Regions Financial Corp (RF) 2016 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 Miss Dana Nolan to begin.

Thank you, Paula. Good morning and welcome to Regions' third-quarter 2016 earnings conference call. Participating on the call are Grayson Hall, Chief Executive Officer, and David Turner, Chief Financial Officer. Other members of senior management are also present and available to answer questions.

A copy of the slide presentation referenced throughout this call, as well as our earnings release and earnings supplement, are available under the Investor Relations section of regions.com.

I would also like to caution you that we may make forward-looking statements during today's call that are subject to risk and uncertainty and we may also refer to non-GAAP financial measures. Factors that may cause actual results to differ materially from expectations, as well as GAAP to non-GAAP reconciliations, are detailed in our SEC filings including the Form 8-K filed today containing our earnings release. I will now turn the call over to Grayson.

Thank you, Dana. Good morning and thank you for joining our call today. Our third-quarter results reflect continued momentum in 2016 and demonstrate that we are successfully executing our strategic plan. We are pleased with our continued progress on fundamentals despite a challenging operating environment. David is going to take you through the details shortly, but let me just provide a few highlights.

For the quarter we reported earnings available to common shareholders of $304 million and earnings per share of $0.24. There are a number of items that impacted the quarter which we will address as we review the results, but all in all a good quarter, a solid quarter for Regions.

We delivered solid revenue growth by increasing deposits and non-interest income. Total adjusted revenue increased 5% over the third quarter of 2015 driven by strong adjusted non-interest growth of 12%, clear evidence that our investments are paying off.

Notably capital markets and wealth management both produced record quarters. As part of our continuing efforts to grow and diversify revenue, we recently announced the acquisition of a low income housing tax credit corporate fund syndication and asset management business of First Sterling Financial.

This acquisition complements our existing low income housing tax credit origination business and further expands our capital market capabilities and our ability to serve our customers.

With respect to market conditions, the global macroeconomic environment continues to remain somewhat challenging. As such it is critical that we focus on things that are within our power to control. And to that end we remain committed to disciplined expense management and are on pace to achieve our 2016 efficiency and operating goals.

Our plan to eliminate $300 million of core expenses over the next three years is clearly underway. However, based on current expectations for a continued low rate, low growth environment we have determined that additional expense eliminations are necessary to operate in this environment to go beyond the $300 million amount.

To that end we have targeted an additional $100 million, which we expect to achieve by 2019. In total this $400 million represents 11.5% of our adjusted expense base.

Turning to asset quality for just a moment, we continue to see some stress in certain segments given where we are in the cycle. But we view our overall asset quality as stable today. In addition the continued stabilization of oil prices has positively impacted certain credit metrics.

With regards to loans, we continue to exercise caution and remain focused on prudent and quality loan growth. Regarding business lending average loans are down modestly on a year-over-year basis.

We continue to experience muted customer demand and heavy competition in the business segment, particularly in the middle-market, commercial and small business sectors. We are also seeing some large corporate customers accessing the capital markets and are using these proceeds to pay down bank debt.

In addition, we experienced a 100 basis points decline in line utilization of commercial customers during the quarter. Corporate customers remain focused on liquidity, which is evidenced by a 2% increase in average corporate bank segment deposits. Excluding the impact of public bonds average deposits in the Corporate Bank at Regions are up 5%.

In addition, direct energy loans continue to pay down or pay off and over the past two quarters we have seen a favorable decline of approximately $500 million on a point-to-point basis and approximately $300 million on a linked quarter basis.

It is important to point out that while reduced demand is impacting the industry, we are deliberately limiting production in certain areas. For example, investor real estate in particular is an area where we remain guarded. We are also limiting exposure specifically to multi-family and medical office buildings.

Year-to-date in these outstanding balances in these portfolios have declined approximately $300 million combined on a point-to-point basis.

Importantly, we continue to focus on achieving appropriate risk-adjusted returns within our business, portfolios and relationships and we believe this approach will lead to quality loan growth in the future. Despite market uncertainty the overall health of the consumer remains strong and we continue to see solid demand and steady growth in almost all of our consumer loan categories.

With respect to capital we are encouraged by recent regulatory directions and comments and the subsequent notice of proposed rulemaking which we believe will be constructive for Regions.

That said, our capital deployment priorities remain unchanged; first and foremost we are focused on prudent organic growth. We will also continue to evaluate strategic alternatives that increase revenue or reduce operating expenses while returning an appropriate amount of capital to our shareholders. Year-to-date we have returned approximately 99% of our earnings to shareholders through dividends and share repurchases.

In closing, our third-quarter results reflect the continued execution of our plans and our commitment to our three primary strategic initiatives which are: number one, grow and diversify our revenue streams; two is to practice disciplined expense management; and three, to effectively deploy our capital.

With that I will turn it over to Dave who will cover the details for the third quarter. Dave?

Thank you and good morning, everyone. As Grayson noted, several items impacted the third quarter and I will speak to each of them as we move through the results. So let's get started with the balance sheet and a look at average loans.

Average loan balances totaled $81 billion in the third quarter, down 1% from the previous quarter. Consumer lending experienced another solid quarter of growth as average consumer loan balances increased $302 million or 1% over the prior quarter. This growth was led by mortgage lending as balances increased $259 million linked quarter, reflecting another seasonally strong quarter of production.

We continue to have success with our other indirect lending portfolio which includes point of sale initiatives. This portfolio increased $93 million linked quarter or 14%. Average balances in our consumer credit card portfolio increased $44 million or 4% as penetration into our existing deposit customer base increased to 18.2%, an improvement of 50 basis points.

And turning to the indirect auto portfolio, average balances decreased $36 million during the quarter. We continue to focus on growing our preferred dealer network while exiting certain smaller dealers. In addition, we remain focused on achieving appropriate risk-adjusted returns in this portfolio. And average home equity balances decreased $94 million as the pace of runoff exceeded production.

Turning to the Business Services portfolio, as Grayson mentioned, the decrease in average Business Services loans during the quarter was driven by an approximate $300 million decline in average direct energy loans. In addition, loan growth was impacted by continued softness in demand for middle-market commercial and small business loans.

Furthermore, we are remaining disciplined with our management of concentration risk limits and a continued focus on achieving appropriate risk-adjusted returns. More specifically, we are limiting our exposure to multi-family and medical office buildings. And as a result total business lending average balances decreased $979 million or 2% during the quarter.

Despite this decline there are areas within Business Services experiencing growth such as technology and defense and asset based lending. And we expect to continue to leverage our go-to-market strategy of local bankers working with industry and product specialists to deliver the entire bank to our customers to meet their particular needs.

Related we are also making progress with our focus on profitability and are using capital more effectively. Through July we have achieved greater relevance in a number of large corporate relationships and improved our risk-adjusted returns on these loans over 200 basis points.

Let's take a look at deposits. Total average deposit balances increased $439 million from the previous quarter, including $330 million of growth in average low-cost deposits. Deposit costs remained near historically low levels at 12 basis points and total funding costs remained low totaling 30 basis points for the quarter.

Total average deposits in the consumer segment were up $483 million or 1% in the quarter, reflecting the strength of our retail franchise, the overall health of the consumer and our ability to grow low-cost deposits.

As previously noted, average corporate segment deposits increased $675 million or 2% during the quarter as corporate customers remain focused on liquidity.

Average deposits in the wealth management segment decreased $637 million or 6% during the quarter as certain institutional and corporate trust customer deposits, which require collateralization by securities, continued to shift out of deposits and into other fee income producing customer investments.

So let's see how all of this impacted our results. Net interest income and other financing income on a fully taxable basis was $856 million, a decrease of $13 million or 1% from the second quarter. The resulting net interest margin was 3.06%.

Net interest income and other financing income was negatively impacted by a $7 million leveraged lease residual value adjustment. Now this adjustment reduced net interest margin by 3 basis points.

In addition, historically low rates experienced in the second and third quarters of 2016 caused prepayments in our mortgage-backed securities book to increase resulting in higher premium amortization of approximately $13 million during the quarter.

However, given the recent moves to modestly higher long-term rates we expect $4 million to $6 million of improvement in premium amortization during the fourth quarter. And lastly, lower average loan balances further reduced net interest income and other financing income in the quarter.

Now these productions were partially offset by higher short-term rates, one additional day in the quarter and our debt deleveraging that we executed this quarter.

So if you exclude the impact of the $7 million leveraged lease residual value adjustment and the expected $4 million premium amortization improvements net interest income and other financing income for the third quarter would have been approximately $867 million on a fully taxable equivalent basis and a margin of 3.09%. And we believe the fourth quarter will approximate these amounts.

Non-interest income increased 14% in the quarter and included the impact of $47 million of insurance proceeds associated with a previously disclosed settlement related to FHA insured mortgage loans. Adjusted non-interest income growth was particularly strong in the third quarter and reflected our deliberate efforts to grow and diversify revenue.

Almost every non-interest revenue category increased driven by record capital markets and wealth management income and growth in card and ATM fees resulting in a 5% increase compared to the second quarter. Capital markets fee income grew $4 million or 11% during the quarter driven primarily by the mergers and acquisition advisory services group.

Card and ATM income increased $6 million or 6% during the quarter driven by an increase in the number of active cards and spend volume. Wealth management income increased $4 million or 4% during the quarter driven by increased investment management and trust fees as assets under administration increased 5% from $88.1 billion to $92.6 billion.

Mortgage income was stable during the quarter as increased gains from loan sales were offset by declines in the market valuation of mortgage servicing rights and related hedging activity. Within total mortgage production 67% was related to purchase activity and 33% was related to refinancing.

Also during the quarter we completed a bulk purchase for the rights to service approximately $2.8 billion of mortgage loans. And year to date we have purchased the rights to service approximately $6 billion of mortgage loans.

And our mortgage portfolio service for others has grown from approximately $26 billion to $30 billion over the past year. We still have additional capacity and we will continue to evaluate opportunities to grow our servicing portfolio.

Other non-interest income includes a recovery of $10 million related to the 2010 Gulf of Mexico oil spill. We also recognized an $8 million leverage lease termination gain, which was substantially offset by a related increase in income taxes.

These increases were partially offset by a $4 million decline in revenue from market value adjustments related to employee benefit assets which were offset in salaries and benefit expense and resulted in no impact to pretax income.

As it relates to future non-interest income growth, Regions is one of the nation's largest participants in affordable housing finance through the low income housing tax credits program. And we are excited about the opportunity to enhance our capabilities through the recently announced acquisition of the low income housing tax credit corporate-fund syndication and asset management businesses of First Sterling.

Let's move on to expenses. Total non-interest expenses increased 2% during the quarter and include a $14 million charge for the early extinguishment of parent Company debt and a $5 million charge associated with branch closures we announced last quarter.

On an adjusted basis expenses totaled $912 million representing a 3% increase quarter over quarter. Total salaries and benefits increased $6 million from the second quarter primarily due to one additional weekday which accounts for approximately $5 million.

Production-based incentives also increased during the quarter. These increases were partially offset by a $4 million decrease in expenses related to market value adjustments associated with assets held for certain employee benefits which are offset in other non-interest income that I mentioned.

In addition, year-to-date staffing levels have declined 5% or approximately 1,200 positions as we continue to execute on our efficiency initiatives.

Looking at the fourth quarter and excluding any impact from market value adjustments, we expect salaries and benefits to decline as a result of one less weekday in the quarter and the impact of continuing expense management.

Professional and legal expenses increased $8 million during the quarter primarily due to increases in legal reserves. As expected, FDIC insurance assessments increased $12 million in the third quarter including a $5 million related to the implementation of the FDIC assessment surcharge.

In addition, the second-quarter assessment benefited from a $6 million refund related to prior period overpayments. The Company also incurred $8 million related to the reserve for unfunding commitments, as well as $11 million of expense related to Visa Class B shares sold in a prior year.

The Visa Class B shares have restrictions tied to the finalization of certain covered litigation. The current quarter charge primarily relates to a class action settlement that was overturned on appeal and we would not expect this level of expense to repeat.

For the first nine months of 2016 our adjusted efficiency ratio was 63.3% and we have generated 3% positive operating leverage on an adjusted basis.

As Grayson mentioned, we have targeted an additional $100 million in expense eliminations beyond our original announcement bringing the total target of $400 million or 11.5% of our adjusted expense base. And we will continue to identify opportunities to pull those savings forward whenever possible.

Let's move on to asset quality. Net charge-offs totaled $54 million in the third quarter, a decrease of $18 million from the second quarter, and represented 26 basis points of average loans. Charge-offs related to our energy portfolio totaled $6 million in the quarter.

The provision for loan losses was $25 million less than net charge-offs in the quarter and our allowance for loan losses as a percentage of total loans decreased 2 basis points to 1.39%.

The allowance for loan and lease losses associated with the direct energy loan portfolio decreased to 7.9% in the third quarter compared to 9.4% in the second quarter, reflecting the continued improvement in our overall energy book.

Total nonaccrual loans, excluding loans held for sale, increased to 1.33% of loans outstanding. There were five energy and energy-related loans which primarily drove the increase in non-accrual loans. However, the increased provision associated with these loans was more than offset by the credit quality improvement in the balance of the energy portfolio driven by continued energy price stabilization as well as declines in loans outstanding.

Troubled debt restructured loans and total delinquencies were relatively flat while total business services criticized loans increased 2%. The increase in criticized was driven by a small number of multi-family construction and transportation loans that were downgraded from pass to special mention.

While oil prices are continuing to stabilize uncertainty remains. We expect cumulative losses for all of 2016 and 2017 to range between $50 million and $75 million. And should oil prices average below $25 per barrel through the end of 2017 we would expect incremental losses of $100 million.

Through the first nine months of 2016 we have incurred $23 million of charge-offs related to our energy portfolio. And we are encouraged by the performance of our energy segment to date. However, we will continue to monitor and manage it closely.

Given where we are in the credit cycle and considering fluctuation commodity prices, volatility in certain credit metrics can be expected, especially related to larger dollar commercial credits.

Let's talk about capital and liquidity. Under Basel III the Tier 1 ratio was estimated at 11.9% and the common equity Tier 1 ratio was estimated at 11.1%. On a fully phased-in basis, common equity Tier 1 was estimated at 11%. In addition, our liquidity position remains solid with a historically low loan to deposit ratio of 81%.

Now in terms of expectations for the remainder of 2016, we expect both average loans and average deposits to be relatively stable with the fourth quarter of 2015. Our expectations for net interest income and other financing income remains unchanged with full-year growth of between the 2% to 4% range.

As a result of our investments we now expect to grow full-year adjusted non-interest income by more than 6%. Total adjusted non-interest expenses in 2016 are expected to be flat to up modestly from 2015 and we expect to achieve a full year adjusted efficiency ratio of approximately 63% with positive operating leverage in the 2% to 4% range. And we continue to expect full year net charge-offs to be in that 25 to 35 basis point range.

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

Thank you, David. Before we begin the Q&A session of the call, we ask that you please limit your questions to one primary and one follow up to accommodate as many participants as possible this morning. We will now open the line for questions.

(Operator Instructions). Matt O'Connor, Deutsche Bank.

I was hoping to follow up on expenses a bit and a couple questions -- I guess one, any more color or can you frame how much of the $400 million of cost saves will fall to the bottom line or what it means to expenses overall.

And then what is the base off of? Because I'm a little confused; this quarter the costs came in higher than expected, part of it was higher revenue. Even adjusting for that it seemed like it was a little bit higher; I know you're increasing the cost target. So I am trying to figure out what the base is and then what it means for overall expenses.

Yes, sir, Matt, we will -- we have some more work to identify what that additional $100 million will be and what year it will fall in. We did extend that component of the cost elimination program to 2019. That being said, as I mentioned, we are trying to bring forward as much as we can.

The base we have been working off is that base from last year which is about $3.450 billion-ish range -- $3.454 billion I think to be more exact. And that is an adjusted expense number. So that is what we are pegging this $400 million off of and that is where you calculate the 11.5% from.

And I guess just specifically in terms of this quarter's expenses, I mean besides the items you called out within adjusted expenses, would you view kind of the adjusted expense base as being a bit inflated? I know you talked about some decrease coming in 4Q on seasonality, but is it an inflated level?

Yes, that is right and that is why I tried -- if you go through what I was enumerating, not just on an adjusted schedule, but enumerated some of the unusual things that occurred in the fourth quarter, that $912 million is higher than our core run rate.

Okay, all right, thank you.

John Pancari, Evercore ISI.

Back to expenses. Just want to get a little bit of a feel how this impacts your efficiency ratio. I mean if you look at it you are running year to date around 63.5% or so and you came in around 65% for the third quarter.

I just want to just get some color on how you are confident that you are going to come in below 63% for the full year 2016, what that means for fourth quarter. And then more importantly just overall thoughts on 2017 efficiency, what we can expect out of that.

Yes, so, kind of consistent with Matt's question, we believe the adjusted number of $912 million was higher than the run rate that you will see in fourth quarter and into 2017.

We still need some more work, John, around the 2017 numbers. We will highlight that in the first part of December at our next conference in terms of what we think we will do over the next three years on a number of metrics.

But if you -- if we put our forecast in for the fourth quarter and recalculate the adjusted expense number we think we will be right on top of 63%.

Okay, all right, that helps. I was just trying to go at it a different way. Okay and then separately, on the loan growth front I wanted to see if I can get your thoughts on the outlook for loan growth for 2017.

I know you flagged a couple times the weaker business loan demand in midmarket and a conservative approach to certain portfolios that you flagged as well. So can you talk about how you feel about loan growth as you look into 2017 considering that?

I mean, John, if you look at our reported earnings for the third quarter, clearly consumer was a very strong quarter. We were very encouraged by what we saw in the consumer not only from a loan growth standpoint but from an asset quality perspective continues to be very good and very stable.

And we think while there is some seasonality in consumer lending, in particular around mortgage lending, we do anticipate that that positive momentum carries forward.

On the commercial side, especially in the small- to medium-size enterprises, we had very good production in the third quarter, but we also had an abnormally high level of payoffs and pay downs and in particular around reductions in outstandings on commercial lines of credit.

When you look at our thoughts for fourth quarter, we think production bodes well, but we do anticipate stability in the fourth quarter. I would just ask John Turner, who heads up that group for us, to add a little bit more color because I think this is an important question.

Thank you, Grayson. We've said as you think about our strategy that we are under penetrated in certain markets, businesses and portfolios. We have we think too many single service credit only relationships. We've been good about client selectivity but not as focused on returns.

And so, as we think about our businesses and our desire to create a better mix of revenue we have talked about real estate and our desire to manage that carefully given where we are in the cycle.

Within our larger credit exposures our corporate banking business, again we want to be thoughtful. That business has been growing over the last few years, but it grows with large exposures. And so we are mindful of the tall tree risk and mindful of the returns that we are getting in that business.

And so, a lot of what we have been doing there over the last nine months is reallocating capital within that portfolio to relationships that are going to generate higher risk adjusted returns. And we are beginning to see meaningful impact as a result of that.

And I think it is also, as you can see, helping grow non-interest revenue which is up almost 20% year over year. And then finally, within middle market and small business it is really important we think that again we build those relationships out broadly. We don't chase opportunities.

While Grayson said production was good, we had an opportunity to generate almost again half as much credit as we did, but it wasn't priced appropriately or the structures we didn't think were consistent with our risk appetite.

So we have some levers to pull if we felt like that we needed to do that. But we believe that a disciplined approach to building long-term, prudent, sustainable relationships that are profitable to the Company, that generate value for our customers and for our shareholders is appropriate.

And so, we will see stabilization we think in the fourth quarter and then we believe kind of modest growth, I think we have indicated, David, in 2017.

And then I'm sorry just one more thing, the modest growth that you just mentioned there, John, is that back to where you were previously in that sub 3% type of range?

So, John, this is David. So we'll put together our total loan growth plan, that is what we will share with you on the 2017 metrics. But John was trying to address we believe -- we won't have certain things working against us, energy being a big one, in 2017 as much as we had this past year. So we will give you more specificity on loan growth at the next conference.

Thanks. And did you quantify the pay downs on the commercial real estate side?

I don't think we did. I can't recall whether we --.

The main decline we had talked about was energy; the last couple quarters it has been about $500 million with average of $300 million of that this past quarter.

And I think the number in real estate was about $300 million, right? Point to point. And again, as we try to remix our business, real estate as an example, and shift from a very high level of construction loan production to a better mix of term lending and construction lending we can't manage the timing as you can imagine.

And so, it is going to be a bit lumpy as we experience pay downs in the construction book and we seek to grow the term book. And so, we over time expect to grow real estate as the economy grows, but we will have I think some timing differences as we attempt to remix that business.

But John, as you saw in this quarter when we -- with all the actions we are taking we are actually reducing the risk profile of our overall loan portfolio and are encouraged with the progress we are making in that regard.

It does create some noise on a quarter-to-quarter basis. But I think the point is we are trying to be very thoughtful and very prudent, but reducing the overall risk profile of our portfolio.

Okay, thanks, Grayson, thanks for taking all my questions.

John McDonald, Bernstein.

Hi, good morning, I wanted to ask a little bit about credit quality. The charge offs, David, this quarter came in at the low end of your range at 26 basis points. Do you expect to hold the lower end in the near-term in terms of the charge-offs?

And then on the reserve front, are you comfortable letting the reserve go further down from this [139] or so and -- or do you expect the provision to kind of match charge-offs going forward?

Yes, this is Barb, I will take that question. Relative to -- I will touch the reserve first. As you know, we have a pretty prudent way we go about looking at it consistently we go looking at our reserves. So we will let the numbers speak for themselves at that point. However, I don't see us going back to what we call the old days of something sub 1% coverage.

We came in at 139, as you know. So we'll move in around that band for what that is worth relative to charge-offs. It was a great charge-off quarter. I would stick with our guidance of 25 to 35 basis points as we close out the year, that would include the fourth quarter coming up.

But there can be considerable volatility from quarter to quarter. Given the granularity of the portfolio and some of the larger credits we have. But overall to Barb's point, very good quarter from a credit quality standpoint this quarter. Had a lot of things moving around but at the end of the date we think we are in a good place.

Okay, just to follow up on that, Barb, the consumer charge-off ratios, if we look in the supplement, is showing a trend of going up. And obviously you are growing this from a small base. So just kind of wondering what you are seeing there.

Is that seasoning that you kind of expect this trend? These are small numbers right now, but as you grow this consumer portfolio do you have destinations in mind for where these charge-off ratios should be headed?

Yes. Firstly they are all within our risk appetite so we are very comfortable with what is happening in the consumer book. What we see is real estate continues to improve, in particular the home equity was down significantly this quarter. Mortgage is really back to its all-time low tracking along the bottom.

Some of the other portfolios that we see, indirect is pretty stable. And then of course we have a handful of new initiatives that we are looking at, that contributed a little bit, a few million to our numbers overall.

But again, on the revenue side we are seeing that handful of increased losses are more than offset by the increased revenues. So we don't see the consumer book moving up significantly in terms of overall losses at this point.

Okay, thank you.

Betsy Graseck, Morgan Stanley.

A couple questions. One is on expenses, just in general what do you think your normalized expense increase is on an annual basis? Not including the cost saves, but just what you have to consider as normal course of inflation of expenses?

Yes, I think if you start back at that [$3.454 billion] number and it could go up modestly there. We are hitting about run rate, so adjusted expense is [$912 million], that is a little bloated. I have tried to numerate those. If you carve this out you are going to be in that [$880 million] range, [$885 million] range is probably where that is a more normal run rate point. That is all adjusted.

Right, so if you are talking about a 2% or 3%-ish, normalized increase from just salaries and expense inflation, then we are looking at over a three-year period an outlook where you should be able to bring your expense dollars down over a three-year period. Is that fair?

Well, one of the things that is important to us strategically, as we laid out at Investor Day, is to grow and diversify our revenue and to continue to make investments. And in order to make those investments we have to -- and control expenses at the same time, we have to have savings from our core operations. And that is really what the $300 million, now $400 million is all about.

And so, we have to continue to find other ways to become more efficient because it is critically important for us to continue to grow our Company and to grow non-interest revenue in particular. And so, having a reduction in expense versus having them flat to up modestly, which is what we have today and, again, we'll give you 2017 and beyond, but it would be somewhere in that range as well.

Okay. So, yes, what I am missing in my little calculation is the investment spend that you are making, okay. Okay, and then just separately, you no longer have to deal with the qualitative part of the CCAR test. I know the regulators say that they are going to be assessing your process in the normal course of regulation.

But maybe you could give us a sense as to how much that helps you in terms of dealing not only with the CCAR itself at that point in time of the year, but also how you think about the capital return that might open up for you without the qualitative test issue that you have had to deal with over the past few years.

So I would start with obviously the -- it is still just a notice of proposed rulemaking, so we still need finalization there. But, based on what is out there I think it is constructive for the industry for the regional bank space.

That being said, we manage our capital in the manner we have laid out a capital planning process and all the governance and none of that is going to change. We are going to continue to have robust capital planning and loss forecasting.

What this does is that plus learnings that we get from each CCAR filing help us frame up what we can do with our capital. First and foremost we want to leverage our capital to grow organically and that is the first order of business.

We want to make investments for bolt-on acquisitions that we have done, you saw the one we released yesterday. Those are important. Having a fair dividend to our shareholders is important. And then when we have excess capital that we are generating, having an appropriate return in the form of a share buyback is in order.

So I think given all of that it gives us an ability to think about capital targets relative to the risk that we have in our balance sheet. And we have mentioned based on today's risk that we have that that common equity Tier 1 ratio in the 9.5% is where we would target over time and we are at approximately 11%.

So we have capital to be put to work or to be given back to shareholders over time. And so, I think all the body of evidence that we have will help us manage that in a prudent manner over perhaps a shorter period of time. We have to think through that though, Betsy, it is a little early to tell what that exactly means for our CCAR submission in 2017.

Okay, thanks.

Jennifer Demba, SunTrust.

I was just wondering if you could give us some color around the increase in criticized loans in the multi-family and transport area.

Absolutely, Betsy, it is Barb again. So what we had is we had effectively in multi-family three credits, two of them are in the Houston area, one was in Oklahoma. The one in the Houston area I will give you a little more color on -- higher concessions than originally expected, so we moved that to a special mention loan.

Another that was also in the Houston area, construction delays due to rainfall, so we moved that one over. And the last one is in Oklahoma, 93% complete on that building, marginally behind schedule in terms of the leasing, but we still expect completion of the building by the end of December.

So again, we look at everything relative to how you are supposed to be performing in any of these credits. And if you are not performing as per what we originally laid out we will move you to a special mention. The transportation credits are energy-related, one large transportation credit energy related.

What I would say though about our overall criticized book is that 93% of our criticized book in the business services area is paying us great. So I don't expect at the end of the day that there will be a significant number of losses at all coming from any of those loans that we have moved over.

Okay, separate question on your branch sales incentives. Grayson, do you expect any meaningful change to your branch sales incentives given the backdrop of what has happened with Wells?

Yes, given the backdrop that the industry is facing right now, I think the prudent thing to do, and I assume all of our competitors are doing that, is taking a very deep dive on all of our sales practices using both our internal leadership, internal experts as well as external advisors to re-challenge ourselves on all of our sales practices.

We are quite proud of the culture we have built at Regions. We have had a sales culture that is really based on shared values, making sure that it is customer focused and that we are doing the right thing for customers in the right way.

And our messaging is quite strong and the feedback we get from surveys and external sources is very encouraging. But all that being said we believe in the backdrop of all that is going on that we are all re-challenging ourselves to make sure that everything is done correctly and appropriately and that activity is going on here as I am sure it is going on everywhere.

But as I said, we have got a lot of confidence in the processes we have built, we think we are doing the right things, but more importantly we think we are doing them the right way. But we have got to make sure that that is occurring in all aspects. And so, given the backdrop we are re-reviewing everything we are doing.

Thanks very much.

Steve Moss, FBR.

I just want to circle back on expenses a little bit. I know in the past you have talked about pulling forward expenses. And I was wondering what is the possibility that the $300 million -- you could complete it in 2017.

Yes, so, we are continuing to challenge ourselves on the $300 million plus additional $100 million in terms of timing and are looking to pull forward as much as is prudent without harming the long-term franchise.

So I can't give you a probability of being able to complete that in 2017. I think getting all of that in 2017 will be very difficult. But could we move some of it that is currently in 2018 into 2017? I think that is an appropriate challenge to our team.

And we will be coming back again after this challenge and in December at our next conference we will lay out what that three-year plan looks like including metrics like operating leverage and efficiency and just total expense bogie as well.

Okay. And then my second question on investment securities yields, just wondering what is your new money purchase yield these days?

Well, if we are in the -- mortgage backs are about 1 3/4, about 1.75 to 2, and corporate bonds are [230]-ish range to [275]. But the preponderance of what we are at have been adding mortgage backs.

Great, thank you very much.

Michael Rose, Raymond James.

Just another follow-up on expenses. The additional $100 million that you identified, is there -- and I am sorry if I missed this -- is there any change in kind of the complexion of what that $100 million comprises relative to the $300 million that you laid out at Investor Day?

No, Michael, those are -- if you go back to Investor Day you will see roughly four broad categories of expense. I suspect they will fall into those categories. I think you should expect us to leverage -- see us leveraging technology a bit more, which gives us time to put things in place to help us from an efficiency standpoint. So that could be one of the changes.

As we go through this we kind of started on the human capital side and then getting into really third-party spend which we have done some of. There is probably some more room there. We continue to work on occupancy cost and branch consolidations and office space.

As you know, we had 1 million square feet we wanted to take out over the initial three-year period time. We are in good shape with that. But we are continuing to challenge ourselves on those kinds of areas; we think there will be more to come there.

Is it fair to say that most of the kind of heavy lifting from the expense efforts have been realized at this point? One of your competitors this morning basically said that they had many things kind of incremental beyond today's announcement would be much smaller.

Is that a similar view for you guys? Or if you were to take a more critical look at your branch network could you actually see some more material savings as we move forward?

No. I mean, Michael, you look at the past few years we have been very focused on efficiency and trying to find expenses. And obviously the duration of this operating environment has continued to put substantial pressure on expense management and a lot of the easy first steps are all behind us in terms of expense management.

And really what you are doing now is having to sort of transform how you do business. And if you look at the investments we have made in a lot of our digital channels, investments we've made in sort of retooling our branches and how we operate out of our branches, we are really at this point in time having to really challenge ourselves on how we go to market in certain parts of the Company. And as David said using technology to make those people more efficient and more effective.

So to answer your question, easy expense saves are long behind us, have been for a while. And so, the things we are doing now all much more transformative. Interesting, take a little more longer to execute, but at this juncture you really have to look at how you do business rather than just trying to look at normal inefficiencies of process.

Okay, that is helpful. And then maybe just one more for Barb on energy. I appreciate that guidance around charge-offs for energy reiteration that you provided. What would cause you to be kind of at the lower end of your range? And then what set of variables would cause you to be at the upper end of that $75 million?

Yes, Michael, it is clearly oil prices. Where they sit right now, generally around that $50 area, that provide some stabilization. But we honestly don't believe that things will really move in the right direction until we get somewhere in the $60 a barrel range, give or take. But if they stay at $50, we do see stabilization in our metrics.

If they go down into, again, you saw our guidance of sub $30 -- we would expect significant increases, i.e. being an additional $100 million. But if oil got down into the $30 a barrel range as well, we would also see some upward pressure on all of our credit metrics and on our charge-offs as well.

And by the way, just for some more color on the energy charge-offs that we did have this quarter, of the $6 million that we had, roughly $1.5 million was coal. So year to date, we have had $23 million in energy charge-offs and of that, approximately $9.5 million, $10 million is related to the coal portion of our book as well.

That's very helpful. Thanks for the color.

Geoffrey Elliott, Autonomous Research.

In your prepared remarks, I think you mentioned examining strategic alternatives to increase revenues or reduce expenses. I wondered if you could elaborate on what you were referring to there?

Yes. So when we talk about strategy, it would be the things like we saw yesterday with our announcement of First Sterling; continuing to make any type of investments that are helping us to serve our customers, to give us a more fulsome offering to our customer base as we seek to meet their needs. There are other investments that we seek to make. We talked a little bit about leveraging technology to help us from a cost standpoint over time.

So we are looking at different technologies to help us -- look at process improvement to help us where we might be able to get a better answer and take labor out, improve our internal control structure for making those type of technology investments. So those were kind of the ideas we had.

Yes, we really believe the best strategy for us at this point in time is to really focus on executing our plans. We have got plans that allow us to continue to improve the fundamentals of the Company. If you look at the fundamentals, the fundamentals are posting up some very good numbers, in particular on the consumer side of our house, but really across the board.

So that focus on execution is a key point of what we are doing. And the other side is innovations. I think in this market you have got to be able to execute, but you have also got to be able to innovate.

And so, we are spending an awful lot of time trying to figure out how we innovate in a way that better serves our customers and does it in a way that creates greater efficiency in the way we operate.

So, I think that we have got a number of good strategic moves that we are making that will help improve the overall performance of the Company.

So it sounds like the focus is more around bolt-on acquisitions where you think you can do something to improve efficiency rather than selling businesses, which you look at you don't think they fit anymore?

Yes, I think actually what we have done thus far, you have seen our advancements on things like our GreenSky initiative, Avant was an initiative. We do challenge ourselves on our businesses to ensure that they are seeking an appropriate return -- risk-adjusted return on that business.

And when we have a business that can't help us meet our return hurdles and/or don't serve a customer, then we will challenge ourselves on that. But right now it has been investments to really help us grow and diversify revenue.

And that diversification is moving a little bit away from NII to NIR, it's moving geographically, it is diversifying in products and services that we offer to give us a little more balance in terms of how we generate revenue and earnings for our shareholders.

Great, thank you.

Jill Shea, Credit Suisse.

So maybe just on fees. You are on pace to grow fee income by more than 6% this year and you had some nice growth across capital markets, card and wealth. Can you just speak to some of the momentum that you are seeing in your fee income the remainder of this year and into next?

Yes, I mean I will ask John Owen if he would to sort of talk about some of our fee rates businesses and some of the growth rates you are seeing there. It is a very encouraging story.

Thanks, Grayson. Good morning, everyone. As Grayson said, we are seeing steady improvement in our consumer business. If you look at an account growth standpoint, we are going to grow checking accounts about 2.5%, debit card growth at about 4% year-over-year, credit card growth of about 12% year-over-year and our [NOW] banking customer account growth about 14%.

The other point I would make is utilization on debit cards, both total transactions and spend is up as well on the cards. So those are driving a lot of our increases.

And then maybe just any color on capital markets in wealth and some of the momentum you are seeing there.

Sure, this is John Turner. We are continuing to build out our debt capital markets platform and doing that across a number of different products and capabilities. So what you have seen as we have grown capital markets revenue significantly over the last two years is the introduction of some of those products and capabilities.

We had a very nice third-quarter largely built on the M&A advisory revenue that we generated. We also had a pretty good quarter in real estate permanent placements particularly through our Fannie DUS license. We expect to continue to see that kind of growth going forward as we continue to leverage these new capabilities.

We are excited about the acquisition of the First Sterling businesses, community investment capital business is one that has been very important to us. We decided that we wanted to grow that business strategically two years ago. We set out to find a syndication platform that would help us build out some distribution capabilities that we didn't have.

So again, that is another product capability that we have that will allow us to meet customer needs, grow revenue in a more diverse and balanced way. And we expect to see again nice growth in capital markets into 2017 as we leverage more of these capabilities.

Matt Burnell, Wells Fargo Securities.

First on margin, I thought I heard David mention something about some loan re-pricing efforts that you have been able to pass through. I am curious if there is more of that to come and what the benefit might be going forward.

And I guess in a related question to David, how do you think a 25 basis point hike, if we are lucky enough to get it in December, would benefit Q1 margin? Last year it was about a 5 basis point benefit quarter over quarter on an adjusted basis. Should we see something similar in the first quarter if we were to get the 25 basis points?

Yes, so I will start with your second question first. And I think when you look at 25 basis points and see where we are positioned you are probably for the year in that $15 million to $20 million range. So your number is not too far off for the first quarter.

Okay.

I would tell you as we think about the returns, improving our returns -- that is not just a pricing issue only. It is really the relationship; it is trying to get the relationship return up which can include credit, but it is going to include all the other products and services that we offer that customer.

And so, we certainly are looking at things that have a credit only relationship that have a sub optimal return for us. And those are the ones we want to try and get the relationship, get our pricing through, get our returns better, or recycling and leveraging the capital into another option or another alternative.

So I think over time what you ought to see is we should have some positive impacts to margin, the pace of which is really dependent on how we change this whole relationship and whether it is credit related or product and service driven.

Yes, I would just add as we look at yields, calling on spreads over LIBOR did improve during the quarter. More importantly though as David talks about, I think what you are seeing is growth in fee revenue or growth in deposits, all because of our focus on relationship returns.

Just to underscore the work that is being done, talk about our corporate banking portfolio, particularly shared national credit book, and our desire to improve returns in that business. We actually exited almost $2 billion worth of credit in the first nine months of the year.

We reallocated that capital back into new relationships and existing relationships. And in doing that we increased the revenue per relationship over 50% and the risk-adjusted returns in the business by almost 250 basis points.

So, we are seeing that activity really begin to have an impact. It will take some time to see it in the P&L, but we believe that it is occurring and it is the right approach.

And, Matt, I will add -- this is David. In terms of kind of margin expectations I tried to put in the prepared comments we had a couple of things that were fairly unusual in the fourth quarter that pushed our margin down to the 3.06% that we think rebounds a bit in that 3.09% range give or take.

And there are a lot of things that can move, but based on the best evidence we have today we would be in that range. And I gave you about $11 million of NII that was a bit different for the quarter that we think helps give you some stability in terms of NII and resulting margin for the fourth quarter.

Sure. No, that makes sense, David, thank you for the color. And actually your comments earlier about the re-pricing and relationship are in nice segue into my final question.

Specific to the capital markets business, how far along are you relative to where you would ultimately like to get in terms of cross-selling those investment banking capital markets products into your corporate middle market customer -- credit customer base?

Yes, this is John Turner. I would say we are probably 70% along in developing, 70%-75% in developing the product capabilities that we would like to have in our debt capital markets business. And maybe 20% to 25% along in terms of really capturing what we think is the opportunity within the business.

Today about 24% of our total revenue in the corporate banking business is non-interest revenue and we would like to see that number improved to 40% plus over time, which means we have effectively got to double the business. And we think that there is visibility to get there. It will take a while, but we see the opportunity clearly.

Thanks for answering my questions.

Ken Usdin, Jefferies.

Just one quick follow up on credit. You talked about the quality of the book improving over time as you remix. This quarter we still saw your ability with the energy improvement to release some reserves and the overall reserve for loans ratio is still quite high versus almost all peers at [1.4].

Just can you talk about philosophically over time with that change in the mix of the business do we see that reserve to loans ratio continue to come down? And as credit continues to prove on energy is there more room to still be releasing as we continue to see the improvements on the resi side as much as the potential improvements in energy? Thanks, guys.

Yes, Ken, it is Barb. And so, as we book loans -- book new loans we are always going to have a provision associated with those. So we will put that as a positive to increase the provision. On the other side, as our book continues to get better and our ratings improve on all of these credits, we also have the opportunity then again to reduce our overall provision on these.

So net-net over time if we are suggesting that we are going to have a book that is stable to some continued improvement and you should see some stability in the provision to improving. And again, a lot of that though will be driven by energy, you saw that this quarter.

So as the number of energy credits got much better we were able to reduce our overall level of provision roughly $50 million in that book. And we will continue to review that book every quarter as we move through the next several quarters and see how that impacts our overall numbers.

First a follow-up, do expect that the new stuff that you are adding on the consumer side, is that higher loss rate content? And do have an exchange in your kind of philosophical like what your through the cycle loss rate should be? Understanding there is a lot of current things that are plus and minus underneath?

Yes, our overall philosophical -- we have stated 75 basis points of loss through the cycle. We still believe that that is the right number. Consumer book was heavily weighted towards real estate and again real estate tracking in those low-double-digit numbers in terms of losses. But also doesn't give you the returns that some of the other products that we are looking at do give us.

So the answer is, yes, we will see some increased credit costs on the consumer side, although we think, again, they are going to be quite manageable. We do have limits and concentrations on any of those new initiatives that we do.

Okay, thanks a lot, Barb.

David Eads, UBS.

Maybe just a follow up for Barb, can you give a little bit of color about what you are seeing in the oilfield services portfolio? It looks like you have had some declines in balances and commitments but you had a pickup in criticized.

I mean, is it one of these things where that portfolio really is the only part that you are really worried about here and that improvements elsewhere are more than offsetting some continued headwinds there?

Yes, I think you are correct. I think on the E&P side of our book that generally what we have seen is certainly some stabilization especially with prices where they are for a barrel of oil. We have talked about in prior quarters that the oilfield services portion of our book will lag in terms of recovery to the E&P portion of our book.

And we are seeing that and that is the reason we are continuing to guide that between now and the end of next year we believe our total overall losses will be somewhere in that $50 million to $75 million potential total range.

We are seeing that oil field services -- here and there there is pockets and we are seeing that they are getting back to work. But again, that is, as I said, going to take I think the rest of 2017 for that to work itself out.

All right. And then you made some comments earlier about multi-family and some of the medical care facilities pulling back from those. And just want to get the read, is that more about hitting concentration limits and wanting to be disciplined on that front as opposed to seeing any kind of specific signs that are worrying on that?

Kind of excluding some of the comments you made about [Houston], some of the energy related locations where you are seeing some downgrades this quarter?

Well, you are exactly right. We do have a very disciplined concentration methodology. We learned a lot coming out of the last crisis and what we learned is diversification of our book and concentration limit management is paramount to having a good, solid prudent book.

And so, as we have come up on some of our concentration limits we have worked very closely with, in particular John Turner and his team to again recycle capital, but also stay well within those concentration limits. And again, that is the reason for the commentary on that and the same thing with our medical office buildings.

Great, thanks.

Marty Mosby, Vining Sparks.

I have got two bigger kind of strategic questions. As you look at, Barb, talking about your through the cycle losses, you all are spending a lot of time de-risking, offloading what could be some of the more troublesome loans. Really over time to get the benefit from that I think you are seeing that with lower losses now.

But you should also see it with less volatility when we get in that downdraft. I think communicating and talking about the benefits of the de-risking are going to be very important for Regions. Just your thought on as you keep saying 75 basis points, the benefits of de-risking and how you can see it materialize over time.

Well, I thank you for those comments and you are absolutely right. We have spent a lot of time on the de-risking. As part of that de-risking was, as you know, in the real estate book what we wanted to do is as we thought about how do we re-risk our portfolio, that we do it with assets and we do it with portfolios that are much less volatile. And back to again that we do open our concentration limit so that we don't get outside in any one area in any one product and sticking to that discipline.

The other challenge that you have when you de-risk a book and by de-risking you sell a lot of the assets is you don't enjoy the recovery stream after. Whereas if you instead manage a book that is prudent and less volatile when you do have losses you do also anticipate a benefit and also having future recoveries. So there is a lot of benefits to making sure that we stay with a pretty tight beta on what we are doing.

Because, Marty, we really are trying to make sure that we are not only diversifying, but we are remixing our loan portfolio to have it be a better performing asset through the cycle with reduced volatility exactly to your point.

We are trying to be very careful about client selectivity, trying to make sure that we understand who we are banking and how we are banking them. And we are trying to make sure we have got a full relationship with that client.

And we do believe that there will be points in the cycle where we will grow less than some peers. But we do believe that what we are doing in diversifying and managing concentration risk will in fact reduce the overall operating volatility of our Company over a longer period of time.

I have seen that and I just think that communicating and materializing how that is going to kind of play forward is going to be important.

And then, David, on the extra $100 million in expense savings, you've been producing 2 to 3 percentage points of operating leverage and actually revenue growth is picking up. So I just wanted to go back to how you couched it in this environment. It would almost seem like things weren't improving or you weren't getting revenue growth so you had to go and dig harder.

Or are you just finding things as you have gone through, like you said, redesigning that give you another $100 million that you can now put on the table? I think the difference between that feeling is pretty important. Is it desperation or is it, no, we are just finding more things that we can do more with?

Yes, Marty, I would put it this way. We've have been really working with a great set of urgency on efficiency, we know it is important. But we are finding investment opportunities and we know in this environment that we have to figure out how to self fund those investments. We have got to figure out how we can reduce our expenses to make those investment decisions.

And those investment decisions are getting traction now. We are starting to see the benefits of some of the decisions we have made in terms of investments, you are seeing that very strongly in capital markets. But as we have gotten into this process we have just come to the conclusion that if this environment persists we have got to be even better.

And we are finding opportunities that will allow us to extend this process earlier and we believe get our Company into a much better position. We do believe that operating leverage is the right metric to look at, we continue to believe we are delivering on that. But it is going to require both work on both revenues and expenses of the income statement. And so we can't give up on either one.

And then one tactical question. David, you had $13 million negative in prepayment write-offs, you're getting about half of that back in the fourth quarter. But if rates stay where they are at or at what level do you have to get to get the other $6 million back into your quarterly NII from prepayments going back to where they were in the prior quarter?

Yes, I think where we are clearly is beneficial. We obviously have seen a lot of volatility though in rates. And I think that you are right, we will get a piece of that naturally because of what has happened.

But I think that it is going to be -- it is a little premature to say well, we might get that other piece in. We need to see what will happen over maybe the next couple of quarters before we can get that premium amortization down into the lower 40 range.

Thanks.

Erika Najarian, Bank of America.

I apologize in advance for prolonging the call on one more expense question. But I just wanted to make sure I understood David's response to Betsy's question correctly. The way it was framed was the core run rate for expenses was $880 million to $885 million plus potentially a natural growth rate of 2% to 3%.

Should we then on top of that separately think about the $400 million of savings and that $400 million is being used to fund all those investments that you have been talking about for the past hour?

Yes, so, I think if you look at our kind of core that $880 million to $885 million is where we are. We do continue to make investments to grow our revenue. So an example would be our release we had yesterday. You will see expenses coming through from that investment in 2017 and none in 2016.

And so we are trying to figure out how to pay for that by having other savings. So part of that $400 million is to compensate us for that. We do have built in natural inflation that we have, salary increases and the like, that we try to curtail by ensuring that we have the right number of people, the right number of the right kinds of people to manage our business, run our businesses.

We are down some 1,200 people, we continue to challenge ourselves on that. And you see some of that manifest in the branch consolidations that we've had during the year.

So, the question is how to we keep the $880 million to $885 million as stable to up modestly as we can while we are making the investments to grow revenue and having things like First Sterling with 12 months worth of expense next year and virtually none in 2016. Does that make sense?

It does, thank you.

Kevin Barker, Piper Jaffray.

I just had a follow-up -- not to beat a dead horse, but a follow up on expenses again. You say flat to up modestly on a yearly basis. I mean that could be a very wide range going into the fourth quarter.

Are you assuming that the run rate is going to be closer to the $880 million to $885 million range going in the fourth quarter? Or is it going to be -- could you see some volatility where that would drive that number lower?

No, we believe that is our core kind of run rate where we are right now for the fourth quarter is in that $880 million to $885 million.

Okay. And then when you think about the revenue side when you say it is going to be on a yearly basis up around 6% or more than 6%, that is a run rate closer to $500 million going into next quarter from $544 million. But it seems like you have a lot of positive commentary around your momentum on the fee income side.

It seems like that number could be up a lot higher than the 6% that you are guiding to. Is there some moving parts there that may cause the number to come down considerably going into the fourth quarter?

No, we have had -- we grew just about every category in non-interest revenue. And we are excited about those investments that are paying off that we have made. So I don't see that -- the 6%, the reason we left it there is our initial target at Investor Day was 4% to 6%. We had said we would be in the middle and then we said we would be at the upper end and now we are giving you guidance that we will be over 6%.

But that is where we stop and we haven't -- we are letting you draw your own conclusion as to what percentage you want to use over that. But there is nothing that indicates to us that we had any type of major disruption in that trend that you are seeing.

Okay, thanks for taking my questions. Thank you very much.

Gerard Cassidy, RBC.

A couple of questions for you. David, you touched on the premium amortization and how it is going to improve obviously in the next quarter and in an earlier question you talked a little bit about it may be getting even better if rates go higher. Can you quantify where rates would have to go, the 10-year government bond yield that is where the premium amortization would really drop significantly and be a nonfactor?

So I think if you took the 10-year maybe up closer to 2% we might have some meaningful reduction in the premium amortization. And that is just an approximate. Because obviously what happens with prepayments, refis and mortgages didn't always totally correlate to the 10-year. But suffice it to say that is a pretty good proxy.

Okay. And then on the other end, if we were to see a higher level similar to what we saw this quarter, would the 10-year need to get closer to the [160] or below for that to reoccur?

Yes, I think that we are coming off of pretty historic lows in the second quarter. And when you look at that that is why we were able to give you maybe that $4 million that we don't think will repeat. But you would have to be steady in the [150]s for the quarter for it to get anywhere close to where it was.

Okay, great. And then coming back to the capital question, obviously, Grayson, you talked about using the capital deployment for organic growth and strategic alternatives. And, David, you pointed out that you are comfortable with a CET1 ratio at 9.5%.

If the NPR turns into an actual regulation about the qualitative portion of CCAR, you are not going to have to go through it anymore. Would you guys consider doing an accelerated share repurchase agreement in the next CCAR exam or a Dutch tender offer to really pull out a lot of excess capital to bring you down closer to your 9.5%? And obviously the ROE would go higher.

I will let David add to this, but we do believe that the proposed rules are constructive and give us more certainty. And we do believe that given the risk profile of our Company today as we run through CCAR that given the current mix that we think we are in that sort of 9.5% range as David said.

Obviously we are trying to improve the mix of our portfolio; that will change some of our metrics if we are successful in that regard. But the rules that are proposed give us more certainty, but we still -- it is our responsibility to manage capital and to do that prudently and thoughtfully.

And assuming the rules get approved in somewhat similar fashion as they stand today, I think it is constructive for our bank and constructive in general for a lot of the regional banks and will give us more flexibility.

All that being said is we are still some time away from those strong deliberations that go into our submission. And so, it is premature to for us to comment on what we might or might not do in that regard. But it is a possibility.

So, Gerard, I would tell you it is really important that this 9.5%, that is our number, that is our loss forecasting, that is the way we go about measuring the kind of capital we need to have. We are not interested in pushing ourselves to the point where we have a quantitative failure and ask for a Mulligan and all those kinds of things.

I think it is important that we have a capital planning process with the appropriate governance, I'm talking about the Board review, that helps us establish capital based on the risk in our Company.

Today we think that risk would indicate 9.5% is kind of the common equity Tier 1 number. We are evaluating, as Grayson mentioned, how we might change that risk profile to help us get the appropriate amount of capital that we have to keep.

Now your question really is, fine, you are at 9.5% versus -- you are at 11% you have got to go to 9.5%, how quick, what is the pace of change assuming the NPR turns in exactly as it is. And I think that is a great question.

We are going to have a lot of thought put into that especially after learning what we did last year from CCAR submissions. But I do think we need to be real careful about indicating this is some form of panacea.

I do think that we need to be prudent and very careful of how we manage this capital because we have other players, we have shareholders, we have other third parties that are looking at how we think about capital too. So being very thoughtful about it and looking at that pace. We want to go at the pace that is fair and reasonable for all interested parties. And so, a lot of work needs to be done.

Gentlemen, thank you for your insights, I appreciate it.

Vivek Juneja, JPMorgan.

Let me just follow up on that capital discussion little bit with both of you. David, to your point about, yes, it is going to take time obviously to go from 11% to 9.5% and, Grayson, you have been doing the bolt-on acquisitions but they have not really used up that much capital and you have done a bunch of these given how much you are generating.

So as you look into 2017, and I recognize you can't do this right now, but if you look into 2017, where do other uses of capital, how would you prioritize them returning more than 100% versus say bank acquisitions?

Yes, so, Vivek, you bring up a good point in terms of capital deployment. Let's go through how we think about it. First and foremost is organic growth. But it is organic growth on things that add to the return hurdle that we are trying to get to which is growing to 12% to 14% return on tangible common equity.

That's what we laid out at Investor Day, it is where we are today, we are going to update that in December. So to the extent that is not there and we continue to generate capital that we are not utilizing, having an appropriate dividend that we have is important to us, bolt-on acquisitions have helped.

You are right, they don't have a tendency to use up a lot of capital. And then outside of that returning it to the shareholders and exceeding 100% payout ratio has been done. I think that is a learning that we picked up this past year. And we would consider that as well.

You mentioned bank acquisitions; when you look at valuation for us right now obviously we have our CRA issue that we hope gets cleared up. But we really have to get those two things dealt with before we can really start looking at it. From a valuation standpoint the math -- [this isn't] very supportive of that at this juncture.

And even then I think we have been pretty clear, I mean we are very interested in non-bank bolt-on acquisitions, we have been active in that. There will come a time when bank-related bolt-on acquisitions matter, will be of interest when valuations improve and I think that we look at that and we try to understand that.

I think that right now that is just not our primary focus for -- as David mentioned, for a couple reasons as well as others. And so our focus on organic growth, our focus on improving the fundamentals of our Company and our focus on bolt-on acquisitions that, while they don't consume a lot of capital, they also don't add a lot of risk to our Company, that it is the integration, the synergies that we create.

We have got the ability to do that. We are pretty good at it. We think we could continue to do that. Hopefully over time we could even increase the pace of this kind of activity. But it doesn't -- it is a very manageable risk profile when we execute it this way. Larger acquisitions obviously have a very different risk profile. And right now we are just focused on building a very sustainable franchise value for our shareholders.

Vivek, I will add one other thing, I should have mentioned this. We do -- as we think about our 12% to 14% target in terms of return on tangible common equity, we are working on the numerator as we just talked about for a little over an hour and a half. But also managing the denominator in terms of our capital base and getting to our target is important in that calculation.

So I think we are all -- we get the message and the pace is -- back to Gerard's question, the pace of how we get there just needs to be done in a responsible manner and we need a little more time to think how that might look.

Okay, I have a small one for Barb. Thank you for that. And, Barb, what was the NPL ratio on energy loans less quarter? Your slide had 12%, what was it this quarter?

Give me half a second -- 13%. Thank you.

Okay. That was at the addition of those five NPLs?

That's right.

Okay, great. Thanks. Thank you.

Christopher Marinac, FIG Partners Research.

I guess just kind of going back to part of what Gerard was asking about. Do you think given the changes on the margin, a positive and expense is also a positive heading into the near future, should we be paying more attention to the return on tangible equity or return assets? Which would be more appropriate to kind of gauge progress at Regions?

Well, so we look at both. We do when you kind of look at the -- regress the return on tangible common, the stock price and valuation is a pretty tight correlation. So we have a tendency to focus on return on tangible common. It also forces us to make sure we have an appropriate capital base for our business model.

So while ROA is important you will see businesses and peers that have more revenue generated from non-balance sheet, non-assets always have a higher ROA. But I think that where the rubber meets the road is really returns on the capital.

And I would add to that, I think also we monitor pretty gross the growth in the absolute value of tangible common equity, not just the return, but how much of our tangible common equity is improving.

Great, guys. Thank you very much. We appreciate it.

This concludes the question-and-answer session of today's conference. I will now turn the floor back over to management for any additional or closing remarks.

No further remarks, just want to thank you for your time, your participation and your comments, questions. Thank you, we look forward to speaking to you again next quarter.

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