs remain low at 52 basis points illustrating the strength of our deposit franchise. Cumulative deposit betas through the current rising rate cycle are only 14%. And importantly, consumer retail deposit betas remain low at approximately 1%. As expected, commercial deposits have been more reactive with an accumulative beta of approximately 44% driven primarily by large corporate and broker deposits.

We believe our large, retail deposit franchise differentiates us in the marketplace. As such, we're in a position to maintain a lower deposit beta relative to peers. Our customer base is also highly engaged with over 55% of consumer checking customers utilizing multiple channels and more than 75% of all interactions are now digital. The number of active mobile banking customers has increased by 12% compared to the prior year and active mobile deposit customers have more than doubled. We continue to focus on being our customers' primary bank as 93% of our consumer checking households include a high-quality primary checking account.

So now let's look at how all this impacted our results. Net interest income increased 2% over the prior quarter and net interest margin increased 3 basis points to 3.49%. These increases were driven primarily by higher market interest rates and prudent deposit cost management. With respect to full-year 2018, the current market expectation for the fed to continue increasing rates combined with better than forecasted deposit pricing will likely push NII toward the upper end of our 4% to 6% guidance on a non-fully taxable equivalent basis.

Specific to the third quarter of 2018, current market expectations for our rate increase in September, along with similar deposit bases to what we have experienced in recent quarters, are expected to result in another solid quarter of growth in net interest income along with modest net interest margin expansion. Remember the third quarter will have one additional day that will benefit net interest income but reduce net interest margin. We also experienced a good quarter as it relates to fee revenue. Adjusted non-interest income increased 2% with growth across most non-interest revenue categories during the quarter. Keep in mind the first quarter benefited from net gains associated with the sale of certain low-income housing investments and a positive evaluation adjustment associated with a private equity investment totaling $13 million that did not repeat this quarter. These gains were included in other non-interest income. With respect to corporate fee revenue categories, the company's investments in capital markets continue to pay off as a business delivered another record quarter. Revenues totaled $57 million with all businesses within capital markets contributing.

The second quarter increase was led by merger and acquisition advisory services and customer derivative activity. Consumer categories remain an important component of fee revenue. To that point, service charges in card and ATM fees grew by 2% and 8% respectively. This growth has been aided by years of checking account growth of approximately 1.2%. In addition, revenue growth was supported by an increase in debit transactions of 9% and an increase in credit card spending of 10% during the second quarter. Mortgage income remains stable during the quarter despite seasonally higher production due primarily to a 25 basis point reduction in gain on sale.

While production is lower across the industry, we continue to expect better performance relative to peers due to our historically higher mix of purchase versus refinance volume. We continue to evaluate opportunities to grow our residential mortgage-servicing portfolio and during the quarter we reached an agreement to purchase the rights to service approximately $3.6 billion of mortgage loans with an expected close date of July 31, 2018, and is subject to customary closing conditions. Increasing servicing income is expected to help offset the impact of lower mortgage production. Wealth management income was up modestly in the quarter driven by a 12% increase in investment services to income.

Let's move on to expenses. On an adjusted basis, non-interest expense increased approximately 2% attributable primarily to increases in professional fees and expense associated with Visa Class B shares sold in a prior year. Excluding the impact of severance charges, salaries and benefits decreased approximately 1% reflecting staffing reductions and lower payroll taxes partially offset by annual merit increases.

As a result of our efforts to rationalize and streamline our organization, staffing levels declined by 344 full-time equivalent positions compared to the prior quarter and approximately 1100 full-time equivalent positions compared to the second quarter of the prior year. Years date full-time equivalent positions have declined by approximately 700 positions. Further salaries and benefits expense reductions are expected in the third and fourth quarters, as approximately 500 additional position reductions will benefit the run rate. Keep in mind; these numbers do not include the 644 position reductions associated with Regions insurance.

In addition, we continue to take a hard look at occupancy expense and will exit approximately 500,000 square feet this year benefiting 2019 and beyond. This amount does not include another 200,000 square feet of reductions associated with Regions insurance. The adjusted efficiency ratio was 60.4% down slightly from the prior quarter. And through the first six months of 2018, the company has generated 2.7% of adjusted positive operating leverage. For full-year 2018 we continue to expect adjusted positive operating leverage of 3% to 5%, relatively stable adjusted expenses and an adjusted efficiency ratio of less than 60%.

Balance sheet asset quality; broad-based asset quality improvement continued during the quarter. Non-performing criticized and troubled debt restructured loans as well as total delinquencies all declined. Non-performing loans, excluding loans held for sale, decreased to 0.74% of loans outstanding, the lowest level since 2007.

Debt charge-offs totaled 32 basis points of average loans, an 8 basis point decline from the prior quarter's adjusted ratio. The provision for loan losses approximated net charge-offs during the quarter and included the release of our remaining hurricane-specific loan loss allowance of $10 million. The allowance for loan losses totaled 1.04% of total loans outstanding and 141% of total non-accrual loans.

Let me give you some brief comments related to capital and liquidity. As John mentioned, we are pleased with our CCAR results and remain committed to maintaining prudent capital ratios, while thoughtfully investing in our businesses for future growth and delivering a solid return of capital to our shareholders. On July 2, we completed the sale of our Regions insurance subsidiary. The after-tax gain associated with a transaction was approximately $200 million and common equity tier one capital generated what's approximately $300 million. Our capital plan incorporates the capital generated from this transaction and is included in our board authorized share repurchase program for up to $2.03 billion in common shares over the next four quarters.

Subject to our board's approval, the plan also includes a 56% increase in Regions' quarterly common stock dividend to $0.14 per share beginning in the third quarter. Regarding 2018 expectations, our full-year expectations remain unchanged and are summarized again on this slide for your reference. So in conclusion, we are pleased with our second quarter results and believe our simplify and grow strategic initiative along with other opportunities and competitive advantages position us well for the remainder of 2018 and beyond. With that, we thank you for your time and attention this morning and I'll turn it back over to Dana for instructions on the Q&A portion of the call.

Questions and Answers:

Dana Nolan -- Head of Investor Relations

Thank you, David. As it relates to Q&A, please limit your questions to one primary and one follow-up to accommodate as many participants as possible. We will now open the line for your question.

Operator

Thank you. The floor is now open for questions. If you have a question, please press the * key followed by the number 1 on your touchtone phone. If at any point your question is answered, you may remove yourself from the queue by pressing the # key. We'll pause for just a moment to compile the Q&A roster.

Your first question comes from John Pancari of Evercore ISI.

John Pancari -- Evercore ISI -- Analyst

Morning. On the loan growth front, want to see if you can give us a bit more color on where you see the drivers of loan growth through the back half coming from and your full-year outlook of low-single-digits. It seems like at this point you might be trending at the lower end of that. Do you see it that way or do you think you can break to the upside a little bit through the back half? Thanks.

John Turner -- Chief Executive Officer

I would say, first of all, we are affirming our current guidance for low-single-digit loan growth excluding the run-off that's targeted in an indirect portfolio and the TDR sale, obviously. If I focus on the consumer side of the business, we feel pretty good about our forecast. We look at mortgage; we expect it, in general, to be flat, I think. We see raw in the HELOC portfolio and the balance of our consumer business should grow modestly, we believe, across most of the sectors in the remaining part of the year.

On the corporate side of the business, our pipelines are good. They have improved since the first quarter and they continue to be pretty solid. Our customers are optimistic but I'd say they're still a bit cautious. We're seeing customers use a lot of their liquidity to fund their additional borrowing needs or what would have traditionally been additional borrowing needs and you can see that in some of the run-off in our deposit balances.

But generally, if you think about our business in the three segments that we think about them, the corporate banking business I think will grow modestly through the balance of the year largely as a result of activity within our specialized industries groups and a more narrowly targeted focus by our diversified in-street bankers. And we 've seen both those teams have some success in the first part of the year. In the traditional middle market commercial banking and smaller business banking, we have renewed focus there that we're beginning to see really get some traction.

Over off by real estate, which had been running off at a pretty rapid rate through the last ten years has really begun to slow and that will help us we believe, see some additional loan growth through the balance of the year.

And then finally, in real estate, we had indicated we thought in the second quarter we would begin to see some modest growth. You remember that we had been de-risking that portfolio, exiting many of the multi-family construction loans that we had on the books and that has been successful, I think.

Term lending, while it's very competitive, has begun to have a positive impact on our portfolio and since we saw some nice loan growth at the end of the quarter in real estate banking. So all in all, I think our guidance is solid. I would not say that we, at this point, would guide toward the upper end of the range. I think it would be lower end to the middle of the range. But we do believe that we will achieve those objectives and if we do, we will meet all of our other targets as a result of that.

John Pancari -- Evercore ISI -- Analyst

Okay, that's helpful, thank you. Then in terms of your margin, saw some pretty good expansion again this quarter and probably would've even been higher if not for the leverage lease transaction -- or the impairment, that is -- want to get your updated thoughts on the sensitivity to the ongoing fed moves but also rising betas. What's your updated sensitivity to each incremental 25 basis point fed hike?

David Turner -- Chief Financial Officer

Our expectation for the year, our beta thus far is 14% as I mentioned earlier, we do think that picks up in the back half of the year but if we look at 2018 we think a beta in the 30% range is what's baked into the guidance that we've given you. Thus far, we've outperformed our expectation on beta and rates have come in faster than we had anticipated as well.

So we're reiterating our guidance on net interest income growth this year to the higher end of that 4% to 6% range. We think we can get the higher end of that. As it relates to next quarter, we think we'll have another solid quarter growth in NII and we think our margin will grow modestly because it has to overcome about two points for the next quarter. So I think that we feel very good about our expectations.

Operator

Your next question comes from Jennifer Demba of SunTrust.

Jennifer Demba -- SunTrust -- Analyst

Just wondering if you could clarify what your M&A interest in capacity is at this point?

John Turner -- Chief Executive Officer

We have an M&A team and they're charged with finding both bank and non-bank opportunities and we've had some success acquiring non-bank businesses, mortgage servicing rights, and other loan portfolios. In fact, we've plot point to Blackarch Partners and that investment is being a real hot point in the quarter in terms of their contribution. And we'll continue to look for those kinds of opportunities because non-bank opportunities help us fill gaps in our capabilities, meet customer needs, and importantly, grow and diversify our revenue.

Bank M&A is a good bit more challenging. We think about where Regions trades relative to our peer, or relative to our likely targets I would say, we're trading at a discount and as a result, the economics just don't work for us. We look at our plans and our opportunities and we think they're significant. We benefit from rising rates; we have a good plan to return capital to our shareholders, which should generate outsize returns.

We think through our simplify and grow initiative that there's a real opportunity to improve our core business. And so we're just not gonna do a transaction that would be significantly dilutive to our shareholders in this environment. Now that's not to say that we're not gonna continue to look. We will do that, we learn as we do. But we're either gonna be very conservative, very thoughtful, we'll seek to build relationships with potential sellers, we'll watch the market, but we're gonna be very disciplined in that regard. Principally because, again, we have the opportunity we think to take advantage of a number of other levers that will drive outside returns for our shareholders.

Jennifer Demba -- SunTrust -- Analyst

Great, thank you for the update.

Operator

Your next question comes from Ken Usdin of Jefferies.

Ken Usdin -- Jefferies -- Analyst

Hi, thanks, guys. In terms of the balance sheet mix, you haven't had a lot of earning asset growth which has allowed you to be, I think in part, so disciplined on the deposit side. How much more shrinkage do you think you could see in terms of the non-interest bearing deposit side and at what point do you think that you might have to just go out into the market just to keep up with hopefully is now a better trajectory on the loan growth side?

David Turner -- Chief Financial Officer

You mentioned us being disciplined on pricing on the deposit side but I would tell you we've been very disciplined on the left side of the balance sheet. We want to grow loans, we did grow loans this quarter, but we are going to remain very disciplined making sure that when we lay out capital to our customers to serve their needs that we're paid and we have an appropriate return on that capital that we put out. We have a low loan-deposit ratio relative to our peers in staying disciplined on the left side of the balance sheet lets us be even more disciplined on the right side.

You were correct to say that non-interest bearing deposits have been put to work. A lot of that has been on the corporate banking side where corporate banking customers were looking for alternatives to generate yield. Some of that's gone into interest-bearing accounts with us. Some of that's been utilized, as John mentioned earlier, to fund capital expenditures and put the excess cash to work. But at some point, we believe those actions will dissipate and we'll be able to grow loans.

We are constantly looking for relationship deposits, whether it is on the consumer side or the business service side that will always be important to us. But we don't see any need in the near term to have to go out and bid up a deposit from a cost endpoint. That being said, we do have promotions like others do and we'll look at opportunities to strengthen the market, leveraging that. But wholesale changes in our deposit structure is not in order at this point.

John Turner -- Chief Executive Officer

And I'd just make another maybe two points, Ken. One is, if you look at growth in consumer deposits we grew demand deposits in the consumer business by 6.4% year-over-year and continue to see good growth in checking accounts and households and so we believe that we'll see nice, steady growth in consumer deposits. The second thing I'd say is, we are, again, reiterating our guidance for low-single-digit deposit growth through the end of the year. We do expect it will continue to grow deposits and finish the year with a little growth.

Operator

Your next question comes from Steve Moss of B. Riley FBR.

Steve Moss -- B. Riley FBR -- Analyst

Good morning. On the commercial real estate growth there, I was just wondering -- we've heard more comments around competition and tighter spreads. Wondering what you guys are seeing as it relates to that and what types of properties are driving growth?

John Turner -- Chief Executive Officer

Great question. We are seeing a lot of competition particularly in that term lending product, spreads that compress 50 basis points or more since the beginning of the year. We've had to be very selective in seeking out opportunities in the space. The growth we've had, though, most, has been in multi-family and office primary. We think we have good expertise. With this mind of the audience, we have been managing that portfolio very actively for quite some time. And today it represents about 7% of our total loan portfolio down from that one-time part in the 30% range back during the crisis.

So we believe it's a business that we can and will continue to grow modestly. It provides really nice fee income opportunities for us, and you see that in our capital markets business and it improving. Also presents an opportunity for us to grow deposits as we begin to develop more relationships with the owner-operator customer who is the term lending customer. So we'll grow it modestly but carefully and again, manage it, I think, very judicially.

Steve Moss -- B. Riley FBR -- Analyst

Okay, that's helpful. And then on the securities portfolio here, wondering what your thoughts are on balances going forward as the yield curve has narrowed and what are your thoughts if it inverts you in the next couple of quarters?

John Turner -- Chief Executive Officer

In terms of the level of security the percentage of earning assets, we don't anticipate any significant change there. If we do get some liquidity LCR relief we may change out some [inaudible]  securities and put them to work more effectively. But right now we think that just continuing to manage the book like we are with the same duration -- we have the lift coming from our fixed rate lending and our securities book.

Even if rates stay flat where they are right now, as we rerate some $12 billion to $14 billion worth of assets over a given year. In inversion that you spoke of, we think would be more central bank driven than a precursor to a downturn and even with that, as rates have shifted up and repricing comes through, we still have a very significant tailwind to help us continue growing NII.

Operator

Your next question comes from Saul Martinez of UBS.

Saul Martinez -- UBS -- Analyst

Hi, good morning everybody. Wanted to ask about loan yield to your CNI yield obviously picked up with the higher rates. Significantly less I think than a lot of other banks who benefited from this blowing out of liebor relative to the set funds rate. Maybe the leverage lease trend right down heads. Maybe on the margin, something to do with it.

I'm curious why you're not seeing a bit more of a yield pickup as some of your competitors have? Does it have to do with hedging strategy? Does it have to do with the structure? It's been over the last few quarters about 10 pips sequential with every rate hike. So I'm curious why, if there's something there that is different about your CNI book or how you manage the portfolio.

John Turner -- Chief Executive Officer

I'll take a shot at that and then maybe David could follow. Typically, [inaudible] CNI business has been very much a relationship-oriented business going back a very long time. It's generally built around our core markets: Alabama, Mississippi, and Tennessee where we have very long and deep relationships. We enjoy significant demand deposits associated with those relationships in that business and while we don't as we look at our peers typically don't get the same yield on the loan side of our business we enjoy, we think, greater demand deposits and so we view it from a relationship perspective. We think that there's a fair trade-off there.

That's part of it. Another part of it is that we have been seeking to grow both our government and institutional banking business, which is a little more competitive and yields are narrower and separately, we've been working hard to extend the tie of run-off in our own [inaudible] real estate portfolio. Yields there have been compressed a bit, too.

David Turner -- Chief Financial Officer

I'll add the other thing -- really, you got to look at the whole relationship versus picking apart loan side versus the deposits but we did have the leverage lease impairment, $5 million you pointed out. That's about three basis points of that change, too. That's the other piece of this.

Saul Martinez -- UBS -- Analyst

It's just hard to triangulate though with some of your peers having 30, 40 bips, 30+ bip yield pickups sequentially pointing to the higher liebor and you guys have been pretty consistent with that 10 basis point per quarter when you have a rate hike. Everything you said makes sense but I wonder if it has anything to do with how you -- is it hedging strategy? Is it the structure of the loan? Because it seems like there's a bit of a disconnect versus what we've seen some of the other banks report.

John Turner -- Chief Executive Officer

You've got to look at mix, you have to look at everybody's hedging strategy, but if you look at our asset sensitivity 25% of it's on the short term, 25% of it's in the middle term, and 50% is on the long end so that will have a little bit of a dampening impact in terms of rate increases that move up. I think that it's really hard to compare peer-to-peer. There are a lot of puts and takes on it.

Saul Martinez -- UBS -- Analyst

If I could just get in a quick one. The indirect other consumer is obviously growing pretty well, Green Sky and -- but can you remind us where you think that book can grow to in terms of absolute size over the next year or two?

John Turner -- Chief Executive Officer

So we do have limits in terms of how much we want our indirect other to get to. Right now our indirect other consumers about 1.7 billion. We're looking that number to be in the $2 billion range. Some growth there but not an extraordinary growth.

Saul Martinez -- UBS -- Analyst

Two billion by year-end?

John Turner -- Chief Executive Officer

I would say over time.

Operator

Our next question comes from Geoffrey Elliott of Autonomous Research.

Geoffrey Elliott -- Autonomous Research -- Analyst

Hello, thank you for taking the question. Maybe following up on the earlier discussion on M&A, can you kind of outline both on the non-bank side and the bank side either from a product point of view or geography point of view, other areas where if the price was right and the economics were right you'd be particularly interested from a strategic perspective?

John Turner -- Chief Executive Officer

With respect to non-bank, I think our focus has been on, as I've said earlier, adding capabilities whether it be in capital markets or wealth management as an example, adding products of capabilities that help us fill gaps to meet customer needs. We've been acquiring loan portfolios, mortgage servicing rights and those things that we'll continue to do. We have the capacity within our force of mortgage service operation. We think we do that well so we'll continue to likely add to that portfolio.

On the bank side, typically our interest is gonna be in footprint. We talk about size and I think that ranges but our conversations have been in the $3 billion to $15 billion kinds of range. We're not interested as a [inaudible] in doing a transaction that would be significantly dilutive to tangible book value and earn backs are important to us. I hope that gives you a little bit of perspective.

Geoffrey Elliott -- Autonomous Research -- Analyst

That does. And then a quick one on CCAR. It looks from the CCAR results like there's some preferred issue that's baked into the ask as I think there was last year. Could you discuss a little bit what Percy confirmed that's the case and then discuss the circumstances when you'd be expecting to issue preferreds?

John Turner -- Chief Executive Officer

So Geoffrey, originally, we had a preferred issue built in but it was in 2019. We do need to continue to watch regulatory changes with regards to the SCB in terms of how that might impact our capital ratios in terms of will it have us have more common and therefore negate the need to have preferred stock over time. There's more to come there but we want to make sure that also we have an appropriate amount of capital tier one and common equity tier one.

Our focus right now in the short term has been to get our common equity down to our 9.5% target range. And as we do that, we need to make sure we backfill appropriately for tier one and if we don't get relief through the SCB then we'll have a preferred issuance in there right now pegged into '19.

Operator

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

Matt O'Connor -- Deutsche Bank -- Analyst

I was wondering if you could talk about the relationship of provision expense, the charge-offs, looking at the next few quarters. Obviously, this quarter I was very close to matching after a couple quarters of release but with loans starting to grow again here, wondering if you could give some color on that?

Dana Nolan -- Head of Investor Relations

Yes, I think you'll continue to see us, Matt, match provision to charge off and there could be a slight build relative to loan growth as one would expect.

Matt O'Connor -- Deutsche Bank -- Analyst

Okay. And in terms of the loans that you're adding now, say the indirect consumer, which isn't that big but the growth that you're getting there and from some of the other portfolios, do you think the loss content of what's being added is higher than what's running off or is there still some kind of underlying de-risking as say, home equity runs off and things like that?

Dana Nolan -- Head of Investor Relations

I think we're gonna continue to see some modest improvement in our numbers across all of our portfolios over the balance of the year, definitely, and what we're putting on the books is of very high quality, very happy with it. What we're seeing with those loans is, in fact, they are performing very well and we would expect them to continue to perform well, including better than those that are running off.

Operator

Your next question comes from Betsy Gracek of Morgan Stanley.

Betsy Gracek -- Morgan Stanley -- Analyst

Hi, good morning. I knew that there's -- you mentioned briefly what the trajectory of simplifying grow is but maybe you can give us a little bit of color as to the kinds of actions that have been taken over the past quarter or so and how you expect the operating leverage trajectory to shift from here? Is it at the run rate that we've been seeing over the last year or so or do you feel that we're moving into a period where there could be a little bit more acceleration in that trajectory?

John Turner -- Chief Executive Officer

John Owen's leading that work, I'll ask him to answer your question and maybe David can follow on as well.

John Owen -- Head of Enterprise Services and Consumer Banking

Good morning everyone. We're making good progress on simplifying growth initiatives. We said earlier we've got about 40 initiatives that are under way. We started just about seven months ago and I think we're off to a really good start. Let me give you a couple of examples of products that we have under way. I think that might provide some color and background.

The first lead focus is gonna be our consumer lending space. We've got a team working on how we take all of our consumer lending categories and make them fully, 100% digital, meaning a customer can come in, start at a digital channel whether it's a mobile device, iPad, or laptop, start there and finish that loan completely digital.

We're gonna do that for all consumer loan categories for will down the road in that process. How we paid for the end of 2018 we'll have the majority of that work done. There'll be some things that'll spill over into 2019 but the example of some of the changes we've made, I'll take the mortgage application process.

We've reengineered that process. We're going through and taking out about half of the data requirements for the application and it's taking the application time down from over 15 minutes to under 5 minutes. The other thing we're seeing is a huge shift in adoption in terms of filling out your application in digital format. In December early about 20% of our apps were filled out in the digital space. We're now about approaching 60% of our applications filled out in that digital space.

The other one I would point out, another initiative is in our commercial lending process. We've gone through and really put a dedicated team focused at how do we reengineer that process really with the goal being for us to get a faster answer back to the customer. So from application time to a yes or a no to a customer, we've dropped that by about 70%. And so the team's done a great job of making banking much easier for our commercial customers.

The last one I would point out would be in our contacts in our area. We've gone through and used IBM Watson in our contact center really to provide some assistance to our reps so they can better assist our customers. A couple use cases that we have deployed, the first being for certain call types, Watson will actually take the call, handle the call with the customer, and service that call right there with Watson. We've had about 700,000 calls already year to date that Watson has handled that call from start to finish and that's equivalent to about 55 contacts into reps in that initiative alone.

The other thing we've done is we've gone through and really tried to arm our reps to be able to have quick, fast answers back to customers. And we have Watson set up almost in a chat mode so a rep can actually ask Watson a question when they have a customer on the phone. They've done that 700,000 times year to date. So a lot of good work there, a lot of good energy.

As David mentioned earlier about headcount -- and one of the things you think about headcount and I'll say corporate real estate -- those are two big indicators that you can watch to see as well, are we making progress on our simplifying growth strategy? We're down about 770 positions through June and that's a direct result of management actions that have been taken with these 40+ initiatives that are out there.

Also, Regions insurance is closing on July the 2nd. That's about 644 positions eliminated there. And in the balance of the second half of the year, you'll see simplifying grow, impact probably another 500 positions in the second half of this year. That's over 1900 positions. And what I would tell you is; that will really show up in 2019 when we get the full run rate.

The last point I would make would be on the real estate side. We've got a good opportunity to continue to reduce our space across the bank. We'll be down about 700,000 square feet this year. We expect that trend to continue.

David Turner -- Chief Financial Officer

Betsy, I'll add to that. So operating leverage to date is 2.7%. We are reiterating our guidance of 3% to 5% for the year. We get there both by having improvements in revenue, whether it comes from rate balance sheet growth, simplifying and grow initiative helps for revenue and then continuing to watch our cost for the remainder of the year. You'll see the benefits that John just mentioned really ramp up in the third and fourth quarter such that gives us confidence that not only we're gonna meet our operating leverage target but we'll also get our efficiency ratio below the 60% level.

Betsy Gracek -- Morgan Stanley -- Analyst

Got it. That was really helpful color; sounds like you were well prepared for that question. One other, just a separate topic but David, with the capital I know we talked a little bit about capital and capital return already. Just especially since the insurance sale is happening this year, is there any opportunity to do a mid-quarter asq or a de minimis as well in terms of capital return?

John Turner -- Chief Executive Officer

We had baked into our submission to the extent we generated capital that we were also going to be able to include that. And that is in the numbers that you see. So that $300 million is already being asked for so there's no need to go back. There's always an option to go back on a de minimis. The de minimus is a fairly small number now and we'll have to see circumstances changes anticipate that but it's always an option.

Betsy Gracek -- Morgan Stanley -- Analyst

Okay, thank you.

Operator

Your next question comes from Peter Winter of Wedbush.

Peter Winter -- Wedbush -- Analyst

Good morning. I just want to follow-up on the efficiency ratio looking out longer term; if you're still targeting bringing it down to the mid-fifties and over, what timeframe do you think you can get there?

David Turner -- Chief Financial Officer

Peter, that's a good question. We've been pretty focused on our 18 to make sure to meet that. It's the third year of our three-year plan we laid out at investor day in November of '15. We are gonna have our investor day in February of '19 where we will have our scorecard that we told you we were going to do. And that we're gonna be laying out expectations for the next three years. You've heard me mention before, I think our industry is going to have to become more efficient over time.

And I think we will certainly do that and I think targeting something in the mid-50s to maybe even better than that over time is on the table. I think you should see us through simplifying grow initiatives to get just a little better each quarter. But when can we hit that mid-50s? We haven't really gone out and said that. You're gonna have to wait and show up in February to hear it. I think in the not too distant future we could actually get there.

John Turner -- Chief Executive Officer

I would just reiterate that. I think we're very focused on continuing to improve the efficiency of our operation and I'd make the point that our simplify and grow initiative -- we've tried to be clear that it's not a program, it's really about making a cultural shift here at Regions. It's about developing a culture of continuous improvement. We've got to always be looking for how do we make it easier for our customers and bankers to do business? How do we improve our processes? How do we drive efficiency to be more respective and deliver more value for our shareholders? So we're very committed to doing that.

Peter Winter -- Wedbush -- Analyst

That's really helpful. And just a follow-up: If I look last year, the share buyback coming out of CCAR you frontend loaded that buyback. Should we expect kind of the similar type trend this year?

John Turner -- Chief Executive Officer

Well, we haven't laid out our timing, Peter, but we have a pretty tall order to get that done as soon as possible and that's our goal. We're carrying excess capital right now that's really been an anchor from a return standpoint and we would like to get that capital right size sooner rather than later. And so I'll leave it at that.

Operator

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

Erika Najarian -- Bank of America -- Analyst

Hi, good morning. Just one follow-up question for me. You mentioned that 93% of your consumer deposits have high-quality checking accounts tied to them. Obviously, the consumer beta stands at 1% on the cumulative basis. I guess I just wanted to make sure I'm understanding the message correctly. A lot of your peers are starting to dive toward more aggressive betas going forward. Is it that a lot of your consumer retail accounts are transactional and don't have that excess cash that potentially could rotate away from regions into some of these online offerings? Are we reading that correctly?

John Turner -- Chief Executive Officer

That's a big piece of our deposit base and that's why it's been fairly stable, that's why our beta was low last time, that's why we think it'll be low this time. And we have the core checking account of our consumer base and that is really important, very granular, average deposit of about $3,500 with count. That's what makes us unique. And that's how we'll win from a beta standpoint.

Operator

Your next question comes from Christopher Marinac of FIG Partners.

Christopher Marinac -- FIG Partners -- Analyst

Thanks. David, I had a similar question as Erika but just want to look at it from the angle of the non-metro markets. To what extent does that keep working for you, as we get further along in the right cycle? Is that still a benefit that you have?

David Turner -- Chief Financial Officer

Yeah, absolutely. We think it's foundational to who we are in non-metro markets, that's a big part of our deposit base. It's not just deposits but it's the whole relationship that we have with these customers that are very loyal to us. And we dominate in those markets. So it's important for us to continue to provide good, solid customer service and we will retain those deposits, which we think, again, is foundational and really the differentiator. We've had this strategic advantage for a long time but without rates rising some we couldn't extract the value until now. And so we think that continues in the future.

Now, the offset to that is our deposit growth relative to some of those smaller markets isn't as robust as some of the major metros, which is why you have seen us make some investments in major metros like Atlanta where we can capture some of that faster growth. But we don't want to abandon that core customer base in the smaller markets. So that's really our strategy on both sides.

Christopher Marinac -- FIG Partners -- Analyst

That's very helpful. Is there a way to pinpoint the kind of rate advantage between metro versus non-metro, even in just in the big picture context?

David Turner -- Chief Financial Officer

We can get back to you on that, Christopher.

Operator

Your final question comes from Gerard Cassidy of RBC.

Gerard Cassidy -- RBC -- Analyst

Good morning, guys, how are you? David, can you share with us in the securities portfolio, I think you said that about $12 billion to $14 billion reinvest every year? Did I hear that correctly?

David Turner -- Chief Financial Officer

That's total assets, Gerard. That's probably 2, 3 billion in the securities book and about 10, 11 in the loan book.

Gerard Cassidy -- RBC -- Analyst

Okay. In the securities book, what yields are you giving up when it rolls off and where are you reinvesting it in? And what is the duration of that portfolio as well?

David Turner -- Chief Financial Officer

So our duration really hadn't changed over time. We are in four, four and a half years in terms of duration, which rolling off is in the 250 range and what's going on is about in the 315 range. So that was one of the benefits of if rates just stayed here, that reinvest of securities, again both in securities and loans, is a big benefit to us.

Gerard Cassidy -- RBC -- Analyst

Very, very true. And then circling back to deposits. One of your peer banks talked about they're seeing their commercial customers using their cash for capital expenditures, which is one of the reasons they felt their commercial loan growth was a bit modest. Is there any evidence with your corporate and commercial loan book in talking to your customers that they're drawing down on their deposits for capital expenditures and down the road, you might see the loan growth as they use up those excess deposits?

John Turner -- Chief Executive Officer

Gerard, this is John. Yeah, we think that is exactly the case. And we would point to $500 million more or less in deposit declines that we think have been directly related to customers putting that to work. It's sort of rough. That's a more specific number than it ought to be more of a round number I guess but that kind of the runoff that we've seen has I think largely been, we believe, of use to our customers to invest in their businesses. And as a result, at some point, we think that will translate into additional loan growth.

Gerard Cassidy -- RBC -- Analyst

Right, OK. And then just lastly, David, you mentioned that you're outperforming on the beta. Have you guys figured out why the beta so far this year has just moved so slowly? Is it just the nominal rate of interest rates being so low or is there another factor?

David Turner -- Chief Financial Officer

Well, I think for us, if you look at our retail base betas of 1%, it gets back to the makeup of our deposit base and who our customers are, which was really Christopher's question that I was trying to answer. You go to the business side; we've had a cumulative beta of about 44%. Those are often times large corporate customers that are looking every time rates go up for their fair share and I think that we have to be prepared for that just like we are on competitiveness from a loan pricing standpoint.

But what differentiates us is our intense focus on relationship banking, whether it be on the consumer side, the business services side or the wealth side is really important for us to maintain a relationship and have all the products and services delivered to our customers and we think that's what helps keep our beta down as well.

Operator

I'll now turn the call back over to John Turner for any closing remarks.

John Turner -- Chief Executive Officer

Just thank you all for participating today, I appreciate your time. Thanks for your interest in Regions.

Operator

This concludes today's conference call. You may now disconnect.

Duration: 57 minutes

Call participants:

Dana Nolan -- Head of Investor Relations

John Turner -- Chief Executive Officer

David Turner -- Chief Financial Officer

John Pancari -- Evercore ISI -- Analyst

Jennifer Demba -- SunTrust -- Analyst

Steve Moss -- B. Riley FBR -- Analyst

Saul Martinez -- UBS -- Analyst

Matt O'Connor -- Deutsche Bank -- Analyst

John Owen -- Head of Enterprise Services and Consumer Banking

Betsy Gracek -- Morgan Stanley -- Analyst

Peter Winter -- Wedbush -- Analyst

Erika Najarian -- Bank of America -- Analyst

Christopher Marinac -- FIG Partners -- Analyst

Gerard Cassidy -- RBC -- Analyst

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