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Regions Financial Corporation (NYSE:RF)

Q4 2008 Earnings Call

January 20, 2009 10:30 am ET

Executives

List Underwood – IR

Dowd Ritter –President & CEO

Irene Esteves – CFO & Sr. EVP

William Wells – Chief Risk Officer & Sr. EVP

Mike Willoughby – Chief Credit Officer

[Barb Guidon] – Head of Consumer Credit

Analysts

Matthew O'Connor – UBS Securities

Steven Alexopoulos – JP Morgan

Kevin Fitzsimmons – Sandler O'Neill & Partners

Richard Bove – Ladenburg Thalmann

Jefferson Harralson – KBW

Todd Hagerman – Credit Suisse

Scott Valentin – FBR Capital Markets

[Gordon Watson – Orr Hills Partners]

Chris Marinac – FIG Partners

Jennifer Demba – SunTrust Robinson Humphrey

[Rodney Pitts – Southern Elevator]

Operator

Good morning and welcome to the Regions Financial Corporation quarterly earnings call. (Operator instructions) I will now turn the call over to Mr. List Underwood before Mr. Ritter begins the conference call.

List Underwood

Good morning everyone. We very much appreciate your participation. Our presenters today are our Chairman, President, and Chief Executive Officer, Dowd Ritter, and our Chief Financial Officer, Irene Esteves. Also joining us and available to answer questions are William Wells, our Chief Risk Officer, Mike Willoughby, our Chief Credit Officer, and Barb Guidon, Head of Consumer Credit.

Let me quickly mention a change in our presentation format. We have prepared a short slide presentation to accompany Irene’s comments. They are available under the Investor Relation section of www.regions.com. For those of you in the investment community, that dialed in by phone, once you are on the Investor Relations section of our website, just click on listen via phone and the slides will automatically advance in sync with the audio of Irene’s presentation.

A copy of the slides will be available on our website shortly after the call. Our presentation during the next few minutes will discuss Regions’ business outlook and includes forward-looking statements. These statements may include descriptions of management's plans, objectives, or goals for future operations, products, or services, forecasts of financial or other performance measures, statements about the expected quality, performance, or collectability of loans, and statements about Regions’ general outlook for economic and business conditions.

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

Information on the risk factors that could cause actual results to differ is available from today's earnings press release, 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, September 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 Dowd Ritter.

Dowd Ritter

Thank you List and good morning. We appreciate all of you joining us for Regions fourth quarter earnings conference call especially on the historic occasion with today’s inauguration later this morning.

As we announced earlier we reported a loss of $9.01 per diluted share for the quarter driven by $6 billion non-cash goodwill impairment charge. This charge was the result of recent impairment testing which indicated that the estimated fair value of our banking reporting unit was less then its book value.

While this charge certainly had a large impact to earnings for the quarter its important to note that this is a non-cash item and our regulatory intangible capital ratios were completely unaffected and remained solid.

Excluding the goodwill impairment and merger charges our loss for the quarter totaled $0.35 per diluted share reducing full year earnings to $0.74 per share. These results reflect a worsening economic and credit quality environment as well as actions we have taken to aggressively recognize and deal with problem assets.

Specifically we furthered our efforts to accelerate loss recognition including aggressively writing down values of stressed, housing related assets in the fourth quarter by either selling or moving to held for sale these nonperforming assets. Included in these write-downs we recorded a total net charge-off of nearly $800 million. The loan loss provision totaled $1.15 billion for the quarter.

As a result of these factors the allowance for credit losses increased by $353 million to 1.95% of loans. Irene will provide more details on these actions and fourth quarter’s financial results but first I want to spend a few minutes discussing what is being done to steer Regions through these turbulent times and ensure that we are well positioned to take advantage of the eventual economic rebound.

From an operating earnings standpoint the fourth quarter was the most challenging in our company’s history and although we are encouraged by steps taken by the government to stabilize the housing market and revitalize the economy, there is not quick fix for credit quality issues that are plaguing the financial services industry.

We are working hard to minimize risk and ultimate losses in Regions loan portfolio. Nonetheless I would expect 2009 to be another difficult year. Provisioning and nonperforming assets will continue to be elevated and the levels will depend on the depth and length of the economic downturn and its effect in particular on housing, commercial real estate, and consumers’ balance sheets.

This is by far the most difficult credit cycle that we’re ever witnessed. Regardless lessons learned in other credit quality down cycles remain valid such as the earlier a bank recognizes and deals with a problem loan or asset, the greater potential for reducing or limited losses.

Few problems age well. This thought was the catalyst for our intensified efforts to dispose of troubled assets. While the market for distressed assets softened in the fourth quarter we were ahead of many potential sellers in creating a comprehensive process to dispose of these assets.

As a result we were able to sell or move to held for sale, approximately $1 billion of nonperforming assets in the fourth quarter versus $430 million in the third. Nonperforming assets excluding held for sale declined $347 million quarter-over-quarter if you look at September 30 compared to year end, due to the stepped up disposition effort.

Nonetheless the inflow of new nonperforming loans accelerated in the fourth quarter and its unlikely that we’ve seen the peak for this cycle. As the operating environment has worsened we’ve added staff to our problem asset workout group in both the commercial and consumer areas and combined they now total over 600 dedicated workout personnel.

We will continue to shift resources into this area as needed. These experienced professionals are focused on identifying the most expedient solutions for mitigating loss content in our loan portfolio. Problems continue to be centered in our homebuilder, Florida home equity second lien, and condominium portfolios. However as unemployment rises risk beyond these segments are building especially commercial real estate categories such as retail properties as well as residential first mortgage loans in Florida.

We are making every effort to identify all potentially problematic exposures and take steps to reduce them. At the same time we will continue to maintain reserves that sufficiently reflect our overall portfolio risk.

During these tough times capital and liquidity are especially critical. Regions is in good shape with excellent liquidity and held [B] capital levels. At year-end 2008 our regulatory capital ratios were considered above well capitalized minimize requirements and our tangible common equity to tangible assets was 5.23%.

As you are aware Regions participated in the Treasury’s capital purchase program issuing some $3.5 million of preferred stock and common warrants that raised our Tier 1 capital ratio to an estimated 10.39% at year-end.

This incremental capital [shores] up our balance sheet and enhanced our ability to prudently expand lending to our customers. In fact we’re continuing to make credit available to consumers, small businesses, and commercial companies as intended by Treasury and the Congress. During the fourth quarter the government’s investment strengthened Regions’ capital as I noted earlier which supported us originating almost $12 billion in new or renewed loans; some 22,000 home loans and other loans to consumers which totaled $1.3 billion and over 13,000 loans to businesses of all sizes totaling $10.4 billion.

That $12 billion in lending production was an increase of approximately 3% compared with prior quarters during an economic environment where lending typically is flat or reduced. In addition don’t forget we’re paying the government $175 million each year in dividends on this investment, providing taxpayers a fair return while meeting the government’s objective of making credit available to both consumers and businesses.

Operating expense containment is always important but even more so when revenues and credit costs are being pressured by weak economic conditions. In 2009 we will continue to actively explore ways to improve our operating efficiency. At the same time we will work hard to provide our customers with superior products and service.

I am particularly pleased with our success in attracting new customer deposits and accounts during the fourth quarter. Most of the growth came in the form of money market balances which grew $1.7 billion and for customer certificates of deposits where we picked up an additional $3.1 billion. In another positive note net new consumer checking household growth picked up dramatically late in the year to an annualized rate of 3.2% which is double our growth rate from 2007.

This increase certainly reflects an upward trend in service quality metrics where Gallop has showed our results are the highest marks that we’ve ever received in the fourth quarter for our branch service excellence.

In summary we fully acknowledge the challenges that face us in 2009. We have been aggressively preparing for those challenges and will continue to take appropriate actions to successfully steer Regions through this difficult environment.

Let me now turn the call over to Irene to review our fourth quarter’s results in greater depth.

Irene Esteves

Thank you Dowd, let’s begin with a summary of results for the quarter. If we look at slide one, fourth quarter’s loss was largely driven by the $6 billion non-cash goodwill impairment charge, equivalent of $8.66 per share. Full year earnings totaled $0.74 per share before the goodwill impairment and merger charges.

Beyond the goodwill impairment results reflect incremental weakness in housing valuations and the overall economy but also the actions we took to reduce exposures in our most stressed portfolios. Consequently our fourth quarter provision for loan losses increased to $1.15 billion, that was $354 million above net charge-offs and $733 million higher then the third quarter.

Our allowance for credit losses now stands at 1.95%, up 38 basis points linked-quarter. As previously announced on December 18, we recorded a $275 million tax benefit related to a settlement with the IRS covering tax years up to and including 2006. This completely closes those years and removes that uncertainty.

In line with our expectations Regions net interest margin declined 14 basis points to 2.96%. Both non-interest revenues and non-interest expenses were negatively effected by broad economic pressures. Lastly like many banks the US Treasury invested $3.5 billion in our preferred stock. We are paying a 5% dividend on this plus we have issued warrants to them for 48 million shares of our stock.

This incremental capital is the primary driver in the increase in our Tier 1 capital to 10.39%. Now I’ll cover each of these topics in greater detail but first let’s turn to slide two where we’ve shown the most significant drivers of our fourth quarter earnings per share.

Obviously the non-cash goodwill impairment stands out but in terms of other significant items, we recorded the $0.40 per share tax settlement benefit that I mentioned earlier, of course higher credit costs were also the main driver including about $0.42 directly related to our accelerated asset disposition program, either through losses on closed loan sales or marks taken on held for sale transfers.

As a reminder in the third quarter some $430 million of stressed assets were sold or moved to held for sale. During the fourth quarter we stepped up those efforts disposing of or moving to held for sale $1 billion of nonperforming assets. We took an average 51% mark on those loans at the time of sale or transfer, translating to $466 million, most of which is included in net charge-offs and the remainder in non-interest expense.

Other real estate write-offs totaled $14 million and are recorded in non-interest expense. And as previously noted we also took a sizable provision above net charge-offs equating to about $0.32 per share. Continuing declines in housing and residential related construction project values as well as rising unemployment necessitated the increased provisioning and allowance.

Fourth quarter’s earnings per share was negatively effected by a $99 million or $0.09 impairment charge related to mortgage servicing rights driven by falling interest rates. Interest rate volatility has caused MSR valuations which are calculated based on market rates as of the end of the reporting period to fluctuate greatly from quarter to quarter.

You may recall that we booked a recapture benefit of $67 million just two quarters ago. The issuance of preferred stock to the government under the TARP was also a drag on fourth quarter earnings per share. The cost of this capital equates to $0.04 per share for the seven weeks it was outstanding. The balance of earnings absent the items set out separately on this slide total a positive $0.12 per share.

Focusing on credit slide three provides current data on the status of our most stressed portfolios; residential homebuilders, home equity second liens in Florida and condominiums. Stressed assets currently make up about 9% of our total loan portfolio. This slide highlights the progress we’ve made in working down this portfolio from 12% to 9% of loans. In total remaining exposure is $3.1 billion less then just a year ago.

To date our credit problems and charge-offs have been concentrated in our smaller loan portfolios as shown on slide four. The bar height represents 2008’s net charge-offs percentage by loan type while the width represents the average loan balances by type. As you can see our highest loss rates are in the stressed portfolios. Note that these loss rates reflect the loss taken on assets we sold or transferred to held for sale.

Fortunately these high loss rate portfolios are relatively small in size but we recognize that worsening economic conditions and rising unemployment are likely to begin to take a great toll on other segments of our portfolio. In fact there is some recent evidence of this in our retail commercial real estate loan portfolio and in residential first mortgages in Florida.

We are expecting loss rates on these segments to climb somewhat as the year progresses. Despite emergent portfolio stresses the over arch in credit message remains unchanged. We are focused on proactively identifying problem assets and disposing of them as judiciously as possible while at the same time making sure that reserve levels remain appropriate.

Let me give you a quick perspective on housing across our footprint. This slide is a good illustration of where housing pressure is and importantly is not for Regions. The spread of home price deterioration as indicated by the progressive color change is the real takeaway. Note that in most of our markets price declines average less then 5% in 2008. But in our most stressed markets nearly all of which are in Florida, prices have fallen much more precipitously, greater then 20% in many markets in fact.

Another metric for the health of the Florida real estate market is the inventory of homes for sale. As of the end of the third quarter available home supply stood eight months, an increase from the seven-month level at year-end 2007. Contributing heavily is Florida’s high and rapidly rising unemployment rate.

Slide six lays our selective credit metrics for the last six quarters. Looking at the chart on the left, you see the fourth quarter’s spike in net charge-offs to an annualized 3.19% represented by the yellow line, but the context for the increase is important. Note on the right hand chart both the corresponding drop in nonperforming assets represented by the green bars as well as the increase in the coverage ratio shown by the red line.

At the same time that we’re proactively recognizing losses we are adding to our allowance for credit losses. The increase at year-end to 1.95% of loans incorporates not only up to date asset valuations but our estimate of portfolio loss content using appropriately distressed economic assumptions.

This in essence shows that we are taking losses as quickly as possible illustrating our thesis that few problems age well. These actions have also improved our level of nonperforming assets and our coverage ratio of allowance to nonperformers.

Slide seven provides a quarterly roll forward of nonperforming assets for 2008 excluding assets transferred to held for sale, to help understand the migration of inflows and outflows. On this basis NPA’s are down $347 million versus the third quarter. While inflows were flat in the third quarter they were up again in the fourth quarter primarily due to Florida homebuilders.

Moving beyond credit quality, on a reported basis net interest income grew $3 million third to fourth quarter. However adjusting for third quarter’s one-time SILO charge net interest income actually declined $41 million linked-quarter and the margins [slid] 28 basis points excluding third quarter SILO impact.

Falling short-term interest rates have particularly pressured the margin given that about 55% of our loan portfolio is tied to prime or LIBOR and immediately reprices downward while deposit rates must stay competitive. The recent Fed rate decision on December 16 to put short-term rates near zero and the subsequent declines in short-term LIBOR will likely compress the first quarter margins by an amount similar to what we experienced in the fourth quarter.

However with market yield curves now hovering around these historic lows, we expect the margin to begin to stabilize in the second quarter of 2009 with potential improvement thereafter arising mainly from our focus on loan spread expansion and the expectation that more rational deposit pricing will return to the market.

Slide nine shows the change in our funding base since last quarter. Of note, total customer deposits grew 4% on average in the fourth quarter and almost 7% point to point reflecting strong CD growth in response to competitive offers and customer desire to lock in rates in the falling rate environment. Note that the Integrity Bank acquisition on August 29 had a full quarter impact in the fourth quarter as well.

But even without these deposits we were still up 3.7% for the quarter on average. Average low cost deposits which are total customer deposits minus customer CD’s posted a 0.5% linked-quarter decline due to customer moves to CDs or to Treasuries. However ending levels were up 4%. Positive results from money markets and interest free categories were driven by money market rate offers and the introduction of new consumer and business checking products.

On the asset side average loans increased at a 1% pace in the fourth quarter. Within total loans commercial and industrial lending increased $1.2 billion or 5% versus the third quarter. As we reported last quarter we are targeting new commercial business relationships that extend beyond lending to include deposits and fee-based services such as treasury management products.

Commercial real estate construction balances declined as expected reflecting the general environment for residential real estate. Within the consumer categories home equity balances increased slightly but were more then offset by a decline in other consumer balances driven largely by student loan sales.

Non-interest revenues were $18 million lower then in the third quarter largely due to a drop in service charge and trust income. A weak economy is negatively effecting service charges with lower transaction volumes and overall activity. The change in trust income includes the impact of lower asset valuations from declining markets and a third quarter benefit from energy-related broker transactions.

Excluding the impact of the goodwill impairment and mortgage servicing rights charges non-interest expenses were up 7% primarily due to higher legal and professional costs and increased branch incentive tied to our strong deposit growth. For 2009 we are targeting a 2% to 4% reduction in total non-interest expense relative to the full year 2008 expense base excluding merger charges.

Switching to capital, our regulatory ratios which are comfortably above the well-capitalized minimums were substantially bolstered by the US Treasury’s investment in our preferred stock as detailed on slide 11. With regulatory capital at comfortable levels focus has now shifted to the tangible common ratio. Our year-end ours was 5.23%. The largest driver of the decline versus third quarter is an increase in assets primarily, excess liquidity from preferred and debt issuances.

As the year progresses we will be opportunistic with respect to strengthening our tangible ratio. We are in good shape from a funding and liquidity standpoint. As summarized on slide 12 we have solid funding to asset ratios which are aided further by the ability to issue senior unsecured debt through the FDIC’s temporary liquidity guarantee program of which we have already issued $3.75 billion of fixed and floating rate notes with maturities through December 2011.

We still have over $4 billion of remaining capacity through this program. As to liquidity we have combined contingent liquidity available from a number of sources including the Fed, the Federal Home Loan Bank, unpledged securities, and unused lines exceeding $45 billion. As of December 31 we were holding excess reserve balances of $7.5 billion.

The holding company itself has a large cash position and only minimal long-term debt maturities through the end of 2010. Finally our average loans deposits stands at 111% while our average non-interest bearing deposits account for 14% of our average interest bearing assets.

Wrapping up 2008 was a difficult year and we know that 2009 will be challenging for the industry, but Regions is entering the new year on solid footing. We have strong capital and excellent liquidity. We have plans in place to mitigate credit losses and capitalize on opportunities to de-risk our balance sheet.

We are proactively identifying problem loans and aggressively managing them. We are taking steps to improve our net interest margin and at the same time we are continuing to prudently invest in our key businesses with a focus on strengthening existing client relationships, attracting new customers, and improving operating efficiency.

Lastly we are implementing changes to reduce our cost structure. To summarize we are positioned to not only successfully manage through the current credit and economic down cycle but to fully participate in recovery. We are addressing the challenging environment with a strong team, a clear vision, and a strong sense of resolve.

And with that I’ll turn it over for your questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from the line of Matthew O'Connor – UBS Securities

Matthew O'Connor – UBS Securities

I was wondering if you could provide a little more detail on the retail commercial real estate, you had said losses will likely increase versus current levels. For that one book that seems to be about $4 billion, what’s the current loss rate?

William Wells

When we say this is one of the portfolios we’re looking at we have not seen any real hard stress factors come in as far as nonperforming assets or comments or data points like that, what we’ve seen is some of the stress in some of our projects.

Mike Willoughby

Well you see what you would expect. We’ve talked about the expectation that our retail commercial real estate portfolio would be effected by rising unemployment and what we’ve seen so far is exactly that. So we’ll see some vacancies but not to the point of impacting the paying capacity of the borrowers. I guess the point here would be we see early signs of deterioration but they’re not showing up in nonperforming assets and charge-offs.

William Wells

And what we’ve also done too is we’ve identified this portfolio probably six months ago, but [inaudible] in this product line, we’ve been watching it, doing credit servicing so it is one of the things that we have been doing to proactively address the portfolio pretty much as we have seen us do throughout all of 2008.

Matthew O'Connor – UBS Securities

Then help me better understand when we look at the roughly $11 billion of non owner occupied commercial real estate, a loss rate went from 2.1% to 9.1% from 3Q to 4Q, what’s the biggest driver of that big increase?

Mike Willoughby

Well the biggest driver is going to be the cost of asset dispositions in the quarter which was the total of that was around a little over $450 million and the bulk of that had to do with non-owner occupied commercial real estate.

Matthew O'Connor – UBS Securities

Is that just a classification issue, its none of your homebuilder exposures and construction, that category too, driving those losses?

Mike Willoughby

Yes, I would take construction and the amortizing piece and put them together.

Matthew O'Connor – UBS Securities

We’ve seen a couple of the money center banks get another round of capital infusions. There’s a lot of talk in the press that the new administration is going to inject more capital into the bank industry or some kind of combination of big, bad bank to take bad assets off of the balance sheets, any of these things are something that you would consider doing going forward?

Irene Esteves

Not as far as our capital we feel we have a very strong capital base at this point and don’t envision asking for additional capital or needing additional capital and then as far as the asset disposition program there just is not enough information yet for us to judge if we would want to participate in that.

William Wells

We would look at, remember that’s how it first started out as having a problem asset disposition program then move it into capital and now they’re back. We set up a very good function internally that evaluates, that’s why we’ve been able to dispose of over a billion, or to mark our self, a billion in assets so we’ve been doing that but if there was an opportunity for the Federal government to assist in that, we would take a look at it.

Matthew O'Connor – UBS Securities

Your comment about the first quarter net interest margin declining similarly to what we saw in 4Q would that be the 14 basis point decline in 4Q or the 28 basis point decline ex the lease noise from the third quarter.

Irene Esteves

It would be the latter.

Operator

Your next question comes from the line of Steven Alexopoulos – JP Morgan

Steven Alexopoulos – JP Morgan

Looking at the $423 million of nonperformers and held for sale how much have they been written down already.

William Wells

What we did is and I’ll go back a little bit to third quarter we marked or sold about $430 million and we said at that time we took an average mark of about 50%. When we moved into the fourth quarter considering the tax monies available we took at look at our portfolio again and we’re trying to deal with some of our worst problem credits, what I would say is when we sold we did a little bit better then 50%.

When we did a mark I believe Irene said 51% so when we marked them as they moved over we were a little bit above 50% so I would say quarter-over-quarter a 50% mark is probably the best number to give as we’re going through what we’ve seen the, for our products, for our loans or assets as well as what we’re able to get into the market.

Steven Alexopoulos – JP Morgan

It sounds like you’re rethinking the importance of common in the capital structure, what’s the timeline you’re thinking of to boost that up and what level of TCE would you be targeting?

Irene Esteves

I think as I mentioned we do feel our capital ratios are strong but we will look for opportunities as markets open up to shore up that tangible common but we don’t have a current plan in place.

Steven Alexopoulos – JP Morgan

Do you expect to earn the dividend this year and if not why keep paying it?

Irene Esteves

As you probably know we don’t give earnings guidance but the Board just voted to issue, continue the $0.10 dividend share and we’ll continue to look at that as the market unfolds and we look at what our credit losses are and how bad the economic downturn is.

Steven Alexopoulos – JP Morgan

I guess though if you’re balancing, you’re saying if the markets open up you’ll go and issue additional common but you’ll probably consume $275 million or so with the dividend, I’m just trying to balance how important it is for you to actually raise more common here near-term.

Irene Esteves

Well as you know one of the big benefits of raising common is you can pay the TARP back sooner. That is one of the major items that we’re looking at.

Operator

Your next question comes from the line of Kevin Fitzsimmons – Sandler O'Neill & Partners

Kevin Fitzsimmons – Sandler O'Neill & Partners

A little on the heels of a previous question in terms of what you said your average mark on the portfolio, can you, the mark taken on the loans moved to held for sale, what if we’re saying it was a little more then 50%, what kind of mark would have been required if you actually physically sold those off the balance sheet this quarter. I’m just trying to get a feel for that decision process you faced this quarter and then just wanted to bring up your subsidiary Morgan Keegan, on one hand you’ve had a few recent deals, small deals in early December, but I just noticed it really wasn’t even brought up on this conference call, wasn’t really brought up much in the release, so what I’m wondering is, is Morgan Keegan, do you view that as a source of new capital potentially in the future if there were any interested acquirers, or could that be the source of expense reductions going forward.

William Wells

Again for our fourth quarter we probably did on an average mark around 47% discount. When we looked at, and that’s what we sold, when you look at what we did for the average mark overall down on the portfolio it was about 51%. So you’re hovering around that 50% mark there.

Dowd Ritter

You were correct in that Morgan Keegan had a couple of small transactions. To really add to their expertise going forward we’ve said it before and I’ll say it again, Morgan Keegan is an integral part of this company and the long-term strategy is to continue integrating the two customer bases and there is absolutely no fault whatsoever on our part of any kind of disposition of Morgan Keegan.

Kevin Fitzsimmons – Sandler O'Neill & Partners

They did have a big increase in expenses, is that really mostly incentive related with the fixed income business doing so well?

Dowd Ritter

Always with Morgan Keegan you’ll see their expenses will go up in the quarter as you just mentioned when they have the revenues, exactly.

Operator

Your next question comes from the line of Richard Bove – Ladenburg Thalmann

Richard Bove – Ladenburg Thalmann

I know that you don’t give earnings guidance but since the [STARK] is down about 75% this year, I’m wondering if you have any thought as to what type of environment would turn earnings positive, whether it could happen this year or whether you see us waiting until 2010.

Irene Esteves

A good part of the decline as you know in our earnings is the credit outlook and we’ve taken over $2 billion of credit charges to our P&L in 2008 so that is the big swing factor for us is how long and how deep is this credit cycle.

Richard Bove – Ladenburg Thalmann

Is that still an unknown at this point or do you have any feel in the way you’re budgeting 2009 as to when it might contract.

Dowd Ritter

I think as I commented, as we look out into 2009 unfortunately I don’t see unemployment having reached its peak yet nor we do see real estate values having bottomed to where they’re start to rebuild and until we see either of those things, I just can’t see bank earnings improving.

Operator

Your next question comes from the line of Jefferson Harralson – KBW

Jefferson Harralson – KBW

I wanted to ask a question on the changes in the balance sheet this quarter, if you take out the goodwill impairment, the balance sheet grew by about $8 billion due to the debt and the TARP money, could you talk about how you’re thinking about the TCE ratio and as juxtaposed against liquidity do you plan on shrinking this balance sheet at all going forward to help the TCE ratio out, or do you think that you just kind of amass liquidity and run with a lower TCE.

Irene Esteves

As we mentioned we’ll look opportunistically at building our TCE but one of the things that is impacting our assets is that liquidity sitting on our balance sheet and we have since then paid off some [task] money which will bring down those assets.

Jefferson Harralson – KBW

Is there any plan to shrink the balance sheet more or do you think that this is basically the level of the balance sheet we’re going to have for most of the year.

Irene Esteves

We’re reallocating resources within the balance sheet but we’re not expecting to significantly shrink it.

Jefferson Harralson – KBW

The $8 billion increase in other earning assets, what is that asset, and what is it yielding?

Irene Esteves

Its primarily at the Fed.

Operator

Your next question comes from the line of Todd Hagerman – Credit Suisse

Todd Hagerman – Credit Suisse

Just in terms of the reserve action this morning, you mentioned that the coverage on the nonperforming increased sequentially, could you give a better sense of how the reserves are allocated, where a lot of the reserve build is coming through as I think about between consumer and commercial in the construction portfolios.

William Wells

One of the things we’ve been doing for the past two or three years is having a very consistent reserve methodology that we’ve put in place and we regularly review that and what we did this time is you go back and look at your large problem credits which were [called] FAS 114 credits, we went back, do a single analysis on those, and then we go back and look at our individual pools of credit and we went back and upped a little bit of our ratios in that, when we’re starting to look at what the impact would be for the overall quarter.

When I go back and look at the reserve you think about it right now that as of the end of the fourth quarter we have about $1.050 billion in nonperforming loans. You add in OREO other real estate owned about $243 million, that comes up with NPAs of about $1.3 billion. And we’ve got a reserve of almost $1.9 billion.

So when we looked at we go back and see how do we allocate and we do that for, it could residential, it could be consumer, and its just part of our methodology that we have.

Todd Hagerman – Credit Suisse

But could you give us any kind of a sense of again just as you highlighted the residential or the retail commercial real estate and the Florida first mortgage as an example, obviously commercial real estate is still a very meaningful part of the company’s asset mix if you will, can you give us a better sense of where you are reserves on that portfolio relative to other pieces of the pie.

William Wells

Again we went back and looked at our reserve percentages, when we looked at [baddest five] pools and we upped a good bit of that so we feel we’re more then adequately reserved for any of the issues that we see still confronting the company. And again for us its still been in the residential homebuilder portfolio. Its been in the home equity side as well as the condo portfolios.

Todd Hagerman – Credit Suisse

The restructured credit took another big jump this quarter, could you give us a sense just in terms of the mix of restructure between the consumer versus the commercial in that bucket and maybe give us a sense of the success in terms of the cure rate if you will on the restructuring credit.

William Wells

That mainly is that most of the restructuring coming through our customer assistant program that we have in our consumer area.

Barb Guidon

Yes it was, in fact all of it but $1 million came out of the consumer book and that goes back to our customer assistance program helping customers who are stressed. We’ve had some very good success in both the restructured loans as well as loans that we continue to modify so a number of our modifications are included as part of our restructure.

As an example bankruptcies were 2% and only 2% of that book of restructured loans. The rest of the customers are continuing generally to pay us and we’re continuing to work with customers.

Todd Hagerman – Credit Suisse

If you could, could you just expand a little bit in terms of your margin outlook and specifically as you have termed out some of your funding with some of the Fed programs and the like and obviously there is quite a bit of incentives carrying through this quarter in terms of some of the deposit growth and the company has talked a lot about the importance of deposit growth and how critical that has been to the margin if you will, could you just expand on that in terms of between what you’ve done on the funding side with some of the term debt facilities and the deposit flows kind of again where the deposit factors into the mix in terms of the stabilizing margin outlook.

Irene Esteves

On the funding as you know liquidity come with a price so as we’ve termed out our loans even though they are at pretty good rates, they’re not as good as overnight rates. So that has increased our funding costs but we feel its prudent in order to maximize our liquidity. On the deposit side we are beginning to see moderation in deposit rates. They’re very slow to come down but near the end of the fourth quarter we’re starting to see that and our rates are coming down and we are counting on that to continue to moderate.

And then on the loan pricing side we are looking at risk based pricing and not having exceptions to that pricing so all of those are efforts to moderate the decline in our net interest margin and then the expectation is that it will level out mid-year.

Operator

Your next question comes from the line of Scott Valentin – FBR Capital Markets

Scott Valentin – FBR Capital Markets

Regarding asset dispositions, are you providing financing for any of the buyers?

William Wells

No we’re not.

Scott Valentin – FBR Capital Markets

You mentioned earlier that asset prices on disposed assets were kind of soft in the fourth quarter its still early in the first quarter but I imagine there’s more people joining you in the strategy of bulk dispositions, do you expect prices to rebound somewhat or stabilize?

William Wells

When you say bulk, what we’ve been trying to do for our company is use strategic investors which gets away from a deeper discount then maybe what some other companies may be doing. We do think over a period of time you are going to see more properties come onto the marketplace. What I’d go back and point to is we did a little bit better fourth quarter then we did third quarter and our mark pretty much held up to where it was before so we think we’re doing a very good job of identifying some of our most troubled property and identifying what the mark should be and holding it relatively to what that mark is.

As for the going forward we’re going to continue to try to dispose of these assets that were have and held for sale and we’ve already taken our mark on those so we think we’ll have fairly good success. In fact since the end of the quarter we’ve already sold about $15 million of property and we have bids of I think about an additional $45 million.

So we’re continuing our process but I will tell you it will be impacted by what additional product will be coming to the market.

Scott Valentin – FBR Capital Markets

You mentioned that based on your outlook 2009 will be challenging, I was trying to get maybe a bit of a base line, you mentioned increasing unemployment and declining real estate prices, but is there kind of a range, is it 8% to 9% unemployment, is that a range we should think about when you factor in your forecasting and loss projections?

Irene Esteves

Yes, that is the range that we’re looking at, that 7% going up to 9%.

Operator

Your next question comes from the line of [Gordon Watson – Orr Hills Partners]

[Gordon Watson – Orr Hills Partners]

When you move assets into held for sale, you’re saying the coverage ratio has gone down over nonperforming assets isn’t there some sort of a survivorship, I’m just wondering what the coverage ratio would be if those loans had stayed in held for sale.

William Wells

When I talked about a coverage ratio the point I was saying, these were loans that are still nonperforming, we haven’t marked or sold those and the question was talking about reserve methodology so when you look at that, we’ve got a little over $1 billion in nonperforming loans and we have a reserve of almost $1.9 billion so I’ll look at it from a coverage ratio where we think we’re more then adequately reserved. I think the question was talking about commercial real estate and you look at your pools.

What you do is when you move it into held for sale you’re taking your mark at that time what you think you’re going to get a bid for that piece of property. We won’t move a piece of property unless we think we have a very good chance to sell. As you get into the negotiation phase of it, you may take an additional charge but that has not happened all that, in all those cases.

So you take the reserve deals with existing nonperforming loans, it is not talking about the held for sale.

Irene Esteves

To clarify, the coverage ratio went up from Q3 to Q4 our coverage ratio went from 1.07 to 1.81 and that’s the allowance we have compared to our nonperforming so our allowance coverage went up dramatically given our nonperformers. It’s a little more conservative approach.

Operator

Your next question comes from the line of Chris Marinac – FIG Partners

Chris Marinac – FIG Partners

On the restructured loans that went up in the quarter is there any more color on those and do you expect a higher pace coming up here in the next quarter or two?

Barb Guidon

I would say that the restructured loans that went up this quarter again result of our customer assistance program, we are continuing all of those efforts with our customers including when a customer is unemployed because unemployment may start to peak, we may start to see some more restructured loans happening.

I wouldn’t want to suggest what that level might be at this point in time but as I said we’ve had some very good experience working with our customers and keeping them in their homes and avoiding foreclosure.

Chris Marinac – FIG Partners

Would any of those be construction related loans or CRE loans?

Barb Guidon

None of them are, they are all consumer, in fact to give you a little more color, there’s 2,922 of them to be exact. You can see if you take our total $453 million and divide it out, they are relatively small sized loans.

Operator

Your next question comes from the line of Jennifer Demba – SunTrust Robinson Humphrey

Jennifer Demba – SunTrust Robinson Humphrey

Could you repeat the expense guidance you gave and give us perhaps some more detail about what time of rationalization of costs you might be looking at doing this year.

Irene Esteves

We’re forecasting a 2% to 4% expense reduction and its going to come from a number of areas. We’re looking at our expenses in all areas, our travel and entertainment expenses, our training, all but the most critical frontline training, we’re looking at limiting the amount of conferences we attend, its throughout the organization.

Operator

Your final question comes from the line of [Rodney Pitts – Southern Elevator]

[Rodney Pitts – Southern Elevator]

As it relates to your preferred stock that you sold in the marketplace how much do you have outstanding now, do you anticipate offering more preferred stock, and how safe is the dividend on the preferred stock?

Dowd Ritter

That preferred stock is the $3.5 billion invested by the US government at a 5% dividend and that is a very safe payment to the US government and the taxpayers.

[Rodney Pitts – Southern Elevator]

I’m really talking about the preferred stock that you offered in the marketplace prior to the $3.5 billion to the government.

Irene Esteves

That was our convertible preferred, hybrid sorry, hybrid preferred that was earlier. Obviously that is a safe dividend that we are comfortable in making and that market currently isn’t open to issue additional but we are watching it and if there is an opportunity we will issue additional shares.

Dowd Ritter

With that let me thank everyone for joining us and we’ll stand adjourned.

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