Regions Financial Corp (RF) 2015 Q3 法說會逐字稿

Good morning and welcome to the Regions Financial Corporation's quarterly earnings call.

My name is Paula and I will be your operator for today's call.

(Operator Instructions)

I will now turn the call over to Mr. List Underwood to begin.

Thank you, operator, and good morning, everyone.

We appreciate your participation in our call today.

Our presenters are Grayson Hall, our Chief Executive Officer; David Turner, our Chief Financial Officer.

Other members of management are present and available to answer questions as appropriate.

Also, as part of our earnings call, we will be referencing a slide presentation that is available under the investor relations section of Regions.com.

Finally, let me remind you that in this call, and potentially in the Q&A that follows, we may make forward-looking statements which reflect our current views with respect to future events and financial performance.

For further details, please reference our forward-looking disclaimer that is located in the appendix section of the presentation.

With that, I'll turn it over to Grayson.

Thank you, List, and good morning, everyone.

We're pleased you could join us for our call today.

For the third quarter, we reported earnings from continuing operations at $246 million, or $0.19 per diluted share.

These results reflect total adjusted revenue growth despite an operating environment that remains challenging.

In the third quarter, we continue to deliver growth and categories that we believe are fundamental to future income growth.

Our fundamentals are strong with growth in households, accounts, loans, and deposits.

In fact, one of the most important categories is checking accounts, which have grown by more than 2% year-to-date.

We remain focused on expanding and deepening relationships through our neat-based approach to relationship banking.

Total net interest income increased 2% from the second quarter, representing the highest quarterly increase in approximately two years.

For the same period, total loans increased 1% on ending basis and a rough 2% on an average basis contributing to the increase in net interest income.

Business lending had a good quarter driven by real estate and corporate banking groups.

Within real estate, REIT business growth was strong.

The growth within corporate banking reflects the strength of our business model as local bankers collaborate with industry and product specialists to grow loans.

In the third quarter, all specialized industries experienced growth led by power, utilities, technology and defense, restaurant and healthcare.

Consumer lending had another strong quarter reaching $30 billion in total outstanding on an ending basis with growth in every loan category.

Our new point-of-sale initiative led this growth as consumers took advantage of the convenience of this product offering.

Additionally, indirect vehicle lending continues to be strong, supported by robust auto sales during the summer.

Total non-interest revenue in the third quarter declined compared to a strong second quarter.

The majority of the decline was attributable to a lower benefit from mortgage servicing rights and related hedges.

Despite this decline, we have continued to experience good momentum in several areas, including capital markets, wealth management as prior investments continue to produce results.

Wealth management income was strong this quarter, up 13% over prior year.

We remain focused on our strategy to grow wealth management by continuing to recruit, retain, and develop talent required to meet the diverse needs of our clients.

We will continue to look for insurance acquisitions and [looked out] similar to our recent addition in Georgia.

Clearly, this operating environment continues to be challenging as we have continued to face lower interest rates for an extended period of time.

Furthermore, we expect the pace of increases in interest rates to be slow and measured.

Given this backdrop, it is essential that we take more aggressive action as it relates to expense management.

We have instituted a number of initiatives and are carefully evaluating a number of other actions that we will provide more details at our investment day on November 19.

Credit quality was relatively stable during the quarter with some weakening in the energy portfolio.

As expected, there has been some downward migration risk ratings inside this portfolio.

These shifts could continue if oil prices remain at current lows.

Overall, we believe our energy customers are taking appropriate actions by reducing cost and making other infrastructure adjustments to create liquidity, preserve capital, and reduce debt to mitigate vulnerabilities to this environment.

As a result, we expect any future losses related to this portfolio to be manageable.

We have remained focused on our strategic initiatives for 2015 and have made progress diversifying growing total revenue by continuing to effectively deploy capital.

We remain committed to generating positive operating leverage over time and in the near term we rigorously seek operating efficiencies.

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

David.

Thank you and good morning, everyone.

I will take you through the third quarter details and then wrap up with our expectations for the remainder of 2015.

Loan balances totaled $81 billion at the end of the third quarter, up $914 million or 1% from the previous quarter.

Year-to-date, loans have increased $3.8 billion, or 5%.

Business services achieved solid growth with balances totaling $51 billion at quarter end, an increase of 1%.

Commercial and industrial loans grew $559 million, or 2%, and commitments also increased 2%.

As previously mentioned, real estate corporate banking and all specialized lending areas experienced growth in the third quarter.

Consumer lending had another strong quarter.

Loans in this portfolio totaled $30 billion, an increase of 2% over the prior quarter.

Indirect vehicle lending increased 3% while production increased 8%.

And other indirect lending, which focuses primarily on home improvement retailers, increased $107 million linked quarter, or 28%.

Year-to-date, loans in this new portfolio have increased $284 million, and we plan to continue to grow this business into 2016.

Mortgage loan balances increased $141 million.

While production declined compared to a seasonally strong second quarter, total production remain healthy at $1.4 billion, an increase of 11% over the prior year.

Looking at the credit card portfolio, balances increased 2% from the previous quarter and our penetration rate into our existing customer base now stands at 17%, up almost 200 basis points from the third quarter of last year.

Finally, total home equity balances increased $48 million from the previous quarter as new production outpaced portfolio runoff in the third quarter.

Let's take a look at the positives.

Supported by our multi-channel platform, average deposit balances increased $66 million and a totaled $97 billion at quarter end.

Consumer and wealth deposits represented 75% of total deposits.

Of note, our average account balance is smaller and is expected to be less volatile in a rising rate environment.

Deposit costs remained at historically low levels at 11 basis points while total funding cost remained at 25 basis points.

Now, let's see how this impacted our results.

Net interest income on a fully taxable basis was $855 million, an increase of $16 million, or 2%, from the previous quarter.

Higher loan balances and balance sheet hedging strategies were the primary drivers behind the linked quarter increase.

In an effort to mitigate impact from a continued low-rate environment, we executed hedges involving interest rate derivatives.

These strategies benefited net interest income while only modestly reducing asset sensitivity.

The net interest margin was primarily affected by pressure on asset yields and higher cash balances, resulting in a three basis point margin decline to 3.13%.

Total non-interest income declined after a particularly strong second quarter driven in part by lower mortgage revenues due to lower benefits from mortgage servicing rights and the related hedges.

However, our investments in and commitment to diversifying and growing fee-based revenues yielded positive results in several areas.

Total wealth management income increased 5% linked quarter driven by insurance income and investment services fee income.

Insurance income increased 15%, driven in part by the acquisition that Grayson previously mentioned.

And investment services fee income grew 15% as our financial consultants continue to expand and deepen relationships primarily through our Regions360 approach to needs-based selling.

Capital market income increased $2 million over the previous quarter, primarily related to pick up and loan syndication income.

This reflects our continued investment in people and products in order to grow and diversify revenue.

Card and ATM fees increased 3% as a result of increased credit card usage as well as an increase in active credit cards.

Let's move on to expenses.

Total reported expenses in the third quarter were $895 million, an increase of $35 million on an adjusted basis.

This included an increase of $31 million in deposit administrative fees.

In the third quarter we incurred an expense of $23 million related to prior assessments.

Also impacting the linked quarter variants were refunds that we received in the second quarter of $6 million from overpayments.

We expect the future quarterly run rate for this expense items to be in the $22 million to $25 million range.

Salaries and benefits were down 1% linked quarter.

Additional headcount related primarily to strategic investments drove an increase in base salaries.

However, this was offset by reductions in performance-based incentives.

Expenses related to occupancy increased linked quarter due to seasonal increases in utilities.

And, additionally, furniture and fixtures increased from the previous quarter due to investments in technology and back office infrastructure which will improve efficiency over the long term.

This expense item is expected to increase modestly over the next few quarters, reflecting these investments.

Outside services declined $2 million from the prior quarter, partially related to lower risk management and compliance cost.

Our adjusted efficiency ratio was 66.8% in the quarter.

However, excluding the additional expenses related to deposit administrative fees, the resulting ratio was 65%.

As Grayson previously noted, in this operating environment we must do even more to improve our efficiencies and lower operating cost.

To that end, we have recently instituted hiring restrictions and continue to rigorously review all discretionary expenditures.

Additionally, we have allocated expense challenges and goals by business unit, and we will provide more details on these additional steps when we meet with you for investor day next month.

Let's move on to asset quality.

Total net charge-offs increased and represented 30 basis points of average loans.

Importantly, this increase does not reflect the broad deterioration in credit quality.

Total business services criticize and classified loans increased $304 million, or 10% from the prior quarter, and non- accrual loans increased 5%.

These increases were driven by some weakening in a small number of larger loans primarily within the energy portfolio.

As it relates to the energy portfolio, we remain in close contact with our energy customers.

Rigorous credit servicing activities are ongoing, and we have instituted heightened requirements for loan renewals.

As previously stated, we anticipate additional migration into non-past categories but expect any losses in this portfolio to be manageable.

Based on what we know today, over the next 12 to 18 months losses could range in the $30 million to $50 million range; however, we have adequate reserves to cover these losses.

The provision for loan losses was $60 million, matching net charge-offs, and our allowance for loan losses was relatively stable at 1.38% at the end of the third quarter.

Compared to the prior quarter, troubled debt restructure loans, or TDRs, declined 7%.

And at quarter end our loan loss allowance to non- accrual loans, or coverage ratio, was 141%.

And given where we are in the credit cycle, volatility and certain credit projects can be expected, especially related to larger dollar commercial credits in our portfolio and fluctuating commodity prices.

Let's move on to capital and liquidity.

During the quarter, we repurchased $270 million, or 26.6 million shares of common stock, and declared dividends of $79 million.

Under the Basel III provisions, the tier one ratio was estimated at 11.7% and the common equity tier one ratio was estimated at 11%.

On a fully phased in basis, common equity tier one was estimated at 10.7%, well above current regulatory minimums.

Our loan and deposit ratio at the end of the quarter was 83%, and regarding the liquidity coverage ratio, Regions remains well positioned to be fully compliant with the January 2016 implementation deadline.

Now, let me have a brief review of current expectations for the remainder of 2015.

We expect total loan growth to be in the 4% to 6% range on a point-to-point basis and probably end up at the higher end of that range.

Regarding deposits, we continue to expect full-year average deposit growth in the 1% to 2% range.

With respect to the margins, we expect performance through year-end to be marginally better than the full-year guidance communicated in early 2015 which called for a decline of 10 to 12 basis points if rates remain persistently low.

However, even if rates remain low, net interest income is expected to grow moderately.

Finally, we expect to continue to benefit from revenue initiatives, and we will take steps to prudently manage our expenses.

We remain committed to generating positive operating leverage over time.

With that, we thank you for your time and attention this morning.

I will turn it back over to List for instructions on the Q&A portion of the call.

Thank you, David.

We are ready to begin the Q&A session of our call.

In order to accommodate as many participants as possible this morning, I would like to ask each caller to please limit yourself to one primary question and one related follow-up question.

I appreciate your cooperation.

Now, let's open up the line for questions, Operator.

(Operator Instructions)

Stephen Scouten of Sandler O'Neill.

Thanks for taking my question here.

First, one of the things about the energy portfolio and the reserves, I know you don't tend to disclose specific reserves related to the energy portfolio, but did you take any incremental provision related to that $30 million to $50 million in potential losses that you could see, or was that, as you said, matching the net charge-offs you had in the quarter?

Stephen, thank you.

A good question.

I will ask Barb Godin, our Chief Credit Officer, to make a few comments in that regard, and then John Turner, Head of Corporate Banking, to follow that up.

Barb.

Thanks very much, Grayson.

Yes, we actually did take some incremental reserves this quarter on the energy portfolio and we currently stand at around 4.7% of that portfolio being reserved.

So, we are well reserved, given where we feel the losses will be in the next 12 to 18 months.

I would just add we provided some additional detail, particularly on the oil field services sector, in our release.

I think what you'll see is we have, as we said before, a smaller number of customers that comprise our portfolio.

We believe that we have been very prudent in the selection of those clients, stay very close to them.

We think they are doing all the right things to react to the crisis that they have faced, the declining oil prices.

So we remain cautiously optimistic about the performance of our book.

Thank you.

Okay, thanks.

I appreciate that.

I definitely appreciate the additional color there in the slide deck.

And then just as a follow-up as it relates to capital deployment.

Obviously the share buyback was a little bit -- it seemed accelerated in the quarter.

I'm assuming just taking advantage of the lower share price.

Is that something that you can continue to do in this current quarter as the share remains lower than it should be in my view?

Or how much flexibility do you have there?

This is David.

We have actually a capital plan that was not objected to by our regulatory supervisors for which we are executing against.

We were able to move up a small portion of that into a different quarter, but in order to have any meaningful change in our total buyback we would have to go through a submission to our regulatory supervisors for future -- any increases in the buyback over our CCAR request.

Okay.

So the $8.75 will remain the same, but you could pull that forward like we saw here in the current quarter?

We did pull a piece of that forward this last quarter, but we can't change the $8.75.

Perfect.

Thank you so much.

I appreciate the color.

Thank you.

Ken Usdin of Jefferies.

Good morning, Grayson.

Just a quick question just on the outlook for net interest income.

David, your comments about less bad than the prior guidance earlier in the year was lost in the sequential, so just wondering can you can help us understand, do we still see the core compression of the NIM from here on an X rates basis?

And what other drivers do you have to help support that further?

I think we will still have a couple of basis points of compression expected for the quarter.

We really are speaking more to NII, we believe that can continue to grow, though.

Obviously you are continuing to see the impact, partially higher cash balances for us, our driver, and then just a low rate environment grinding down.

But we will put in a couple basis point pressure from here to the end of the year.

And underneath that it looked like the loan yields have started to flatten out.

Was that just finally getting past the natural rollover?

Was there any incremental help from swaps or hedging activity that helped, as well?

It is a little bit of both.

So you are seeing low rates work through to some degree, but you have to have help from some of the derivatives that we put on, as well.

Okay.

Thank you.

Marty Mosby of Vining Sparks.

Good morning, Marty.

Good morning.

David, I had two questions for you.

One is looking at the investment process that you have been in, that forced your expenses to grow faster than your revenues over the last year.

Do you anticipate that you're getting to that inflection point, where the return on those investments begin to flip that around and you can start to create that operating leverage that you're talking to in your outlook?

That is a great question, Marty.

So, I will tell you we have made investments in a lot of areas to execute our strategy, which is to diversify our revenue stream and to submit IR sources.

In some cases we have further investments to make and in others we are just about finished.

So an example of that would be our financial consultants that we have.

In wealth management, we had a goal to hire about 225 of those.

Through September 30 we have about 219, so we have got a handful more to go in the fourth quarter and we will be done.

And so what you will start seeing is the payoff of these investments will start becoming even stronger relative to the investments or the expense that we had earlier.

And so, it just depends on which investment we're talking about.

Our goal is to grow our income, diversify our revenue stream, and to have better returns on capital over time, which is why we needed to make those investments early on, and they are starting to pay off for us.

They are performing exactly like we expected.

As a matter of fact, in some cases they are actually ahead of schedule.

You have seen expense go up, and we've talked about making the investments.

We still believe it has been the right thing for us to do, and you will see the benefit as we get into 2016 and beyond.

Marty, to add to that we obviously made what we think are very prudent investments and the results we have seen from those investments have been very positive and we continue to see opportunities for that.

That being said, given the current right environment and our rate forecast for what we believe the next few quarters hold, we have had to become much more rigorous on expense management.

We are trying to self-fund a lot of our investment to make sure that, as David said, over time we can generate positive operating leverage as a company.

So you will see us be more rigorous around expense management over the next few quarters.

We just think given the rate environment that it is prudent to do that.

That being said, we really are trying to create long-term franchise value while being sensitive to quarter-to-quarter earnings pressure.

We need to make sure that we are thoughtful about how we manage expenses and to make sure that we continue to build franchise value over time.

Thanks.

And then, David, this won't be a surprise, my next question.

You started to step out with hedging and neutralizing some of your asset sensitivity position.

You said net-net it really didn't effect your pickup when rates go up.

Is that enough?

You are still letting cash balances build.

Shouldn't you start thinking about neutralizing that balance sheet, over the next 12 months at least more aggressively?

And I know you are smiling there, listening to me ask the same question I have asked to several times before, but just wanted to ask you that again.

So, Marty, we continue to challenge ourselves on the positioning of the balance sheet.

We have been asset sensitive for an extended period of time.

We believe staying asset sensitive is the right thing for us as we seek to extract the value out of our competitive advantage which is our deposit base, our granular, sticky, consumer-oriented deposit base, and to neutralize rate sensitivity in this environment we think is the wrong thing to do.

We did put on some hedges to protect ourselves primarily on a prolonged low rate or declining rate environment, but we didn't want to take too much sensitivity off.

So we are still up an instantaneous 100 basis points.

We are still at about $155 million of NII impact down from about $165 million.

So it was a slight change down, but we believe maintaining that sensitivity is the right thing for Regions given the construct of our deposit franchise and that size balance sheet.

Thanks.

Betsy Graseck of Morgan Stanley.

Good morning.

A couple questions.

One, Barb, I just wanted to make sure: you indicated that regarding energy you feel like you have done the reserving you need to do here today.

And is that -- could you just give us a sense of that is at current oil price, or the forwards on oil and the kind of time frame that your price outlook [persists]?

When we go through our process, including sizing up what we think the losses might be, et cetera.

We go through looking at a number of models, but we also do an account by account bottoms up review.

We do that on a monthly basis, staying close to our customers, close to their balance sheets, et cetera.

And when we look at the price of oil, we look at the spot price, we also look at the futures price, as well.

So all of that is incorporated into our thought process as to how we determine what the appropriate level of allowance was.

And what kind of discount do you give to spot in futures?

Well, again, we go through the standard.

We start off with the number of barrels of oil that our engineers feel are in the basins.

We apply our price deck to it.

Our current price deck base was $46; stressed is $36.80.

We discount that by the [TB9], so discounted by 9%.

Then we risk adjust all of that again one more time.

We do that at approximately a 10% level and then we do a borrowing base.

The borrowing base is about 65% of all of that.

So long story short is you'll end up with 53% of what's in the ground is what we'll end against.

And do you think that there is going to be much in the way of reduction in supply here, based on all of that and what you and others are doing with regard to these re-determinations, or do you think supply kicks along as is?

Well, I know with the borrowing base redeterminations we believe that we will probably reduce another 15% to 20%, which is roughly what we did in the prior quarter, as well.

And we do see a lot of supply that is still out there.

Okay.

And then just separately, on the outlook for operating leverage.

What I'm hearing is with the hiring restrictions and we will see the benefits of the hiring that you have done over the last 12 to 18 months come through, that we should look for operating leverage to improve as we go through the next two, three, four quarters.

Is that a fair assessment?

That's right.

We wanted to continue, as Grayson mentioned, to make investments to grow revenue and we are going to self-fund those.

So we are going to look at all areas of our Company to control our expenses with the goal of generating positive operating leverage.

It just takes time to work through.

I think the question came earlier in terms of the investments.

It takes time to generate the revenue, pays for the investment we made.

We are on track and we think that you will see that improvement coming through in 2016.

And then in the past you have talked a little bit about the insurance growth from lift outs.

I know it is a modest effort relative to the size of the overall company, but would that continue in this outlook for slowing down hiring or putting a freeze on hiring?

We have continued to expect to make investments, as we mentioned.

Those are not included into the hiring numbers we have talked about: the freeze as you mentioned, the restrictions.

So you should see us continuing to look for opportunities to grow that insurance business.

Okay.

It's threading the needle between the words.

I just wanted to make sure where it starts and stops with regard to insurance, so appreciate that.

Thanks.

As I said earlier, we recognize in this environment that the most prudent thing for us to do is to be much more rigorous, much more disciplined in managing expenses.

That being said, we have to do that in a thoughtful way that doesn't degrade franchise value, but actually affords us the opportunity to continue to increase franchise value.

And where there are opportunities, such as the insurance lift outs, that provide us a situation that we believe that gives us economic benefit in a relatively short period of time, we're still going to seize those opportunities.

Okay.

Alright.

Thanks.

David Eads of UBS.

Good morning.

Maybe following up on energy just quickly, great color you have given so far.

Just curious, particularly on the oil fields services side, if you can give any color on how you think about lost frequency and severity in that book?

It is Barb Godin again.

Oil field services totaled $1.2 billion; 24% of that book is close to the well head, but what you need to know about that book is 66 customers make up 98% of that book.

So, we're very close to them.

As I look at that overall book, what the largest piece of that book is marine, and we have just under $500 million, $494 million in marine; 23 obligors, so again not very granular, but 70% of what we do in marine is deepwater marine, so only 30% is on the Gulf of Mexico shelf.

So again, looking at that book, we feel pretty good about the marine piece of that book.

Quite frankly, all of the other pieces are quite manageable.

The one I would worry about the most would be the fluid piece, and we have eight obligors on fluid and we have $99 million in outstandings for fluid.

So, again, we are paying them a lot of love and attention these days.

Thanks for that.

And then on the longer side obviously another quarter almost everything is looking good.

The main exception there being continued runoff in the unoccupied commercial real estate portfolio.

Are you any closer to knowing when we might get an inflection point in that portfolio?

It is a great question and it's one we challenge ourselves with frequently.

As David had said earlier, one of our primary goals is to try to not only grow revenue by diversify our revenue streams.

And if you look at what is different this quarter versus last quarter certainly versus a quarter a year ago, we've really gotten greater diversity and gotten greater growth more broadly across a different lending segment.

And as you pointed out, the one segment that we did not get growth in, have not hit an inflection point on has been owner-occupied real estate, which has predominately been our small- to medium-sized businesses that we provide banking product to.

And that small business community we have seen this year an improvement in production.

What we have not seen is enough production to offset normal amortization of that portfolio and is predominately an amortizing portfolio.

There is some line usage in that group, but mostly it is amortizing.

We continue to look for that inflection point.

We don't think it is too far down the road, but that one product segment has been the one that we have been most challenged to reach that inflection point on, but good production numbers.

I think the confidence of that segment is improving, but that small business sector has been sort of the last to recover from a confidence perspective.

Great.

Thanks for taking the question.

It has been a great deposit sector though.

We really have been growing deposits in that group.

So, we are encouraged, but still not to that inflection point yet.

Paul Miller of FBR.

Thank you very much.

I do want to commend you on the energy slide.

I do like it.

I just had a question about how do you define indirect exposure?

In that sense, a lot of people, feedback I get from clients is, I'm not really worried about the direct exposure, I'm worried about the indirect exposure, i.e., small businesses in these communities that are mainly oil-driven.

Are you seeing any deterioration in these communities on the Gulf where you do business?

I'll start and then I'll let Barb Godin speak in a second on that.

We have really tried to take a broad view of what the implications of the drop in commodity prices in the energy sector have been.

I think that some segments of that energy portfolio are fairly easy to define.

When you get down to the indirect piece there is some subjectivity and objectivity that is required to define those.

I would tell you that we have seen in certain cases some softness in some of those indirect segments.

Overall, some are markets that we operate in, New Orleans, Baton Rouge, Houston, there is a lot of activities that is offsetting the softness in this, activity from a community perspective.

But some individual companies, absolutely, you do see some softness.

Barb?

Yes.

Thank you, Grayson.

We would define indirect as both types of companies.

As an example, transportation, that the majority of their business is done to support something going on in the energy sector.

So we capture all of that.

That's an incremental almost $500 million that we talk about.

Relative to the other contagion affects that we would look at, i.e., consumer, small business, commercial real estate, et cetera, we look at all that consumer side of the positive.

It's a net positive.

They are enjoying the low gas prices.

It is helping them a lot.

We're seeing that pick up as an example in our restaurant business that we have a specialty in; we're seeing better results there.

Relative to some of the other areas is we think about Texas.

The only area of any heightened attention is the Houston market, the office sector.

We're looking at that.

It's still doing well, but we're keeping an eye on that.

And New Orleans of course has suffered a little bit from softening demand, as well, and that is pushing our vacancy rates up.

Overall, retail and all of those sectors have done well along the Gulf of Mexico and Houston as well, but we don't want to be a Pollyanna.

We absolutely want to keep our heads up and keep attuned to making sure that if we do see some softness that we react quickly.

As a followup, have you gotten any feedback from the fed with the rates staying low on any guidance in your capital management, or is your capital management good to go for the year until the next CCAR?

Yes.

I think -- so, we can't discuss anything with our regulatory supervisors, but suffice it to say that all capital planning that we have built into this year's expectations have been the non- objection we received in our CCAR.

If we wanted to do something outside of that, it would require some form of off-cycle request to our regulatory supervisors.

Okay.

Thank you very much.

John Pancari of Evercore ISI.

Good morning.

Just a question regarding the loss range of $30 million to $50 million on energy you put out there.

Can you give us a little color on how you arrived at that.

Did you look at the past cycles and what basis you have behind the numbers on that calc?

Thanks.

John, it's Barb Godin again.

Again, we use both quantitative as well as qualitative.

The quantitative being that, yes, we look at models that we run.

It includes historical information as well as current information on what we think will happen in the future.

Again, we supplant a lot of that with that ongoing monthly looking at every file, every customer, looking at what their balance sheets look like, looking at what their cash flows look like so that as we talk about our estimate of losses we talk about -- I can't have a look through the cycle; I don't know when the cycle will end.

But we use the 12 to 18 month horizon to say we have pretty good visibility for that period of time.

So, again, pretty comfortable with the number we put out there.

Barb, is that 12 to 18 months, is at 12 to 18 months from now?

Yes.

Okay.

Now, do you have any way of identifying what that implies in terms of a cume loss assumption that you are now incorporating?

No, I wouldn't go that far.

Okay.

Alright.

Separately, David, just on the interest rate side on the swaps, I'm not sure if you disclosed, but did you indicate how much in swaps that you added and then also can you give us your thinking in terms of your willingness to add incremental swaps here or is this it?

So we will be disclosing our swaps in the Q. We put about $3 billion of received fixed swaps.

They are a little longer dated.

We had some short term that we took off.

We were up about $1 billion net on notional.

John, as we think about interest rate and risk position, it gets back to Marty's question.

We challenge ourselves every day on where we need to have this.

We think taking that sensitivity away and foregoing that nice lift, nice benefit that we think we will get when rates rise would be the wrong long-term answer for our shareholders.

We will pay the freight today for the benefit that we will get tomorrow, and we will manage our profitability the way we have done.

So we have put some incremental swaps on.

We don't have any current plans to execute further swaps, but if conditions change then we could change our mind, as well.

Okay.

And if I could just ask one more.

You may punt me to your investor day for the answer for this one.

I know you have been investing in a lot of your fee-based businesses that tend to be higher efficiency ratio businesses, like wealth management and cap markets, but less capital intensive and accordingly higher ROE, so can you give us just -- how do you think about that?

How that can all come out in the wash in terms of the ultimate benefits to your ROE from these investments?

That is a very good question.

We challenge ourselves on that.

You nailed exactly the math there.

We have to look at all of our businesses working together and the synergistic effect it can have on the total business and the diversification and how we might react in a stressed environment versus a normal environment.

All of those come into play as we think about the investments we want to make in businesses.

We well understand that investments in some of these businesses are less efficient.

That is part of where our efficiency ratio is today, but they take a very little amount of capital, as well.

So the return on capital is pretty strong, and they have a tendency to be annuity-based so that you can count on them year in and year out.

So that's worth something.

You will see -- so I'll half punt to investor day.

You'll see how all this comes together in terms of our outlook over the next three-year period with the investments that we have made and plan to make, and how we are going to self-fund these investments as Grayson mentioned from an expense standpoint, so that we can improve our bottom line over time.

So that we can become more efficient over time, as well.

So that we can -- our business model can address whatever interest rate environment might be out there.

We are going to put together a plan that shows you how we win and all those scenarios.

Alright.

Thank you, David.

Erika Najarian of Bank of America.

Good morning.

Just a follow-up question on previous questions of efficiency.

If I take your adjusted efficiency ratio of 65% and I put together everything you have said so far, so modest NII growth even if rates stay low because loan growth has been solid.

Fee income starting to benefit from some of the investments you made, but naturally a more higher efficiency ratio business in terms of wealth management and capital markets and self-funding some of the investments.

Over the next 12 months, how much improvement can you generate on that 65%, assuming no increase in rates from the expense side?

Let me talk about it in terms of all of our business is coming together and this will be a discussion we will have at investor day.

As you know, we have sought to be in the lower 60s.

We believe we can get their based on all the things we have talked to you about this morning.

We will get more granular on the how if you come to investor day.

But our long-term goal with the rates increasing was still in the higher 50s that we talked about previously.

We're building the business model that if we don't get the rate increase, how do we continue to improve bottom line?

How do we continue to become more efficient?

That is get below 65 and trend toward the lower 60s without rates increasing.

So we believe we can do that.

We are going to show you more specifically how we will do that on November 19.

Got it.

And as we think about the next quarter, David, is the correct base for adjusted expenses as we think about a fourth quarter $872 millions to $875 millions?

That is the basis on which you should extrapolate anything in the fourth quarter, yes.

Okay.

Thank you so much.

Matt Burnell of Wells Fargo Securities.

Good morning, Grayson.

Good morning, everybody.

Thanks for taking my question.

First of all, David, maybe a question for you.

It looks like your long-term borrowings were up roughly two times quarter over quarter.

If I look at some industry sources, it didn't look like you had issued quite that much debt.

Could you give us a little sense as to what is going on there?

And also in terms of any preferred issuance that you might think about going forward to fill up that regulatory bucket?

Sure.

We did increase our long-term debt.

We did have the debt issuance during the quarter.

It was about $750 million, I think, that you have seen.

We did take out some short-term FHLB debt in place of long-term FHLB debt.

Part of that was to fund long growth.

Part of that is sitting in cash, as well, as we think about LCR, but that was really the biggest driver.

The second part of the question?

In terms of any possible preferred issuance going forward?

So we do acknowledge we probably need a little more non-common tier one.

To issue it right now without a good place to put the proceeds, though, is really cost prohibitive.

The carry on that is something we want to avoid.

If we can work that through our optimization of our capital stack over time, I think would be the better play for us as we trade out a more expensive common instrument for a less expensive preferred issuance and get our delta between common equity tier one and our tier one to be a little better then we have today.

So you will see that in time.

Sure.

Makes sense.

Barb, my followup is directed toward you.

If I take the -- I guess an admittedly conservative view of the $30 million to $50 million range that you've talked about over the next 12 months, that's roughly a 1.5% loss rate on your overall energy exposure.

How does that compare perhaps with the 12- to 18-month loss rate that you may have had on an energy portfolio back in the 2008, 2009 time frame when energy prices were down about 70%?

We look back on that timeframe and we had a very few losses.

If I recall, it was something, give or take, around $8 million I think, and we have had none since then.

Okay.

Thank you very much.

Gerard Cassidy of RBC.

Good morning, Gerard.

Hi, Grayson.

Good morning.

David, maybe you can share with us on the LCR, I think you said you are well positioned to reach the 90%, is where most of the regional banks need to be by January of 2016.

Assuming that is correct, if rates don't change in 2016 and you then lift the LCR to 100% next year to reach the January 2017 target, should we expect margin pressure as you do that, if you're not already at 100%?

Yes.

I think you would see some downward pressure there.

I would not call it significant.

We continue to have -- that is why we are positioned where we are today.

We have a little bit more in cash.

It has already weighed down our margin.

Overtime, there could be a little further compression, but not significant enough, not a significant amount.

Thank you.

The follow-up question, you have given us good detail on the oil portfolio and how you have looked at it.

One of the banks, JPMorgan, when they released numbers, gave us some sensitivity analysis suggesting if oil got to $30 a barrel they would take another $500 million to $750 million in reserves.

Have you stress-tested this portfolio?

I know you are using the future prices and discounting it back for the next 12 to 18 months, but have you gone beyond that saying that if oil got to $35, $30, or $25 a barrel what would happen to the portfolio?

This is Barb.

We have not run those model specifically with a $30 number, but we have done an awful lot of dialogue on what happens if it goes to $30.

And it's not just a matter of price, it's the speed at which it would go down to $30.

If it goes down to $30 slowly over time, everyone has an opportunity to adjust their CapEx, adjust their expense models, et cetera.

If it goes quickly, of course we're going to feel more pain, but so far what we found was our customers they have taken all of the right measures at the right pace to make sure they are adjusting their operating models as quickly as they can.

Thank you.

Jennifer Demba of SunTrust Robinson.

Good morning, Jennifer.

Morning.

I was wondering if you could give your perspective on the Houston market specifically right now and what you're seeing in terms of your overall Texas loan growth?

Jennifer, we could not hear you very well.

I'm sorry.

Could you give us some commentary on what you are seeing in the Houston economy right now and what you're seeing in terms of the Company's Texas loan growth over the last three to six months?

I think when you look at the markets we are seeing in Texas, clearly we are still seeing some good strength in most of the markets in Texas.

Obviously, there is some softness in Houston.

We have -- we're spending a lot of time focused on that market because it is one of the markets most exposed to the energy industry and our customers that are there.

So far, the Texas markets have held up surprisingly well.

As Barb had mentioned a moment ago, the consumer in particular has shown some good strength in terms of benefiting from the lower pump prices.

But also there is a lot of diversification in a lot of the economy in Texas.

I think everyone is worried about what the contagion that may occur in some of these markets.

Quite frankly, we have not seen that in Houston yet.

We look for it especially in the commercial real estate market which were monitoring very closely.

I'd add a little bit to that.

It's Barb.

Demand continues across all the Texas markets vigorously in fact for newly constructed single-family housing, particularly in Austin, Dallas, Fort Worth, San Antonio.

In Houston it has decelerated somewhat for newly constructed units exceeding $600,000, so pretty high price point.

Sales of lower priced units, those under $600,000, continue at a healthy clip.

And the homebuilder industry has responded pretty quickly.

They have reduced construction activity.

We have looked at that -- looking at permits, et cetera.

Again, the market has been adjusting to the reduction in the oil prices.

Dan Werner of Morningstar.

Good morning.

Thank you for taking my question.

With respect to just a little bit more color on the commercial portfolio.

Is it primarily from draw downs from existing lines, or is it more organic growth?

Maybe give some color on the energy, in terms of the lines themselves.

It looks like you still had increase in midstream.

I was wondering if that is from existing lines and how you are addressing those.

So, this is John Turner.

I would say that the commercial growth that we see is fairly broad-based and it is both reflection of customers borrowing under lines of credit, though we actually saw about a 30-basis point reduction in utilization of lines of credit during the quarter, and customers borrowing to finance transactions to acquire new businesses to expand, to add to their working capital or support their working capital needs associated with expansion of businesses.

So we have seen a variety of activities that resulted in growth in the book.

As we have said, that growth has occurred across our businesses, particularly in real estate and in our corporate banking business, across our specialized industries verticals.

Good growth in power and utilities in our restaurant book and technology and defense.

And so we think nicely diversified, and reflecting good fundamentals in that sector of the economy.

With respect to the energy book, we have added a couple of midstream names over the course of the last 12 months.

We have done that typically through our Regions business capital group where we feel like we have a very good asset support.

Those particular customers are operating under longer-term contracts.

We think there is a lot of stability in that business and industry and we have seen an opportunity to grow a couple nice relationships as a result of bringing those customers on.

Okay, thank you.

Vivek Juneja of JPMorgan.

Just wanted to check a couple of things.

Firstly, the check posting order change that you were going to go through, did that start in the third quarter or is that coming in 4Q?

Vivek, this will start in the fourth quarter.

You will see a piece of that.

Okay.

Service charges were down 8% year-on-year, which is a little faster rate.

Any color on that then, what is making that go down a little bit faster, David?

I just think it is more seasonality.

There is really nothing that stood out for us.

We continue to grow accounts and customers and feel good about service charges.

I will be a little more specific that posting order will start about mid quarter for us.

We're still in on guidance we have given you on the posting order of $10 million to $15 million per quarter.

No real changes in the third quarter.

Still growing accounts.

Growing transactions.

Growing balances, but seasonally we did see service charges slow down.

I think it is just normal seasonal adjustments.

Vivek, were you comparing quarter to quarter or year --?

No, I was looking at actually year-on-year for the minus 8%.

Quarter over quarter was down about -- it was more flattish.

Year-on-year was down 8%.

I was trying to get a sense of is there customer behavior further change or anything else that is causing that?

The primary driver there was the, if you remember we exited the Ready Advanced product about a year ago.

That was in your number last year, it's not in your number this year.

That was the biggest component of that difference.

A quick question for Barb.

Barb, last quarter you talked about national credits.

Can you give us -- where you had some issues, can you give us an update on where that stands?

One of your peers this morning took some additional provisions for weakness and were based on global manufacturing conditions.

Could you weave any thoughts on what you are seeing in relation to that into your comments, too?

Yes.

The shared national credits, as you know, there is currently going to be two reviews a year.

The second review is going to take place starting in November, but it's only for the large players.

We will not be involved in that other than as a participant, so we will get some of those results likely January or so, by the time they put the results out.

Relative to the overall shared national credit book though, it is a very strong book, a very good book for us.

We're happy with those credits.

Again, we don't specifically look at the shared national credits per se, because it is a shared national credit reserved for it any differently.

We look account by account, credit by credit to see what the underlying issues are and what the appropriate level of reserve to be against it.

Any color on the manufacturing stuff that Fifth Third talked about this morning?

They are seeing some weakness, so they are taking some provisions.

What are you seeing in your manufacturing clients?

Yes, what we're seeing is aluminum castings, steel companies we're seeing a little bit of softness there.

Keeping an eye on that sector.

Again, as they move through our risk rating process, if any of those credits do deteriorate, of course they will get a larger allowance as they move through our normal process.

Thank you.

At this time, there are no further questions.

I will now turn the floor back over to management for any closing remarks.

Let me close and say thank you for your time, your attention, and your questions today.

We encourage you to attend our investor day on November 19, and we thank you again.

We stand adjourned.

Thank you.

This concludes today's conference call.

You may now disconnect.