Regions Financial Corp (RF) 2010 Q3 法說會逐字稿

Good morning everyone.

We appreciate your participation this morning.

Our presenters today are our President and Chief Executive Officer, Grayson Hall, our Chief Financial Officer David Turner, and, also here and available to answer questions is Bill Wells, our Chief Risk Officer.

Let me quickly touch on our presentation format.

We have prepared a short slide presentation to accompany David's comments.

It's available under the Investor Relations section of Regions.com.

For those of you in the investment community that dialed in by phone, once you're on the Investor Relations section of our website, just click on live phone player and the slides will automatically advance in sync with the audio of the presentation.

A copy of the slides is available on our website.

With that said, I'll direct your attention to the forward-looking statement slide that should be on the screen right now.

And, now, I'll turn it over to Grayson.

Good morning and thank you for your time and participation in our conference call.

Although we saw continued improvements in our core business performance this quarter, we have announced a third quarter loss of $0.17 per share, due to still elevated credit expense with an economy that is demonstrating a slow pace recovery and actions that we've taken to accelerate the disposal of problem assets and reduce our balance sheet risk going forward.

In addition to absorbing higher costs related to problem asset sales, and loans transferred to held for sale, we also reported a loan loss provision essentially equal to the elevated level of loan charge-offs.

Loan loss provision, OREO, and held for sale costs in total were an estimated $0.41 per share after-tax this quarter.

We executed disposition of $1 billion in problem loans, including $709 million in distressed asset sales.

We remain confident our business plans and our determination to execute these plans and returning Regions to sustainable profitability, as promptly and prudently as possible.

Our actions are moving Regions closer to the improvement needed to achieve a breakeven point.

We are encouraged by this quarter's business progress that results in steps towards achieving a goal.

While our credit teams are diligently working to resolve credit-related issues, the majority of our associates have been demonstrated a focus on profitably growing revenue and constraining operating expenses in our core businesses.

In the third quarter, net interest income rose 1% from second quarter, driven, as expected, by continued reduction in overall cost of deposits and a favorable shift in mix.

And, while fee-based revenues declined 1% versus last quarter, the drive was primarily driven by the impact of Regulation E on service charges.

Notably, while the implementation of Reg E did negatively impact the quarter.

That impact was less than we forecasted and we continue to be encouraged by the efforts of our associates and our branches and our call centers to further mitigate the impact of this regulatory requirement, as we assist customers in making the best decisions to accommodate their needs.

At the same time, operating expenses, while being closely managed, did, unfortunately, increase due to the impact of higher credit-related expenses.

We remain confident in the progress we're making, in spite of the slow pace of economic recovery.

Our strategies are working, we're disciplined in our focus on customers and we have developed strong accountability for execution in results.

The operating environment does continue to be challenge.

The economy is gradually recovering but growth is forecast as to be unfavorably slow for the next few quarters with a stubbornly high unemployment, weak housing market and an unusually low interest rates.

Today, the economic recovery with our markets has been uneven.

Residential home values have not stabilized in many of our markets, with especially the markets within the state of Florida, where we could potentially experience another 10% or so decline, relative to mid-2010 prices depending on the ability of the banks and the courts to process foreclosures effectively and the amount of shadow inventory remaining in the system.

With that in mind, we are careful when we're making general statements.

It may prove to be inaccurate, due to the inconsistent valuation from market-to-market.

But, we are starting to see what appears to be stabilization in some of our markets.

Fortunately, the Gulf oil spills' impact on individuals and business customers has been far less economically negative than initially forecast.

It's still a difficult situation for these markets but far less impact that earlier feared.

Regions' maximum loss potential is projected now to be $20 million or less, sharply less than our initial $100 million estimate.

That being said, the long-term economic, environmental impacts remain a concern, as the markets and businesses along the Gulf Coast recover very slowly.

Across all of our markets, I am convinced the economic conditions are improving but the slow pace of recovery is weighing on borrowers' capacity, and borrowers' willingness to continue to fulfill credit obligations and, thus, has decreased the implied potential benefit of guarantor's support on many of our credits.

As such, we have become incrementally more cautious on our economic outlook, which was a driving factor in the increased gross migration of loans moving to a non-performing status.

I think it's important, however, to consider the composition of that migration.

Of the $1.4 billion in third quarter gross non-performing additions, approximately $390 million were disposed of during the quarter.

Of the commercial loans remaining, $933 million, 62%, or $575 million, were current home payments.

Overall, the percentage of non-performing commercial loans that are current payments has risen from 24% at the end of the second quarter to 36% at the end of third quarter, giving us more confidence in ability to manage the potential loss content and the potential to restructure, in some cases.

It's also important to point out that internally risk-related problem loans declined on a linked quarter basis.

Our early stage and late stage delinquencies have stabilized and are moderating.

The lingering effects of the slow-paced economic recovery has not helped many of our borrowers and we have acted cautiously and prudently, reassessing and modifying risk ratings as appropriate.

We are being focused on being very careful and accurate in assessing the financial condition of our borrowers, in taking prompt action, as required and as appropriate.

Retracted economic challenges have also reaffirmed our stance with regards to disposing of problem assets, as well as our strategies to reduce exposure to higher-risk loan portfolios, especially investor real estate.

Investor real estate declined $1.5 billion, point-to-point, ending balance in this quarter achieving $17.5 billion in investor commercial real estate.

In terms of strategic growth, our customer focus remains a top priority, as we strive to deepen existing relationships and acquire new customers.

Our efforts continue to pay off in the third quarter, as evidenced by further strengthening in new checking account sales.

We remain on track of more than one million new business and checking accounts this year, exceeding 2009's record level.

The addition of new relationships is fueling revenue across multiple lines of business for Regions.

For example, in the third quarter we processed 182 million debit card transactions, representing a 14% increase over the third quarter of last year.

With respect to deposit balances, in line with our overall balance sheet strategy, overall deposit levels have declined.

As many of you are aware, we have a sizable amount of higher interest rate CDs mature in the third quarter and forecasted as some run-off as rates were reduced to market levels.

Given the reduction of higher cost deposits, Regions' funding mix and costs continue to improve, declining another 9 basis points, driving third quarter's net interest income and net interest margin higher.

We remain on track to reach our target of 3% year-end margins.

Our liquidity remains solid, with a loan-deposit ratio of 89%.

While maintaining clear focus on reducing overall cost deposits, we are successful in improving our market position.

According to the recently released data by the FDIC Summary Deposit of Analysis, recent deposit gross ranked first in our peer group and seventh among 25 largest US banks.

Furthermore, we grew market share in six of 16 states in which we operate and in 15 of our top 25 MSAs.

Unfortunately, total average loans did decline in the third quarter.

But, importantly, at a slower pace than previous quarters and despite the continuing derisking in investor real estate portfolio, generating good quality profitable loans remains a challenge but we are starting to see some encouraging signs, including a 2% linked quarter end period commercial and industrial outstandings.

Within C&I, the growth story is really about our middle market segment which represents about half of the outstandings.

These balances grew 5% in the quarter despite low but stable line utilization.

Most of this production was related to capital expenditures and refinancing of existing debt.

Small business lending is starting to gain traction as well, but this has yet to materialize into growth and net outstandings, given generally light demand.

Nevertheless, small business lending is a significant opportunity for Regions, as we are the number three small business lender in the country, as ranked by the Small Business Administration.

On whole, we remain cautious but optimistic that production volumes will further strengthen in the first fourth quarter, due to increasingly solid new business pipelines.

On the consumer side, we continue to emphasize residential first mortgage lending.

Production was $2.3 billion for the quarter, a 31% increase over last quarter.

We continue to incrementally adjust our business model to mitigate the unfavorable revenue impact of new regulations.

In fact, we've already begun mitigation efforts, having eliminated free accounts for all customers except students and seniors and up raised balance and transaction hurdles for a waiver of monthly service charges.

We are closely monitoring performance on the new structure and will make further adjustments as necessary taking into account both customer value provided and related costs of delivery.

In all instances, we continue to focus on superior customer service which we believe sets us apart and which customers highly value.

We continue to provide many free account services for customers but will incrementally adjust our pricing models over time to better rationalize the value proposition.

Please keep in mind that the actual impact of Regulation E changes are proving less negative than anticipated .

Originally, we had expected implementation to reduce service charge revenue by $72 million here in the second half of this year.

Based on third quarter results, the second half impact is now expected to be in the range of $50 million to $60 million.

This performance and the continued adoption of overdraft services indicate customers find value in the services.

In terms of interchange revenue, like the rest of the industry, we are waiting for proposed rules from regulators so it is difficult to project final financial impact.

We do have annual interchange fees of approximately $333 million, so, any change in free structure could be significant.

But, we are seeing a 14% increase in transaction activity year-over-year.

On Basel III, while still being finalized, we are not estimated it to have a significant impact on Regions.

Our Tier 1 common ratio is currently at a solid 7.6% and, based on our understanding of proposed rules, it's above Basel III's minimum 7% guideline.

Regions has also expected to meet Basel III's liquidity requirements in its current form.

In any case, we will ensure that Regions' capital levels remain strong and fully compliant, as the formal implementation of Basel III requirements are better known.

In summary, we are successfully executing our plan to return Regions to sustainable profitability.

We are aggressively reducing credit risk, growing our customer base, implementing productivity and efficiency initiatives, and taking appropriate steps to ensure that we are positioned to fully capitalize on profitable revenue growth opportunities.

At the same time, we recognize that environmental, economic, and regulatory challenges persist, creating headwinds and caution on our part.

But, I am convinced that Regions has the right strategy and the right people in place to deliver on our commitment.

David will now discuss third quarter financial results.

Thank you, Grayson, and good morning everyone.

Let's begin with a summary of our third quarter results on slide one.

As Grayson mentioned, our third quarter loss amounted to $0.17 per diluted share.

Pre-tax pre-provision net revenue, or PPNR, amounted to $454 million, down about 7% linked quarter, due primarily to the impact of higher credit-related cost and Regulation E.

Compared to the same period a year ago, adjusted PPNR was up 11%.

Within PPNR, net interest income continued to grow, increasing $12 million, which drove a 9 basis point improvement in the net interest margin.

Non-interest revenues dipped 1% linked quarter, primarily driven by the impact of service charges from Regulation E, which I'll cover in just a minute.

Absent this impact, non-interest revenues were higher, primarily due to strong mortgage and fixed income brokerage revenue.

Non-interest expenses increased $37 million or 3%, second to third quarter excluding second quarter's $200 million regulatory charge.

Total non-interest expenses were negatively impacted by the rise in credit-related costs primarily due to higher OREO and held for sale expenses related to the bulk sale of distressed assets.

Regarding credit quality, the level of non-performing assets, excluding loans held for sale, was down $186 million this quarter to $3.8 million.

The provision for loan losses rose to $760 million from $651 million in the previous quarter and essentially equaled net charge-offs.

The increase in charge-offs reflects about $233 million of charges associated with distressed asset sales and the transfer of loans to held for sale.

Let's now take a deeper look at the quarterly results, beginning with credit.

Shown on slide two, non-performing assets, excluding loans held for sale, were down 5% this quarter but remain elevated.

And, I will reiterate what we said earlier, an increasing and substantial portion of the migration into non-performing loans was attributable to loans that are paying as agreed.

The sluggish and persistent nature of the economy necessitates that we remain cautious when internally risk rating our portfolio.

Despite that cautious stance, internally risk rated problem loans did decline this quarter.

However, factors like Florida unemployment which has been greater than 10% since May 2009 and is now over 12% and pressured housing prices in parts of the state require that we not get ahead of ourselves and that we maintain a clear and objective view of the economic environment.

To that end, we remain focused on derisking our portfolio.

Our proactive disposition efforts remain a key element of our risk management strategy.

This quarter, we sold or transferred to held for sale a total of $1 billion of troubled assets.

This total reflects a broadened effort, as it included approximately $350 million of distressed asset sales on a bulk basis.

These assets, which were predominantly land, included both non-performing loans and OREO and resulted in $108 million of associated charge-offs and $30 million in losses that are recorded in non-interest expense.

While the markdowns were greater than we had previously experienced, we believe the long-term economics justify getting these assets off our books and behind us.

Land is one of the most difficult assets to sell, and we were pleased to be able to dispose of these assets as opportunities arose during the quarter.

We don't want to be in the property management business and we'll make every reasonable effort to remove properties and risk from our books when it makes long-term economic sense.

As you can see on slide four, net charge-offs increased to $759 million, for an annualized 3.52% of average loans and reflect our efforts this quarter to derisk our balance sheet and dispose of problem assets which contributed $233 million in charge-offs.

Drilling down, the main source of charge-offs continues to be our investor real estate portfolio.

Our loan loss provision essentially matched net charge-offs this quarter and was up $109 million linked quarter.

Our loan loss allowance to loans ratio increased 6 basis points linked quarter to 3.77%.

As we said at our Investor Day, we remain cautious about the economy when evaluating the loan portfolio and our allowance methodology reflects this stance.

Turning to the balance sheet, slide five breaks down this quarter's change in loans.

Although investor real estate still accounts for a relatively high percentage of our loan portfolio, we have reduced this exposure substantially through the credit crisis.

In fact, total investor real estate loans have declined by $6.5 billion over the last two years.

And, we continue to make solid progress in reducing this segment of our portfolio, as shown by the current quarter reduction of $1.5 billion.

At the same time, targeted efforts to grow segments of our portfolio are getting traction.

Most notably, commercial and industrial loan balances were 2% in the quarter, primarily through our energy and healthcare lending groups.

Energy lending in Texas has been particularly strong.

New client acquisition is driving this growth, as line utilization has remained about 40% over the last several months.

Furthermore, we continue to invest in specialized lending groups, including business capital, healthcare, transportation, and franchise restaurants.

Lastly, we are excited about the opportunity to leverage our small business expertise through our extensive branch network.

Our plan to grow consumer loans is multifaceted and includes increased emphasis on direct lending through leveraging the strength of our branch network.

Also, on the consumer side, we are evaluating products targeted at the underserved customer segment, a large group with short-term funding needs

This next slide shows changes in our deposit base this quarter.

Ending time deposits declined $2.1 billion, reflecting expected run-off of balances, as we reduced maturing high cost CD rates to market levels.

Low cost deposit growth was somewhat offsetting with ending balances increasing $854 million or 1% in the quarter.

Total deposit levels were also affected by our more disciplined approach to deposit pricing, with some customers choosing to pay down debt rather than hold deposits at current rates.

Although customers are deleveraging and paying down their loans, our new checking account growth has helped offset this downward pressure on deposit balances.

Net interest income on a fully taxable equivalent basis grossed $13 million linked quarter, while the margin strengthened 9 basis points increasing to 2.96% percent.

Improvements stemmed primarily from continued optimization of deposit cost and mix.

For the quarter, deposit cost declined another 9 basis points to 0 .7% in the third quarter and loan yields remain stable at 4.29%.

We expect to see continued improvement in deposit cost and expect to reach a 3% margin in the fourth quarter, as originally projected.

In fact, we expected to reach our target of 3% this quarter, but the recent decline in long-term interest rates accelerated mortgage refinance activity and premium amortization within the portfolio which had an adverse impact on net interest margin of around 4 basis points.

Driving further margin improvement, we have approximately $11.4 billion of CDs maturing over the next nine months, which will be repriced to market rates as they mature.

These CDs currently carry an average 2.1% interest rate and should enable us to reduce our overall deposit cost.

In addition, the drag to net interest margin associated with interest reversals and carrying excess cash at the Fed will fade with time.

These items were margin headwinds of 16 basis points and 8 basis points, respectively, on an annualized basis in the third quarter.

As an update, we have recently adjusted the hedges in place to support the margin in a prolonged low rate environment.

These now reduce our interest rate sensitivity through December 2012.

Our emphasis on improving deposit mix and cost, combined with a projected impact of these hedges has -- is expected to result modest margin improvement going forward and are most likely rate forecast scenario.

Let's now shift gears and look at non-interest revenue and expenses this quarter.

Non-interest revenues were down by about 1% linked quarter, driven by an approximate $16 million impact of Regulation E.

Absent this impact, non-interest revenues were higher, reflecting strong mortgage revenue, driven by heavy refinancing activity.

In fact, we originated $2.4 billion of loans this quarter versus $1.8 billion last quarter.

And, refinance activity was much higher, representing 67% of current quarter originations, up from second quarter's 41%.

Also contributing to non-interest revenues, Morgan Keegan's brokerage revenues were up 6% versus the prior quarter, reflecting continued private client and fixed income strength.

Fixed income revenue was especially strong, increasing 13% linked quarter, driven by high -- higher by customer purchasing short-term securities.

In terms of non-interest expense, while credit-related costs continued to remain high, we continue to focus on containing other overall costs.

Excluding prior quarter's regulatory charge, total non-interest expense was up $37 million or 3% linked quarter, due to the $31 million linked quarter rise in OREO and held for sale cost.

As I mentioned earlier, the rise in these costs reflects approximately $30 million, resulting from a bulk sale of OREO during the quarter.

In all, PPNR continues to be impacted by credit-related costs which on a normalized basis are impacting us by $75 million to $100 million per quarter.

We recognized that in this economy, to be successful, we have to be diligent in our efforts to manage expenses.

It's going to be a low growth, low rate environment for an extended period of time and we have to continue to target all areas of staffing, occupancy, discretionary spending and credit-related expenses.

Rest assured that, any changes we implement will, at the same time, maintain focus on service quality and making sure that we are serving the needs of our customers.

Let me now discuss our capital and liquidity.

We continue to execute our disciplined capital planning process that we developed over the past year or so, which encompasses various scenario analysis, including stress testing under a range of adverse conditions.

It begins with a development of macro economic forecast scenarios, which serve as a basis for our credit modeling.

Our capital ratios remain strong, with a Tier 1 capital ratio that now stands at 12.1% and a Tier 1 common ratio at a very solid 7.6%.

As we stated last quarter, the columns amendment will have little impact to our risk ratios since trust preferred securities, at about $846 million, are a fairly small part of our overall capital base.

Let me briefly touch on Basel III, which will be phased in over the next several years, beginning in 2013.

We continue to assess the impact and are awaiting the details, but we feel very good about our capital base, as our Tier 1 common and Tier 1 risk-based capital ratios are above the respective 7% and 8.5% minimums required under Basel III.

The proposed adjustments are expected to have a minimal impact on us.

Similarly, Regions is well-positioned with respect to the liquidity coverage ratio described under Basel III.

In fact, we have been interally managing to a similar measure for some time.

Moving to the broader impact of recent regulatory reform.

There is no doubt that recent sweeping legislative actions will ripple through banks' operations and financial statements from this point forward.

But we are well-positioned to effectively manage any potential impact.

In terms of Regulation E, with the August 12 full implementation date behind us, we now have good visibility into the foreseeable financial ramifications.

As Grayson noted earlier, the negative impact is proving less than our original forecast.

To date, roughly half of all of our customers who have overdrawn their account in the past year have chosen to opt in or link their account for overdraft protection.

And, 97% of customers, who have made an election after experiencing a declined transaction, are choosing to opt in or participate in overdraft protection.

Clearly, customers are seeing value in services that ensure their ability to make purchases.

The Durbin Amendment, which affects debit card interchange fees, will likely result in a revenue reduction, as well.

Keep in mind that final rules have not been established.

They will be determined by the Federal Reserve as we head into next year, and we will make adjustments to our products and services, as appropriate.

Lastly, unlike many of the larger money center banks or brokerage houses, regulatory reform will only minimally impact our brokerage revenues, since Morgan Keegan does not engage in proprietary trading, has little to no private equity exposure and faces very minor impact to its derivatives business.

Bottom line, while regulatory changes are certainly challenging from a revenue perspective, I'm confident that we will be able to make adjustments to minimize any long-term financial effect on Regions.

In summary, although we are not pleased with the loss this quarter, our associates remain focused on executing both our short-term and long-term goals.

We continue to remain focused on returning the Company to sustainable profitability as promptly as possible and with this quarter's further derisking efforts, we are building a stronger Company, with an emphasis on improving our risk profile, which will ultimately benefit our shareholders.

With that, I'll turn it back over to Grayson for closing comments.

Thanks, David, and before we move to questions, I'd like to give you Regions' positional topic, which has received a tremendous amount of publicity of late, residential foreclosures.

Regions has a solid and tested foreclosure process in place to ensure the fairness for customers and compliance with state and federal regulations.

In cases where all options to avoid foreclosure have been exhausted, a committee of key managers approves the decision to proceed with foreclosure after a thorough review of loan documentation.

Once the decision's been made to proceed, the process is the same where the loan is owned by Regions or by an investor that we service the mortgage for.

In each case, department managers review and verify the accuracy of the loan documents.

In states where mortgage foreclosure affidavits or similar legal documentation is required, the document is completed and signed by a department manager in the presence of a notary employed by Regions.

Due to our foreclosure prevention efforts and a relatively small size of Regions' servicing portfolio, our foreclosure volumes have remained relatively low.

Regions foreclosures -- forecloses on approximately 100 loans that we own each month and 160 investor-owned loans each month.

Staffing levels are sufficient to internally verify loan information and appropriately execute required documentation.

Regions has a residential mortgage servicing portfolio of $41.2 billion.

Of that, $16.3 billion are loans that we own, while $24.9 million are owned by government agencies or investors, such as Fannie Mae and Freddie Mac.

Our foreclosure rate for the entire portfolio, both owned and investors, is less than half the national average.

Our ability to maintain low foreclosure rates is the result of proactive efforts to provide solutions to distressed customers.

In late 2007, Regions began reaching out to customers at risk of falling behind on payments through our customer systems program.

The program is available to customers whose loans we own and service.

To date, we have helped more than 30,000 customers stay in their home.

We pursue all available options to help homeowners avoid foreclosure, including loan modifications, rate reductions, short sales, and deed in lieu of foreclosure.

Foreclosure is the option of last resort.

When foreclosure does take place, evictions are rare, as many homes are second homes, investment properties, or are no longer occupied.

Our focus on the customer has resulted in Regions' second consecutive year of ranking in the top five of JD Power and Associates Customer Satisfaction Survey For Primary Mortgage Servicers.

That being said, we have directed our leadership in the business and internal audit and in risk management to review and validate each process step to ensure full compliance with all laws and regulations and customer needs.

Operator, that concludes our remarks and now we will open it up for questions.

Certainly.

(Operator Instructions) Your first question comes from the line of Marty Mosby with Guggenheim Securities.

Good morning.

I had a question on inflows.

We had the schedule in there in the past that were showing us what that migration was.

My estimate is it's still above $1 billion per quarter.

So I wanted to get a feel for maybe what that number might have been this quarter and then also you're talking about the in flows being more related to paying as agreed so what triggered moving more of those into non-performer this quarter?

Marty, good morning.

Just a couple of comments and I'll ask Bill Wells, Chief Risk Officer, to make some additional comments.

Number one, is that we do see some of our credit trends clearly moderating.

Our early stage and late stage delinquencies appear to have stabilized and declining slightly.

We do see internal risk rated loans improving as you saw in our numbers.

However, the migration to non-performing status clearly stands out this quarter.

It was significantly up from last quarter.

As we mentioned last quarter, we were very cautious.

One quarter does not make a trend and as we look at the loan portfolio, the pause in economic recovery, it really focused around commercial real estate and in particular, the guarantor.

If you look at as the economy continues to have a slow recovery, the capacity and willingness of these guarantors comes into question and as we look at what's migrated into a non-performing status this quarter, as you saw of the amount we disposed of a significant amount of that migration.

But we also retained quite a bit and of what we retained 64% is still paying as agreed but there are questions, even though they're paying, there were questions raised regarding the capacity or the willingness of those guarantors to continue.

With that I'll ask Bill to make a few comments.

Yes, Marty.

The first thing we talked about last quarter about being very cautious about where we were with the economy, the slow growth economy and what we saw in our migration really is a reflection of what we've seen in the economy.

Also as we looked at our valuations, that has caused us to be very conservative in how we've looked at our non-accrual call and that's what was the uptick in looking at our growth inflows.

As Grayson mentioned, the one thing to talk about, while we're disappointed in talking about the inflow -- the increase in the inflow and migration, what we did notice is that a high percentage of ours, over 60% of the non-performing loans that we had remaining at the end of the quarter were currently paying.

But what the difference is, as Grayson mentioned, there's some question about the guarantors' willingness or capacity to pay so we thought it was very prudent to put it on non-accrual.

Having said that, we do think the loss severity is less than what we have seen before in earlier migrations and it also gives us the ability to do more restructures which in the past we had not done a lot of restructuring.

The other thing that Grayson mentioned is that as we see the gross migration coming in, we are continuing our efforts to aggressively derisk the balance sheet.

We've seen that not only in the reduction in our [Vesta] real estate of $1.5 billion over the quarter but also our ability to dispose of problem assets in our sales program which continues to work very well for us.

And I guess a follow-up to that would be if you're looking at the pricing and you said it deteriorated this quarter, was that related to what you were selling and in a sense was it more distressed or more land-oriented or was that really just a contraction and you think of the market in a sense of the willingness of investors?

One thing, Marty, what we did is a couple of quarters ago, we were approached by two or three companies to look at some efforts of disposing of our problem assets and we did a bulk land sale this time.

It was well up to almost 4,000 properties.

These were small loans located primarily land located throughout our footprint and so in our pricing that we saw, we saw a little bit more discount than what we had been seeing in the past.

That bulk sale discount was about 40% of the book balance that we had.

The other thing that I would say is that on our additional sales, we were probably averaging in the low 20s so an average for us when you take the bulk sale and what we did on the note sales was a discount rate on our dispositions of about 31% as opposed to what we did last quarter of 24%.

And Marty, we remain cautious in regards to bulk sale.

It's really the first material bulk sale we've participated in.

It's clearly, when we moved, as Bill said close to 4,000 properties out of our portfolio and the economics of bulk sales are very challenging and we were pleased to be able to execute this transaction internally.

We still are not particularly encouraged by the economics of bulk sales but we still believe the best way to do these are strategic sales but as we looked at these particular properties and how long we estimated that we'd have to carry them to sell them to strategic buyers, we believe this was the right decision to accelerate the derisking of our portfolio.

So I guess what we were talking about is the composition of the bulk sale drove some of the pricing being lower and then also did you have any of the process where you looked at the guarantors?

Or was there something in the sense of review process that triggered you to say, I need to look at those and expedite moving some of those into the non-performers?

And I'll let the questions move on.

Thank you so much.

Marty, as we were entering into the third quarter, clearly there was a pause in the economic recovery of the country and we have taken a much more disciplined, much more conservative approach to looking at guarantor support.

And we've challenged ourselves on guarantor support to determine as Bill said the capacity of our guarantors, has it held up through this economic cycle?

Where did they stand purely from a capacity perspective?

But also as you continue to see evaluations of these properties decline, how much decline and willingness of these guarantors did we see?

And so we've taken a very rigorous and disciplined approach to looking at guarantor support and that's why you're seeing many of these that are paying as agreed moving to a non-performing status.

Thanks.

Thank you.

Your next question comes from the line of Craig Siegenthaler with Credit Suisse.

Thanks.

Good morning everyone.

Good morning Craig.

Relative to $1 billion of loans sold or transferred to held for sale this quarter, how is disposition activity trending in October and do you think there how should this trend in November/December here?

Right now we have about $40 million to $50 million under contract.

It's trending again very, very good.

The marks are holding back pretty much to what we were trending in the second quarter when you take out the bulk sale so again there's a lot of interest in property.

We continue to move it.

We try to strike our best deal possible and as Grayson said, we have seen our best results is when we find a strategic buyer for these properties.

Okay.

Got it.

Was your question specific to loan sales?

It was actually on both.

It was transferred to held for sale plus the loan (inaudible), the aggregate activity level we saw in the third quarter.

Should we expect that level to remain flat, move high, or move down at the end in the fourth quarter?

Craig, I think that as we have staked the course with our strategy of acceleration of disposition of stressed assets and we would anticipate continuing that strategy until we see a clear turn in the credit metrics.

And also too, Craig, what I'd say is you would see us continue to use the held for sale and then as you look at our marks that once it moves into held for sale have been pretty true, have been pretty consistent over time and hold to when we actually move it into held for sale, our marks have held true.

And then just a follow-up on the net interest margin.

What is the dollar value of CDs maturing in the fourth quarter and do you know roughly what the average cost is?

We have about $4 billion of CDs that are maturing in the fourth quarter.

The cost of that if you give me just a minute will, with just over 2%.

About 2.1%?

Yes, the more meaningful maturities come in the first quarter of next year, where we do have some CDs maturing in the first quarter that are over in excess of 4% cost of funds.

And is that a big number?

It's a couple billion dollars?

It's roughly $4 billion.

Great.

Thank you for taking my questions.

Thank you.

Your next question comes from the line of Betsy Graseck with Morgan Stanley.

Good morning.

Good morning, Betsy.

Hi.

I had a follow-up on the NPA question.

And then a separate line of questions on just loan growth.

When we look at the additions of $1.4 billion in the quarter, should I read that as a little bit of a one-timer for this reassessment of how you're treating guarantor loans?

Betsy, I think the way to look at it and last quarter when we saw the migration in last quarter, we expressed that we saw moderation in our credit trends but we were cautious because we just didn't -- we're seeing a little bit of volatility if you will in migration quarter-to-quarter.

And as we progressed into the third quarter we're disappointed with the amount of migration that occurred but nevertheless that's where the economics of our customer base took us in that review.

We are, as I said earlier, we see encouragement in some of the trends in terms of early stage and late stage delinquencies.

We didn't see any surprises on the consumer side.

Consumer side will, while still elevated, continues to modestly improve a little but really tracks very closely to our forecast.

The disappointment this quarter was all around investor commercial real estate.

That continues to be the problem segment in our portfolio.

We do believe that the aggressive stance that we took on guarantor support is reflected in these numbers but in terms of trying to give guidance on where this goes in the fourth quarter, I'm reluctant to do that.

I can understand.

I'm just wondering of the $1.4 billion that was additions in Q3, can you give us a dollar amount that was associated with the guarantor (inaudible) portfolio?

I would say that probably the majority when we say that 60% of what was non-performing loans that were current, I think you would say as a good percentage of that of what we saw is dealing with that guarantor support.

The other thing I'd also mention too, Grayson mentioned early stage delinquency, we're at about 2.09% and that's relatively flat quarter-over-quarter.

If you look at our 90-plus days, they are actually down in business services and the one thing that David had also mentioned earlier while we don't disclose the actual number, we have seen a second quarter decline of our internally risk rated credits which shows another positive trend when we talk about what we think will happen for the future.

Okay and then you mentioned that you retriggered the hedges a little bit, we're still expecting to get to NIM of 3% at year-end and then is it modest improvement from there?

Could you maybe describe what you did to retrigger the hedges and what you mean by modest improvement?

We do feel good, Betsy about getting to our net interest margin goal of 3%.

Like I said earlier, we were hopeful to get to it in this past quarter, didn't get through there through the pre-payments I mentioned on the mortgage-backed security portfolio.

The ultimate net interest margin is going to be driven by the rate environment which is driven by the economy.

We have positioned the balance sheet and the hedging strategy to protect us on the low side from a protracted low rate environment through 2012.

If, on the other hand, rates continue to go up, the economy rebounds, then we'll have --we'll still participate in that rebound, just not as much as we otherwise without the hedges and we think that, that means everything is getting that much better.

So we're willing to take that risk to protect ourselves on the low side and I would expect that you would see like you said modest improvement in the net interest margin but it's all driven by what rates do.

And the modest improvement is not from Q3 but it's from your 3% expected?

That's correct.

Okay.

And then on loan growth, you outlined a couple of areas of loan growth, could you just give us some color as to on the C&I side why you're able to getting that growth, you mentioned new customers, is it -- how are you extracting them from competitors?

And then maybe if you could talk about the [residential] mortgage, I know that was up 1%, is that a change in demand or is that a change in migration, you shifting investments from securities into loans?

I'll take those.

In terms of loan demand, we have been encouraged by areas within our C&I portfolio or middle market.

We were able to really leverage our strength there and specific industries I've mentioned energy.

Energy in Texas has really been a spot for us to generate loan growth.

We think that, that will continue.

We have continued to invest in specialty teams in energy, specifically out of Houston and that is -- we expect that to continue for us for some time.

We do have other specialized industries that we are -- will be investing in, Regions Business Capital.

We also have investments in healthcare we think is particularly strong for us so areas of those industries where we see capital expenditures and continued expansion in those businesses are really what's driving our loan growth and our investment in the areas of the country that are driving that.

As it relates to the [residential] mortgage growth obviously a lot of refinance activity going on across the country with the rate environment that we have.

We have continued to -- we've put certain products on our books.

We continually evaluate what we want to put on our books from a rate standpoint, duration standpoint, so I think we have opportunities to grow that but what we will be evaluating and have been evaluated is whether or not we want to put a given rate or duration on that's available to us.

And Betsy, if I could add to that, when you look at the growth in our commercial industrial segment it really is a middle market segment and those customers are really won and lost one at a time.

And our efforts around making sure our bankers are calling frequently and calling prospects because if you look at our commercial line utilization it's approximately 40% this time, roughly 39% last quarter.

It hasn't moved much and it bouncing around that 39% to 40% for several quarters in a row.

If you look at our pipelines as we mentioned in last quarter's conference call, we started seeing strengthen July.

That strength we were a little cautious, it might not hold up in terms of new business.

It's continued to hold up through the quarter and the pipeline sales pipelines that we're looking at today are strong but it really -- there's nothing really special that we're doing from a growth standpoint.

It's just executing our plans of calling on customers.

It's a very competitive market, obviously the industry is struggling with loan growth and so it's very competitive and we're trying to win these customers one at a time each and every day.

Betsy, let me update -- give you a little more color, you asked a margin question and so did Craig earlier, as we continue to reflect on where we think we can go from 3%.

It's more specifics on our maturing CDs.

In the fourth quarter, we do have the $4 billion maturing.

The average rate there is 1.37% and then in the first quarter, it's $4.6 billion of CDs maturing with a rate of 2.36%, so you could think about that in terms of where we might go with our continued improvement in net interest income and margin expansion.

Well, I mean, because I do think that we'll continue to see some improvement in our deposit cost.

We believe that's going to occur but the pace of improvement coming from deposit cost will obviously slow and the material improvement in our margin going forward has to be in loan pricing discipline.

Okay, and the pace of improvement in CD slows post-1Q?

It carries a little bit into the second quarter but the strongest is in the first quarter where we have some CDs at 4.55%.

Sure.

But the average is 2.36%?

That's right.

Okay, super.

Thanks so much for the detail.

Thank you.

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

Hi guys.

Good morning, Matt.

Maybe I'm just missing something here but I'm trying to understand the Reg E impact that you had this quarter which I think was a $16 million drag and how you get from that to the $50 million to $60 million for the back half of the year.

I guess I thought I would just take double that $16 million.

I guess that's--

Yes, I think Matt, this is David.

I think if you just did a straight line you'd have $16 million for the quarter we just had which was essentially a month and a half, so if you double that then you're at $32 million straight line so $32 million and the $16 million is the $48 million.

That's your $50 million and there's a little cushion -- caution.

There's caution.

Caution in there with respect to what might happen.

That's where the number comes from.

Okay, that makes sense, yes.

And then just separately on your deferred tax assets, it looks like the amount that was excluded from Reg capital came down a little bit this quarter and I was just wondering if you could give us, one, the overall deferred tax asset amount and then just how we should think about how much is included versus excluded going forward in the regulatory capital?

Yes, today our deferred tax assets a little over $1 billion gross.

We exclude just over $400 million from our capital calculation and that's based on regulatory rules.

We look at and forecast our income as defined by the regulators.

That $400 million didn't change dramatically from quarter-to-quarter.

We continue to look at it every quarter and it's dependent on however it turns a sustainable profitability.

So I guess the way I would look at it is as we see the economy turn, credit turn, and our return to sustainable profitability will be the triggering point where we can count that little over $400 million which is 40 some odd basis points of Tier 1 common and so we continue to look at that every quarter.

Okay and then just lastly if we look at the securities portfolio, I think you have one of the higher quality books out there and that might be driving some of the increase in pre-payments which is obviously happening industry-wide, but can you give us a sense of what the pre-payments speeds have been doing there and I guess what the strategy is on the securities book going forward, do you plan to reinvest or let some of it run-off like you did this quarter and use a swap instead?

Yes, we had mentioned at a conference about pre-payments really coming through the government short refi program versus this which is market driven with a low rate environment.

Given we do have substantial gains in our investment portfolio, a little over $600 million at the end of the quarter, that's up even today.

We measured today which poses risk to us to the extent pre-payments occur.

We are going to evaluate what that risk is and whether it makes sense to continue along with our strategy, which has been a fairly clean investment portfolio, virtually all of it and agency guaranteed and we did that as we derisked our balance sheet.

We've had CMBS and taking credit risk in our investment portfolio.

We had it on the loan side and we didn't think that was prudent for us to do.

We are looking at ways to reinvest proceeds coming off the investment portfolio as well as whether it makes sense to take any gains and reposition into other asset classes whether it be back into some of the newer traunch CMBS or corporates or whatever the case may be and we will evaluate that during the quarter.

What we have been seeing from a cash flow perspective off the investment portfolio has been about $500 million per month to reinvest.

As a result of pre-payments, that number has been up about $300 million on top of that so we have about $800 million right now to deal with from a reinvestment standpoint and we'll consider that in our overall balance sheet strategy going forward through this fourth quarter.

Okay, thank you.

Thank you.

Your next question comes from the line of KC Ambrecht with Millennium.

Hi.

Thanks very much for taking the questions.

One thing we're looking at, we're trying to figure out if Regions has enough capital.

Right now, your tangible common equity is 6.13% or $7.8 billion.

It seems light considering you have criticized assets around $6.2 billion.

Can you comment on that?

Well, your percentages that you came up with Tier 1 common of, we have about --

No.

I'm just looking at your tangible equity so it's $7.8 billion and you have about $6.2 billion of criticized assets.

We continue to obviously look at our capital levels.

We feel like we're in a good position from that standpoint.

We do have as I mentioned earlier over $600 million worth of gains sitting in our portfolio.

We have in order to really get our capital generation going we realized we have to return to sustainable profitability there which is dependent on our turns and our credit metrics.

But it sounds like from the call though that the provision should be elevated for a lot more quarters to come.

Well, we will -- we continue to evaluate the level of our reserves that we need to have.

Our charge-offs will remain elevated as we discussed.

Our provisioning will be dependent on what we see credit metrics doing from a migration to non-performing status.

And as we see that while our charge-offs may remain high, the question is when do you -- are you able, when is it prudent to do, to provide less than your charge-offs?

And that's what we have to watch each and every day for that turn.

Maybe I could ask you one other way then.

If -- what happens if housing were to rollover 10% from here or 15%?

What would -- how much cushion do you have to protect yourselves if the housing double-dips?

We have a robust capital planning process that we go through, including multiple scenarios, adverse scenarios.

We have about actually five scenarios that we've run from an adverse standpoint which includes GDP and housing prices and unemployment and we've gone through those scenarios and believe we will be adequately capitalized through those scenarios.

We continue to update that each and every month as the group meets and we think from that perspective that we have enough capital.

If you go through another double-dip obviously it puts strains on capital, no question about that but we think based on our forecasting that we should be in okay shape from that standpoint.

Okay, and then one last question.

The -- if you had to look forward a year, I know a lot of things are dependent on housing and the markets but if you had to look forward a year and considering you have $6.2 billion of criticized assets, a lot of which are residential related, how much do you think your book size is going to be down in the year?

Well --

Because last year at this time it's $7.40 and now it's $6.22, so you're down 16% year.

What do you think it will be in a year from now?

Yes, we haven't given guidance with respect to what we think our book value will be or our earnings for next year.

I think there's no question that the determinant on where we will be with regards to our book value is going to be based on the economy and the turn in our credit metrics.

And that is the key driver and if you could tell me when the economy is going to settle down, I could give you better perspective on that but that's really what it's going to be driven off of.

Okay, thank you very much.

Thank you.

Your next question comes from the line of Heather Wolf with UBS.

Good morning, Heather.

Hi, good morning.

A couple of quick questions.

On $1 billion of troubled assets sold or transferred and the $1.4 billion of inflows, can you give us a sense for how much of that is related to resi real estate that and how much of it is related to commercial real estate?

Yes, Heather, I would say that the majority of what you saw in our dispositions was really dealt with on the commercial side.

We did do that bulk transaction that has to do on our sales of I believe it was $350 million that had part of it coming out of the loan sale and OREO, but the majority of what you saw coming through is from the commercial side.

I think that I had this problem last quarter.

Let me clarify again.

I understand it's all coming from the commercial side of it but is it land and property for use in resi or for use on commercial real estate such as retail lodging, hotel, et cetera?

It's predominantly coming through on the land side.

If you look --

Resi land.

Resi land.

Okay.

If you look at page 24 of our earnings supplement that gives a little bit of a breakdown and I would say when you look at that land, condo and single family, the majority of the green part is coming out of the resi side.

Okay, and can you give us a sense for all of the -- your NPA, OREO and NPL, where do you have that resi land marked currently?

I'm trying to go through and think of our numbers of how -- we'll have to get List and get back to you on that to make sure we have the right number, because we've gone through and marked down over a period of time and then did a recent markdown we moved to held for sale.

If it's okay --

And then every time we reevaluate for evaluations and so we'll have to calculate that.

It's a good question.

Let me give you some broad strokes and it may not be what you're looking for but obviously if we have that in OREO or held for sale, that's been mark-to-market, so we have that covered to whatever the current market price is.

Now if you're asking what's the percentage of book we'll have to get back to you on that.

Obviously we do have those mortgages in non-performing loans too and I don't have the reserve coverage on those.

Is that what you want to know about?

Yes, I'm trying to figure out how much more in the way of marks we can expect on the existing NPL book.

It's a good question.

Certainly spend some time doing that.

We'll get back to List and let him contact you.

Okay.

That sounds great and one last question on your consumer loans restructured but not included in NPAs, can you give us a sense for the types of redefaults you're seeing currently versus what they may have looked like previously?

Heather, I've got Barb Godin with us and I'll ask Barb to answer that question.

Good morning, Heather.

Yes we're continuing to see a recidivism rate give or take around 20% on that book and that's held pretty constant for us over the last six quarters or seven quarters.

Okay, great.

Thank you very much.

Thank you Heather.

Thank you.

Your next question comes from the line of Jefferson Harralson with KBW.

Thought you guys could help with putback risk and the amount of loans that you have originated, I was thinking specifically about EquiFirst.

I know it's been a long time ago you've sold it but do you hold [resi] warranty risk to EquiFirst?

No, we don't have any.

We do not.

And can you talk about the putbacks that you've received so far and what you expect over the next few quarters?

Sure, this is David, Jefferson.

In terms of our putback, they've been fairly consistent and not all that large.

We're probably in the $3 million to $5 million range per quarter.

We think we have our reserve coverage of about almost two years' worth of our exposure based on our experience, but our reserve of around $30 million, a little over $30 million.

So our putbacks repurchase reserve issue that you've seen in other places just has not been an issue for us.

And Jefferson, we have predominantly sold to the agencies and almost all of our putbacks coming from the agencies.

They come in two forms.

They come in a make hold transaction which is where the agency has disposed of that property at a loss and they are expecting us to make them whole on that loss.

They also come back in mortgages that they are asking us to put back on our balance sheet.

As David said, we're incurring a loss on the combined of those two in the $3 million to $5 million a quarter.

That's a little bit up from last year but not materially and we look at a $40 billion loan portfolio that we're servicing.

It's just not material to our numbers and we don't anticipate it becoming material.

I would tell you on the loans they are putting back to us, we're challenging or appealing some number of those.

We're probably of the ones we appeal, we probably win half of those but I would tell you successfully, they're putting back about 80% of what they desire to putback, and so but overall, I mean if you look at our numbers and the size of our portfolio just not a material issue for Regions.

All right, and lastly, on the GAAP DTA, what type of a scenario would it take for that GAAP DTA to have to be written down?

Do you need to be profitable you think by second or third quarter next year or I guess if you're not profitable by I don't know, third quarter of next year would you expect GAAP DTA write-downs?

The threshold is more likely than not if you realize the benefits of that deferred tax asset and so we evaluate that, the vast majority are DTA is due to our allowances for loan losses and timing differences related to that for broken tags.

We don't have a lot of net operating loss carryforwards that are about to expire which would put more risk that you would have to have evaluation allowance for GAAP purposes.

So we think -- we've obviously trended out cash flows and profitability over an extended period of time in support of the DTA and from a GAAP standpoint, we don't foresee, at least at this juncture any evaluation allowance anything in addition to what we already have.

I think we have some valuation allowance for some state net operating loss carryforwards that are fairly minor, but we do not anticipate having that valuation allowance for GAAP purposes.

Okay, thanks.

Thank you.

Your final question comes from the line of Scott Valentin with FBR Capital Markets.

Good morning.

Thanks for taking my question.

You mentioned Florida still being an area of concern, just wondering with the foreclosure issues starting to creep up what that will do to foreclosure timelines and potentially OREO expense going forward?

Well, Scott, we continue to see from market-to-market there are markets in Florida stabilizing but there are many who still are showing declines and we're predicting further declines in the next year.

Right now, on average, in Florida our foreclosure process has taken about 23 months.

We're trying to work hard with those customers but obviously, our foreclosure rate in the state of Florida is high.

It's about at the national average for all of the US but Florida as you know is probably three or four times the national average in Florida and so we're disappointed that we got foreclosures period but encouraged that our foreclosure rate compares so favorably.

But we would anticipate that there's going to be a lot of attention on this issue.

It's too early to call.

There's a certain amount of media attention and there will be a certain amount of regulatory intensity around this foreclosure issue.

I think in today's call it's way too early for us to predict what some of the implications to foreclosures will be going forward.

I can tell you we feel good about our process but we're going back and revalidating and retesting to make sure that everything is working as it should be, but I think it's going to take a few weeks for this issue to fold out across the industry and as it does, we'll react appropriately, but I think we're in a good position today.

Okay, and just in terms of the extent of duration of the foreclosure process, do you test for impairment because initially you booked the asset I guess into a fair market -- mark-to-market on the asset and do you test later maybe 12 months or (inaudible) later for impairment?

Yes, we do.

Barb, if you could speak to that just a second?

We absolutely do and just way back to what Grayson said a second ago, I'll just give you metrics on our Florida foreclosure rate, we're at 4.34% compared to an industry of 14% and even during this entire time frame with the foreclosure issue front and center in the media, we have not stopped our foreclosure process again.

We work very diligently with our customers, up to the point of foreclosure and even up to the point of being sold on the courthouse steps if need be so that we give every opportunity to avoid foreclosure where possible, but again, the second part of your question, yes we do test for impairment.

Let me add to that.

This is David.

We go through a process and get updated appraisals periodically but we have a -- it's incumbent upon us to make sure we're taking markdowns on our OREO at least quarterly for the accounting rules.

So even if we don't have an appraisal doesn't mean we don't at least consider what we're seeing with sales activities, what's going on in the marketplace, we've leverage that information to take whatever marks we think we need to on a quarterly basis.

Okay, and on a different note, the guarantor issue it sounds like you reviewed loans for guarantor financial ability to carry the loan.

Was that on entire loan portfolio, or just a certain segment of the portfolio and is there much more to review there?

What we do on -- Scott, is we go through our risk weighting scale, we go through and look at guarantor support on an ongoing basis these are some of our credits we identified and we went through those specifically to identify where the guarantor issues were.

Usually these are in some of your troubled assets when the question came up about valuation and that in part came about the question about looking at guarantors, but we look at our whole portfolio on an ongoing basis to look about where we are as far as the guarantors' willingness and a capacity to repay.

But Scott, let me be clear on the valuation is a big part of this issue.

It's not just reevaluating guarantor support.

It's reevaluating guarantor support and a lot of valuation change.

Okay, and as you mentioned before, it's ongoing, I guess, throughout the whole time.

That's correct.

Okay, thanks very much.

Thank you.

I'll turn the call back over to Mr.

Hall for closing remarks.

Well, thank you, everyone, for your questions.

We appreciate your time this morning and we'll stand adjourned.

Thank you.

Thank you, ladies and gentlemen.

This concludes today's conference call.

You may now disconnect.