Regions Financial Corp (RF) 2008 Q1 法說會逐字稿

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

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

I would like to remind everyone, that all participants' phone lines 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 Mr.

List Underwood before Mr.

Ritter begins the conference call.

Welcome and good morning, everyone.

This is List Underwood and we appreciate very much your participation today.

Our presentation will discuss Regions' business outlook and includes forward-looking statements.

These statements may include descriptions of management's plans, objectives, or goals for future operations, products, or services, forecasts of financial or other performance measures, statements about the expected quality, performance, or collectability of loans, and statements about Regions' general outlook for economic and business conditions.

We also may make other forward-looking statements in the question-and-answer period following the discussion.

These forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially.

Information on the risk factors that could cause actual results to differ is available from today's earnings press release, in today's Form 8-K, or in our Form 10-K for the year ended December 31, 2007.

As a reminder, forward-looking statements are effective only as of the date they are made, and we assume no obligation to update information concerning our expectations.

Let me also mention that our discussions may include the use of non-GAAP financial measures.

A reconciliation of these to the same measures on a GAAP basis can be found in our earnings release and related supplemental financial schedules.

Dowd?

Thank you, List, and good morning, everyone.

We appreciate you joining for Regions' first quarter earnings conference call.

With me this morning are Bill Wells, our Chief Risk Officer and Mike Willoughby, our Chief Credit Officer.

Also joining us, is Irene Esteves, who, as or just last week began as our new chief financial officer, replacing Al Yoker who, as most of you know, recently retired.

We all will miss Al and certainly wish he and his family the best, but at the same time we're very excited to have someone with Irene's impressive background and experience on board.

Since Irene has only been with us about a week, List will provide a detailed discussion of our quarterly performance later in the call, after which we will, as usual, take any questions that you might have.

Despite a very difficult operating environment, Regions achieved first quarter earnings from our continuing operations of $0.55 per diluted share excluding the merger charges.

At the same time, we continued to proactively address the ongoing challenges of the slowing economic growth and a worsening credit cycle.

We increased our allowance for credit losses to 1.49%, increased our tangible common equity to tangible assets ratio to 5.90% and took additional steps to improve our cost structure, wrote down our Morgan Keegan mutual fund investments and implemented some new broad-based revenue initiatives.

In other words, we're taking actions that continue to position us to successfully manage through this current economic cycle as well as prepare us for improvements in longer term profit potential.

I want to spend a few minutes elaborating on some of those actions but first let me share a few additional thoughts about the first quarter.

Our first quarter earnings were solid given this current operating environment.

Unusual revenue and expense items largely offset one another, and List will take you through those in a few minutes.

As expected our credit quality did deteriorate during the quarter.

We remain comfortable with our overall loan portfolio, however, with the exception of that residential homebuilder portfolio which we are managing as we outlined to you last quarter.

With the widespread decline in residential property values, our home equity portfolio losses also increased from the fourth quarter but we feel remain manageable.

Much of the relative strength at our portfolio stems from the fact that we have historically shied away from nontraditional mortgage products.

Things like option ARMs, negative amortizing loans, loans with teaser rates.

And at the same time we've originated and underwritten our portfolios in-house.

As a result, while we fully understand and expect mortgage-related losses to increase as we progress through the cycle, we also expect these to continue to compare favorably to others in the industry.

List, again, will give you some additional details on our entire portfolio and its performance this quarter.

Regions security portfolio is straightforward.

We view that portfolio primarily as a source of liquidity rather than a source of earnings.

It contains no exposure to collateralized debt obligations, no structured investment vehicle exposure, and is very conservatively managed with minimal exposure to the subprime market.

Average loan growth picked up to 4% linked quarter on an annualized basis.

On the funding side, we saw a reduction in our low-cost deposits, partly seasonal but also driven by commercial customers using their deposits to pay down debt in this slowing economic environment.

Consumer low-cost deposits, on the other hand, remained steady during the quarter.

Overall, we expect deposit growth is likely to remain a challenge for us in the industry throughout 2008.

Total non-interest revenues, if you exclude securities transactions and the Visa IPO gain, grew an annualized 11% linked quarter, very encouraging, I believe, given seasonal effects.

This helped offset somewhat the effect of slightly weaker net interest income.

We've also made good progress in developing and implementing some new revenue generating initiatives.

You may recall we mentioned in our last quarterly call a formal company-wide process to identify and capture revenue from fee-based opportunities as well as look for new revenue streams.

In the case of fee-based opportunities, we have a working group focused on identifying and implementing programs to realize appropriate and competitive fees related to product offerings while maintaining customer loyalty.

Another group has the mission of identifying and launching new streams of revenue and -- or they could significantly enhance some existing revenue streams.

Both groups have identified a number of opportunities.

They've set their priorities and have begun implementation.

I would expect those efforts to translate into some tangible results as early as this quarter.

Ultimately our goal is to identify and capture somewhere in the $200 to $300 million range in annual incremental revenues from these efforts as we get to 2010.

We are also pleased with our continued success in containing our core operating expenses.

In the first quarter we achieved quarterly cost saves of $127 million which equates to an annual run rate of $510 million, putting us ahead of our upwardly revised run rate goal that we set last year.

As you may have read recently, in late March we eliminated about 700 positions across the company.

These were primarily redundant back office and operational positions that had not been contemplated in our original cost save estimates when we announced the merger.

With these eliminations, we have now reduced our net staffing from May of 2006 to 15%.

Again, you may recall that during the last quarterly earnings call, we mentioned that in addition to our incremental revenue initiative, an initiative to further improve our operating efficiency, this effort, which we internally talk about it in terms of efficiency and effectiveness initiative, has begun in earnest.

Our goal is to improve the efficiency and effectiveness throughout our organization by leveraging our new scale and continuing to consolidate selected back office and operational function while increasing standardization and, if you will, organizational chart modeling.

Most importantly, we believe that this initiative, plus the recent staff reductions, will allow us to exceed $700 million in cost saves by the end of 2008 as we look at our all-in cost save run rate.

With that, let me turn it over to List for greater detail.

Thank you, Dowd.

All in all, first quarter operating earnings of $0.55 per diluted share, excluding merger charges, were solid.

However, it was a noisy quarter with several unusual revenue and expense items it largely offset.

Specifically, we received $63 million from the redemption of a portion of our ownership interest in Visa's recent initial public offering and recorded a $92 million gain on the sale of investment securities early in the quarter.

On the non-interest expense side, we were able to recognize a $28 million expense reduction related to the Visa IPO.

You may recall that we recorded nearly $52 million of Visa-related litigation expenses in the fourth quarter 2007.

Non interest expenses also include a $42 million mortgage servicing rights impairment charge, a $65 million loss on early debt extinguishment, and $24.5 million write-down of our investment in two Morgan Keegan mutual funds.

I will discuss some of these items in more detail to clarify core trends in just a moment.

But first I want to update you on Regions' credit quality.

As anticipated, both net charge-offs and nonperforming assets rose fourth to first quarter.

Net loan charge-offs were an annualized 53 basis points of average loans, up 8 basis points on a linked quarter basis.

The provision for loan losses totaled $181 million, $55 million above net charge-offs.

As a result, the allowance for credit losses increased to 1.49% at quarter end.

The linked quarter increase in net charge-offs was primarily driven by deterioration in the residential homebuilder portfolio and losses in the company's home equity portfolio.

Both of which, of course, are closely tied to the housing market slowdown.

Losses within our home equity portfolio increased to an annualized 57 basis points during the first quarter.

As Dowd mentioned, this was primarily driven by lower residential property values.

Despite the increase, we still believe our home equity portfolio will fair better than most.

And although it is not immune to broad economic and market pressures, we like this portfolio for several reasons.

It was entirely originated in-house, not through brokers or correspondents.

It contains high FICO scores, low LTV's, and most importantly, it also has a high proportion of first liens, 41%, in fact.

Nonperforming assets increased to 1.25% of loans and foreclosed assets, up 35 basis points from year-end 2007.

As expected, the linked quarter increase in nonperforming assets was primarily driven by a residential homebuilder portfolio.

In fact, homebuilder credits accounted for about $140 million of the increase in non-performing loans and approximately $40 million of the quarter over quarter uptick in other real estate owned.

We continue to make progress in effectively managing the risk in this portfolio.

As discussed last quarter, we have fully implemented and executed our proactive strategy for this quarter.

This strategy, which involves some of our most experienced real estate lenders, includes frequent borrower contact, continuous local market review, and comprehensive internal analysis of resolution and exit credits.

The residential homebuilder portfolio declined $1.3 billion, the majority of which relates to pay-downs, partially offsetting this decline was $340 million of additional funding.

The total portfolio stands at $6.2 billion as of March 31, 2008.

While the portfolio declined in size, as expected, given current market conditions, the loans within the portfolio that we have identified as exit credits increased from last quarter and now total $1.2 billion.

Our focus for this portfolio remains centered on identifying the most sensible exit strategy, one that best serves our shareholders in the long run.

Turning now to other aspects of the quarter, non-interest income, excluding security transactions and the Visa income, grew an annualized 11% linked quarter.

Commercial credit fee income was especially strong, up $19 million fourth to first quarter, driven by a surge in corporate finance activity by our customers in an effort to manage their interest rate risk.

Insurance fees were also strong, reflecting our January 1 purchase of a multilane agency in Mississippi, plus some other seasonal factors.

Mortgage income climbed nearly $18 million linked quarter, with about half the pickup due to a one-time adjustment related to the adoption of financial accounting standard 159 for mortgage loans held for sale.

A fourth quarter servicing loss of $4.4 million also contributed to the quarter over quarter improvement.

Conversely, service charges declined linked quarter, reflecting seasonal factors as well as an increase in waivers due to fourth quarter convergent events.

Notably, brokerage income remained healthy despite market turmoil, up 23% comparing first quarter to the comparable year-ago period.

Morgan Keegan's first quarter core operating results were solid driven by higher fixed income revenues.

Equity capital markets' revenues were also significantly stronger than in the previous quarter reflecting increased oil and gas advisory activity, coupled with an overall pickup in investment banking.

As you might expect, both private client and asset management fees were somewhat weaker than last quarter, a result of slower demand for traditional retail products and generally lower asset valuations.

On the expense side, Morgan Keegan earnings were again impacted by losses on investments in two Morgan Keegan mutual funds this quarter totaling $24.5 million.

These investments carry an approximate $38 million market value at March 31.

Fully taxable equivalent net income, totaled $1 billion in the first quarter, slightly below the prior period.

Seasonality was a factor but an 8 basis point drop in the net interest margin to 3.53% was the primary reason for the decline.

The margin continues to be pressured by a negative shift in the funding mix, given a lower level of low-cost deposits.

Changes in the term structure of interest rates are also providing pressure as interest rates on loans reprice downward and is becoming more difficult to reduce funding costs.

Rising non-performing asset levels are also having an unfavorable effect on the margin.

Average low-cost deposits declined an annualized 8% linked quarter driven in part by a mix shift resulting from customers seeking higher returns in the current environment.

As Dowd mentioned, commercial deposits were also a driver, as these customers increasingly used their deposits to pay down debt.

Importantly, we did see a sign of stability in the quarter with March average total low-cost deposits increasing nearly $300 million over February, and that does reflect some seasonality.

Positively, the previously mentioned up-tick in average loans fueled 6% on annualized growth in total average earning assets linked quarter.

Commercial credits mainly originated in Tennessee and Florida drove first quarter's loan growth, partially offset by decline in residential mortgage loans.

We continue to make good progress in curtailing operating expenses.

As I highlighted at that time beginning of my comments, a number of unusual items impacted reported first quarter expenses.

However, adjusting for these items in both periods, before operating costs were stable between quarters, despite the jump in benefits and (FICA) costs.

Full flow-through at fourth quarter branch conversion benefits lifted first quarter merger cost saves to $127 million, which, as Dowd covered, exceeds our goal of $500 million on a run rate basis.

A great start toward our new year and run rate goal of at least $700 million.

First quarter's effective tax rate, excluding the merger charges, returned to a more normal 33%.

Finally, our tangible common equity to tangible assets ratio increased to 5.9% as of March 31.

While we are very comfortable with our capital levels, like most banks these days, we are in a capital conservation mode.

So, as you would expect, we have no immediate plans to repurchase shares any time soon.

In summary, the economic and credit environment is likely to remain challenging for the foreseeable future.

But we believe we have taken and will continue to take actions that enhance core earnings power, manage credit risks, and further strengthen an already strong capital position and balance sheet.

As a result, we believe Regions is well positioned to take advantage of opportunities as they occur in the future.

With that, operator, we're ready to take questions.

(OPERATOR INSTRUCTIONS) And our first question comes from Steven Alexopoulos from JP Morgan.

Your line is now open.

Yes, first question, with the dividend payout ratio at around 75% or so, could you talk about the sustainability at a current dividend rate and what your thoughts might be related to a need for equity capital down the road?

Sure, be glad to.

Obviously we feel like our earnings and our dividend, it is a higher payout than would be our normal policy.

Our board looks at that, and at this time, given the earnings stream that we see going forward, taking into account the credit difficulties in this market, we're comfortable with our dividend at that level, and as List noted, we saw a little uptick in our capital ratios.

And we would expect, with not share repurchases, if I look at our capital plan, which is basically on a two-year rolling cycle, the more detail of it, we would expect to see in that plan those capital ratios strengthen keeping the dividend at its current level, and that's what we're operating under.

Could you share what that level is that the board is specifically comfortable with, in terms of a payout ratio?

Our payout ratio, we've talked about our policy before, and basically it's in a 50% to 60% range.

And obvious we're above that right now.

Okay.

Just some other quick questions.

In terms of home equity, the second lien that went delinquent, or into default in the quarter, what were you typically doing there?

Where were you writing them down, holding the judgment, or are you going through with buying out the first and going through foreclosure?

No, I would say basically the jump there that you see, is when we talked about valuation decline and, you know, probably anybody you talk to at any bank that lived through the late 80's and the early 90's, to me, the biggest difference in what's happening right now is, I'll use the word velocity, and it's how fast things have changed, and the biggest change that we've seen, quarter over quarter, and even if you go back and look at third to fourth and comparing them, is property valuations in certain markets.

I would tell you that in a few of those that you saw us basically write off, we did not write them down, and because some of those -- they did have firsts, but there are cases where people as early as 18 to 24 months ago had one value on that property, and as they started to sell it or refinance it, they realize that valuation was 40% below what it was 18 to 24 months ago, and they're walking away from those homes in those markets.

That's real helpful.

Just one final thing.

Looking at the land that's in non-accrual, $94 million or so, is that written down to what you believe it's worth in terms of current market value?

Yes, Steven, this is Bill Wells.

We have an in-house appraisal review function, so any time any credit starts to move into a troubled phase, we're requesting current evaluations as best as we can tell what the value of that land is.

Okay.

Thanks, guys.

Thanks.

Your next question comes from Kevin Fitzsimmons from Sandler O'Neill.

Your line is now open.

Good morning, everyone.

Good morning.

Good morning.

I was wondering, I heard your comments on credit, and you specifically mentioned the homebuilder portfolio and the home equity portfolio, obviously.

What I was wondering is just if you can give some commentary about C & I, non-owner occupied commercial real estate in Alt-A.

Because those, while maybe not -- they haven't been big moves in prior quarters, they seem, when you look at non-accrual loans and 90-day past due they had pretty healthy increases.

And just how you would characterize those increases at this point.

And Kevin, this is Bill Wells.

We've been -- all the time looking at our commercial portfolio to see if we see, what the word is contagious, and see if you start to see anything spread over to the portfolio.

Our losses in commercial were up.

What I would tell you, part of that was a large unsecured debt to a national homebuilder, and then we also had a business person loan on the individual basis unsecured.

So, those were probably the two pieces that made up a majority of the loss increase on our 90 days past due which is one thing that we track pretty intensely within risk, most of those are coming through some type of work-out phase where they've moved into our special asset area, and we're working with the customer to try to work to resolution.

And I'll let Mike answer the alt-A piece.

We've had Alt-A for at least 15 years now, so it's been tested through a cycle.

It's underwritten primarily in-house, all today, and unlike a lot of Alt-A that's gotten a lot of discussions our Alt-A isn't because of high LTV's or low scores or low debt coverage ratios.

It is because of the structure of the credit having to do with making them nonconforming, like cross collateralization.

So, we're very comfortable with the with the Alt-A piece of our business.

I'd also say Alt-A means a lot of things to a lot of different people, we take a very conservative view about how we would categorize a (credit) as alt-A.

Okay, can you just, as a follow up, can you just update us on, I think you give the numbers somewhere in the release, but what the total amount is in the special asset group, and does that -- is that number -- just clarify for me again is that included within the non-performing asset total or is that separate?

Well, I think you're talk about our homebuilder book.

And we've got $1.2 billion that we've designated to be in special assets, and it runs the gamut.

Most of it is what we would call classified.

There's a good size chunk of it, and it's in the supplemental piece to the earnings release that is non accrual, but there's also part of that, that is things that we just have concluded that we're not comfortable with through the cycle, but they would not be officially adversely rated.

Kevin, also, we took the step, probably in the latter part of '07, and what we tried to do is identify as much as we could, issues around the residential portfolio.

We took several steps.

One of those, we're moving more experienced people into our special asset work-out area, and with that, what we tried to do is identify all of the credit that we thought we should be looking at and working with the customers to exit them as best we could.

As you continue to go through that process, a little bit of what List mentioned earlier, as work with your borrower, as your're doing your market analysis, you're working with that customer and looking at your portfolio, you're probably going to see that number move around as we start to get better and understanding what that -- what's in that portfolio.

So, to see movement up and down is what we would hope would see from a credit -- from a risk perspective.

Okay.

And just -- I don't want to belabor this, but of the portion in -- of homebuilder loans in the special asset group that have not been adversely classified, have they been written down, do you think, to what you think they're valued?

Because typically that trigger of putting it in the non-accrual bucket triggers that write-down, and I just want to know, are these loans that you have gone through that process, or have not because they have not gone through that -- into the classification bucket?

Well, if you look in the -- there's a chart that covers this.

We've got about $400 million of the $1.2 billion that's on non-accrual.

Those have to be marked to market.

The remainder of the portfolio, while we want to exit those credits, are performing.

So, they're paying interest and principal as would you expect, and we would not write those down at this time.

Kevin, also, too, what I would -- a part of our appraisal review process, we're looking at markets on an ongoing basis to see if we see changes in valuations which make us decide whether we should move something to non accrual or not, and we would be looking at that valuation at that time.

Okay.

Great.

Thanks very much.

Our next question comes from Ed Najarian from Merrill Lynch.

Your line is not open.

Good morning.

Good morning.

Just a quick question in terms of the commercial credit losses, just from a mapping standpoint so I understand this correctly.

You have a chart on page 12, I guess -- or a table on page 12 and another table on page 13 that don't seem to line up with respect to commercial loan losses.

One shows 94 basis points, in terms of a charge-off ratio, and the other one looks to me like it shows either 67 basis points or 61 basis points, depending on how you read it.

So, I guess I was wondering if you could sort of indicate the difference.

And then secondarily, when you talked about the large unsecured homebuilder loss, national homebuilder loss, as well as the personal business loan loss, is that lumped into the commercial loan losses that I see in the 94 basis points on page 12?

Ed this is Bill Wells.

On the first part, when you look at that, that other page where you're trying to reconcile to, we tried to get a little bit more granular for you, and what you're seeing is commercial and what's called business and community banking loans, so you have to kind of put those together.

The difference on the business and community banking loans, if you look at December fourth quarters, they really just had one month of charge-off numbers.

Remember, we were going through a big conversion at the time, so we're trying to get better about our MIS as we go forward.

What I would always do is go back to that front section.

And that's how we look to see, of our true C & I loans, charge-off rate.

The two loans that you mentioned, yes, are in the C & I loss number.

And that's what predominantly drove to 94 from 60 last quarter?

Exactly.

And when we looked at that residential homebuilder line, unsecured, that's not reflective of what we see in the rest of our portfolio.

That was to us an isolated incident.

Okay.

And then secondarily, and maybe you have a chart in here that I just am not seeing, oh, yes, it looks like you do.

Forget it.

I've got the answer to my second question.

All right, thank you very much.

I'm glad I helped you out, Ed, on that one.

Our next question comes from Chris Mutascio from Stifel Nicolaus.

Good morning all.

Good morning.

Good morning.

I had just two quick questions.

You said a lot of the homebuilder exposure that was relinquished during the quarter was from pay-downs.

I was just curious if there was any homebuilder loan sales that might have occurred during the quarter and if so what was the pricing on those?

And then somewhat unrelated, I'll just follow up now, the loan loss reserve ratio as a percent of NPA's, and that covers NPA's about 1.1 times right now, are you comfortable with allowing that to fall below 1 if the non-performing assets continue to rise at the current level or the current pace?

Could you ask the second questioning a gain?

The reserve to NPA ratio, or the reserves cover NPA's 1.1 times right now if I did my math right.

And I was just curious if you're comfortable allowing that to fall below that 1 to 1 ratio if indeed nonperforming assets continue to rise at the current pace?

Alright, first the first question.

We had some sales during the quarter but they were kind of one or two off as we've done.

We continually look at our portfolio and talk to people about potential sales, in fact, we had a meeting last week.

We were trying to get a couple groups in to take a look at always our portfolio and what we can sell, not only from a residential side, but looking at all our non-performing assets and non-performing loans.

As for as the 1 to 1 ratio what we do is we have a pretty detailed methodology quarterly that we look at how we assess the risk within the portfolio.

We go through several different scenarios trying to understand what we see, the happening of the shifts within the portfolio.

That is one of the factors that we look at and feel very comfortable with where the reserve is today.

We will look at it quarter by quarter as we see what's happening within that loan portfolio.

But I would tell you I don't necessarily look at one specific ratio.

We look at several of them as we do our methodology.

Could you disclose what type of pricing you're getting on the few sales you had during the quarter on the home builders?

Generally those are what we call strategic buyers, and we did not take much of a haircut.

Okay, thank you.

Your next question comes from Todd Hagerman from Credit Suisse.

Your line is now open.

Good morning, everybody.

Good morning.

If I could, Bill and Mike, just get a little bit more detail on the home equity portfolio.

Roughly $15 billion in terms of outstanding at the quarter.

Could you give us a sense of what the current unfunded commitments are against that portfolio?

And then a little bit better sense of the geography breakout similar to what you give for the homebuilder in terms of the various Regions, how that would split out.

The easiest way to answer your first question, is we're about 40% funded, and that's been, should you want to know, very consistent, so we've not seen net funding up under those lines.

In terms of where our exposure is, we're in really all of our geographic markets.

I guess we're -- we've probably seen more stress in terms of what Dowd talked about for values in some of our higher growth markets.

And I'd also add, it goes back to Legacy (inaudible) most of the, to me, the portfolio is driven out of Florida, Alabama, and Tennessee.

Very little exposure over in the Georgia and the Carolina areas, which I think is a differentiation from our residential homebuilder, if that's what you're trying to get to.

Yes, just as an example, I mean, the Florida region, the central region, what would the composition be there in terms of the total?

Our biggest concentration would be in Florida, and central would probably be right after that, because it would include Alabama.

And roughly how much is that, Mike?

Well, I'm going to give you just kind of, on a percentage basis, Tampa St.

Pete is around 7%.

It drops off around Orlando to about 4%.

So, those are kind of our two main areas.

Okay.

And then just, again, you mention about 40% is funded.

Have you done much in terms of modifying the outstanding lines in terms of cutting those off or scaling them back, depending upon the region or customer, if you will?

And then could you give us a better sense of how much of the portfolio would, say, exceed 100% LTV?

The answer to your last question is none.

And on the first part, can you prompt me with that again, please?

Sure.

The 100% LTV, in terms of the portfolio, you have a weighted average LTV on the entire portfolio of 74%.

How much would you say exceeds 90% or 100% LTV?

And, again, I'm more focused on the roughly $9 billion of second lien product.

In our second lien product, we have -- we've ensured our second position over 80% LTVs for quite some time.

That was something that AmSouth did pre merger, and at the merger, that has been part of our standard practice.

So, we shy away from second position high LTV's.

And also, you mentioned about underwriting.

We go on a constant basis looking at our individual customers and underwrite them as we start to look at different factors that may come up, maybe a reapproval of lines or looking as we go through the credit process.

So, we do underwrite again as we look at the home equity book.

Okay.

Again, not to beat the issue to death here, but you mentioned some of the geographies, but as you look at the portfolio, Mike, outside of geography, is a particular product or customer segment that's showing more stress?

Again, as I look at the past-due and delinquency buckets there is there any kind of telltale signs that you can share with us in terms of where you're focused?

Well, I'd say that we're seeing more stress both in terms of defaults and in terms of loss on sale in some of the higher growth markets in Florida.

And if I had to pick one that's probably particularly troublesome, it would be the Ft.

Myers, Cape Coral area.

And that's presumably less than 5%?

Yes.

Terrific, thanks very much.

Our next question comes from Matt O'Connor from UBS.

Your line is now open.

Hi, Dowd, List.

Hello.

Hello, Matt.

I was just wondering what type of loans were the $700 million that you transferred from the construction portfolio to the mortgage book?

You're talking about what went out of the homebuilder book?

Correct.

They would be a variety of loans between the combination of our conversions, which we did in the fourth quarter, and if you remember, part of when we created this homebuilder group and took all of the homebuilder credits, they came from community banks, they came from a variety of places within the company, and the whole idea was to put professional residential construction lenders in charge, whether it was in special assets or otherwise.

And the purpose of that was to be very close to the customer, to be internally focused, and to scrub those portfolios.

And in the process of that, plus the conversions, there were loans that primarily land, that were coded to residential homebuilder that were not correctly coded.

And you would expect that, frankly, in a merger like we're doing, as part of what we were looking for when we really started intensifying our focus on this portfolio.

And also, too, Matt, there's a part of it, as you go from construction phase into permanent phase, and I believe that's part of our reclassification, too.

Okay, and then within the residential real estate how much additional loans are there beyond this $700 million, related to this quasi land that one could argue is also some sort of residential construction?

Well, I'm not sure where that question is coming from.

I just would point you to the homebuilder chart and statistics that are on page 15 of our supplement to the earnings release.

I think it gives you a pretty good rundown.

That's what -- that's what we think the different pieces of that are by lots, land, pre-sale, and so on.

Right.

But this $700 million is to longer included in that $6 billion, right?

Correct.

So, I guess I'm just wondering, are there additional loans similar to this $700 million that would be classified within residential real estate?

Matt, let me jump in here for a minute.

I think we had a drop or decline in our total homebuilder portfolio of $1.3 billion in the quarter.

$730 million of that was payoffs.

We had another $580 million that was recoded or reclassified, what Mike was talking about.

In addition to that, we had another $340 million of additional fundings where we were funding up construction projects for completion.

So, that sort of gives you all the components.

So, we've ended up today with $6.2 billion in that portfolio.

I hope that clarifies it a little bit.

Okay.

No, that's helpful.

And maybe I'll follow up with List specifically on my previous question, just to not tie it up here.

But I did have a separate question on capital, actually.

I might have missed it but what was your tier 1 capital at the end of the quarter?

We don't publish the tier 1 at this point.

We don't expect it to change a whole lot from year end, if at all.

Okay.

That would make sense, given what your tangible capital did.

So, if I recall correctly it was around 7.3%.

That's correct.

And as I look at that, on the one hand, the quality of your capital is very high, because I think all are mostly common, but on an absolute basis, the 7.3% seems kind of low, or at the lower end of many other banks, and I'm just wondering how you think about that, and is there pressure to increase it?

Well, one thing you've got to look at I think is also the bank level ratio.

It was at year end 8.7%.

And, of course, it makes up more than 100% of the holding company.

In this environment in particular, I think we want to look at continuing to find ways to conserve capital.

The markets are very tough right now, as you know, but we continue to look there, and for any opportunities to raise that number, and we'll continue to.

Okay.

So, the real number that the regulators will be focusing in on right now will be the 8.7% as opposed to the 7.3%?

Well, that's the bank level, and certainly they're both important, but the bank is very strong.

Okay.

Do you have any interest in trying to bring some tier 1hybrids or preferreds to the market?

I know it's kind of a tough market out there right now.

Like I said, I think we want to remain opportunistic there.

The market's really tough but in today's environment if you can find a window, you certainly would take advantage of it at this point.

You know, Matt, going back to your comment at the start, we do think it's a high quality capital base, and as we put the two companies together, one of the things we did was we said, is we compared ourselves to our near peer group, we knew we didn't have the amount of hybrid that some of them had, but frankly, the market, that isn't available right now, but in a perfect world we would absolutely have taken that hybrid percentage up just for competitive reasons as we looked in the marketplace.

But, you know, if the's not available, we're not going to do something foolish.

As List says, we're out there looking, and if an opportunity presents itself, we'll take advantage of it.

Okay, that would make sense.

And when you're having conversations with the regulators and the rating agencies, their sense is that while the tier 1 might be low, the quality of that is high, so, that kind of balances it out, at least in the near term?

Well, we don't even -- in the case of the rating agencies, for example, they don't think those are particularly low ratios.

We again compare favorably in our categories, rating categories.

Okay.

All right, thank you very much.

you're welcome.

Our next question comes from Ken Usdin from Banc of America Securities.

Thanks, good morning.

Good morning.

Good morning.

I just had a bigger picture question on credit quality.

In January, the company had spoken to a couple of specific pieces of credit guidance, and taken into consideration some of your commentary already.

I'm just wondering, is there any changes to your view on overall NPA growth and charge-off expectations as you had detailed a quarter ago?

And I guess if not, given everything we've seen, what would be the key reasons for it not to have changed at all?

Ken, this is Dowd.

Good morning.

We did that last quarter.

We put out there those guidance on charge-offs and on non-performers.

A quick digression, as I read most of you that publish, nobody paid any attention to the anyway.

And so, basically as we got ready for this conference call, I said, you know, the world is change so fast, why in the world do we need to be forecasting charge-offs and non-performers in this environment?

So, while we sit here today, and I would tell you, from the comments we've made, we're pretty comfortable with where we were.

We don't think it makes sense to keep updating that quarterly as rapidly as this environment is changing.

Ken, are you there?

Sorry about that.

Okay.

So, then a broader sense -- broader notion then, Dowd, forgetting quantitative updates to it, can you just kind of sum up all the credit characterization that we've talked about now on kind of on an individual basis and just say, do you just feel kind of just net better or net worse?

Oh, I think, as I've said, the velocity is changing on the consumer side it's home equity driven, and it's property valuation driven.

An earlier question, I mean, our real concern is not any particular customer segment.

It's a geographic location of a customer, where real-estate values are falling so rapidly and significantly.

And on -- the commercial portfolio, if you look at that it's that residential builder book, and again, we think both of those will near-term, as we look out through the remainder of this year, I think you'll see those metrics deteriorate, and that's what we've said all along.

I don't see anything that's happened in the past quarter that would change that.

Okay.

If I can ask one follow-up, can you give us a little context on Morgan Keegan?

Obviously there was -- there was a charge this quarter, but can you just give us some color on your expectations for that business as we move ahead, obviously given the challenging market environment, the company's actually held up very, very well as far as top-line revenue.

I'm just wondering if we should expect some type of deterioration from here given the ongoing challenges and the capital markets.

Right, Ken.

No, I appreciate it, and you're right, I think they had a very strong first quarter.

You know, we've all got to remember, they do have many more offices now than they would have had this time a year ago.

They're continuing to add staff, the people dealing with the customers, the brokerage side.

We think it is still a real opportunity, and as we look at our ongoing business, Morgan Keegan and partnershipping with the bank, whether it's on the commercial side, the investment banking side, or on the consumer, the private banking side, we think they're huge opportunities to increase that penetration, and John Carrson, the new CEO and his team, are working very closely with their counterparts in the bank to see that that happens.

And, you know, three months ago, probably none of you or us would have maybe said we thought they'd have that strong a quarter in this market, but they did, and we continue to see good things happening in their marketplace.

The real negative, as you pointed out, was we did have to mark down those funds we'd purchased by that additional $25 million, but on the bright side, the value of those that's left is only $38 million.

Okay.

Thanks a lot.

Your next question comes from Jefferson Harralson from KBW.

Your line is now open.

Thanks, guys.

I want to talk about the balance sheet a little bit, too.

Two of the last three-quarters you had some negative earning asset growth.

This time it was very nice at 6%.

Can you -- you grew the securities book a little bit.

Are you seeing -- do you think that kind of balance sheet growth can continue, and can you talk about the loan growth that you did have this quarter and what drove it?

Jeffrey, I think that we will continue to see low single-digit type growth as we look out.

That would be what we'd expect.

A lot of what's on the books and the growth you see is a result of some planning and some internal efforts that have been underway for several quarters, and it's good to see that the, frankly, that the net new business increases more than the payoffs this past quarter.

And I would tell you that's primarily what you saw.

We had pay-downs, but frankly we had some good new business production, and it's really primarily I'm thinking first quarter would have been our Tennessee market, and Florida on the commercial side.

All right.

Those would have been where the two greatest pieces of new business came from.

And to follow up on some of the peoples' home equity questions, have you guys contemplated or done some of line cutting on customers, possibly maybe in your most weakly, I guess, where the home prices have gone down the most, maybe Cape Coral, Ft.

Myers or other most negatively affected markets?

Jeffery, this is Bill Wells, yes, we look at that all the time and we look at the customer's ability to repay and we are reducing some lines as we go forward.

It might be worth noting that we can rescore the portfolio quarterly, and we also can refresh values quarterly.

So, we're able to look carefully at this.

All right.

And finally, on the -- I notice that the condo piece of your book it's not a big book, but it shrunk by $400 million.

Is that also pay-downs, reclasses, or sales?

It's primarily pay-downs.

What I would tell you is on our condo book what we're continuing to see stressed, its has performed very well, in my opinion.

Again, we do see some problems come out of here and there, different parts of our footprint, but overall, the condo portfolio has done really well, and will you still continue to see reduction in it, principally from pay-downs.

Alright, thanks a lot, guys.

Thank you.

Your next question comes from Jeff Davis from FTN Midwest securities.

Your line is now open.

Thank you, but my questions have been answered.

Thank you, Jeff.

The last question comes from Jennifer Demba from Robinson Humphrey.

Your line is now open.

Thank you, Dowd, I just wanted to clarify something from an earlier question.

So, you don't wish to update your previous net charge-offs and non-performing guidance range at this point?

That is correct.

Okay.

Thank you very much.

You you're welcome, Jennifer.

Well, if there are no more questions, I would just thank all of you for joining us today, and we'll stand adjourned.

This concludes today's conference call.

You may now disconnect.