Regions Financial Corp (RF) 2012 Q2 法說會逐字稿

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

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

I would like to remind everyone that all participant phone lines have been placed on listen-only.

At the end of the call, there will be a question-and-answer session.

(Operator Instructions).

I will now turn the call over to Mr. List Underwood to begin.

Good morning, everyone.

We appreciate your participation on our call 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 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 will 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.

These 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.

With that covered, let me turn it over to Grayson Hall.

Thanks, List, and good morning, everyone.

We appreciate your interest in Regions and your participation in our second-quarter 2012 earnings conference call.

Regions delivered another quarter of improved financial results, building on our momentum from earlier this year.

In short, the Company reported prudent and profitable growth driven by solid business performance, and we continue to see broad-based improvements in our asset quality.

Second-quarter pretax pre-provision income was $503 million, 15% higher than in the first quarter, and earnings from continuing operations were at an improved level of $0.20 per diluted share.

As you are aware, earlier in the quarter, we repaid the US Treasury's preferred stock investment, and therefore incurred accelerated accretion charges.

Excluding these charges and the final preferred stock dividends, earnings from continuing operations would have been $0.25 per diluted share.

While our results reflect some encouraging and positive trends, the US economy continues to improve, but on an uneven and slow pace.

The economy continues to work through structural headwinds, including deleveraging, high unemployment, a weak housing market and fiscal consolidation at the local, state and national levels.

Within Regions' markets, job growth has been approximately on par with the US as a whole.

Importantly, with respect to housing, we are seeing modest and incremental improvements in most of our markets, in particular the Florida Metro markets.

While housing remains soft in many markets, there are signs of recovery.

We are pleased that we were able to deliver solid business results despite the challenging economic landscape.

Looking at several important metrics, our second-quarter results demonstrate that we are executing well against our business priorities.

Despite the persistent challenge of a low interest rate environment, our margin expanded for the third consecutive quarter.

The improvement largely reflects lower deposit costs, declines in nonaccrual balances and a reduction in excess cash reserves at the Federal Reserve.

There is still an opportunity for further improvements in deposit costs, which will largely support a stable margin even if market interest rates remain at these levels.

And while our long-term debt levels are low relative to our peers, we continue to evaluate liability management opportunities.

Although total outstanding loan balances were down less than 1%, total loan production increased a healthy 15% linked-quarter.

We experienced improved growth in our commercial and industrial portfolios, which helped to offset the favorable decline in the investor real estate portfolio.

Our loan-to-deposit ratio remains conservative and provides considerable flexibility to continue to take advantage of profitable lending opportunities that will benefit future revenue growth.

Our mortgage loan production and related fee income improved significantly this quarter as customers continue to take advantage of historically low interest rates and HARP II opportunities.

We experienced growth in both refinancing and new home purchase.

We continue to be disciplined and rigorous in our focus on improving operating efficiency.

At the same time, we are continuing to invest in new technology and people where appropriate.

In the second quarter, we began the implementation of new technology at our banking offices that will enhance our cross-sell capabilities, streamline and enhance our customers' experience and reduce our overall operating expenses.

We also posted another quarter of broad-based improvement in asset quality, exceeding our own internal expectations, confirming what we believe was a pivotal turn in the first quarter.

Importantly, improving asset quality is enabling us to focus more of our resources and energy on executing strategies that profitably leverage our opportunity for revenue growth.

With respect to capital, our improved ratios, bolstered by recent capital actions, position us well for the future.

We are still reviewing the latest notices for proposed rulemaking regarding capital, but expect to be fully compliant well before the rules are officially phased in.

The first half of 2012 has been transformational for Regions, and with several quarters of solid results and continued successful execution against our plans, we believe Regions is better positioned for ultimate outperformance.

I will now turn the call over to David Turner, who will discuss second quarter's financial details.

Afterward, I will come back and make a few closing comments.

David.

Thank you, Grayson, and good morning, everyone.

I want to begin on slide three with a quick snapshot of our second-quarter 2012 financial results.

We reported net income available to common shareholders of $284 million or $0.20 per diluted share.

Income from discontinued operations totaled $4 million, primarily related to the gain on the Morgan, Keegan sale.

Early in the second quarter, we repaid the Series A preferred stock investment [made] by the US treasury.

In conjunction with this repayment, earnings were impacted by the acceleration of the accretion of the discount, and along with preferred dividends, totaled $71 million or $0.05 per diluted share.

Pretax, pre-provision income from continuing operations, or PPI, was $503 million.

Net interest income increased $11 million or 1% linked-quarter, and the resulting net interest margin increased seven basis points.

Non-interest revenues decreased 3% on a linked-quarter basis, while non-interest expenses were down 8%.

From a credit standpoint, net charge-offs were down 20%, and the total loan loss provision declined 78%.

Now let's get into the detail, starting with the balance sheet.

Average loans for the second quarter were down $498 million or less than 1% linked-quarter.

Despite a low interest rate environment, our loan yields remained steady.

Balances were impacted by a decline of $664 million or 7% in the investor real estate portfolio.

At quarter end, balances stood at $9.4 billion, down almost $4 billion from one year ago.

This portfolio now comprises only 12% of our total loan portfolio compared to 17% a year ago.

We expect this portfolio to continue to decline at a moderate pace over the next few quarters.

Commercial and industrial loan demand remained healthy in the second quarter, driven by our specialized lending groups.

On an ending basis, commercial industrial loans grew $892 million or 4% first to second quarter.

The growth in this portfolio is aiding to offset the decline in the investor real estate portfolio.

While growth was broad-based geographically, we experienced particularly strong growth in healthcare, asset base lending and the real estate corporate banking division, which provides REIT financing.

Pipelines remain solid and are slightly above the same level at this time last year, as our clients fund capital expenditures, working capital needs and, increasingly, M&A activity.

Line utilization on commercial industrial loans was up 130 basis points linked-quarter to just over 44%, and commitments have increased 11% over the last year.

Moving on to consumer services, average mortgage balances declined 1% linked-quarter, reflecting our continued strategy to sell fixed rate conforming mortgages.

The Company also experienced additional loan declines in the home equity portfolio as consumers continued to refinance and/or deleverage.

At the end of the second quarter, we started our rollout of our new credit card product line and an enhanced relationship rewards program.

Additionally, we will convert these cards onto our system in the third quarter, which will allow us to better control the customer experience and should enable us to increase sales production going forward.

Indirect auto continues to be an area of growth, as loan production in this portfolio increased 15% over last quarter and average loan balances increased 6%.

Notably, total consumer loan production totaled $2.8 billion in the second quarter, up 24% linked-quarter.

Total loan balances for the remainder of the year are expected to remain relatively stable with second quarter's balances.

Let's move on to deposits.

As shown on slide five, deposit mix and costs continued to improve in the second quarter.

Average low-cost deposits increased $1.7 billion from last quarter and over $5 billion from one year ago.

Average higher-cost CDs declined almost $2 billion linked-quarter and $5.3 billion from last year.

Total average deposits were relatively steady linked-quarter and year over year.

Average time deposits fell to just 18% of total deposits, down from 23% a year ago as a result of our continued success in growing low-cost deposits.

This positive mix shift resulted in deposit costs declining to 32 basis points for the quarter, down five basis points from first quarter and 21 basis points from one year ago.

We expect to drive additional improvement in deposit costs.

We have approximately $2.9 billion of CDs that are scheduled to mature in the third quarter.

They carry an average interest rate of 1.2%.

And an additional $3 billion at 2.1% that will mature in the fourth quarter.

Looking ahead to 2013, we currently have $6.5 billion of CDs that will mature.

Of that, $4.6 billion mature in the first half, with an average rate of 1.8%, and $1.9 billion dollars in the second half, with an average rate of 0.8%.

This compares to our current average going on rates for new CDs of approximately 20 basis points.

Our total funding costs improved five basis points linked-quarter to 60 basis points, and we will continue to evaluate the capital and liquidity benefits of our two outstanding trust preferred securities, as well as other liability management opportunities.

Let's turn to net interest income on slide six.

For the quarter, taxable equivalent net interest income was up $11 million or 1%.

The resulting net interest margin was up seven basis points to 3.16%.

The net interest margin benefited from reductions in overall deposit costs, reduction in nonaccrual balances and a decline in low-yielding cash balances at the Federal Reserve.

Last quarter, we deployed some of our excess cash into higher-yielding corporate and consumer mortgage-backed securities, thus decreasing the negative impact of the excess cash reserves by five basis points to eight basis points in the second quarter.

At the end of the quarter, cash at the Federal Reserve totaled approximately $1.8 billion, which is in line with our target operating level.

The negative impact of non-accruals on the margin declined three basis points to seven basis points in the second quarter.

Currently, our investment portfolio amounts to $27.2 billion, or 25% of average earning assets.

The future size of the investment portfolio will largely depend on the dynamics of the rest of the balance sheet.

Loan demand remains somewhat soft relative to the availability of stable deposits, and we expect to continue to sell conforming mortgages to the agencies in favor of retaining that exposure within securities.

In the latter half of the second quarter, long-term rates declined to record lows.

Should rates persist at these levels, growing net interest income in 2012 will be challenging as fixed-rate securities and loans are prepaid or mature and are replaced by lower-yielding assets.

However, as previously noted, the opportunity to continue to improve deposit costs will be an important factor supporting net interest income and the resulting net interest margin.

Consequently, we do expect net interest income and the resulting net interest margin to remain at relatively stable levels.

Let us turn to non-interest revenue on slide seven.

Second-quarter noninterest revenues were down 3% linked-quarter.

Mortgage banking revenue was particularly strong in the quarter, driven by new home purchases and refinance activity aided by the government's HARP II program, which is serving to increase refinance volume.

Mortgage revenue was up $13 million or 17% over the first quarter.

Mortgage loan production of $2.1 billion during the second quarter reflects an increase of 28% from $1.6 billion in the first quarter.

We estimate that HARP II will add over $1 billion to our full-year 2012 mortgage refinance volume.

As we evaluate the mortgage refinancing opportunities, we believe our capacity to handle refinancing activity more expeditiously is enabling us to take market share.

In fact, almost half of our HARP II loan applications are new mortgage customers.

Account service fees and charges were down $21 million linked-quarter due to the establishment of a reserve for certain customer fee refunds resulting from a change in our non-sufficient funds policy.

Excluding this item, total service charges would have been consistent with the first quarter.

Moving to expenses on slide eight, non-interest expenses were down 8% linked-quarter and 12% year-over-year.

During the quarter, credit-related expenses were down $31 million.

Notably, other real estate expenses declined 57% linked-quarter and 73% year-over-year.

Within held for sale, we incurred $26 million in net gains related to property sales.

Also, staffing was down during the quarter, and over the past year we have experienced a decline of 544 positions, or 2%.

Looking ahead, we expect overall 2012 expenses from continuing operations, excluding goodwill impairment, to be down from the 2011 level as a result of our continued and disciplined focus on cost control.

Let's move to our credit metrics on slide nine.

For the second quarter in a row, we experienced broad-based asset quality improvement, with virtually all credit metrics improving.

Net charge-offs were down significantly, resulting in a decline of $67 million linked-quarter or 52% year-over-year, and exceeded the loan loss provision by $239 million.

Inflows of nonperforming loans declined to $315 million or 17% from last quarter.

This is down 81% from the peak, which was in the second quarter of 2010.

Inflows have now reached what we would characterize as a normal range, somewhere between $250 million and $350 million.

Nonperforming loans, excluding loans held for sale, decreased $236 million or 11% linked-quarter.

This is the first time since the first quarter of 2009 that our nonperforming loans have been below $2 billion, which is down 48% from the peak in the first quarter of 2010.

Total nonperforming assets declined $1.3 billion or 35% from the prior year.

Much of this improvement was driven by resolutions rather than charge-offs, another favorable indicator of future trends.

Notably, business services criticized and classified loans continued to decline, with criticized loans down 9% or $543 million from the first quarter, and down $3.4 billion or 38% from the fourth quarter of 2009, which was the high point.

As a reminder, criticized and classified loans are one of the best and earliest indicators of asset quality.

Our coverage ratios remain strong.

At quarter end, our allowance for loan and lease losses to nonperforming loans stood at 120%, or 1.2 times, up two basis points from last quarter.

Meanwhile, our loan-loss allowance to loans remained strong at 3.01% at the end of the second quarter.

In light of the backdrop of an uneven and slow economic recovery, forecasting asset quality improvement with certainty is difficult.

As Grayson previously noted, our improvement in asset quality exceeded our own internal expectations, and each quarter will have its own unique characteristics and some volatility should be expected.

However, our credit quality indicators continue to be encouraging.

Now let's look at our capital and liquidity on slide 10.

Early in the second quarter, we repaid the US Treasury Department's $3.5 billion preferred stock investment.

This transaction followed the completion of the sale of Morgan, Keegan and a highly successful common equity offering.

In connection with the repayment of the Series A preferred stock, the Company repurchased the outstanding warrant for $45 million.

As a result of these capital actions and events, our estimated Tier 1 ratio at the end of the quarter stood at 11%, and our estimated Tier 1 common ratio increased 40 basis points to 10%.

And we continue to review the capital NPRs that were published on June 7. The proposed minimum capital levels and definitions of capital are largely in line with Regions' expectations.

However, we are working to understand all the proposed changes to risk weightings and are collecting the data to quantify the impact.

Based on our interpretation of the NPRs, we estimate our pro forma Basel III Tier 1 common ratio will be approximately 8%.

The NPR comment period ends in early September and changes could be made, and those changes could result in materially different capital ratios from what we have estimated.

Liquidity at both the Bank and the Holding Company remain solid, with a low-to-deposit ratio of 80%.

Lastly, based on our interpretation, we are well-positioned with respect to the liquidity coverage ratio.

Overall, this quarter's results demonstrate the continued progress that we have made on several important fronts.

Our operating results continue to improve, driven by solid business performance.

We delivered another strong quarter of substantial improvements with respect to asset quality, and we further strengthened our balance sheet from a capital standpoint.

With that, I will turn it back over to Grayson for his closing comments.

Overall, this quarter's results really demonstrate continued progress that we've made in entering the second half of 2012, with both positive and encouraging momentum.

While there is still work to be done, we are successfully executing our business plans, making substantial progress and taking actions that position us to maximize our opportunity for outperformance.

We continue to make progress even in the face of challenging markets.

In the second quarter, we completed the sale of Morgan, Keegan, and as result, we are a simpler organization, focused on the fundamentals of serving our banking customers.

We are now able to offer our wealth management customers segment enhanced banking, trust and investment products with outstanding customer service.

On the business services and consumer front, we have been taking steps that expand and enhance our product offerings, as well as simplify and improve the delivery of customer services.

As a customer focus is central to our business model, our associates are working hard to ensure Regions is providing competitive products and services to satisfy customers' individual needs.

We have a competitive team that consistently provides award-winning customer service, which we believe is a differentiating factor in today's marketplace.

With this in mind, we are continuing to manage efficiency and selectively add to our team; for example, recently hiring additional bankers for growing specialized industries.

We continue to invest in people and technology to build the best foundation for delivery and execution of our business plans and to take advantage of opportunities present in our markets and in this economy.

Although economic growth is expected to remain modest over the balance of the year, Regions has the levers in place to continue to strengthen our financial performance and deliver improved returns for our shareholders.

Operator, we are now ready to take questions.

Ryan Nash, Goldman Sachs.

First on the Basel III NPR, I understand you are still reviewing it.

Can you just give us a little bit more detail on some of the moving parts?

And maybe you could talk about some of the areas that there could be further mitigation and how big those can be.

As I mentioned -- this is David -- that the biggest change for us came in the form of risk-weighted asset changes.

And more specifically within that, the consumer products that are tied to real estate; in particular, resi mortgage and our HELOC book.

And I will caution this is still an NPR.

There are changes that can be made and I'm sure will be made that we need to incorporate.

That being said, we will look at starting to analyze our business and changes that we need to think through in terms of how that would impact going forward.

Clearly, as is, you will be holding more capital for those two products that I just mentioned.

And those --- holding more capital clearly would have an impact in terms of the availability of that credit at the prices that we have today.

And so we will look at restructuring those if we have to to minimize the capital impact to us.

I would also tell you that changes in the risk weights don't take effect until 2015, as proposed.

That, too, could change.

But we have time to overcome and will modify our business such that we have an appropriate amount of capital at the date that is implemented.

As we look at the NPR, and we are studying this very carefully to make our comments and recommendations for change, it does -- when you look at our balance sheet, the most material impact, as David said, is on the consumer segment, and in particular the real estate related products.

Obviously, as these rules are passed, in the form they are in today or in similar form, it will require some adjustments to our products, and will also -- will change somewhat in how we approach that market with those products.

And so even though they won't be implemented until 2015 as it stands today, I do believe that the industry and ourselves in particular will start making business model adjustments as soon as we know what the definitive rules will be.

Got it.

And then just on credit, it seems like the provision came in a lot lower than I think a lot of us expected.

And with NPL migration now back in a more normal level, I recognize credit can be volatile from quarter to quarter, but is it your expectation that we could see the provision running at these levels for several quarters as the reserve begins to come down?

It seems like you had some positive comments on housing, and it seems like disposals of assets are coming in at better prices than I think we would have expected.

So can you give us a little bit more color there on the provision and the reserve?

Thanks.

I think clearly when you look at our credit metrics, we are continuing to see favorable trends.

As a result of our conservative nature, we have clearly communicated that we think that recovery can be uneven.

Although in the metrics, we continue to see our metrics perform really at levels better than we had internally forecasted.

But we continue to see an improving landscape from a credit standpoint.

We have seen some recent recovery in some of our markets that relate to housing.

These have been modest recoveries, but been more widespread than we would have anticipated at this juncture.

But I do think that when you specifically look at our provision, our charge-offs remain elevated, above normal levels, although continue to improve.

But when you look at the provision, the provision obviously will also normalize as our asset quality normalizes.

And I'll ask Barb Godin to make a few comments, if you will, on this same subject.

As you look at the impact of our provision, really [those] three factors.

One is the reduction in our overall charge-offs that came down quarter over quarter.

The second would be the number of resolutions that we saw.

And by that, I mean we had a number of payoffs of substandard loans and even nonperforming loans, where the entire loan was paid off, we were able to reduce or release the reserve on those loans.

Lastly, the mix shift, which is as we are putting on much better quality loans, we need less reserve than those we are taking off the back end.

So all in, that led to just a $26 million provision.

I would not call that a normalized provision level.

Clearly, it is going to be somewhat above that, but again, will be in line with what happens with our charge-offs.

If you look at it, clearly, nonperforming loans were down quarter over quarter 11%, but 48% from their peak.

If you look at migration, migration was down 17% quarter over quarter and 81% from the peak.

So clearly improving numbers from what we had seen historically.

But, if you will, the migration is starting to fall in what we would categorize as normalized rate.

Great.

Thank you for taking my questions.

Marty Mosby, Guggenheim.

Good morning and congratulations on getting the two handle on the operating and reported numbers this quarter.

Thank you.

Question on the deposit service charges.

David, you were saying that if you take out the reserve that you put in place for the customer refund, that would put you back in line with the first quarter.

But typically, first quarter is seasonally depressed, and you would typically get about a $15 million to $20 million uptick.

So would we still expect to see a level that would be higher than the first-quarter level as we move into the third and fourth quarters?

Marty, I think that what our guidance was there to try and give you information that would guide you for the rest of the year that we felt would be fairly consistent with that first-quarter number or the as-adjusted second quarter.

Clearly from the deposit rate policy changes that we made, there will be some impact going forward that's in the $3 million to $5 million per quarter, not a big number.

But we expect that to be fairly consistent with what you see as adjusted.

And then on the net interest margin, two things.

One is we have the CD repricing that is coming through, especially in the fourth quarter.

Should there be -- we had kind of been looking for a little bit of further improvement.

We got a little bit more this quarter than we expected, but maybe a basis point or two as you kind of went through the end of the year.

Is the bias maybe why you are saying stable still towards a little favorable move in net interest margin?

Marty, I will tell you that we did have a little bit of a more favorable move in the quarter due to our improvement in our credit metric.

So there are two to three points there.

And we wanted to guide to the consistency or stability of the margin from where we are right this minute because of that.

We will see if things of that nature, the improvement in nonperformers continue in the third and fourth quarter.

You're right to point out that our repricing in the second half is very strong from a deposit standpoint, but we also are looking at historically low 10-year and the reinvestment rates will serve to work against us.

The question is how long will this remain.

And so we've been a little cautious and wanted to kind of guide towards the stability of where we are right now.

And if it is higher than that, then that will be a plus.

Marty, we continue to see, and as we said earlier, our loan yields appear to be stable.

And we think that will continue.

But we think there is also still room for improvement in the deposit costs or deposit pricing itself.

The question we have, as David just said, is where do reinvestment rates go on our investment portfolio.

But when we net all of that together, we still are indicating that we believe we will maintain a fairly stable margin.

Okay.

The last thing is, David, as you kind of move in the mix of deposits, is the CD runoff just customers taking their money and shifting it into the lower cost, so it is really a transfer of deposit balances?

Or is it an influx of new balances into the lower-cost deposits and an exit of the CDs going to try to find higher yields someplace else?

Or is it something that as soon as rates change, you will see it kind of shift back to the CD level once you can get reasonable rates there?

Marty, what we are seeing is that when CDs renew, we are retaining about 70% of those CDs in the CD product.

The other 30% of the CDs, some of that is migrating into other depository accounts or migrating outside our bank.

But clearly, we've seen a strong improvement in our low-cost balances, deposit account balances, and believe a healthy portion of that money is being retained by the Company.

I'd also point out that a lot of our liquidity in deposit accounts is with business customers, and we continue to see above-normal levels of liquidity in our business checking products.

Thank you.

Josh Levin, Citigroup.

Some of your peers have suggested that over the last month or so, customers are becoming a bit more reticent about investing in their businesses and borrowing, given all the macro uncertainty.

Are you hearing that or detecting that from your customers?

I would say that the numbers don't appear to support that.

When you look at our numbers, our sales pipeline still remains strong, still above this time last year.

And if you look at our numbers in terms of growing our commercial industrial loans, we saw good growth in the second quarter.

That being said, anecdotally, I would say you are correct.

What we've heard from our customers as we meet with them is that the risk appetite for our commercial customers has softened.

I think with some of the uncertainties that are in the marketplace today, and all are well-described in the media each and every day, I think a number of our customers are taking a less aggressive risk appetite position.

And anecdotally, we are hearing that; numerically it hasn't quite shown up in our business yet.

Okay.

Also, one of your peers said last week that it is going to close up to 5% of its branches.

As you think about navigating through this very challenging environment for banks, is closing branches -- is that on your radar screen?

We were fairly aggressive early on in branch consolidation and branch rationalization.

If you recall, we closed 46 branches in 2011.

That is embedded in our expense run rate today.

We have consolidated seven branches in 2012.

But I would tell you, in summary, when you look at it from the top of the Bank, we've been -- we were aggressive early in branch rationalization and took some pretty strong steps over the last three years.

We believe in large part our branch franchise today is going to be fairly stable.

We will make some minor changes, but you shouldn't expect anything of a major level in that regard.

It will only be making minor adjustments to our business model.

That being said, we are seeing transaction volumes of monetary transactions in our branches decline, but we continue to see improvement in sales transactions.

And we are trying to transition our offices with more of a focus on sales and meeting customers' needs and realizing that monetary transaction volumes will continue to slowly decline through that channel.

We are investing an awful lot of money in our other channels.

We are seeing some remarkable growth in our mobile channel, but also in our web-based product offerings.

So we are trying to invest in those channels that the customers want most.

But quite frankly, our branches continue to be one of our most effective sales channels that we have.

Thank you very much.

Jefferson Harralson, KBW.

Thanks.

I want to ask a question about normalizing expenses.

The explicit credit-related expenses have come down all the way, when you think about OREO expenses.

But I guess how can we -- I guess how can you kind of point us in the direction to think about the further benefit that can come maybe in the personnel line or the other line as the credit-related expenses, the environmental expenses come out?

Can you do it in number of employees or just types of things that are going to naturally shrink down over time?

Jefferson, one of the things we tried to guide to was looking at 2012 expectation over 2011, which we are confident that we would have lower -- and this is excluding last year's goodwill impairment -- that we would be lower in 2012 than 2011.

Now, we clearly have improvements in our credit costs, our environmental type expenses, which are OREO and held-for-sale expenses.

And we reported the net gain that we had in held-for-sale.

So you should expect some unevenness relative to that.

As our nonperforming loans continue to come down and the number of loans in our special asset group comes down, we certainly have cost saves that we get there.

That being said, we also have an increasing compliance environment where we have to shift and hire people to cover the compliance costs.

We have a new regulator in, as well.

And so I think our best guidance right now is to stick with really kind of global year-over-year where we are.

That being said, we focus on expenses intently, and intense focus on expenses.

We are down year-over-year about 544 positions.

Salaries and benefits is our number one expense item.

We continue to watch that.

We watch occupancy costs, and our furniture and fixtures expenses -- those are the top three -- very closely.

And when we have opportunities to tighten up, as credit improves for instance, we will take advantage of that.

Jefferson, this is a topic that we spend an awful lot of time on.

Clearly, as we are looking at what we believe our future earnings potential will be in a low-rate, slow-growth environment, we continue to believe that we have to have a very rigorous and disciplined approach to expense management.

We are doing a number of things.

There is a number of initiatives across the organization to improve efficiency.

Part of that is people.

Clearly, a big part of our expenses is in salaries.

But we really are trying to focus on processes that we can change and improve that allow us to do things more effectively.

We've got new technologies rolling out into our branch systems that allow us to reduce a considerable amount of overhead expenses in our operating environment.

We don't necessarily have a named program like many of our peers do, but don't misinterpret that.

We've got a very distinct and clear focus on trying to reduce our expense base.

That being said, I would agree with David.

Part of our expenses savings are to fund headwinds that we are facing as we are having to add staffing and add technology to make sure that we are effectively managing all of our compliance risk.

So there are some offsets to our savings.

All right.

Thanks, guys.

That's helpful.

Matt O'Connor, Deutsche Bank.

If I could just follow up on the service charge.

Just to be clear, as we think about the back half of the year, we should look at the 1Q level, the [$254 million], and that would include the $3 million to $5 million drag.

That's right, Matt.

We've kind of guided to roughly even with that.

Maybe slightly up from there, but not a large change from that quarter.

Okay.

And then the change that you made, did that relate to the sort order, the high to low?

No, Matt, what we've done is really we've tried to focus on our funds availability policy, as well as our non-sufficient funds policy, to ensure that one -- it is in concert with our focus on service quality.

And as we've looked at that, we continue to challenge ourselves every month as we analyze customer activity and customer responses to make sure we are taking the appropriate steps.

This particular adjustment we made to those -- to our processes are not around sort sequence, but really around the way we handle customers who have come in and pre-established overdraft protection lines, and how we handle transactions that come in that exceed the capacity of those pre-established lines.

Okay.

Then just separately, on the reduction to capital, the Basel III under the NPR, I don't know if you have a sense of how much of that 200 basis point reduction is from the undrawn lines.

I guess I'm hearing from some folks that there is a lot of confidence in mitigating the impact of the undrawn home-equity lines and commercial lines over time.

And wondering if you had any of those numbers at this point.

I don't have the precise numbers.

I can tell you that the impact on unfunded commitments is going to impact some of our peers a lot more severely than us.

And it has to do with the proportion of unfunded commitments that are 365 days and shorter versus longer.

So there is an impact related to that, but it is not the major mover.

The major one is related to our risk-weighted assets on resi mortgage and the HELOCs.

Okay.

Thank you very much.

Craig Siegenthaler, Credit Suisse.

Just first starting out on the NIM, I'm just wondering if you think about this mathematically, where your loan yields are stable, your securities yields have some depression, but there is actually very significant [depository] price in the second half of this year.

What is actually going to hold the NIM down and not allow it to go up?

Is there any swap runoff we should think about or maybe any large changes in the securities or liquidity portfolio?

The primary driver is just the reinvestment risk that we have in this low-rate environment.

Currently, we have about $500 million rolling off of our -- cash flow off of our investment portfolio.

And having to reinvest that at a lower yield has continued to drag that down.

So we don't have anything that really sticks out other than that.

Again, we cautioned a little bit on the stability of the margin because we had about three points that we picked up in the quarter related to better-than-we-had-anticipated improvements on nonperforming loans.

If we get that kind of improvement in the third and fourth quarter like we had, then that three points would be there.

But we are trying to guide to a little more stable -- stability there.

David, your securities yield only declined by three bps in the second quarter, so it was actually much smaller than we thought.

Any commentary there would be helpful.

And then do you expect a much sharper decline in the third quarter?

And I wonder if you could share with us your new money yield for securities acquisitions.

We do expect there to be some added pressure on the investment portfolio in the quarter.

Our going-on yield today for securities is in that -- just below 2%, 1.70%, 1.75% for the mortgage-backed security products that we would be purchasing.

So over time, you would see that is going to put more pressure in the third and fourth quarter.

Got it.

Thanks for taking my questions.

Paul Miller, FBR.

On the securities portfolio, it is -- it looks like your duration is probably right around three years.

Is that correct?

A little shorter than that.

It is closer to two years.

Closer to two years.

And what type of -- because we've seen different companies who have had different prepayment rate speeds across the board.

What type of prepayments are you getting off that?

In the 20 range.

And you are reinvesting, I guess -- you are reinvesting at the two-year level or the three-year level?

Closer to the three-year level we would be reinvesting.

So that is about a 1.7, 1.8 level?

That's right.

We said about 1.75% just a minute ago.

1.75%, okay.

Because just following up on the last question is do you think your deposits can reprice down?

You do have some room in your deposits to offset that.

So I'm guessing that with the rates where they are and you are guiding to stabilized NIM, that you are depending on the deposit rates to reprice along with this, to offset that.

Yes, we have a fairly significant amount of deposits repricing in the second half of the year, and that is a big part of how we are confident in the stability of our net interest margin.

And one other follow-up in terms of investment portfolio.

If we think of -- we talked a couple quarters ago about trying to invest in more corporate securities.

We don't have -- we've kind of isolated about 10% of our portfolio in those type non-agency mortgage-backeds.

And those are going on the books in the 3.25% range, which also will help stabilize a little bit of the investment yield.

But our biggest benefit that we see in the back half is that price -- deposit repricing on the CD book.

And along with corporate security, are you taking a look at munis?

I know some banks are looking at munis and increasing that portfolio also.

No, you know, we used to have roughly 5% to 7% of our investment portfolio in munis before we got into the economic environment we are in today.

And so we divested of all those and we have been reluctant to go back into the muni market thus far.

Hey, guys, thank you very much.

Erika Penala, Bank of America.

My first question is a follow-up to Ryan's question on the provision.

I recognize that this dollar run rate is going to be quite lumpy as you continue to work through the credits.

But I was wondering if you could help us get a sense of as you look at your -- if most of the improvement is behind you and you look at where your loan book is today, what a normal charge-off rate would look like for Regions in two or three years, and how you look at a normal provisioning rate.

Do we look at reserve to loans?

Do we look at reserve to average loans?

Relative to what we look at for a normalized loss rate, we would target somewhere around that 75 basis points of loss through a cycle, is what you can expect as we get down into that range.

In terms of what our reserve would be, it is not going to be the same as what it was pre-crisis.

I don't think that was normal either.

And I think we are just going to have to hold more capital, so somewhere between 150 and 200.

Okay.

And David, I appreciate all the color on the margin, but could you give us a sense of what the loan yields would have been if you excluded the impact of the NPLs getting worked out of the balance sheet this quarter?

Yes, it would have been about three basis points on the loan yields.

That was on the loan yield, not on the total margin?

Three or four.

Those numbers are going to be fairly close.

It was about 3%.

Okay, thank you.

Michael Rose, Raymond James.

Most of my questions have been answered, but I wanted to get a sense for where you stand in your mitigation efforts related to Durbin.

Thanks.

I'll just make a couple comments.

One is that we continue to look at our consumer business model and see where we can enhance our products, but also expand products.

As you are aware, we entered the credit card business a little over a year ago, and we introduced a number of new products in that line in the last few weeks.

So we've tried to address our interchange revenue in terms of adding credit customers that will use the credit card for purchases.

But we've continued to push the debit card.

We continue to see -- we continue to see success in increasing the penetration of the debit card product into our checking account base.

We obviously have seen the revenue on a per-transaction basis decline there, but we are obviously trying to make up some of our loss through growth.

I would tell you we've introduced a number of new products in terms of prepaid cards that we hope enhance the view of that customer segment.

And if you -- as you are well aware, we've continued to migrate our checking accounts from really the free checking environment to one where accounts are fee-eligible.

We continue to believe that we can mitigate the impact of Durbin over time.

We will not completely mitigate it in '12, but we believe that we can mitigate it over time, and there continue to be -- continue to be positive about the progress we've made thus far.

Thank you.

John Pancari, Evercore Partners.

Can you talk a little bit about your thought process around the potential redemption of your $840 million in TruPs?

I know you mentioned you are evaluating it.

But if you can just give us a little bit more color around what you're looking at there and what the thought process is.

Thanks.

Sure.

We have two issues in that $845 million.

There is a $345 million that is priced at 8 7/8, and then there is $500 million that is 6 5/8.

The 6 5/8 clearly is losing its capital treatment, as is the other one.

But we look at that as a reasonable long-term debt yield today.

The other one, the 8 7/8, is one where we think we have opportunity to, as we think about liability and capital strategies via the NPR, that we could look at and perhaps call, given the regulatory event that occurred.

So that is -- we are trying to lead you to is we are investigating that.

We will be putting together our thoughts on that and get back to the investors and analysts regarding that.

Okay.

Secondly, around the reserve level, can you talk about the pace in the expected decline in the reserve level from your current 3% of loans to that 1.50% to 2% that Barb had indicated?

Yes, I think that clearly the pace is what is harder to predict given that we think [clear] the economy is where it is, there is going to be unevenness relative to charge-offs.

As we indicated earlier, our charge-offs are higher than where we want them to be, although we have them reserved for.

The biggest determinant of how that 3% comes down closer to that 1.5% to 2% that Barb mentioned is going to be the level of charge-offs.

And so as we continue to get clarity around that number, the pace of that change to get to the 1.5%, 2% will become clearer.

As we said earlier, we looked at the migration of loans to nonperforming status -- we were at $315 million this quarter.

That exceeded our internal projections, is actually less than our internal projections.

The pace of economic improvement in the country really drives that.

That really is an indication of the health of our customers.

And we continue to ask ourselves that same question.

It is a great question, is what is the pace of that improvement going to be.

We continue to believe it will be an uneven recovery, but we would love to see it faster.

But predicting that pace of recovery is a very difficult thing to do at this juncture.

The only other comment I would add to that is as we think about the third quarter and what we think might be a potential problem loan at this point, we would think somewhere in that $300 million to $400 million range in terms of migration to NPL.

Yes, and you will see that range when we file our Q. But we do believe that it will fall in that range of $300 million to $400 million.

All right, thank you.

And lastly, just real quick, around the securities portfolio, do you have what the premium amortization expense was for the second quarter and then what your unamortized premium balance was as of June 30?

We don't have that readily available, but we can get back with you on that.

Okay, thank you.

Greg Ketron, UBS.

Good morning/good afternoon, I guess now.

Just a couple of questions around the loan portfolio.

You've had really good growth in commercial, some of the consumer loan categories with continued runoff in areas that you had noted previously.

Do you have a sense, to the degree you can control the runoff, when we may see the loan portfolio bottom out and you actually may start to see net growth come to the bottom line?

What you're seeing in the loan portfolio this time is good growth in commercial and the industrial lending.

We saw good growth in mortgage.

We saw good growth in indirect auto.

We've -- we did not -- when you look at a balance sheet, we've elected not to place any of the fixed-rate product on the resi mortgage portfolio or out of that production on our balance sheets.

And we've done that predominately because of our cautiousness around the duration of that asset, how long it might be on the balance sheet, given the low rate environment that we are in today.

So the consumer portfolio continues to decline, predominately because of that decision.

I would tell you the equity portfolio continues to decline about $100 million a month.

That is the consumer -- that is consumer deleveraging, and we continue to see that deleveraging.

The ability for people to refinance continues, I think, to add to that issue.

The good news we saw in our mortgage production is about 60% of our production was refinanced and 40% was purchased.

And so that purchase -- the purchase part of that activity really encourages us.

From first to second quarter, we saw not only refinancings go up, but purchases go up.

So we have some shrink that I think the housing market is starting to show.

It is slow and incremental, but improvement nonetheless.

On the commercial side I just think what you're seeing is that most of our activities in the higher end of commercial middle-market and the small business owner, the small commercial customer, is still behaving an awful lot like the consumer and is still deleveraging.

And I think as we get more confidence in the economic outlook, you will start to see that segment improve.

What we had said earlier is we thought that our loans outstanding would -- by the end of the year would be approximately what they were at the beginning of this year.

I would say we have less conviction in that today, although we've seen our rate of decline slow.

We see more production on commercial real estate than we saw this time last year, and we are seeing that commercial real estate portfolio still declining, but at a slower pace.

So we think we will be close by the end of the year, but I think that it is a great question.

Thank you.

And then one other question.

Your loan yields have held up very well, really going back over the last five quarters.

And I know it looked like some of it is a mix issue as you put more indirect into the portfolio.

But is this something you anticipate that you will be able to maintain close to despite the rate environment as we look forward into later this year and maybe even into 2013?

I think Erika's question was really trying to get there, too.

We had three, call it, maybe four points related to loan yield that we had related to the performance of nonperforming loans this quarter that hopefully they will repeat.

But if they do, then that will benefit our margin outside of what we are telling you.

The persistently low rates from a loan standpoint will continue to have some pressure.

But it is really the reinvestment risk on investment portfolio is probably the greatest impact to us from a NIM standpoint.

We are trying to change our mix of our loan portfolio more to the consumer side.

I had mentioned in my prepared comments about the changes we were making to our credit card program that we purchased last year, about a year ago, that we will be converting onto our system in the third quarter.

And we are rolling out new cards and rewards program, the purpose of which is to control that customer experience and assist us in increasing our sales production with credit cards.

We think that will also bolster -- to the extent we can execute on that, bolster our loan yields.

Great.

Thank you for taking my questions.

Betsy Graseck, Morgan Stanley.

A couple of quick follow-ups.

One is on the interest rate outlook.

You know, there is some debate as to whether or not the Fed is going to keep paying rates on reserves.

Obviously, the EU has stopped doing that.

What is your kind of game plan for if that were to happen here?

I think to the extent that we are not getting 25 basis points anymore, everybody will move to going back to what we used to do.

It will be more credit risk in the system as we go overnight with other counterparties; probably be compensated some for it.

Don't know that compensation will offset the risk relative to having 25 basis points with the Fed.

But today, we've got net amount that we have on deposit with the Fed down to about $1.8 billion.

It's about the level where we want to be -- maybe in the $2 billion range.

And we will see if that movement is going to happen.

I am not sure what the odds are on that right now.

Okay, so it would be partial mix into more loans to the degree it could, and then offset -- whatever you couldn't do there, you would be doing with other financial institutions?

That's right.

Okay.

And then just second quickie is on HARP II.

You mentioned that $1 billion in mortgage fees you are expecting in 2012 due to HARP II.

How much of that have you seen already in 1Q/2Q?

That was mortgage production of $1 billion (multiple speakers).

If you recall, we did about $1.6 billion in total mortgage production in the first quarter.

We did $2.1 billion in the second quarter.

The HARP II production is running about 24% of total production.

Okay.

And that is up significantly from first quarter.

But yes, we are pretty steady right now at about $700 million in originations a month.

We don't see that increasing a lot from this point, but we think right now, looking at our application pipelines, that at least for the third quarter that looks very sustainable.

Okay, so at least sustainable is what you're guiding to?

That's right.

Okay, thank you.

Kevin Fitzsimmons, Sandler O'Neill.

Just a quick question.

I think this is still a ways out, but as far as the CCAR process for 2013, when you all start to put your plan together in the fourth quarter, I know there is a lot of uncertainty regarding risk weightings as far as Basel III.

But what is your appetite and priority in terms of raising the dividend, doing buybacks?

And is the trust preferred redemption you mentioned earlier, is that part of the plan that was already put through the regulators or is that something you have to include in your 2013 submission?

Thanks.

Let me talk about kind of our capital plan and kind of stay away from the regulators.

From a capital plan standpoint, we will continue to evaluate all capital actions.

You asked specifically about returning capital to shareholders.

The way we view that is we generated the capital or raised the capital.

We think our shareholders expect that we redeploy that in our business to grow our business, to invest where we can get the best risk-adjusted return back to the shareholders, and so that is our first priority.

To the extent that growth is not there, acquiring product lines, entities, those kinds of things would be what we would go to second.

And then to the extent we have capital and are generating -- expect to generate capital, returning it to the shareholders in the form of increased dividends and stock buybacks.

That being said, we do acknowledge that our dividend payout ratio is below our peers today.

Now, we just repaid TARP.

And so expectations would that we would put together a capital plan that would include an appropriate use of that capital.

And we will submit that in January.

And then the trust preferred, the trust preferred, clearly the NPR provides an opportunity for the regulatory call on the trust preferreds.

And as -- we've tried to guide through our prepared comments on liquidity and capital strategies that we would seek to do something with not only the trust preferred, but other debt -- subordinated debt instruments as well.

Okay, thank you very much.

Gaston Ceron, Morningstar Equity.

I just had a quick question following up on economic conditions.

I know you gentlemen spoke a little bit about this already.

But I'm wondering if you can take a quick moment just to give us some color on some of your key markets, especially Florida.

There has been some reports of housing -- the housing situation kind of improving there, but things still seem a little bit mixed and unsettled.

Just kind of wondering what you are seeing on the ground or in Florida and other key markets.

I think obviously, when you look across the 16 states we operate in, there are some mixed metrics around housing.

But generally what we've seen is some pretty steady improvement, although incremental, in most of our markets.

I would tell you that generally speaking, inventory levels are down.

And in some markets, inventory levels are down at levels we haven't seen in a number of years.

In Florida in particular, I would say most of the strength we've seen have been in the Metro markets.

And in particular, we've seen the condominium segment improve faster than we had earlier forecasted.

We are seeing some strengths in our business in Florida that have been exceeding our internal forecasts.

And we think that while Florida was probably one of the harder-hit markets we've seen from a housing standpoint, and it is going to take some time for recovery, that we continue to be encouraged by some of the signs.

When you look at our mortgage production, there is an awful lot more home purchase in Florida than in the other markets.

(inaudible) refinance is not an option for a lot of homeowners in Florida, and so you are seeing -- but you are seeing home purchase there.

And so I would say the strength is -- at this point in time seems predominately located in the metro markets.

Barb, would you like to (multiple speakers)?

The only thing I would add to that is Miami, as an example, seems to have rebounded, clearly, in terms of pricing.

We are seeing increases in the Panhandle area in Florida, and we've even seen increases now starting to happen in places like Fort Myers.

So clearly, we are seeing the bottom has been hit generally across most of the markets in Florida and it is on the way up.

That's very helpful.

Thank you very much.

Ken Usdin, Jefferies.

Two questions.

First of all, David, following your earlier comments about other liabilities, with deposits down at period end, you had some redemptions this quarter of some debt.

I'm just wondering with the kind of flat loan growth underneath it are we still just going to see earning assets continue to shrink?

And at what point do you think the earning asset base will stabilize?

We were trying to guide to in particular within earning assets the loan portfolio being stable from here on out.

So we think we've had good growth.

We've shown you in C&I the decline in the investor real estate portfolio slowed almost $500 million this quarter, and we see that continuing to attrite some, but not as rapidly as we have had.

There will be deleveraging on the consumer side, and we are changing our mortgage -- our resi mortgage strategy.

So we think we can have stability there related to our earning assets, in particular our construct of our loans.

I was getting more at the total balance sheet size, because the right side of the balance sheet continues to shrink.

So if loans are flat and you're happy with where your cash deposits are now at the Fed, it kind of implies that you will be just shrinking the investment portfolio.

I just want to make sure I wasn't misunderstanding that.

From the deposit side, we did have declines on the end-to-end, our average deposits were flat.

But they were down due to the repricing.

We think we can hold where we are with earning assets to be fairly stable from here on out.

Got it.

And my second question just relates to salaries.

You mentioned that you had a 500-person decline in headcount year-over-year, but the salaries line was still up 8% on relatively flat revenue.

So I'm just wondering if there are some moving parts inside the salaries line and what we could expect from that going forward.

As we mentioned earlier, we continue to watch salaries and benefits expense.

We did have -- our merit increases actually took effect at the beginning of the quarter, and that is probably the single biggest item.

The other is pension expense continues to be higher as a result of this extraordinarily low interest rate environment.

So we will see those two things impact us.

But we will continue to look at headcount.

That is really, from a cost control standpoint, our primary lever.

Okay, I got it.

Thanks a lot, guys.

Jennifer Demba, SunTrust Robinson Humphrey.

My question was just answered.

Thank you.

Gerard Cassidy, RBC.

Thank you very much for extending the call.

The question I had was coming back to your comments about the charge-off ratio through a full cycle of being about 75 basis points.

Since your net chargeoff ratio was north of 300 basis points in 2010, does that imply that we should see a net chargeoff ratio then in the good years, that might be coming up in 2014, 2015, in the 30 to 40 basis point range?

Well, it is going to move around a bit, as you can imagine.

We are going to try to keep the volatility as down as we can, as low as we can.

But clearly, if you are going to have 75 basis points through a cycle, you're going to have to have some years that are below 75 and other years that are above 75.

But I wouldn't want to give you any kind of a range right now.

Okay.

On the total classified and special mention loans that you guys reported this quarter at $5.4 billion, is that considered a normalized level, or is there is still improvement here as well?

I know your nonperforming assets are likely to continue to improve as you go forward, but how about the classified and special mentions?

We should continue to see those come down.

If you look at our 90 day past-due levels, while they were up in business services by $34 million this quarter, that was one account.

It got cleared in the last couple of weeks, just didn't make the quarter end.

Consumer was down.

We anticipate those levels will continue to move in the right direction.

Our 30- to 59-day delinquency levels (inaudible) were also down for the quarter.

And again, depending on what happens in the economy, we are going to track to the economy, but those are my very early indicators of what I would expect to see in special mentions, in classified and criticized.

Is the 11.7% -- should we think of a more normalized number -- instead of the 11.7% that you reported here, is it something half of that, or 6% or 7%?

Is that considered to be more of a normal number that you had seen in a normal economy?

I hate to point to a specific number because we won't track it the way that you are talking of the 11%.

I am simply looking at my criticized loans, and my criticized loans are not at that level.

They are at 8.49% for criticized, which includes the classified loans.

And that includes my special mentions, so my 8.49% includes my special mentions.

And during a normal environment, is 8.49% normal, or is it somewhere closer maybe to 5% or 6%?

Right now, clearly it is elevated.

And yes, it would be somewhat reduced.

I would give you a range probably of 5% to 7%.

Okay, thank you.

And then in all of the nonperforming asset results that you reported this quarter, did these results reflect the Shared National Credit Exam, where you may have participated as an agent or lead or a participant?

Yes, they do.

And then one final question, on the loan pricing for loans, C&I loans in particular.

The Federal Reserve data is indicating that it seems like pricing is holding up.

Are you guys a sensing that, that, yes, it is competitive, but there isn't really any slash-and-burning pricing going on?

Or is there really that type of pricing going on?

As you know, I think what we've seen is clearly there is pretty intense competition for loans, obviously, in this environment.

We saw pricing -- we saw some pricing compression early on that -- I think part of that was because pricing -- the spread had really expanded during the recessionary period, and we saw some compression, but still, pricing is holding up above pre-recession levels.

But it seems to be steady at the moment.

I'm not saying there isn't the odd transaction here and there, where one gets priced at a level we don't understand.

But I would say that is infrequent.

The norm seems to be fairly stable.

I know this may sound too optimistic, but with all the new challenges that the industry is confronting, particularly with the higher regulatory costs and certainly efficiency ratios for most banks are elevated.

Do you think more rational pricing could enter the picture, where it doesn't get so cutthroat and people realize that they can't cut prices because expenses are just going to be permanently higher as we go forward?

I think a couple things.

I think one is as this environment extends for a prolonged period of time, there is going to be some rationalization on the part of competition, has to be.

You can -- there can be some irrational behavior on the short term, but over the long term it has to rationalize.

I think the other issue, too, is with the Basel III rules coming out, obviously there is going to be -- the entire industry is going to have to revisit our pricing models with those capital allocations, and certainly will alter pricing on a number of different lending products.

Thank you.

Matt Burnell, Wells Fargo.

Thanks for taking my question.

Quick question on your deposit -- your expectations for deposit growth.

I'm just curious how you are thinking about the potential for the guaranty of non-interest-bearing deposits going away at the start of the year relative to your debt ratings.

I know that you got an upgrade from S&P in March, but just curious as to how you're thinking about what your trends in deposits might be at the start of the year.

We continue to -- we continue to deliver considerable improvement in our deposit costs, without demonstrating much of a decline in our outstanding deposits.

And in fact, other than the time deposit segment of our deposit portfolio, we continue to grow that segment.

We've gone through a quite extensive analysis of the deposit guarantee program.

We believe that debts would have a fairly nominal impact on our deposit base.

We know which customers -- we work with our customers closely -- the debt might be an issue with.

But I think given the capital levels of the industry and where we are at today, that is not as material an issue as it was a couple years ago.

And so we don't anticipate that being an issue for us at this juncture.

We do not know how to handicap that event and would not speculate on that.

Okay.

Grayson, you mentioned that anecdotally in some of your conversations with clients, clients are getting a bit more risk-averse, given the headlines that we are all reading every day.

I'm curious as to if you combine that with your comments about the potential for pricing on loans going up post-Basel III, do you get the sense that your clients understand that industrywide pricing is very likely to change in the relatively near term for commitments and other types of commercial loans?

I do not think that the anecdotal information we are hearing is as a result of perceived pricing issues going forward at all.

I think the average customer is seeing such a healthy level of competition between financial institutions, at this juncture, I think most of our customers continue to believe that they are going to have a fairly robust level of competitors competing for their business and that pricing will be fair.

I think most of the risk aversion is really over economic uncertainty, as opposed to any sort of implications from capital requirements.

Thank you very much.

Thank you.

I will turn the call back over to Mr. Hall for any closing remarks.

We appreciate again everyone's participation today and your interest.

Had some great questions and we thank you for that.

But without any further conversation, we will stand adjourned.

Thank you.

This concludes today's conference call.

You may now disconnect.