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Regions Financial Corporation (NYSE:RF)

Q3 2008 Earnings Call Transcript

October 21, 2008 10:00 am ET

Executives

List Underwood – IR

Dowd Ritter – Chairman, President & CEO

Irene Esteves – CFO and Senior EVP

Bill Wells – Chief Risk Officer & Senior EVP, Risk Management Group

Mike Willoughby – Chief Credit Officer

Analysts

Kevin Fitzsimmons – Sandler O'Neill & Partners

Matthew O'Connor – UBS Securities

Casey Ambrecht – Millennium

Jefferson Harralson – KBW

Greg Ketron – Citigroup

Tony Deltaner [ph] – John Hancock

Scott Valentin – FBR Capital Markets

Operator

Good morning and welcome to the Regions Financial Corporation Quarterly Earnings Call. My name is Stephanie Hanson and I will be your operator for today's call. I would like to remind everyone that all participants' lines have been placed on listen-only. At the end of the call there will be a question-and-answer session. (Operator instructions).

I will now turn the call over to Mr. List Underwood before Mr. Ritter begins the conference call.

List Underwood

Thank you, operator, and good morning everyone. This is List Underwood and in – given that the morning is very busy we really do appreciate your participation.

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

We also may make other forward-looking statements in the question-and-answer period following the discussion. These forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially.

Information on the risk factors that could cause actual results to differ is available from today's earnings press release, and today's Form 8-K, and our Form 10-K for the year-ended December 31, 2007, or our Form 10-Q's for the periods ending June 30, 2008 and March 31, 2008.

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

Let me also mention that our discussions may include the use of non-GAAP financial measures. A reconciliation of these to the same measures on a GAAP basis can be found in our earnings release and related supplemental financial schedules.

Now I will turn it over to our Chairman and Chief Executive, Dowd Ritter.

Dowd Ritter

Thank you, List, and good morning, everyone. We appreciate you joining us this morning. With me are Irene Esteves, our Chief Financial Officer, Bill Wells, our Chief Risk Officer, Mike Willoughby, our Chief Credit Officer and Bob Gordon [ph], our Head of Consumer Credit.

Earlier this morning Regions announced our third quarter earnings from continuing operations of $0.15 per diluted share excluding merger charges. Third quarter 2008 is likely to be remembered as one of the most turbulent and challenging periods in the entire history of the financial services industry.

Credit quality, capital adequacy and the scarcity of liquidity for some are the issues that along with the slowing economy have created the perfect storm for financial companies. We expect recently enacted legislation will provide some broad industry relief, but Regions is not waiting for the storm to blow over. As conditions have worsened over the past year we've taken aggressive steps to manage credit problems and mitigate ultimate losses.

In the third quarter, we stepped up our efforts to dispose of problem loans and foreclosed properties. About $430 million of nonperforming assets were either sold or moved into held-for-sale in anticipation of sales in the coming weeks in an approximate 50% discount to carrying value. As a result nonperforming assets excluding loans held-for-sale steadied June 30th to September 30th or were 1.66% of loans and other real estate owned.

As we move forward, we will continue to aggressively manage exposures, thoroughly evaluating all workout options and strategies. Importantly, our credit issues are well-defined and continue to be concentrated in home builder, Florida home equity second liens and condominium portfolios.

We're diligently working to reduce those exposures. At the end of the third quarter these portfolios totaled $9.9 billion of – some $622 million below the second quarter's level. These assets are managed by dedicated experienced bankers who're evaluating all options from disposition of problem assets to reaching out to customers to proactively resolve issues. All efforts to limit the ultimate loss potential.

Purely, as an example, during the third quarter alone we contacted more than 43,000 residential mortgage and home equity customers to educate them about various options. A large percentage of these customers were not even yet delinquent. Early indications are that those efforts are paying off as our home equity losses declined $11 million, second to third quarter.

Additionally, we're ensuring that our allowance for credit losses remains appropriate. In the third quarter, we booked a $417 million loan loss provision, and added $9.4 million to the unfunded commitments reserve. As a result, the period end allowance for credit losses edged up to 1.57% despite absorbing significant charge offs on the problem loan sales and the transfers to held-for-sale.

Regions is also committed to maintaining a strong capital base. On September 30th our Tier 1 ratio was estimated at 7.47%. As all of you are aware a number of initiatives were announced just this past week by the treasury department. One of the most significant of these was the capital purchase program.

We had referenced in this very call last quarter that we would look to add capital as opportunities arose, and obviously this program would allow us to strengthen capital with preferred shares at an attractive coupon.

We indeed do intend to participate in the program. Based on the treasury's formula, we would qualify for up to $3.5 billion of additional capital providing significant strengthening of our overall capital base.

Irene will give you a more detailed summary of each of the programs in our current expectations for participation in just a minute.

Let me turn now to loan growth. Third quarter total loans grew an annualized 2% on an ending basis, including 5% annualized commercial and industrial loan growth, reflecting continuing benefits of building relationships.

Given the importance of capital, we're now requiring larger spreads, and higher perspective returns on capital for all new and renewed business, plus any new commercial business relationship is now required to extend beyond just the loan to include deposits and fee-based services such as treasury management products.

We're also making progress in building our retail customer base. During the third quarter, new consumer checking households grew at annualized base of 2%. Driving that increase, we opened 210,000 checking accounts in the third quarter, 24,000 more than in the prior quarter, and in fact, more than any quarter in our history.

Additionally, we're well-positioned to capitalize on the disruptions and opportunities that unfortunately will continue to be created by bank mergers and FDI assisted takeovers.

As you may recall in late August we acquired in an FDI assisted transaction, approximately $900 million of deposits from a failed Atlanta bank, enhancing our share in an attractive long-term growth market. Most importantly, we've retained over 85% of those balances to-date.

We're also aggressively managing operating expenses by consolidating selected back office and operations functions as well as increasing standardization. Through this initiative we've been able to further the efficiency efforts that were begun in bringing Regions and AmSouth together.

As an example, through all sources merger related and otherwise we have been able to reduce employee positions some 19% since the merger. That would equate to just over 7,000 less personnel today than in May of '06 when we announced the merger. 8% of that has actually occurred this year. We remain on track to achieve cost saves in excess of our most recent run rate target of $700 million as of year-end 2008.

In summary, we fully recognize that the financial services industry is facing – without a doubt unprecedented challenges and change. We're confident that Regions is taking the necessary steps to preserve, protect and strengthen our company, and our customers. We've identified and are aggressively dealing with credit issues, and we're focused on building profitable relationships with our customers.

Let me now turn the call over to Irene.

Irene Esteves

Thank you, Dowd. Well, the third quarter had its share of moving parts three factors explain the $0.24 link quarter drop in operating EPS. The first was a result of the aggressive stance we took in disposing of nonperforming assets. Net charge-offs and other real estate expense related to these dispositions totaled approximately $186 million, the equivalent of $0.17 per share after tax. And this compares to $0.04 last quarter.

The second factor related to a settlement with the IRS regarding leverage lease transactions or Silos reduced net interest income by $43 million or $0.03 per share.

Lastly, changes in market interest rate necessitate an $11 million or $0.01 per share after tax mortgage servicing rights impairment charge. A $0.07 link quarter swing versus the $67 million MSR recapture that we recorded in the second quarter. So we went from $0.39 last quarter to $0.15 this quarter, a $0.24 difference. And this is owing to three factors. A $0.13 from higher loan sales $0.03 from the IRS settlement and $0.07 related to MSR. And I will cover each of these in more detail as we discuss the quarter in full.

Let's start with credit quality. As expected, credit quality continued to deteriorate fueled by declining residential property values. This along with our ramped up problem asset disposition program led to a $417 million loan loss provision, $108 million above last quarter and essentially matching current quarter net charge-offs. It's important to reiterate that our provision equals a net charge-off level that reflect a high level of loan loss related to write-down.

Loan sales – write-downs because of the loan sales. We also added $9.4 million to our reserve for unfunded commitment. As a result, the allowance for credit losses ended the quarter at 1.57% of September 30th loan balances of 1 basis point linked quarter.

Nonperforming assets including loans classified as held for sale, increased $141 million link quarter to 1.79% of loans and foreclosed assets. But excluding the $129 million classified as held for sale which we expect to sell before quarter-end, NPAs were little changed or 1.66% despite the migration of residential homebuilder credit and condominium projects to nonperforming status. We believe this is a strong evidence of our commitment to identify and reduce our exposure to troubled loans and properties in an expedited way.

This quarter alone, we sold or transferred to held for sale approximately $430 million of loans and properties, primarily, homebuilder loans and condos in Florida and our central region. These loans and properties represent the worst of our portfolio. So it's significant to get them behind us.

As I mentioned, losses on those transactions totaled approximately $186 million. We don't want to be in the real estate ownership and management business. By proactively selling problem assets we eliminate uncertainty, about future valuations as well as cost associated with maintaining and managing the properties.

Third quarter net loan charge-off increased from an annualized 0.86% of average loans to 1.68%, the increase due in large part to dispositions. Excluding those loan sales net charge-offs were 1.03% of average loans. Notably, home equity losses were down to an annualized 1.59% of average loans and lines versus second quarters 1.9%.

Contributing to the improvement in this portfolio, the Florida home equity default rate declined by nearly one-third. However this is partly offset by an increase in the average severity of loss as a result of continued downward movement in Florida property valuation.

The actions we've taken such as fortifying, relying, and realigning our collection function, creating a separate collections team focused solely on Florida home equity loans are having a positive impact. We're also calling Florida customers who are not yet delinquent to insure they can continue keeping up with their payments and offering them use of our customer assistance program.

Looking at another consumer area, residential first mortgage losses were low moved up to annualized 45 basis points. Again, Florida was the driver of the increased losses as we continue to see value declines in many markets. The Florida specific residential first mortgage loss rate increased from 45 basis points in the second quarter to 88 basis points in the third quarter. However, if you look at the rest of the portfolio, the non-Florida loss rate remains relatively low and moved up much less by comparison, increasing from 20 to 23 basis points in the current quarter.

Moving now to the commercial side, commercial and industrial loan losses moved up somewhat, but remained manageable during the quarter. In line with expectations commercial real estate construction losses, especially related to homebuilders and condos, increased $152 million link quarter, with the majority of the increase associated with the loan dispositions mentioned earlier.

Our efforts to centralize the management of special assets are clearly paying off. In addition, we expect that the centralization of underwriting for all commercial real estate including homebuilder loans will serve us well going forward.

Our residential homebuilder exposure, a subset that is less than half of our construction portfolio continues to decline as a result of our intense focus on property disposition as well as pay bound. At September 30th homebuilder balances stood at $5.2 billion. A $556 million decrease versus second quarter.

Loans within the portfolio that we have identified as a credit increased to $2.2 billion, of which $557 million was nonperforming. Significantly, in addition to the overall exposure decline, the migration of homebuilder loans to nonperforming status slowed during the third quarter.

Lastly, we have made progress working down our condominium exposure, which now totals $1.1 billion, down $532 million or one-third since year-end. We have not seen widespread condo issues across our footprint or even across the entire state of Florida. In fact, our concerns are generally contained to south Florida and the Florida Panhandle, specifically the Panama City area.

Condominium projects have been on a moratorium list for some time now and we're working closely with our customers to sell out units of existing projects. Through these efforts an additional asset sales we expect our exposure to fall below $1 billion by the end of this year.

Shifting to revenue, net interest income totaled $922 million in the third quarter, $58 million below the prior period, as the net interest margin slipped to 3.10%. $43 million leverage lease settlement charge accounted for 14 basis points of the 26 basis point margin shrinkage. A related $19 million tax benefit reflected on the tax line partially offset the settlement at the third quarter net interest income.

Also a factor in the drop in net interest income was $2.3 billion decline in average deposits during the quarter. Over half of this drop however was due to wholesale funding activity and our strategic decision to exit certain public fund relationships. We also experienced substantial pricing pressure from both community banks and some of our larger competitors.

We are heavily focused on deposit growth opportunities that will serve us well over the long-term. We've realigned our branch incentive plan measures and waiting to drive quality checking account production and overall deposit growth.

Deposits and service quality now represent 90% of our branch scorecard for incentive pay. We've had some success here. In fact, new products such as Regions new LifeGreen Checking accounts are having early success as evidenced by the household growth that we're experiencing during the quarter.

Average loans grew annually 5% in the third quarter similar to second quarter's pace. However on an ending basis loans were up only 1.8% annualized. Commercial and industrial was a catalyst of 5% annualized on an ending basis and C&I line utilization was a source of some of the increase with the utilization rates moving up to 48% at the end of this current quarter versus 47% at second quarter-end. We're managing loan growth with an intense focus on risk and risk adjusted return on capital.

Home equity also rose primarily due to slowing attrition and less pay down. Line utilization was not materially different, second to third quarter increasing from 50.3% to 51.5%. We've taken a hard look at our portfolio as a whole rationalizing the risk reward relationship of every lending line in light of its capital requirement.

Through this process we made the decision earlier this month to exit the indirect auto lending business. It simply didn't meet our threshold for return and did little to further our relationship building and deepening strategy. We expect this move to reduce our leverage by $3 billion by year-end 2009. While we're assessing the profitability of various relationships, we're not planning to exit other lines of business at this time.

Moving now to non-interest income, which not surprisingly declined linked-quarter as brokerage revenue was hard hit by the disarray in equity and credit markets. However, higher levels of trust and mortgage income partially offset the decline. Morgan Keegan, the largest driver of brokerage revenue posted total revenues of $293 million or $46 million below the prior period.

Fixed income and equity capital market revenues were particularly soft due to unprecedented fluctuations in the financial markets which are severely limiting client investment activity. Morgan Keegan's non-interest expenses also dropped primarily due to reduced compensation. Nonetheless, net income declined $7.3 million linked-quarter to $31 million.

Trust income was strong, up $7.9 million sequentially. Higher energy prices provide the catalyst to energy related brokerage transaction within our trust area. Mortgage income was also higher relative to the second quarter, which had included a $15 million loss on sales mortgage servicing assets.

Regions operating expenses adjusted for MSR recapture impairment declined $15 million or 5% on an annualized linked-quarter basis. Contributing to the improvement was the quarter-over-quarter decline of $25 million in salary and benefit costs, resulting from solid personnel related efficiencies as well as reduced incentives.

Included in other non-interest expenses are other real estate losses and related maintenance cost of $43 million, an increase of $23 million versus last quarter as a result of the aggressive efforts to sell foreclosed properties in the stressed market.

Due to the level of pretax income, and the leverage lease tax settlement I described earlier the income tax rate for the quarter was unusually low. At quarter-end, our Tier 1 and total risk base capital ratios are an estimated 7.47% and 11.70% respectively, about flat with last quarter. And we were able to hold our capital levels flat while still derisking the balance sheet through problem loan sales.

Let me turn for a moment to talk about the recently announced funding programs through the treasury department, Federal Reserve and the measures the FDIC is making. Many aspects of the original Troubled Asset Relief Program or TARP are still unclear. And as you just heard we've been aggressively disposing our non-performing assets.

We consider it our own kind of internal TARP program and we've been very successful. The government's TARP could potentially provide another means for us to dispose of these assets. But many important questions remain unanswered such as what properties qualify and how will they be valued. And until these are answered, we won't really know if we will participate.

Some aspects of the FDIC debt guarantee and insurance program are appealing and we have already accepted the FDIC insurance on non-interest bearing deposits and our money market fund. The Federal Reserve's commercial paper proposal is not applicable to us since we don't have a commercial paper program.

Our day-to-day liquidity is already strong and relatively low cost. Our participation in the FDIC debt guarantee program is likely assuming the costs and terms of the funding are competitive. As we have been saying we would look for ways to strengthen our capital base in opportunistic basis.

Under the treasury's plan, qualified institutions can obtain between 1% and 3% of the risk weighted assets which for Regions equates to an estimated $1.2 billion to $3.5 billion of capital. This program provides Tier 1 capital at an attractive price, that is difficult to pass up.

Consequently, in order to provide the greatest flexibility, our board of directors at their regular meeting last week approved our participation up to the maximum limit. We will decide how much to take down once we see all the details of the plan.

Given the uncertain economic environment, we expect to take more than we believe necessary. This higher level of capital will enable us to take advantage of unforeseen opportunities and expand our customer base through organic growth or through acquisition.

To sum up these are challenging times, but we are effectively dealing with the challenges. We will continue to delever and derisk the balance sheet until we see a turnaround in the real estate market and the economy in general.

We're taking aggressive action by selling off problem loans, exiting marginal businesses and constraining loan growth to profitable relationships. In addition we're taking steps to build Tier 1 capital and we're continuing to emphasize strong expense controls. All of these actions are being taken today to ensure Regions is well-positioned throughout the cycle.

Operator, we can open it up for questions at this time.

Question-and-Answer Session

Operator

(Operator instructions). Your first question is from Kevin Fitzsimmons from Sandler O'Neill & Partners. Your line is open, sir.

Kevin Fitzsimmons – Sandler O'Neill & Partners

Good morning everyone.

Dowd Ritter

Good morning.

Kevin Fitzsimmons – Sandler O'Neill & Partners

On the subject of the TARP capital purchase program, the wording that used in the release was that you, Regions has been notified that it is eligible and I just hadn't heard that kind of language because it seem like a lot of the companies are more waiting to find out details and so have you actually been notified and declared eligible for it and gotten any more details than other companies have at this point? I know it's more of an application process, so have you applied and been – and heard a response that you're eligible and I just got a follow-up after that. Thanks.

Irene Esteves

We have been in discussions with our regulators. And we have been told that we will be eligible but we haven't yet applied.

Kevin Fitzsimmons – Sandler O'Neill & Partners

Okay. Thank you. And then separately, can you just talk about how we should look at think about the provisioning level going forward, just the absolute level, but also provisioning versus net charge-offs going forward and imply within all that are there going to be more efforts like this one this quarter? Are there going to be more sales? It was this in your eyes is this – are you reaching a high point for provisions and or should we think about provisions equaling net charge-offs going forward? Thanks.

Irene Esteves

Sure, Kevin. We're looking at this program of disposing of our problem loans as a key strategy for us to move the problems off of the balance sheet if we see good strategic buyers which we have in this quarter. And these are loans as we mentioned that we're selling at a 50% discount and we're not in a position where we need to take more aggressive sales tactic. But if we see good buyers out there we will continue to sell our problem loans and our provisioning this quarter was equal to net charge-offs because we were able to keep our non-performers flat. And if we can do that, then we will – you will continue to see us selling those problem loans in the future.

Kevin Fitzsimmons – Sandler O'Neill & Partners

And is pulling the trigger on getting more aggressive with the sales? Is it more – is it more result of buyers showing up and being able to transact versus knowing that on the back end you have this capital injection coming in from the government so being more willing to be aggressive upfront or is it a combination of both?

Irene Esteves

As you know, the program was not announced until after quarter-end. So, we have put the program in place long before we knew that there would be additional capital available through this program.

Bill Wells

Yes, Kevin, this is Bill Wells. Last quarter or second quarter we sold about $150 million in problem assets. We probably averaged about a 28% to 30% discount as we rolled into the third quarter, one of our strategies was really to take a look at where we were, what we want to do as far as getting some of these assets behind us, and that was where we really started from and we built our process to really identify – it's really just a combination of what we started almost a year ago of a problem loan identification. You get into how you manage through those problems and problem resolution. So we've had this program kind of conceptualized for a period of time. And so we started this, first part of July, really at the end of June, making sure that we identify our problem assets, find strategic buyers, as Irene has mentioned, and try to move the some of the buyer most troubled assets off the balance sheet.

Kevin Fitzsimmons – Sandler O'Neill & Partners

Okay, great, thank you very much.

Irene Esteves

Thank you.

Operator

Your next question is from Matt O'Connor, UBS. Your line is open sir.

Matthew O'Connor – UBS Securities, LLC

Good morning.

Dowd Ritter

Good morning.

Matthew O'Connor – UBS Securities, LLC

If I could just follow-up on the TARP eligibility. Being the first bank to disclose that you're eligible could you just give us a sense of why you think that might be, is it a sign of strength, a sign of weakness? Did you just put your hand up first or just any color around the process I think would be very helpful?

Irene Esteves

Obviously, it's a sign of strength. We talk to our regulators and they were comfortable with us using that language that we are eligible and just as long as we make clear to you, you understand we have not applied for it and have not gotten a response.

Bill Wells

And also it has to go through their recommendation process and then approved by treasury so what we have done is we have been – I am sure like all of the companies in discussion with regulators, I am sure that's part of how you're notified and then what we will do is go through the application process and let us know about participation in.

Matthew O'Connor – UBS Securities, LLC

Okay.

Dowd Ritter

One of the things – this is Dowd. Just think about it this way. Any bank our size, No. 1, you got the regulators in almost on a daily basis on some topic or the other. You have a tremendous program like this announced by the treasury with instructions to deal through your regulator. The first thing we did was ask our regulators, what do we need to do and we got the application form I believe yesterday, as they were made available. And we will submit it but, part of the reason Irene made the reference of we asked the regulators was, was the language we had in there appropriate, was the very fact that if I were on the other side of this call that would be the very thing I would want to know. Are you going to apply for this and take advantage of it. And that's what we're trying to do today is just tell you, yes, it's out there and yes, we're going to take advantage of it.

Matthew O'Connor – UBS Securities, LLC

Yes, I think it's very helpful color and definitely a positive sign. Just separately, I look at the homebuilder exposure. It's actually come down more than I would have thought, probably with a little less pain than you have taken. But if I just step back and look at loan loss reserves overall which were relatively steady. There are a lot of signs from a macro point of view that the economy is getting worse that we should probably expect kind of non-housing related commercial and commercial real estate to experience some pressure. Are you not able to reserve for that anticipate increase in losses, or do you think that maybe they will – the macro environment won't be so bad. Just give us a little more color on the methodology within the commercial and commercial real estate book?

Bill Wells

Yeah, Matt, this is Bill Wells again. What I would say is – think about this. We, as a company, have been through the residential cycle for almost a year now. We were one of the first companies to really talk about residential lending coming out of the fourth quarter of '07. So we put in our plans of managing, identifying, we shifted some of our key people from production into problem loan resolution so we've been doing this for almost a year into the cycle. We have also been effort of reducing our overall real estate exposure. In Dowd and Irene's comments we talked about residential coming down about $2 billion, but also, since really the merger of the two companies we've had land come down about $2 billion, and also our condo exposure has come down about a billion so again you think about us. We've been in this for a year. We've been working through our problems. Understanding more about what these issues are. We've been reducing our real estate exposure. We've been actively managing our past dues and we haven't seen this really spread to other parts of our portfolio right now. So when you look at that and we have a very consistent conservative loan loss methodology that allows us to say where we think the risks are keeping our NPAs flat while we're able to we thought cover our provision for charge-offs.

Matthew O'Connor – UBS Securities, LLC

Okay. If we do start seeing more stress on the commercial side, just from the economy, I think we would expect to see higher NPAs and higher reserves accordingly, right?

Bill Wells

What you see is, we look at that, one thing we were talking about as a credit group earlier is – again we have been in this for about a year. We're getting stronger and stronger about knowledge of our portfolio, understanding where our borrowers are and how we're dealing with issues. But if you start to see some spread to other portfolios, that's where we will start to look about where we are as far as reserve methodology and what does that mean. We just don't see that right now, happening within our portfolio. So you're asking to say what would happen in the future. Right now we're consistently applying our methodology, we're making sure that our reserves are adequate. That's where we're focused on.

Irene Esteves

Another way to think about this is, as we talked about the loans that we sold were at the bottom of the barrel. And the loans that came in were in much healthier shape. So you saw some offsetting issues. So you see some deterioration in the middle, but what was out versus what came in was in balance better that offset it.

Matthew O'Connor – UBS Securities, LLC

Okay. Alright. Thank you very much.

Operator

Your next question is from Casey Ambrecht from Millennium. Your line is open.

Casey Ambrecht – Millennium

Thanks very much for taking my question. Dowd, I saw you at the Lehman conference. And I think you said that there is no situation at all you can think of where you would need capital. I'm just wondering what's changed in three or four weeks, then I have a follow-up please.

Dowd Ritter

First of all, I don't believe I ever made that comment because at that conference, and at last our quarter's earnings, we made the comment that in this environment if the opportunity presented itself we would certainly see ourselves taking advantage of that to some extent. But we openly talked about the fact we didn't see issuing common stock. That maybe what you're thinking about, but basically the other revenues for raising what would be Tier 1 were just closed at the time. That was the comment that really was made at that conference and since then at earnings.

Casey Ambrecht – Millennium

Okay. And then on the reserve ratio, a lot of the – lot of peers your size have really marched the reserves up, National City is over 3%. Fifth Third is getting up there. You guys are still down in the mid-ones. Why not more?

Dowd Ritter

The only thing I can say there. I will be glad to let the credit people answer further is your methodology on your loan loss reserve has to do with the losses you see in your portfolio. I can only speak for Regions portfolio and the fact that we feel that we are absolutely adequately reserved and you have to do your own analysis of why theirs is at that level given this economy.

Casey Ambrecht – Millennium

Okay.

Bill Wells

And I also add. We – where we see our problems continue in our portfolio is what we saw last quarter, and that is the residential homebuilder, the condominium portfolio and home equity. If you go back and look you see the overall exposure of those two portfolios coming down over time. And our losses were down in the home equity side. So again we go back and look at our methodology and we feel like it's appropriate for the size, the distribution that we have for our loan portfolio.

Dowd Ritter

Casey, in fairness I should have pointed out – don't forget at Regions our home equity book is 100% originated through our branch network. The two you referenced for comparison are substantially broker originated I believe. And that in itself gets you a very different answer on loss expectation and quality.

Casey Ambrecht – Millennium

Okay. And then lastly, do you expect the TARP to be buying residential construction related assets whether they be land, condos or whatever?

Bill Wells

I think that's what we're trying to understand. What can you use the capital for? And part of it is what we understand is to devoid, not horde. So I think you can look for a number of ways. And we're in the process of determining what those plans are.

Irene Esteves

I think if you're talking about the special assets that they would be buying from, they haven't been clear on what assets those might be.

Casey Ambrecht – Millennium

Thanks very much.

Operator

Your next question is from Jefferson Harralson, KBW. Your line is open.

Jefferson Harralson – KBW

Hey, thanks guys. Assuming you guys get the TARP money that may actually decrease your tangible equity ratio a little bit. How do you think about your tangible equity ratio in the wake of getting TARP money and possibly levering that up just a little bit? Is that something that could push you to as a better capitalized company to rethink comment and put a little comment as mix and improve that ratio?

Irene Esteves

Jefferson, we're not planning on issuing any common at this point.

Jefferson Harralson – KBW

Okay. Thank you very much.

Operator

Your next question is from Greg Ketron, Citigroup. Your line is open.

Greg Ketron – Citigroup

Good morning.

Dowd Ritter

Good morning.

Greg Ketron – Citigroup

Question I had, you had noticed – or noted that the properties that had been sold is about a 50% mark on the properties sold to the $430 million this quarter. And the question I had, one is, the properties that are in the MPA portfolio where would they be marked at in relation to the 50% to the degree provide any color there. And also, as a result of selling the properties and getting an indication on where these would be marked, did that have any influence or any reevaluation that under FAS 114 that triggered maybe some additional write-downs in the MPA inventory this quarter?

Mike Willoughby

This is Mike Willoughby. Let me just talk about that. Our approach to value is to take markets of concern which would be Florida and Georgia, primarily and in those markets, we're – we order appraisal every six months. We have an appraisal review function looks at the appraisals to make sure that they are appropriate before we accept them. And we use – that's the basis for the value calculations. So it could drive a charge down during the quarter if we got new value in on impaired loans. It could be used in conjunction with FAS 114 for reserves, but I think you wanted to tie that together with the asset dispositions, and frankly the asset dispositions had to do with the point that was made earlier, we were really looking to move the worst of the worst in our impaired loan portfolio, and of course they would have gone through the same kind of value write-down and reserve process.

Greg Ketron – Citigroup

Okay. So the results from the sales wouldn't necessarily influence the level of value that you're holding the rest of the nonperforming loans at?

Mike Willoughby

No, really doesn't. FAS 114 is a very individualized loan by loan process. And our value process is individualized as well.

Greg Ketron – Citigroup

Okay.

Irene Esteves

Really gets back to are we long-term going to work it out or are we going to sell it? Those are two different valuations.

Greg Ketron – Citigroup

Okay. Is there any color you can provide on if you were to look at on a market value basis where you would be holding those nonperforming loans in relation to the market?

Mike Willoughby

Frankly, it's a workout decision. It will depend on the property type and in the case of land we might hold it if we thought value was going to come back, but often a workout strategy when you end up with land is to sell it to someone else who wants to do something with the land. So I would say at the end of it all it's a case by case decision on how to proceed at the end of the workout whether we hold it or whether we think our best deal right now is to sell it.

Greg Ketron – Citigroup

Okay. Another question on deposits, you had noted that you'd lost a little over $600 million in deposits period end. You picked up integrity during the quarter which was about $900 million in deposits. If you kind of look at the net outflows X integrity they were probably closer to a $1.6 billion. Am I thinking about that correctly?

Irene Esteves

Yes.

Greg Ketron – Citigroup

And the follow-on question to that did you see any stabilization in deposit outflows maybe as we got towards the end of September or into October as the FDIC announced the insurance coverage increases?

Irene Esteves

Yes, we have. Both through because of that and the number of programs that we had in place we have seen a tremendous increase in our deposits over the last month or so.

Greg Ketron – Citigroup

Okay, so, the balances were actually increasing as the time went on.

Irene Esteves

Yes.

Greg Ketron – Citigroup

Okay. Thank you, appreciate it.

Operator

Next question is from Susan Stemmings [ph] from John Hancock. Your line is open.

Tony Deltaner – John Hancock

Thank you very much. This is Tony Deltaner [ph] Few questions. Morgan Keegan, is that a sub of the bank or the holding company?

Irene Esteves

Of the holding company.

Tony Deltaner – John Hancock

Okay. And in terms of your – the securities available for sale that we see every quarter, and your statements, I think it was $17 billion at the end of the second quarter, I don't know what it is this quarter, but how much of that would be related to Morgan Keegan type assets?

Irene Esteves

None.

Tony Deltaner – John Hancock

None, so basically all the security stuff is at the bank? The available for sale securities are mainly at the bank, that $17 billion.

Irene Esteves

Correct.

Tony Deltaner – John Hancock

Okay. And in terms of I guess availability, under the new guarantee program, which was talked about, you talked about the equity component, the capital availability. And maybe I missed it but what would be the three-year guarantee availability for you folks in any thoughts in terms of what the game plan for that is right now? So I don't know what – how much debt you have maturing by next June of '09 and 125% of that. Could you give us some flavor there of what you and/or the regulator thinks you could have guaranteed?

Irene Esteves

We have very little long-term debt coming due in that time period. It would only be short-term debt and we're evaluating if we were to participate.

Tony Deltaner – John Hancock

Okay so from now until next June you have a very little debt maturing?

Irene Esteves

Very little long term debt, yes.

Tony Deltaner – John Hancock

Okay. So, so, even if something is maturing by June '09, if it's in a short debt category that means it still doesn't count, is that the idea of the program?

Irene Esteves

It's still unclear what will qualify under the program. We're trying to get that clarified.

Tony Deltaner – John Hancock

Okay. Because by definition anything up to June '09 has to be classified as short-term debt in your statements so I guess I'm lost by your, your distinction.

Irene Esteves

Because there are some short-term products which are unclear. For instance, Euro dollar deposits are – we haven't gotten clarity if they are in or out.

Tony Deltaner – John Hancock

So I can see a deposit but I guess outside of deposits, I guess, how much debt would you have coming due by June '09? I guess I am surprised by your statement that you have very little.

Irene Esteves

We have short-term debt. It's on our balance sheet, it's $7 billion to $10 billion between now and June of '09. But we don't know of that how much the government would consider part of this program.

Tony Deltaner – John Hancock

Okay. So in other words, the government hasn't – they've made this statement, so much debt maturing, but I guess the issue is there could be some clarifications of exactly what that is.

Irene Esteves

Correct.

Tony Deltaner – John Hancock

Very good. Thank you.

Irene Esteves

Sure.

Operator

Your next question is from Scott Valentin, FBR Capital Markets. Your line is open.

Scott Valentin – FBR Capital Markets

Good morning. Thanks for taking my question. Just regarding margin, you mentioned pretty intense deposit competition in the market for pricing. Can you maybe comment on the direction of margin you see over the next couple of quarters?

Irene Esteves

As we said the – in our 10-Q we had put in what we expect on various interest rate scenarios and what's the big question mark will be is what happened to deposit pricing. As I said we have seen a little bit of deposit growth, but what we don't know is how long it will take for the FDIC's programs to filter through the pricing on deposits.

Scott Valentin – FBR Capital Markets

Okay, so margin would remain under pressure until we see improvement in deposit pricing?

Irene Esteves

Yes.

Scott Valentin – FBR Capital Markets

Okay. And just another follow-up question. Regarding book sale – asset book sales where do you see recovery values going to. Do you think they stay in the kind of 40%, 50% range. Do you think there will be more pressure may go towards quarter-end, maybe the market gets little more crowded if some other – some of your peers strengthen up their balance sheets at year-end?

Bill Wells

This is Bill Wells. What we wanted to do is get a little bit ahead of the curve is why we were talking about having this program come back. When you use the word bulk sales we really use with individual properties and work with individual customers that we see coming through. So it is tough out there as far as disposing of some of this property, but I don't know if we can look out for if we're seeing that discount rate is going to change because remember now, we got some of – rid of some of our most troubled properties. We're going to have some more value in some of the other properties that will be in the future if we use to dispose of. So I don't know if you can make a general comment towards that.

Scott Valentin – FBR Capital Markets

Okay. Thank you.

Operator

At this time there are no further questions in queue.

Dowd Ritter

Okay. If there are no other questions, let me thank all of you for joining us this morning. What I know is a busy day and we will stand adjourned. Thank you.

Operator

This concludes today's Regions Financial Corporation's quarterly earnings call. You may now disconnect your lines.

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Source: Regions Financial Corporation Q3 2008 Earnings Call Transcript
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