Regions Financial Corporation (RF) Q3 2016 Earnings Report, Transcript and Summary

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. I would like to remind everyone that all participants online have been placed on listen-only. At the end of the call there will be a question-and-answer Session. [Operator Instructions] I will now turn the call over to Ms. Dana Nolan to begin.

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 reference throughout this call as well as our earnings release and earnings supplement are available under the Investor Relations section of regions.com. I'd also like to caution you that we may make forward-looking statements during today's call that are subject to risk and uncertainties. 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. Dave is going to take you through 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 number of items that impacted the quarter, which we will address as we review the results, but all-in-all a good quarter and 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 low income housing tax credit corporate fund syndication and asset management business of First Sterling Financials. 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's 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 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 additional $100 million, which we expect to achieve by 2019. In total this $400 million represents 11.5% of our adjusted expenses 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 continue 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 experience 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 projects. Excluding the impact of public funds 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 and on a point-to-point and approximately $300 million on a linked quarter correlations. It’s important to point out that while reduced demand is impacting industry, we are deliberately limiting production in certain areas. For example, investor real estate in particular is an area where we remain guarded we’re 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’re 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’re 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 earnings to shareholders through dividends and share repurchases. In closing, our third quarter results reflect to continue to 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 discipline expanse 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, now I’ll speak to each of them as we move through the results. So let’s get started with the balance sheet and 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 increases $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. Now 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 equity balances decreased $94 million as the pace of run-off exceeded production. Now turning to the business services portfolio, as Grayson mentioned the decrease in average business service loans during the quarter was driven by an approximate $300 million decline in average direct energy loans. In addition loan growth was impacted by a 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 by 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 cost remained near historically low levels at 12 basis points, and total funding cost 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 segments increased $675 million or 2% during the quarter, as corporate customers remained 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 continue to shift out of deposits and into other fee income producing customer investments. So let’s see all 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 leverage lease residual value adjustment. And this adjustment reduce 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 back 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 reductions 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 leverage lease residual value adjustment and the expected $4 million premium amortization improvement, 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 the 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 market's 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 a 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’ve 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'll continue to evaluate opportunities to grow our servicing portfolio. Other non-interest income includes the 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 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 pre-tax 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're 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 onto 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 week day, which accounts for approximately $5 million. Production based incentives also increased during the quarter. These increases were partially offset by $4 million decrease in expenses related to market value adjustments associated with assets held for certain employee benefits, which were offset in other non-interest income that I mentioned. In addition, year-to-date staffing levels have decline 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 week day 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 over payments. The company also incurred $8 million related to the reserve for unfunded 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 restructuring 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 $4 million or 11.5% of our adjusted expense base. And we will continue identify opportunities to pull those savings forward whenever possible. Just move on to asset quality. Net charge-offs totaled $54 million in the third quarter, a decreased 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 in 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 non-accrual 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 a 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 loans was driven by a small number of multi-family construction and transportation loans that were downgraded from past 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’ve 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 in commodity prices, the volatility in certain credit metrics can be expected, especially related to larger dollar commercial credits. Let’s talk about capital 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%. 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 2015, our expectation 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 a 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, we thank you for your time and attention this morning and I will turn the call back over to Dana for instructions on the Q&A portion.

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.

This floor is now open for your questions. [Operator Instructions] Your first question comes from Matt O'Conner of Deutsche Bank.

Good morning, Matt. Matt O’Conner: Good morning. I was hoping to follow-up on the expenses of debt and couple of questions, I guess one anymore 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's the base off of because I’m a little confused this quarter the cost came in higher than expected, part of it was higher revenue and even adjusting for that it seem like a little bit higher and then 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. So, Matt we’ll -- we have some more work to identify what that additional $100 million would be, in what year it would 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’ve been working off is that base from last year, which is about $3.450-ish range, $3.454 billion I think the more exact. And that’s an adjusted expense number. So that's what we’re pegging this $400 million off of and that's where you calculate 11.5% from. Matt O’Conner: And just specifically in terms of this quarter's expenses I mean besides the items you caught out within adjusted expenses, would you view kind of the adjusted expense base as being a bit inflated? I know you talked about some decreased coming in 4Q on seasonality, but is it an inflated level?

Yes, that’s right and that’s why I tried if you go through the -- what I was enumerating and not just on the adjusted schedule, but it enumerated some of the unusual things that occurred in the fourth quarter, that that $912 is higher than our quarter run rate. Matt O’Conner: Okay, all right. Thank you.

Your next question comes from John Pancari of Evercore ISI.

Good morning, John

Good morning. Back to expenses, I just want to get a little bit feel how this impacts your efficiency ratio, I mean if you look at it, you’re running year-to-date around 63.5$ or so and 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’re going to come in below 63% for the full 2016, so 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 was higher than the run rate that you'll see in the fourth quarter and into 2017. We still need some more work John around the 2017 numbers. We'll highlight that in the first part of December at our next conference in terms of what we think we'll do over the next three years on a number of metrics. But if we put our forecast and for the fourth quarter recalculate the adjusted expense number we think we'll be right on top of 63%.

Okay. All right, no that helps I was just trying to go at it a different way. 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've flagged a couple of times the weaker business loan demand in mid-market 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?

Yes I mean John if you look at our reported earnings for the third quarter, clearly consumer was very strong quarter. We're very encouraged by what we saw on the consumer not only for 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 paydowns and in particular around reductions in outstanding zone 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.

Yes thank you, Grayson. We've said as we think about our strategy that we're underpenetrated in certain markets, businesses and portfolios. We have we think too many single service kind of 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 desired credit better mix of revenue, we've 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're mindful of the toll free risk and mindful of the returns that we're getting in that business. And so a lot of what we've 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're beginning to see meaningful impact as a result of that. And I think it's also as you could see helping to grow non-interest revenue, which is up almost 20% year-over-year. And then finally within middle market and small business it's 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 leverage 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'll see stabilization we think in the fourth quarter and then we believe kind of modest growth I think we've 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?

Yes so John this is David. So we'll put together our total loan growth plan that's what we'll share with you on the 2017 metrics. But John was trying to address we believe we will have certain things working against us energy being a big one in 2017 as much as we had this past year. So we'll give you more specificity on loan growth at the next conference.

Thanks. And did you quantify that the paydowns in 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, over the last couple of quarters it’s been about $500 million with average of 300 of that this past quarter.

Yes and I think the number in real estate was about 300 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 experienced paydowns and the construction book and we seek to grow the term book. And so we overtime expect to grow real estate as the economy grows, but we'll 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're taking we’re actually reducing the risk profile of our overall loan portfolio and are encouraged with the progress we're making in that regard. It does create some noise on a quarter-to-quarter basis. But I think the point is we're trying to be very thoughtful and very prudent about reducing the overall risk profile of our portfolio.

Okay, thanks Grayson. Thanks for taking all the questions.

Your next question comes from John McDonald of Bernstein.

Hi, good morning. Wanted to ask little bit about credit quality, the charge-offs David this quarter came in at the low end of your range with the 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 what do you expect the provision to kind of match charge-offs going forward?

Yes this is Barbara. I'll take that question. Relative to -- I'll touch the reserve first as you know we have a pretty prudent ways we go about looking at it consistently we also 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 and around that band for what that’s 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 and that would include the fourth quarter coming up.

But again there can be a considerable volatility from quarter-to-quarter. And given the granularity of the portfolio and all 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 day we think we're in a good place.

Okay. Just to follow-up on that part. The consumer charge-off ratios if we look in the supplemental is showing a trend of going up and obviously growing this from a small base. So just kind a wondering what you're seeing there is it seasoning that you kind of expect this trend. These are small numbers right now, but as you grow this consumer portfolio. Give destinations in mind for where these charge-off ratios should be headed?

Yes firstly they're all within our risk appetite so we're very comfortable with what's happening in the consumer book. What we see is real estate continues to improve in particularly we see home equity was down significantly this quarter. Mortgage is really back to with 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're looking at that contributed a little bit a few million to our numbers overall. But again on the revenue side, we're 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.

Your next question comes from Betsy L. Graseck of Morgan Stanley.

Hi, good morning.

Good morning.

Hey couple of questions. One is on expenses, just in general what do you think your normalized expense increases 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 number and we go up modestly there, we are hitting that run rate, so adjust expenses 912 that’s a little bloated I tried to numerate those if you carve those out you’re going to band that 880 range, 885 range is probably where that’s more normal run rate.

Okay.

Well, that’s all adjusted.

Right. So, if you’re talking about a 2% or 3% normalized increase from just salaries and expense inflation then we are looking at over a three year period and I’ll look where you should be able to brining your expense dollars down over three year period. Is that fair?

Well, one another thing that’s 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 time we have to have saving from our kind of our core operations and that's 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 firstly 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 will be somewhere in that range as well.

Okay. So I am missing in my little calculation is the investment spending you’re making. Okay. And then just separately you no longer have to deal with qualitative part of the CCAR test, I know the regulators say that they are going to be accessing your process in the normal course 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 years?

So, I’ll start with obviously the still just a notice to proposed rulemaking, so we still need finalization there. But based on what is out there I think it’s constructive for the industry, for the regional bank space. As that being said, we manage our capital in the manner we’ve laid out a capital planning process and all the governances and none of that’s going to change. We are going to continue to have robust capital planning and loss forecasting. What this does is that plus learning that we get from each CCAR filing help us frame up what we could do with our capital, first and foremost we want to leverage our capital to grow organically. And that's first order of business. We want to make investments to -- 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 an 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 that based on today’s risk that we have that common equity Tier 1 ratio in the 9.5% is where we would target overtime and we’re at approximately 11%. So, we have capital to be put to work or to be given back to shareholders overtime. 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’s a little early to tell what that exactly means for our CCAR submission in 2017.

Okay, thanks.

Your next question comes from Jennifer Demba of SunTrust.

Good morning, Jennifer.

Good morning. Just wonder if you could give us some color around the increase in criticized loans in the multi-family in transport area?

Absolutely Betsy it’s Barbara begin. 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'll give you a little more color on. Higher concessions than originally expected so we move 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're 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 as agreed. 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've moved over.

Okay. Separate question on your branch sales incentive. Grayson, do you expect any meaningful change to your branch sales incentives given the backdrop of what happened with Wales [ph]?

Yes I think 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 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're quite proud of the culture we've build at Regions. We’ve had sales culture that is really based on shared values making sure that's customer focused and that we're 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's going on that we're all re-challenging ourselves to make sure that everything is done correctly and appropriately. And that activity is going on here. As I'm sure is going on everyone. But as I said we've got a lot of confidence in the processes we built. We think we're doing the right things, but more importantly we think we're doing them the right way. But we got to make sure that that's occurring in all aspects. And so given the backdrop we are re-reviewing everything we are doing.

Thanks very much.

Your next question comes from Steve Marsh of FBR.

Good morning.

Good morning.

Just want to circle back on expenses a little bit. I know in the past you've talked about pulling forward expenses. And I was wondering what's the possibility that the $300 million you to complete it in 2017?

Yes so we are continuing to challenge ourselves on the $300 million plus additional $100 million in term of the timing and are looking to pull forward as much as prudent without harming the long-term franchise. So I can't give you 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 and 2017; I think that's an appropriate challenge to our team. And we'll be coming back again after this challenge in December at our next conference we'll lay out with 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're in the mortgage backs are about one and three quarters about 1.75 to 2 and corporate bonds are 2.30 range to 2.75. But the preponderance of what we’re at have been adding the mortgage backs.

Great, thank you very much.

Your next question comes from Michael Rose of Raymond James.

Good morning, Michael.

Hey, good morning. Just another follow-up on expenses, the additional $100 million that you identified is there -- and I’m sorry, if I miss this, is there any change in kind of complexion of what that $100 million comprises relative to the $300 million that you laid out during Investor Day?

No, Michael those are -- if you go back to Investor Day you’ll see roughly four broad categories of expense, I suspect they’ll 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 those 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’ve done some of there’s probably smart room there. We continue work on occupancy cost and branch consolidations and office space, as you know we had a million square feet, we wanted to take out over the initial three year period of time, we’re in good shape with that. But we’re continuing to challenge ourselves on those kind of areas, we think there’ll be more to come there.

Is it fair to say that most of the kind of heavy lifting from the expenses efforts have been realized at this point, one of your competitor this morning basically said that they had anything kind of incremental beyond today’s announcement would be much smaller. Is that similar view for you guys or if you were to take a more critical of 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’ve been very focused on efficiency and trying to find expenses and obviously the duration of this operating environment has continue 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 we’re doing now is having to sort of transform how you do business. And if you look at the investments, we’ve made in a lot of our digital channels, investments we’ve made in sort of re-tooling 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 the answer to your question, easy expense saves along mind has have been for a while. And so the things we’re doing now are 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 and process.

Okay, that’s helpful. And then maybe just one more for Barbara on energy, I appreciate the 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 sort of variables would cause you to be at the upper end of that $75 million.

Yes, Michael, it’s clearly oil prices, where they sit right now generally around that $50 area that provides 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 in 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’ve 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.

It’s very helpful, thanks for the color.

Your next question comes from Geoffrey Elliott of Autonomous Research.

Good morning, Geoffrey.

Hello, thank you, thank you for taking the question. In your prepaid remarks I think you mentioned examining strategic alternatives to increase revenues or reduce expenses, I wonder if you could elaborate on what you were referring to about?

So, when we talk about strategy it would be the thing 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 more fulsome offering to our customer base as we seek to meet their need. There are other investments that we seek to make we talked a little bit about leveraging technology to help us from a cost standpoint overtime. 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 to take labor out and improve our internal control structure for making those type of technology investments. So, those were kind of the ideas we had.

Yes, as we really believe the best strategy for us at this point in time is to really focus on executing our plans, we 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. And so, that focus on execution is a key point of what we are do. And the other side is innovation, I think in this market you got to be able to execute, which is also you got to be able to innovate. And we’re spending an awful lot of time trying to figure out how we innovate in a way that better serve our customers and does in a way that creates greater efficiency in the way we operate. So, I think that we 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, why you think you can do something to improve efficiency rather than selling businesses, which you look out and you don’t think fit anymore?

Yes, I think actually what we’ve done thus far that you’ve seen our advancements on things like our [indiscernible] initiative, [indiscernible]. We do challenge ourselves on our businesses and to ensure that they are seeking appropriate return -- risk adjusted return on the business and when we have a business that can’t help us meet our return hurdles and or don’t serve a customer than we’ll challenge ourselves on that. But right now it’s been investments to really help us grow and diversify our revenue and that diversification is moving a little bit away from NII to NIR it’s moving geographically, it’s 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.

Your next question comes from Jill Shea of Credit Suisse.

Good morning, Jill.

Good morning. So, maybe just one 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 to sort of talk about some of our fee raised businesses and some of our growth rates we are seeing there. So a very encouraging story.

Sure, thanks Grayson. Good morning everyone. As Grayson said we are seeing steady improvement in our consumer business. If you look at our look at our account growth standpoint we grow checking accounts about 2.5%, debit card growth of about 4% year-over-year, credit card growth of about 12% year-over-year and are 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 card so those are driving a lot of our increases.

Thank you.

And then maybe just any color on capital markets and 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’ve 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're excited about the acquisition of the First Sterling businesses, the community investment capital business is one that's been very important to us. We decided that we wanted to grow that business strategically two years ago we set out to find syndication platform that would help us build out some distribution capabilities that we didn't have. And so again that's 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.

Thank you

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

Good morning, Matt.

Good morning, Grayson. Thanks for taking my question. First on margin, I thought I heard David mentioned something about some loan repricing efforts that that you've been able to pass through. I'm curious if there is more of that to come and what the benefit might be going forward? And then I guess in a related question for David how do you think a 25 basis point hike if we're lucky enough to get it in December would benefit Q1 margin? Last year it was about five 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'll start with your second question first and I think when you look at 25 basis points to see where we’re positioned you probably for the year in that $15 million to $20 million range. So your number is not too far off for the first quarter. I would tell you as we think about the returns improving our returns that's not just the pricing issue only. It's really the relationship, it's trying to get the relationship return which can include credit but it's going to include all the other products and services that we offer to 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 price improve, get our returns better or recycling and leveraging that capital into another option or another alternative. So I think overtime 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's credit related or product and service driven.

I would just add as we look at yields going on spreads our LIBOR did improve during the quarter more importantly though as David talks about I think you’re seeing as a growth in fee revenue or growth in deposits. All because of our focus on relationship returns and just to underscore the work that's been done talk about our corporate banking portfolio particularly the 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 for 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's the right approach.

And Matt I'll add this is David. In terms of kind of margin expectations I try to put it 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 306 that we think rebounds a bit in that 309 range give or take. There are a lot of things that can move, but based on the best evidence we have today, we'd be in that range, I give you about $11 million of NII that was a bit different for the quarter that we think help to 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 repricing and relationship are a nice segue into my final question. Specific to the capital markets business, how far along are you relative to where you'd ultimately like to get in terms of cross-selling those investment banking capital markets products into your corporate middle market credit customer base.

Yes this John Turner. I'd say we're probably 70% along in developing 70% to 75% developing the product capabilities that we'd like to have in our debt capital market 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'd like to see that number improve to 40% plus overtime which means we've effectively got to double the business. And we think that there is a visibility to get there it will take a while, but we see the opportunity clearly.

Thanks for answering my questions.

Sure.

Your next question comes from Ken Usdin of Jefferies.

Hey, Ken.

Hey guys, good morning. Just one quick follow up on credit, you talked about the quality of the book improving overtime as you remix. This quarter we still saw your ability with the energy improvement to release some reserves and the overall reserve loans ratio still quite high versus almost all peers at 14. So just can you talk about philosophically overtime with that change in the mix of the business, did 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's Barb. And so as we book loans, book new loans are always going to have a provision associated with those. So I 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 overtime if we're suggesting that we're going to have a book that's stable to some continued improvement. And you should see some stability in the provision to improving. And again a lot of that still 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 up to $350 million in that book. And we'll continue to review that book every quarter as we move through the next several quarters to see how that impacts our overall numbers.

To follow-up, do you expect that the new stuff that you're adding on the consumer side is that higher loss rate content and does any change in your kind of philosophical like what you’re through the cycle loss rate should be? I understand there is a lot of current things that are plus and minus underneath.

Yes our overall philosophical we’ve stated 75 basis points of loss to the cycle. We still believe that that's 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 of some of the other products that we're looking at do give us. So the answer is yes, we will see some increased credit cost on a consumer side. Although we think again they’re 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.

Your next question comes from David Eads of UBS.

Hey, David.

Good morning or slightly afternoon now. Let me just follow-up for Barb, can you give a little bit of color about what you're seeing in the oilfield services portfolio? It looks like you’ve had some declines in balances and commitment but you had a tick up in criticize. I mean is it one of these with that portfolio really is the only part that you're really worried about here and that improvements elsewhere are more than offsetting some continued kind of headwinds there?

Yes I think you're correct. I think on the E&P side of our book that generally what we've seen is certainly some stabilization especially with prices where they are per 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're seeing that. And that's the reason we're continuing to guide 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 oilfield services here and there the stock is where we're seeing that they are getting back to work. But again that is as we 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 going back from those. And just want to get read is that more about fitting concentration limits and wanting to be disciplined on that front as oppose to seeing any kind of specific signs that are worrying on that kind of excluding some of the comments you made about Houston energy related locations where you're seeing some downgrades this quarter.

You're exactly right. We do have the 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've come up on some of our concentration limits, we've work 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's the reason for the commentary on that. The same thing with our medical office buildings.

Great, thanks.

Your next question comes from Marty Mosby of Vining Sparks.

Good afternoon, Marty.

Hey, thanks. I got two bigger kind of strategic questions. As you look at Barb talking about your through the cycle losses. You always spend a lot of time derisking, offloading what could be some of more troublesome loans. It really overtime to get the benefit from that. I think you're seeing that with lower losses now. But she said also see with less volatility when we get in that downdraft. I think communicating and talking about the benefits of the derisking are going to be very important for Regions. Just your thought on as you keep saying 75 basis points the benefits of derisking and how you can see it materialize overtime?

Right, thank you for those comments and you're absolutely right. We have spent a lot of time on the derisking as heard about derisking as you know in the real estate book. What we wanted to do is as we thought about how do we rerisk our portfolio that we do it with assets and we do with portfolio that are much less volatile and back to again that we do it within our concentration limits so that we don't get outside in anyone area in anyone product and sticking to that discipline. The other challenge that you have when you derisk a book and by derisking you sell a lot of the assets as you don't enjoy the recovery stream after whereas if you instead manage a book that is prudent and less volatile where 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 within a pretty tight date on what we're 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're trying to be very careful about client selectivity trying to make sure that we understand who we’re banking and how we're banking them. And we’re trying to make sure we got a full relationship with that client. And we do believe that there will be points in the cycle where we'll grow less than some peers. But we do believe that what we're doing and diversifying and managing concentration risk will in back 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's 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 want to go back to how you catch it in this environment it almost seem like things weren't improving or you weren't getting revenue growth so you have had to go and dig harder. Are you just finding things as you’ve gone through like you said redesigning that gave 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're just finding more things that we can do more with?

Yes Marty I would put it this way. We've been really working with the great set of urgency on efficiency. We know it's important, but we are finding investment opportunities and we know in this environment that we have figured out how to self-fund those investments. We have figured 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 decision we’ve made in terms of investments you are seeing that very strongly in capital market. But as we’ve gotten into those process we just come to the conclusion that if this environment persist and we’ve got to be even better and that we are finding opportunities that will allow us to extend this process early and we believe get our company into a much better position. We do believe that operating leverage is a right metric to look at, we continue to believe we’re delivering on that. But it’s going to require both work on both revenues and expense side of the income statement. And so, we can’t give up on either one.

And then one tactical question, David you had $30 million negative in prepayment write-offs, we’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 back naturally because of what that’s happened. But I think that it’s going to be it’s a little premature to say when we might get that other piece and we need to see what will happen over maybe the next couple of quarters before we can get our previously premium amortization down into the lower 40 range.

Thanks.

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

Good afternoon Erika.

Good afternoon. 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 to 885 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’ve been talking about for the past hour.

So, I think if you look at our kind of core that 880 to 885 is where we are, we do continue to make investments to grow our revenue. So an example will be our release we had yesterday, you’ll see expenses coming through from that investment in 2017 and none in 2016. And so we are trying figure out how to pay for that by having other saving. So part of that $400 million is compensators for that. We do have built-in natural inflation that we have, salary increases and alike that we try to curtail by insuring that we have the right number of people, the right number the right kinds of the people to manage our business and run our businesses. We are down some 1,200 people. We continue to challenge ourselves on that and we see some of that manifest in the branch consolidations that we’ve had during the year. So, the question is how do we keep to 880 and 885 is 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 virtually none in 2016. So, does that make sense?

It does, thank you.

Your next question comes from Kevin Barker of Piper Jaffray.

Afternoon, Kevin.

Good afternoon. Thanks for taking my question. Just one follow-up not to beat the dead horse, follow-up on expenses again, you said you’re flat to up modest 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 to 885 range during going into the fourth quarter or is it going to be -- could you see some volatility where that could drive that number lower?

No we believe that's our core kind of run rate where we are right now for the fourth quarter is a net 880 to 885.

Okay. And then when you think about the revenue side when you say it’s going to be on a yearly basis up around 6% or more than 6% it’s a run rate closer to $500 million going into the next quarter from $544 million. But it seems like you have a lot of positive commentary around on your momentum on the fee income side. It seems like that number could be up a lot higher than the 6% that you're guiding too. Is there some moving parts there that may cause the number to come down considerably going into the fourth quarter?

No we've had we grew just about every category of non-interest revenue. And we're excited about those investments that are paying off that we’ve paid. So I don't see that the 6% the reason we left there is our initial target at Investor Day was 4% to 6%. We had said we’d be in the middle, then we said we'd be at the upper end and now we're giving you guidance that we’ll be over 6%. But that's where we stop and we haven't we’re 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 have any type of major disruption in that trend that you're seeing.

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

Your next question comes from Gerard Cassidy of RBC.

Good afternoon, Gerard.

Good afternoon, Grayson good afternoon, David. Couple of questions for you, David you touched on the premium amortization and how it's going to improve obviously in the next quarter and in earlier question you talked a little bit about maybe getting even better if rates go higher. Can you quantify where rates would have to go the tenure government bond yield that is where the premium amortization would really drop significantly and be a non-factor.

So I think if you took the tenure maybe up closure to 2% we might have some meaningful reduction in the premium amortization and that’s just an approximate. Because obviously what happens with prepayments, refis and mortgages getting always totally correlated to the tenure. But suffice to say that’s 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 tenure need to get closer to 160 or below for that to reoccur?

Yes I think that we're coming off of pretty historic lows in the second quarter. And when you look at that that's why we were able to give you maybe that $4 million that we don't think will repeat. But you'd have to be steady in the 150s 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're comfortable with a CET 1 ratio at 9.5%, if the NPR turns into an actual regulation about the qualitative portion of CCAR you're 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'll let David add to this. But we do believe that the proposed rules are constructive and give us more certainly. 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’re in that sort of 9.5% range as David said. Obviously we're trying to improve the mix of our portfolio that will change some of our metrics if we're successful in that regard. But the rules that are proposed give us more certainty, but we still it's our responsibility to manage capital and 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 regional banks and will give us more flexibility. All that being said is we're still sometime away from those strong deliberations that go into our submission. And so it's premature for us to comment on what we might or might not do in that regard. But it's a possibility.

So Gerard I would tell you it's really important that this 9.5% that's our number, that’s our loss forecasting that's the way we go about measuring the kind of capital we need to have. We're not interested in pushing ourselves to the point we have a quantitative failure, and ask for a mulligan [ph] and all those kinds of things. I think it’s important that we have a capital planning process, with the appropriate governance I am 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% 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’re at 9.5%, you are at 11% you got to get 9.5%, how quick was the pace of change assuming the NPR turns in exactly as it is, and I think that's a great question. We’re 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 as some form of panacea, I do think that we need to be prudent, 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’s fairly and reasonable for all interested parties. And so a lot of work needs to be done.

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

Thank you.

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

Good afternoon, Vivek.

Thanks. Let me just follow-up on that capital discussion a little bit with both of you. David, to your point about, yes it’s going to take time obviously to go from 11% to 9.5% and Grayson, you’ve been doing the bolt-on acquisition, but they have not really used up that much capital and you’ve done a bunch of these, given how much you’re generating. So as you look into 2017 and I recognize you can’t do this right now, but looking to something where do other uses of capital, how would prioritize them? Returning more than 100% versus say bank acquisitions?

Yes, so Vivek you’re bringing up a good point in terms of capital deployment, let’s go through that how we think about it. First and foremost is organic growth, but as organic growth on things that add to the return hurdle that we’re trying to get to which is growing to 12% to 14% return on tangible common equity. So what we laid at Investor Day is where we are today. We’re going to update that in December. So to the extent that’s not there, and we continue to generate capital that we’re not utilizing having an appropriate dividend that we have is important to us, bolt-on acquisitions it help. You’re right, they don’t have a tendency to use 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’s a learning that we picked this past year and we would consider that as well. You mentioned bank acquisitions, when you look at valuation for us, right now 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 and that is isn’t very supportive of that at this juncture.

And even then I think we’ve been pretty clear, I mean we’re very interested in non-bank bolt-on acquisitions, we’ve active in that they will come at times 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’s just not our primary focus for -- as David mentioned for a couple of 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’s the integration, the synergies that we create, we got the ability to do that, we’re pretty good at it. We think we could continue to do that. Hopefully, overtime we can even increase the pace of this kind of activity. When it does it’s a very manageable risk profile when we executed this way. Larger acquisitions obviously have a very different risk profile. And right now we're just focused on building a very sustainable franchise value for our shareholders.

I kind of had one other thing I should have mentioned is we do as we think about our 12% to 14% target in terms of return on tangible common equity. We're working on the numerators as we’ve just talked about for a little over hour and 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're all we get the message and as the pace as 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 last quarter? Your slide had 12% what is it this quarter?

Give me a second, 13%. Thank you.

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

That’s right.

Okay, great thanks. Thank you.

We have time to one more question. Your final question comes from the line of Christopher Marinac of FIG Partners Research.

Thanks, good afternoon. 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 expenses also a positive heading into the near future. Should we be pay more attention to return on tangible equity or returned assets, which would be more appropriate to kind gauge the progress with 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 pretty tight correlation. So we have the 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'll see businesses and peers that have more revenue generated from non-balance sheets non-assets always have a higher ROA. But I think that whether rubber meets the road is really returns on the capital.

I'd 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.

Thank you.

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 and 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.