Regions Financial Corp (RF) 2011 Q3 法說會逐字稿

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

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

(Operator Instructions).

I will now turn the call over to Mr.

List Underwood to begin.

Thank you, operator, and good morning, everyone.

We appreciate your participation on our call.

Our presenters today are our President and Chief Executive Officer, Grayson Hall; our Chief Financial Officer, David Turner; and also available to answer questions this morning are Matt Lusco, our Chief Risk Officer, and Barb Godin, our Chief Credit Officer.

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

With that said, let me remind you that in this call we may make forward-looking statements which reflect our current views with respect to future events and financial performance.

Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results, or other developments.

Those statements are based on general assumptions and are subject to various risks, uncertainties, and other factors that may cause actual results to differ materially from the views, beliefs, and projections expressed in such statements.

Additional information regarding these factors can be found on our forward-looking statement that is located in the appendix of the presentation.

Now that we have all of that covered, I will turn it over to our President and CEO, Grayson Hall.

Thank you, List, and welcome, everyone, to Regions' third-quarter earnings conference call.

The third-quarter results provide additional evidence that our disciplined efforts are paying off, that we are successfully executing our business plans as we delivered another quarter of progress.

Regions earned $101 million, or $0.08 per diluted share, this quarter.

Adjusted pretax pre-provision income rose to $540 million, up 19% year over year and the highest level in more than three years, demonstrating ongoing improvement in our core business performance.

Further, adjusted pretax pre-provision income exceeded the loan loss provision for the second consecutive quarter, which is critical to Regions achieving sustainable profitability.

Although results met our expectations and demonstrated incremental progress, signs of a weakening economic recovery and reduced consumer and business confidence began to surface during the third quarter, causing us to take an increasingly cautious and disciplined stance on credit quality.

This environment led to a $200 million linked-quarter rise in gross nonperforming loans inflows, largely driven by investment real estate credits.

David will provide much more detail, but it's important to note that 63% of these gross inflows were still current and performing as agreed.

Our credit metrics showed improvement linked quarter, as total nonperforming assets declined 6%.

Net charge-offs decreased 7%.

Business services criticized loans fell 8% and delinquencies, both early- and late-stage, improved.

While we remain cautious given the current uncertain economic backdrop, we do expect credit costs to resume their downward trend in the fourth quarter and credit quality metrics overall to continue to improve.

Our investor real estate exposure continued to decline this quarter with total outstandings down $4 billion, or 25%, thus far this year.

Within this portfolio, construction loans are down 48% so far this year.

I am particularly pleased with the progress we're continuing to make in fundamentally improving Regions' business model, both from the standpoint of generating profitable revenue streams and enhancing productivity.

Our ongoing focus on customer needs and superior customer service has enabled us to grow adjusted revenues 1% year to date versus prior year, despite greater economic and regulatory challenges.

At the same time, we have focused on controlling expenses, as evidenced by a 3% decline in year-to-date adjusted non-interest expenses versus the prior year.

In the third quarter, we generated $14.7 billion in new or renewed loan commitments.

In business services, loan production totaled a solid $12.5 billion, down linked quarter but stable year over year.

Commercial and industrial loan growth remained strong with ending balances up 3% linked quarter and nearly 13% higher than a year ago.

Importantly, commitments increased approximately 3% during the quarter and line utilization rose to 43%.

Middle-market C&I lending, particularly specialized industries such as energy, healthcare, and franchise restaurant, continued to drive the growth.

We do expect commercial loan growth to continue even as economic uncertainty weighs on customer confidence, which does have a moderating effect on investment by businesses.

While we are seeing incremental pricing competition, especially in the middle-market space, our relationship banking approach and brand differentiation has, for the most part, mitigated this impact.

Our spreads remain above those experienced prior to the recession.

On the consumer front, loan production totaled $2.2 billion in the quarter, a 7% increase over the prior quarter, led by higher mortgage and credit card production.

Looking specifically at mortgage production, this quarter's low rates resulted in solid origination volumes totaling $1.5 billion, or 9% higher than the prior quarter.

Additionally, indirect auto lending provided a steady source of loan growth, with balances up 4% on a linked-quarter basis.

Demand for home-equity lines and loans remain low.

As a result, this portfolio continues to decline at a pace of $90 million to $100 million per month.

Customer deleveraging continues to affect overall consumer loan balances as runoffs exceed new production.

Efforts to improve funding mix and costs continued to produce good results in the third quarter as well, as deposit costs declined another seven basis points.

Total average deposits were stable linked quarter.

With average low-cost deposits growing 2% linked quarter, we continue to see the opportunity to further reduce deposit costs, most significantly through properly repricing maturing CDs, of which they declined this quarter 22% of total deposits.

As a result, we will likely continue to observe a favorable shift in deposit mix and a further reduction in funding costs.

Notably from September 30 of this year through the end of next year, approximately $13.1 billion of CDs are scheduled to mature.

The CDs, on average, carry an interest rate of 1.54%, which compares to expectations in the current rate environment where average rates of new CDs coming on at 25 to 40 basis-point range.

One important -- one other important note this quarter on deposits is, according to the latest FDIC summary of deposits report, Regions maintained its number one market share in Alabama, Tennessee, and Mississippi, and also maintained a position of fourth or better in Florida, Arkansas, and Louisiana.

This was achieved despite our efforts to reduce our CD portfolio and lower deposit costs 26 basis points during the same time period.

Despite economic, legislative, and regulatory challenges, adjusted noninterest revenues were down only 1% linked quarter and stable year over year.

Relationship banking, not single one-time transactions, are at the core of our business plans.

We are making steady progress in deepening and expanding customer relationships with strong cross-sell products.

We are continuing to adapt our product line to meet our customers' changing needs, while maintaining a best-in-class customer service.

Credit-card revenues, including increased branch card sales, are already benefiting from our credit-card portfolio purchase late in the second quarter.

We expect benefits to increase further once we assume servicing the portfolio next year and we increase our focus and attention on cross-sell efforts in our branch offices.

I'd mentioned implementation of the Durbin amendment on October 1.

This has presented the industry and Regions with another financial hurdle in growing fee revenues, but we have already begun to implement plans to mitigate the estimated $170 million annual impact.

And between changes to our checking-account fee structure and other new revenue initiatives that we have implemented in the second half of this year, we do expect to make up this revenue shortfall over time during the balance of 2012.

Improving productivity and efficiency is another key element of our business plan, and we have continued to make progress on this front in the third quarter.

We're fundamentally changing our cost culture, continuously seeking opportunities to improve and control efficiency while still making appropriate investments to enhance our competitive position and remain a superior service provider.

Year to date, our headcount is down 1,000 positions with further reductions expected by the end of the year.

Also, occupancy expenses are declining, as we have eliminated approximately 1 million square feet of excess space in the Company this year.

Our capital continues to build as we generate earnings, with our Tier 1 common ratio at 8.2% as of September 30.

And let me mention one other item before turning it over to David.

As you know, we are reviewing strategic alternatives for Morgan Keegan.

We are not in a position to comment on this further today, but I can tell you that we're making good progress.

Progress is on schedule and in line with our expectations.

And we do expect to have more to say on this issue in the very near future.

I'll now turn it over to David, who will provide you with additional financial details for the quarter, after which I'll come back for a few closing comments before we take questions.

David?

Thank you and good morning, everyone.

Let's begin with a summary of our third-quarter 2011 results, beginning on slide three.

Overall, our results reflect stable revenue, lower expenses, and improved loan loss provision.

Earnings per share totaled $0.08 and net income available to common shareholders amounted to $101 million.

Adjusted PPI amounted to $540 million, an 8% increase versus prior quarter.

Within PPI, total revenue was down 1% linked quarter and the net interest margin declined three basis points to 3.02%.

However, non-interest expenses, adjusted for the prior quarter's branch consolidation and other property charges, were down 5% sequentially, reflecting a decline in FDIC premiums, as well as a reduction in salaries and benefits expense.

Let us now take a detailed look at credit quality trends, beginning with nonperforming loan inflows.

As shown on slide four, inflows of nonperforming loans rose $200 million linked quarter to $755 million.

This quarter's increase was primarily driven by the land, condo, single-family, and income-producing investor real estate portfolios.

However, it is important to note that 63% of this quarter's inflows were current in paying as agreed.

In addition, as shown on the right side of the slide, 45%, or over $1 billion of the September 30 total business services nonperforming loans, were current and paying as agreed, a three percentage point increase versus the prior quarter.

Turning to slide five, nonperforming loans, excluding loans held for sale, declined $74 million, or 3%, and nonperforming assets decreased 6%.

This quarter, we executed strategic sales of problem assets totaling $660 million.

Additionally, we moved $384 million of problem loans to held for sale.

Early- and late-stage credit indicators again demonstrated improvement, with total delinquencies declining 7%.

Additionally, business services criticized loans were down approximately $595 million, or 8%, from second quarter's level and have declined $3.3 billion since this period last year.

Despite the challenging economic backdrop, we expect overall credit trends to continue to improve.

The $1.2 billion increase in accruing troubled debt restructurings, or TDRs, reflects this quarter's new accounting guidance.

Importantly, this change has no material impact to our allowance.

In fact, commercial and investor real estate loans modified as TDRs increased the allowance for loan losses by less than $20 million.

Moving on slide six, third quarter's net charge-offs were impacted by the disposition activity discussed earlier.

Net charge-offs associated with this activity totaled $198 million; however, markdowns on the disposed assets had largely been provided for earlier in our loan loss allowance.

Net charge-offs totaled $511 million and exceeded the loan loss provision by $156 million, marking the second consecutive quarter we have provided less than charge-offs.

Excluding net charge-offs related to this quarter's disposition activity, net charge-offs were down 8% linked quarter.

Our loan loss allowance to nonperforming loan coverage was 109% at September 30, while our loan loss allowance to net loans totaled 3.73%.

Turning to the balance sheet, slide seven breaks down this quarter's change in loans and loan yields.

Average loans declined less than 1% linked quarter, with declines in investor real estate offsetting healthy C&I growth and second quarter's credit-card portfolio purchase.

The aggregate loan yield increased four basis points compared with prior quarter to 4.31% and was driven by our credit-card portfolio.

We believe there are attractive opportunities to grow this portfolio over time as currently only one out of 10 of our customers has a Regions credit card.

On the business services front, we continue to see strength in the commercial and industrial loan portfolio with the average and ending loans up 12.4% and 12.9% from one year ago, respectively.

Demand continues to be broad-based as we experienced increases in 55% of our markets.

Total commercial and industrial commitments rose $700 million linked quarter, ending the quarter at $28.7 billion, and line utilization increased to 43.3%, which still remains below our historical levels.

We continue to make progress in de-risking our investor real estate portfolio as well.

Over the past year, we have reduced this portfolio by 32%, and it now comprises only 15% of our total loan portfolio, down from nearly 21% one year ago.

Moving on to deposits.

As noted on slide eight, average and ending deposits were both stable linked quarter, driven by our strength in gathering low-cost deposits, particularly non-interest-bearing deposits, offset by reductions in our timed deposits.

Average timed deposits declined $1.1 billion during the third quarter.

As a result, average low-cost deposits as a percentage of total deposits have risen from 73.5% in the third quarter of 2010, compared to 77.8% this quarter.

This positive mix shift led to another seven basis-point decline in third-quarter total deposit costs to 46 basis points, which is down 24 basis points since the third quarter of 2010.

Our shift in funding mix to low-cost deposits is also favorably impacting total funding costs, which declined another five basis points to 75 basis points.

As was mentioned earlier in the call, we will continue to benefit from the repricing of maturing CDs.

Much of this benefit will come in the latter half of 2012, but we do have $2.4 billion of CDs maturing in the fourth quarter of 2011 which carry an average rate of 1.32%.

Turning to slide nine, taxable equivalent net interest income declined $6 million with the resulting net interest margin declining three basis points to 3.02%.

This quarter's drop was due to higher levels of prepayments and the resulting negative impact on investment portfolio yields, along with a larger impact from cash reserves at the Federal Reserve.

Recent changes to the Fed's large-scale asset purchase program, or Operation Twist, among other reasons, resulted in a sharp decline in long-term interest rates.

This in turn led to higher prepayment rates, causing an increase in premium amortization on mortgage-backed securities.

Since long-term interest rates declined in the latter half of the quarter, we do expect prepayments to increase in the fourth quarter as they typically lag a couple of months.

The major drivers of the outlook continue to be the levels of long-term interest rates, which drive prepayment and reinvestment rates in the investment and mortgage portfolios.

However, barring any significant moves from here, we expect the net interest margin will remain stable through 2012.

Let's now shift gears and look at noninterest revenue on slide 10.

Excluding securities transactions and leveraged lease terminations, third-quarter non-interest revenue amounted to $748 million, down 1% sequentially but unchanged year over year.

Third quarter's non-interest revenue reflected higher mortgage revenues and stable service charges, offset by a decline in brokerage, capital markets, and in banking -- in investment banking revenues.

Mortgage revenue was positively impacted by third quarter's decline in interest rates.

Origination volume rose 9% as customers took advantage of historically low rates.

Service charge income remained strong due to the ongoing restructuring of our checking accounts to fee-eligible and an increase in spending activity lifting debit-card revenue.

Incremental debit-card usage has driven an 11% increase in total transactions year to date, resulting in 13% higher interchange income.

We have already begun mitigating lost interchange income through account changes, implementation of fees, and new products and services for our customers.

Brokerage investment banking and capital markets income was down, reflecting pressure from greater market volatility during the quarter.

Turning to expenses on slide 11, non-interest expense declined 5% linked quarter, excluding the prior quarter's branch consolidation and property and equipment charges.

The key drivers of this quarter's improvement were a $32 million reduction in salaries and benefits expense and a $25 million reduction in FDIC premiums.

Now going forward, we currently expect FDIC premium expense to be approximately $50 million a quarter.

Partially offsetting these are credit-related expenses, which include other real estate expense, net gains and losses from sales of loans in our held-for-sale bucket, and credit-related personnel costs increased $8 billion and accounted for 9% of third quarter's adjusted non-interest expenses.

Over time, a significant amount of credit-related costs should be eliminated.

Additionally, we reduced headcount another 1% in the third quarter, resulting in a 3% year-to-date reduction.

We will continue to focus on driving expense savings without sacrificing investment opportunities or compromising high service levels our customers have come to expect and deserve at Regions.

Slide 12 provides a snapshot of our solid capital ratios and favorable liquidity position.

Tier 1 common increased to 8.2% and our Tier 1 ratio stands at 12.8%.

Liquidity at both the bank and the holding company remain solid with a loan-to-deposit ratio of 83%, and cash held at the Federal Reserve totaled approximately $6 billion.

Overall, this quarter's results show continued progress.

We are improving our core business performance, reducing our credit risk, and further strengthening our balance sheet.

Now let me turn it back over to Grayson for his closing remarks.

Thank you, David.

While Regions continues to face some headwinds, we have a business plan in place that we believe will enable us to achieve sustainable performance and ensure attractive long-term returns for shareholders.

And importantly, we are successfully executing our plan, as demonstrated by our third quarter's results.

We can't control the economic environment, but we are focused on those factors we can control.

At Regions, we've made it our priority to keep focused on our customers.

To illustrate this, let me point out that approximately 80% of our associates are customer-facing out in the field, in our branch offices, focusing on winning our customers' respect and loyalty, taking market share, and properly growing our business one customer at a time.

We are building sustainable profitability by diversifying and expanding our revenue streams and controlling our operating expenses.

We are quickly adapting our product offerings and services to be more innovative and to compensate for the negative impacts from legislative changes, as well as customers' changing needs and expectations.

We are enhancing enterprise-wide risk management by de-risking our balance sheet, maintaining pricing discipline, and prudently managing our capital.

Perhaps lost in the market turmoil is just how far Regions has come in the past few years.

Let me highlight a few examples.

The investor real estate portfolio has been reduced by almost $14 billion.

Our loan loss allowance at $3 billion today is over two times higher than it was just in 2007, and our Tier 1 common ratio has increased 150 basis points, and today we are core funded, attributing to a 25% increase in low-cost deposits.

We are clearly a much stronger franchise today and we are profitably moving forward.

Operator, we'll now take questions.

(Operator Instructions).

Matt O'Connor, Deutsche Bank.

Good morning.

This is [Rob Placid] from Matt's team.

How are you guys doing?

(Multiple speakers).

First question, just on your outlook for credit quality.

You mentioned you expect overall credit trends to continue to improve from here.

As we think about NPA levels, how should we think about nonaccrual inflows from here versus additional asset dispositions?

Rob, obviously we are facing a challenging economic backdrop, but as we said in our comments, we do believe that as we look forward we will continue to see a favorable trend in our credit metrics.

I'll just stop there and ask Barb Godin, our Chief Credit Officer, to make a few comments in that regard.

If you look at our early-stage delinquencies, our late-stage criticized [classified] in there, they're all down, so that too would suggest that we're seeing a little bit of stability.

But as Grayson had mentioned, we are obviously tied to what we're seeing in the economy.

When you think about the inflows we've seen this quarter, a lot of the inflows, (inaudible) 62%, were paying current and as agreed, but it is based on conversations from our customers that, you know, they're seeing some of the trends in the overall economy softening.

Based on those conversations, we went ahead and we had moved those to a nonperforming loan status.

All in on the nonperforming asset side, however, we're going to continue to dispose of assets.

You saw that we disposed of $650 million this quarter.

We moved an additional $284 million into held for sale for disposal next quarter.

So we're going to continue with our, I'll call it, aggressive de-risking.

Okay, great, and just a follow-up on your asset dispositions this quarter.

I think the mark you took on the loans was around 20% this quarter, which compared to around 30% last quarter.

So just a question on what drove the decline?

Is it a difference in the type of assets you sold or is it a pickup in interest on the buyer side?

No, what we actually saw, Rob, is we had roughly a -- you know, the old 10% liquidity over and above what we would've reserved the loans for, so we really didn't see a big difference in that.

We did sell a lot more of these smaller loans.

If you take your average loan size we sold this quarter, it was under $1 million.

If you look at compared to year ago, it was $3 million on average in terms of the size of loans we sold.

They're getting a lot more granular.

Okay, thanks very much.

Jennifer Demba, SunTrust Robinson Humphrey.

Good morning.

Can you just talk about -- give us any more color you can on the higher inflows of problem loans this quarter versus the second quarter?

I know you gave us the categories that it was mostly coming from, but can you just give us any more color that you can?

Jennifer, I would say that really the composition of the inflows from second to third quarter really haven't changed that much.

It's still the same relative same mix.

We've continued to have dialogue with our customers in terms of both capacity to repay and commitment to repay.

We had a number of those kind of dialogues.

Obviously, we have a continuous credit review process, and as we've come through the quarter, you know, we have identified certain credits that we felt like that it was prudent move to a nonperforming status.

It's up slightly from, as you have seen, from the second quarter, but we've said all along there was going to be some level of volatility in this.

Obviously as the economy softens, some of our customer confidence has softened as well.

That being said, as we pointed out earlier in the presentation, there is a higher percentage of these loans paying as agreed than what we have seen in the second quarter, and our overall nonperforming loan days continues to have yet even a higher level of paying as agreed.

Barb, anything you'd want to add to that in the mix?

No, I think you've hit on all the major points.

Again, if we look at the migration that we had, it really was -- or the vast majority did come from our investor real estate portfolio, which we all have agreed will be lumpy as we come out of the current economic climate that we're in.

Jefferson Harralson, Keefe, Bruyette & Woods.

Thanks, guys.

I have kind of a broad question.

I'm trying to see if you can -- or figure out if you can keep your pretax pre-provision earnings fairly stable here.

Along those lines, a big piece of that will be the margin, and I was a little surprised you gave flat margin guidance, given that you've got so much firepower in the margin, I suppose, from potential better credit and potential use of liquidity.

But do you think that you can keep your pretax pre-provision earnings fairly stable even if loans continue to shrink a little bit here?

Jefferson, this is David.

In terms of if we look at margin clearly having a -- this interest rate environment that we're in, a very volatile environment on the low side, caused us to reinvest our cash at a lower rate environment that puts pressure on our margin.

That being said, we have been able to hold that margin because of our benefit we receive on the deposit side of the house as we continue to reprice maturing CDs.

So I think being able to hold that -- from a loan standpoint, we have had nice growth in our C&I loan bucket.

We have offset that on a net basis with continued de-risking in investor real estate, which we think will slow -- the decline of that will slow somewhat in the fourth quarter.

So we feel good about being able to maintain that margin.

Now, we do have $6 billion of cash at the Federal Reserve (multiple speakers) more than 25 basis points today that is pretty conservative from a liquidity standpoint, and as our ratings continue, if we can get our ratings to improve, then we can be less defensive with that cash and get it invested on a more efficient basis.

So we have some upside.

We're not calling that right now.

Perhaps if we get the rating change, we will have further progression in the margin.

(Multiple speakers).

Jefferson, this is Grayson.

You know, I think that when you look at the margin, we have guided to a stable margin.

There are obviously some opportunities for upside to that, as there is for downside, but I would say that the deposits, when we look at our cost of deposits, there is an opportunity there for improvement to the margins.

On the loan side, as we are repricing loans, we went into this cycle with a relatively small percentage of our loans fixed versus variable.

So we're not having repricing pressure.

Most of our repricing is actually to our advantage at this juncture in the cycle.

Where most of our pressure on the margin is going to come from is from the investment portfolio, and depending on which way rates go over the near term is really going to drive how much pressure that we'll actually receive from that front.

And the fourth element is the effort to provide more favorable refinancing opportunities for residential mortgage holders and what level of prepayments does that result in, because as you recall, our investment portfolio is very heavy in mortgage-backed securities.

Yes.

I think David may have partially answered this, but do you think the balance sheet can stay around the same size next year or do you think it should shrink a little bit as you continue running off the runoff portfolio?

I think if you kind of look on a net basis, it's going to be driven largely by the economy and how strong that it is for us to continue the C&I growth, which has been a great driver of offsetting the decline.

We've been declining that investor real estate portfolio about $1.5 billion each quarter, and we've had great growth in C&I.

So the question is how long will the economy kind of hang in there where C&I can continue to move along.

But we do see a slowdown, as I mentioned earlier, in investor real estate, so we'll have to see how those two work themselves out over the long haul.

All right.

Thank you, guys.

John Pancari, Evercore Partners.

Good morning.

Can you talk about the outlook for the reserve level longer term and how you think about that right now, just as you're still seeing the ability to release reserves here in the coming quarters?

Okay.

Matt Lusco, Chief Risk Officer, Matt, would you answer that?

I'll be glad to.

You know, we -- our allowance level, we believe that it's at about 109%, I guess, of our nonperformings right now, and as you've seen, we've been able to underprovide our charge-offs for two quarters in a row now.

You know, we believe that we're seeing some shift in our loss given default in our model, but we believe that's offset by a lower probability of default as we kind of continue to work through some of the things.

That being said, I think we are in the back latter half of this credit cycle and I think you'll kind of see the trends that we've shown by our allowance levels and our provision levels continuing in future quarters.

I do think we've been pretty disciplined in our allowance process.

We've strengthened that process over time and we're going to stay very disciplined in how we execute that.

We've been conservatively modest in what we've done over the last two quarters.

I think you can continue to see that conservatism come through in our actions, but we're going to let our methodology and our discipline drive the results of that.

As Matt said, we are seeing a forecast for a more favorable trend, but with maybe a slower pace than we would've seen 90 days ago.

Okay, that's helpful.

And then, my follow-up would be on the loan growth.

You mentioned that you're seeing -- impressively, you're actually -- you're seeing loan yields hold up, particularly on your new loan growth largely concentrated in commercial.

Can you just give us some color on those new yields?

What yields are your new commercial loan generation coming on at?

Let me answer it this way, John.

We have seen pricing pressure clearly in the upper end of the middle-market portfolio.

That being said, the spreads are still better than some of the earlier years.

I think that a lot of folks obviously want to grow C&I, and we see the pricing pressure coming through that.

We want to maintain our discipline in this environment because we want to make sure loans that go on the books have the right risk-adjusted return, and we will not go in and put a low-spread product on our books just to grow the loan portfolio.

We have been able to use our relationship with our customers as our predominant sales tactic, and that relationship allows you to maintain the spreads that we started with.

So I think, all in, we should be able to maintain those spreads.

The question would be what does the economy give us to -- for actual loan growth in that type of environment -- competitive environment.

John, most of that pricing pressures really come from the upper end of C&I.

The lower end of C&I, the middle market, and small-business lending, that pricing competition has been substantially less.

But that being said, we're doing comparative pricing with third parties.

We know where we're at from a spread standpoint, and I would say we have seen that spread compression in the upper end of C&I but still above historical levels.

We're very comfortable with where we're pricing today and the discipline we are using in that.

Ken Usdin, Jefferies.

Thanks.

I know we're not going to be able to talk about timeframes of either the Morgan Keegan or eventual potential TARP exit.

But I just wanted to ask you to go through with us what things you need as far as markers or the glide path, I guess, as you're thinking through getting Morgan Keegan completed one way or the other, and then starting to think about eventual TARP repayment?

Ken, we really are not in a position to comment on our strategic review of Morgan Keegan this morning.

And we don't -- we hope that those -- that commentary is forthcoming in the near future, but as of this morning, we are not in a position nor should we attempt to be to comment on that today.

And our strategy on TARP repayment really has not altered.

We still are being patient and prudent in that regard.

We believe we're doing the things necessary to put us in a position to be able to do that at the appropriate time, and really no change in that regard.

Okay, and my follow-up question, just regards to the remaining risks left on the balance sheet.

You had mentioned that you'd expect dispositions to slow in the context of continuing to see asset quality improvement, but can you just give us some color on where you still see the opportunities to dispose of assets in the portfolio?

And related to -- or side to that, obviously there wasn't a big improvement -- a big increase in the TDRs which you put forth to us in the 10-Q, but the magnitude was still pretty big, so can you just remind us again what the reserves are already against the TDR book as they have already been migrated through the portfolio?

This is Matt Lusco.

As David stated earlier, the disclosure of incremental TDR consists -- with the new literature really did not materially in any way change our allowance composition on that, but I will tell you that as has been said, we continue to see -- in terms of all of our nonperforming book, we do continue to see a higher percentage of paying as agreed, which we do believe provides us with a higher level of opportunity to dispose of those assets.

We continue, as Barb said, to be aggressive in looking at our de-risking activities.

Our higher content loss in land, condo, and single-family is just right at north of $2 billion.

That is the segment we've continued to try and work down by our de-risking activities, and I think we'll continue to be just as aggressive as we can on that.

It varies market to market.

We see better opportunities in some of the larger metro markets than we do in others, but we do continue to -- that is a critical part of our plan, and we're working it as aggressively as we can.

But I would say -- this is Grayson, I'd just add to Matt's comments is that, as Barb had said earlier, our stress loan portfolio is getting more granular in nature, and these loans are in a smaller denomination than what we had seen a year ago, substantially.

And we do still have many interested buyers, and we are still able to dispose of assets at economic positions that make sense.

We haven't seen a lot of change in that.

Obviously, the valuations are still under pressure in many markets, and we have to adjust to that each and every month.

But so far, our strategy remains intact, and we're still executing that strategy.

Erika Penala, Bank of America Merrill Lynch.

Good morning.

The first question I had is a follow-up to Ken's question and is for Barb.

And I apologize in advance.

This will probably be a compound question.

With regards to the additional billing in of investor real estate TDRs that were identified under the new accounting policy, could you tell us specifically what in the change in accounting guidelines caused you to reclassify this?

What composition of this billion dollars is income producing today, and what in your restructuring or the way you restructured these notes gives you confidence that you don't need to further provide for this billion dollars?

Okay, the literature itself has suggested that when you do a renewal, you need to ensure that you obtain a market rate.

Because these loans are substandard in nature, which means they have a deficiency that we have noted, that then brings into question what is the appropriate market rate, and we don't believe that that is an easy number to find.

We believe that we would be talking something probably double digits.

The majority of these credits we've gone ahead and renewed.

We have gone ahead and renewed them for increased interest rates in many instances or even additional collateral support.

But clearly, we are not able to get ourselves comfortable with that.

We would go ahead and make a substandard loan today at any rate, and that's really -- that defining factor is that we won't go ahead and put new substandard loans on the books.

So by definition, all loans that are in the investor real estate portfolio that we are renewing that are substandard will be considered as troubled debt restructures.

And again, that's what led to the increase in the TDRs.

But as Matt and Grayson and others have pointed out, as we think about our reserving methodology, these have all been generally reserved for us.

We said it was less than the $20 million in tax all in as we looked at what the impact of our TDRs were.

So we're feeling comfortable with our process, number one.

And then, number two is we continue with an ongoing dialogue with our customers, which really is ongoing.

It's not stop and start.

We're able to look forward and say there will be a number of these credits that in due course will be restructured when they are no longer considered as a substandard loan, when they get back to a pass-rated category.

And at that time, we would hope that they would come out of the TDR status.

Let me add one thing to that.

The TDR designation is an accounting matter, and as Barb mentioned, it does not have anything to do with how we calculate our reserves.

These aren't restructurings.

The bulk of which you saw, the increase, were not restructurings; they were renewals in ordinary course.

And so as you look at the TDR disclosures, and you're going to see a lot of disclosures going through the 10-Q, the better disclosures we have are the criticized and classified loans and the reserves related to that, and that really gets back to, Ken, your question that you had earlier, if you're still on, on reserves with TDRs.

You need to look at the criticized and classifieds, and that's some better information available out there.

That's helpful.

Just a follow-up, could you, I guess, give us a sense on how much of the total accruing TDRs are income-producing, and also, during the renewal process, if you get updated appraisals during renewal?

I'll answer the second part of the question, which is we do get updated appraisals as we do our renewals.

We have a pretty standard process around that, and we've ensured, Erika, that we keep our tenor short as well, so generally what we've done is -- it's been a strategy of ours -- is to keep the tenor short to make sure that the renewal is done in one-year increments.

That way we stay close to the customer, close to their financial situation, versus renewing something for a two- or three-year period where you could actually lose sight of the customer.

But I do think -- this is Grayson -- that a point Barb is making is important to note.

At the beginning of this cycle, we made a very conscious decision to start reducing our tenor, and most of our -- there's a big percentage of our commercial real estate loans that are on a tenor of one year.

So when these loans come up for renewal, to David's point, when we look at TDRs as an accounting designation and we look at we're renewing a credit that we've got risk-rated substandard, then, you know, the first question is, is it a substandard loan, yes or no, and if it is, then you have to ask yourself the question on the literature, what is the correct market rate that you would do that loan at?

And if you would look historically, most of the loans moving into TDR status were restructured.

In our case, it would be predominantly consumer mortgages that we had made some sort of concession on that moved in there.

On the commercial side, it was really the restructures we had done in an A/B note methodology, but today, under the current literature, you're going to see renewals where renewals go in and if it's substandard and we can't define a market rate, then by definition it's going to get designated as a TDR.

Just to let you know, you asked how much was in TDR-related investor real estate.

The total is about $1.5 billion.

Oh, I guess, I'm sorry, my question was income producing versus still in construction phase.

We'll have to get back with you on that.

We don't have that breakdown in front of us.

Okay.

Thank you; that was helpful.

But Erika, I would mention, I guess, out of our total investor commercial real estate portfolio, construction now just comprises slightly over $1 billion of the entire portfolio.

Brian Foran, Nomura.

Hi.

I guess just more broadly on credit, one of the issues it feels like everyone's trying to get their arms around is for the past two years, three years, it's been easy to explain why you have more credit issues than the average bank because you were heavy in real estate and you were heavy in the Southeast.

And now that we all see a lot of the real estate-heavy banks improving at a faster and more consistent rate and we see some of your Southeast peers improving at a faster and more consistent rate, I guess when you go through the same process of benchmarking, why do you think your credit is slower slowly going to improve at this point in the cycle than some of your peers?

Clearly, when you look at this portfolio, we went into this with concentration in the Southeast, and particular in Florida and Georgia, which have been some of the more stressed markets in the country, but certainly in our footprint the most stressed, and clearly when you see -- you're seeing improvement, but the question is the pace of improvement and the consistency of improvement.

We continue to work through the challenges we have in the portfolio.

The progress is being made.

That being said, the pace of economic recovery in the markets where operating in in large part are going to drive the recovery of our customers.

We're working through it, you're seeing improvements month after month, quarter after quarter, but it's incremental at this juncture.

Obviously, we would love to see a faster pace and are taking actions to accelerate that on our own balance sheet, but in the absence of real economic recovery, this is going to be slower than we had anticipated.

Barb?

Brian, the other thing that I would add is that as I look at what did come into the migration for the nonperforming loans for this quarter, between the Atlanta/Sandy Springs area and Miami, that accounted for 22% of the inflow.

So I would consider those to be our most stressed markets, clearly.

The rest of our markets, as you look in terms of the percentage that they provided on the NPL migrations in, was not great, but those two markets themselves drove, as I said, 22% of inflow, and it really speaks to what's happening with valuations and just the soft economy in both Atlanta and Miami that continues.

I'd add one thing, too.

This is David.

In terms of acknowledging that we have the credit that you laid out, that's where we have a $3 billion loan loss reserve which is 3.73% of the total loans which is higher than most [as well].

That is all extremely helpful, and if I could follow up, the Atlanta and Miami, can you remind us -- I mean, assuming most of those inflows are Atlanta and Miami investor real estate, how much investor real estate is there left in those two markets?

I don't have that number off the top of my head.

Again, we can get back to you on that.

We'll get back to you.

We don't have that with us this morning.

Great, and then, if I could sneak in one last one, how significant is the rolloff of swaps next year and is that factored into the outlook for kind of a flattish NIM going forward?

You know, in total, which is factored already into my comment on that we should be able to maintain the stable margins, but you kind of broke apart -- the pieces apart, you'd be in that seven to eight basis-point range.

Betsy Graseck, Morgan Stanley.

A couple of questions.

One on the asset sales that you did this quarter.

Can you give us a sense as to where you ended up marking them relative to what they were on the books for?

We did a couple of bulk sales of some smaller loans, and again, we were within that 10%.

Again, I would call that the liquidity premium on the bulk sales.

On the balance of the sales that we did, we were right on where our marks were.

And does that at all factor into NCOs or was that embedded within the expenses?

No, that would be -- again, as we move them into held for sale, they show up in the net charge-off line.

When they're in held for sale, they would show up as an expense.

When we sell a lot of held for sale, we sold a total of 660 overall, of which coming out of held for sale we sold $244 million of the nonperforming and a further 163 of accruing loans.

Are they OREO (multiple speakers), Barb?

Yes, OREO sales this quarter were $146 million.

I would add that our experience continues to be pretty consistent over this year with our de-risking activities that we really have.

As Barb said, that 10% liquidity discount has just been what's flowed through beyond the levels of marks and allowance we've already provided.

Predictability and consistency of marks is just -- has gotten much better as this cycle has gone along.

So on a Q-on-Q basis, the impact in the NCO ratio is fairly flat or it's a little bit lighter, is that right?

Our net charge-off percentage is slightly elevated by the de-risking activity.

That's right.

But I think if you really take out the de-risking activities and looked at more of a normal flow of streams, we would be down from 250 to more like 170 or something.

Betsy, if you're trying to go from each quarter, that liquidity discount has been about the same, and we actually had dispositions in each of the quarter transfers of roughly close to the same number.

So it's flattish when you look at the provision component of that.

Okay.

And then, just separately, and it might be too early to answer this question but just wanted to get it out there.

The FHFA did announce yesterday some new program guidelines around HARP, and it sounded like investor properties were going to be eligible.

I know it's -- they're talking about small numbers, maybe doubling the size of the program under the new guidelines.

I'm wondering if you've taken a look at that, and to the degree that that might be helpful or impactful for you.

We did.

This is David.

We looked at some rough numbers to see what that might impact us.

There's been -- you've seen all kinds of numbers in terms of how many mortgages that might affect, maybe 1 million mortgages.

For us, we think that number in terms of prepayment exposure that we would have would be in the range for a period of $20 million to $40 million, perhaps.

Gerard Cassidy, RBC.

Mr.

Cassidy, your line is open.

Hi, everybody, this is Steve (inaudible) in for Gerard.

We've just got one question.

On the NPL inflows, you guys had 63% that was currently paying.

Do you know if that's consistent with the last couple of quarters?

(Multiple speakers).

It's higher than the last few quarters.

48% last quarter, and it's been tracking up each and every quarter as we've gone along.

So as you look at -- just really quickly, as you look at the third quarter, again our overall nonperforming loan portfolio, 45% paying as agreed, last quarter 42%, a year ago 36%.

So you can see it's been tracking up incrementally every quarter.

Okay, perfect.

That's it, great.

Thank you.

Thank you.

I will now turn the call back over to Mr.

Hall for closing remarks.

Thank you, everyone, for their time and attention today.

We very much appreciate it and hope that we answered some of your questions.

We will stand adjourned.

Thank you.

This concludes today's conference call.

You may now disconnect.