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Regions Financial Corporation (NYSE:RF)

Q3 2009 Earnings Call

October 20, 2009 11:00 AM ET

Executives

M. List Underwood - Director of Investor Relations

C. Dowd Ritter - Chairman and Chief Executive Officer

Irene Esteves - Chief Financial Officer and Senior Executive Vice President, Finance Group

O. B. Grayson Hall, Jr. - President and Chief Operating Officer

Barb Guidon - Head of Consumer Credit

William C. Wells, II - Chief Risk Officer and Senior Executive Vice President, Risk Management Group

G. Timothy Laney - Senior Executive Vice President Chief Credit Officer

Tom Neely - Director, Risk Analytics

Analysts

Betsy L. Graseck - Morgan Stanley

Matthew D. O'Connor - Deutsche Bank

Craig Siegenthaler - Credit Suisse

Christopher M. Mutascio - Stifel Nicolaus & Company, Inc.

Jefferson Harralson - Keefe, Bruyette & Woods

Phillip Gutfleish - Elm Ridge Capital

Albert Savastano - Fox-Pitt Kelton

Edwin Groshans - Ladenburg Thalmann & Co. Inc.

Kevin Fitzsimmons - Sandler O'Neill & Partners, LP

Todd Hagerman - Collins Stewart LLC

Heather Wolf - UBS

Christopher Marinac - FIG Partners

Marty Mosby - FTN Equity Capital Markets

Jason M. Goldberg - Barclays Capital

Scott Valentin - Friedman, Billings & Ramsey

Carole Berger - Soleil Securities

Operator

Good morning and welcome to the Regions Financial Corporation's Quarterly Earnings Call. My name is Wes 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, before Mr. Ritter begins the conference call.

M. List Underwood

Thank you, operator and good morning everyone. We appreciate very much your participation today. Our presenters are Chairman and Chief Executive Officer Dowd Ritter; and our Chief Financial Officer; Irene Esteves. Also joining us and available to answer questions are Bill Wells, our Chief Risk Officer; Tom Neely, Director of Risk Analytics; and Barb Guidon, our Head of Consumer Credit. Here with us also is our recently appointed Chief Credit Officer Tim Laney.

Let me quickly touch on our presentation format. We have prepared a short slide presentation to accompany Irene's comments. It's available under the Investor Relations 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 via phone player 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 this morning, we'll 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, in today's Form 8-K, our 10-Q for the quarters ended March 31st, and June 30th 2009 and in our Form 10-K for the year ended December 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'll turn it over to Dowd.

C. Dowd Ritter

Thank you List and good morning everyone. We appreciate you joining Regions third quarter earnings conference call this morning.

Before I begin discussing the quarterly results, I will mention one other item of importance to this company and its future performance. Last week, I am sure most of you saw we announced that Grayson Hall was named President and Chief Operating Officer of the company. This is the logical next step in establishing a clear management succession plan. As well as further strengthening our corporate governance and most importantly positioning Regions well for growth in the years ahead.

This appointment of recognition of Grayson's tremendous leadership of building and accomplishments over his 29 years with the company in ever increasing roles of responsibility as well as our Board's future expectations. Under Grayson's leadership for example, customer satisfaction at Regions has reached an all time high and consistently relaxed in the top quota versus other banks as measured by Gallup surveys.

Finally, sign of the economic environment remains difficult and I am committed to working with Grayson and the other senior members of our management team over the coming years to continue to manage the company for the long-term benefit of our shareholders. By the way, I should add that Grayson is here with us today and available to answer questions as well.

Let me turn now to core. Regions third quarter loss of $0.47 per fully diluted share was driven by our ongoing efforts to proactively identify -- deal with a reserve for credit related problems as we further improve the risk profile of our balance sheet.

Additionally, non-interest expenses were inflated by costs associated with our branch consolidation initiative and other rising costs reflective of the current recessionary environment. Examples of these would include FDIC insurance, other real estate costs and professional fees. These items more than offset to build debts of strong and low cost customer deposit growth. And including net interest margin and solid core fee based revenue and good core operating expense containment.

Let's first talk about credit quality in the third quarter's loan loss provision and OREO cost, which totaled nearly $1.1 billion or $0.56 per share which were up $150 million or a link quarter basis. As Irene will detail for you both non-performing assets and net loan charge-offs continue to rise during the third quarter. Therefore, we increased the allowance for credit losses to 2.90% of loans. The good news is that the gross inflows of non-performing loans appears to be stabilizing. Also of note, related to our $7.3 billion shared national credit portfolio, we recorded just $37 million of net charge-offs and we placed an additional $109 million of non-accrual status in the current quarter.

While manageable, the effects of the economic downturn are to a greater degree extending beyond our problematic homebuilder, Florida home equity second lien and condominium portfolios. These assets still account for a sizeable element of overall non-performers; however, other commercial real estate credits such as loans secured by income producing properties explain the bulk of the third quarter's NPL inflow.

Keep in mind, there is greater cash flow associated with loans on income producing property, which improves our ability to restructure the credit and return it to performing status. We continue to take a proactive stance in recognizing....

(Technical Difficulty)

Operator

Ladies and gentlemen, this is the operator. Today's conference is scheduled to resume momentarily. Until that time your lines will be on silent hold. Thank you for your patience.

Operator

Mr. Ritter, you may resume your conference call.

C. Dowd Ritter

Thank you very much. I apologize, I don't know what happened. List just showed me that he had got an e-mail which I will not name the person sending the e-mail and said he need to take you out the dial and hoping good, but we all do that. We don't know what happened with the phones service, but we are back and I apologize. I think as we were cut-off, I was talking about the greater cash flow associated with the loans that we have on income producing properties which obviously improves our ability to restructure those credits and will turn them to performing status.

We continue to take a proactive stance in recognizing those problem credits. Importantly, approximately $335 million of our commercial real estate loans including 226 million backed buy income producing properties or carry does non-performing -- and are actually paying currently.

Meanwhile, we continue to reduce our homebuilder and condominium portfolios which declined another $498 million in the aggregate during the quarter. Given the lower levels of these portfolios and the significant charge-offs that we've already booked, this source of losses will decline as we move through 2010.

At the same time, we're managing through this period of deep pressure and elevated credit costs; we are continuously looking for ways to enhance the long term profit potential. Our most recent action relates to our branch network where we believe there are opportunities for us to optimize the efficiency. In our extensive analysis, we've decided to consolidate 121 branches and the other branches over the next two quarters.

Our results this quarter include valuation related expenses and other cost of $41 million and the net savings resulted from theses actions are expected to total $21 million on an annual basis going forward. These closings will have very minimal customer impacts. We have a number of other expense initiatives aimed to eliminating non-essential cost and constraining discretionary expenses.

In particular, we are closely managing our headcount and of course, we drastically reduce staffing -- excuse me, as a result of the merger, but we've gone far beyond that. Since this time last year, we've eliminated nearly 1,700 positions across all areas of the company. And with the branch consolidations and the other personnel related measures we'll become even more efficient through the remainder of this year and see the full run rate in 2010.

In addition, we made great strides improving our net interest income. Drivers include enhanced risk adjusted loan and deposit pricing as well as business development initiatives such as continued emphasis on growth in low cost deposits. A main focus has been building our customer base and expanding customer relationships. For example, we opened a record 270,000 new retail and business checking accounts during the third quarter up 29% versus in the same quarter last year taking new account openings for the first nine months of this year to 762,000 new accounts. And we have grown average customer deposits over $10 billion since this time last year.

In the third quarter alone, we increased average interest bearing deposits $701 million or 3.4% which is notably benefiting our funding mix. A very strong conformation of our efforts came late last week, as the FDIC deposit market share data showed that we gained share in all but one of our state markets then after you adjust for acquisitions and broker deposits during the last year.

At the same time, our deposit market share rankings include in six of our 16 states. These are very good results especially consider in this current operating environment. Similar to this quarter however, at least in the intermediate terms the benefits of these initiatives is somewhat overshadowed escalating cost related to the current economic environment, such cost is OREO and other credit related expenses along with the higher FDIC expenses will largely offset the efficiency and revenue initiative benefits that we're achieving. But as the economic credit environment normalizes, we should see substantial improvement in our earnings power.

To sum up, the operating environment remains challenging, but the economy appears to have bottomed and should start to recover although at a potentially much lower pace. Throughout this period of recovery, Regions will continue to prudently manage its capital and other resources and further strengthen our core business and our funds. We are confident that once credit crisis normalize and then Regions will be set to deliver solid bottom line profits.

Let me now turn it over to Irene to discuss third quarter results in greater detail.

Irene Esteves

Thank you, Dowd. Let's begin with the summary of results for the quarter. Despite third quarter's credit driven bottom line loss, results showed strength in several areas. As shown in slide one, low cost deposits rose in average $1.3 billion linked quarter, an approximate 3% gain in non-interest bearing deposits and a 4% increase in money market funds, more than offset a drop in higher cost certificates of deposit.

Reflective of lower demand, average loans were down across most categories. The ongoing positive shift in funding mix combined with improved loan and deposit pricing, helped lift the net interest margin 11 basis points.

As a result, we were able to grow net interest income about 2% even though average earning assets declined nearly 4% due primarily to a $2.8 billion reduction in cash balances and the $1 billion decrease in loans.

As Dowd said, non-interest income was solid adjusting for several unusual second quarter items it was little change linked quarter. Higher service charges and mortgage income were partially offset by lower brokerage revenues.

Non-interest expenses including the $41 million included -- sorry, the $41 million of branch consolidation and valuation related costs as well as higher professional fees and other real estate owned expenses.

Our capital position remained strong with Tier 1 Capital an estimated 12.1% and Tier 1 Common at 7.8%. As expected, credit quality remains challenging during the quarter. As a result, we booked the $1 million loan loss provision that more than covered net charge-offs providing a 46 basis point increase in the period end allowance for loan losses.

Net charge-offs rose to an annualized 2.86% of average loans from second quarter's 2.06%. The change driven by value related write-downs and problem asset disposition. Non performing assets excluding loans held for sale increased $662 million well below second quarter's $1.1 billion jump. CRE was the most notable contributor to the NPL and charge-off increases.

Let's take a few minutes to dove deeper into credit quality trends and related costs given the importance to Regions bottom line results. This slide shows the total loan loss provision including net charge-off and provision above net charge-off, was over $1 billion in the third quarter from the second quarter's 912 million.

As you can see while consumer real estate remained a major source of credit costs, they just declined versus last quarter. Most notably, the quarter-over-quarter home equity loss rate improved 48 basis points. We attribute this to the fact that we're true with most of our investor type loan issues; well through the second home issues and are now working more with customers on loan secured by the primary resonance.

More than offsetting these however, commercial real estate cost increased as we aggressively revalued properties which resulted in write-downs. Note the increase in CRE valuation charges which rose from $129 to 191 million in the current quarter.

NPAs excluding loans held for sale totaled $3.7 billion or 3.99% of loans in OREO at quarter end and 80 basis point rise link quarter. Gross NPA in migration stand at $1.7 billion, $91 million lower than second quarter inflows.

Third quarter inflows included $225 million of currently paying loan as well as the $109 million of shared national credits. As I mentioned earlier, on a net basis standing NPAs excluding loans held for sale increased at a much slower quarter-to-quarter rate, $662 million this quarter versus 1.1 billion last quarter.

We are seeing a shift in the inflow mix with homebuilders and condos selling significantly and income producing commercial real estate inflows picking up. Income producing CRE accounted to 32% of third quarter's gross inflow driven by retail and multi-family properties.

Again, it's important to remember that many of our CRE loans are income producing properties, with some level of cash flows. This suggests lots of areas should be less than what we have seen in our homebuilder and condo portfolios and that will have greater ability to restructure and to more quickly return some of these loans to performing status.

Problem assets has disposition remains a focus for us. In fact, during this quarter, we sold $353 million of assets, more than twice the amount sold in the second quarter; plus we transferred an additional $201 million to loans held for sale, taking average 37% charge-off in the process. The fourth quarter is off to a quick start too; shortly after the third quarter ended we closed sales on $27 million which were in the held for sale portfolio.

Looking now at specific loan categories, we've talked a lot about our closely managed homebuilder portfolio for last several quarters. Over that time, we have made significant progress in reducing our exposure through combination of sales, pay-downs and loss recognition. Outstandings have declined now totaled $3.4 billion, down 53% from the peak of 7.2 billion. These assets now equal 15% of our non-owner occupied CRE portfolio or 4% of total loans.

Condos are quickly becoming a non-issue, as these loans totaled just $647 million at September 30th, down to just under $2 billion two years ago. These loans have been on more 20 months for sometime now and expect this portfolio to be even smaller by year end.

Lastly, let me touch on commercial real estate loans secured by income producing retail and multi-family properties. These loans totaled about $9.4 billion at quarter end, with the non performing content of $448 million. Of this non-performing portion, $226 million is paying currently.

We expect income producing properties to present greater opportunity to restructure and return to a full status at a later date. On the consumer side, our home equity portfolio is performing much better than the industry, largely because of our disciplined accrual process and the fact that was originated in our branch network.

The most stressed portion continues to be second liens in Florida, which account for $3.6 billion or 4% of total loans. Losses here were actually down versus last quarter, owing largely to the fact that we have a very active customer assistance and outreach program, where customers come in to collection process on average at six days past due and in Florida at three days past due.

Wrapping up on credit quality, let me mention a couple of important points regarding allowance coverage. First, we've taken appropriate write-downs on our non-performing loan portfolios at the time of the migration into non-performing status. Beyond those marks, our loan loss allowance covers additional losses inherent in our total loan book. The coverage of non-performing loans was at 0.82 times at quarter end.

Further as you know, this allowance consists of both specific or FAS 114 reserves allocable to certain non-performing loans and with the remaining allowance applying to the remainder of the portfolio. Breaking NPLs down in similar fashion between the portion for which FAS 114 reserve exists and remaining portion you see that specific reserves amount to just under 20% of related NPLs. And recalculating the coverage ratio on the remainder of NPLs, our coverage is approximately 1.9 times.

Now let's take a closer look at third quarter balance sheet changes. As I previously mentioned both commercial and consumer loan demand was sluggish. However, you will notice an increase in both non-owner occupied and owner occupied commercial real estate. The note here that these increases were essentially offset by declines in the construction categories with the shift being driven by construction loans upon project completion migrating to minimum status.

On the consumer side residential first mortgage production declined as refinance activity slowed as a result of increasing mortgage rates. Rest of our other consumer loan portfolios mainly consisting of indirect auto lending are in run-off mode, so they will continue to decline with normal amortizations.

Let me now turn to our deposit growth. Our growth in low cost funding continues to be robust on all fronts including consumers, small business and commercial. Slide 12 shows a positive change on our deposit funding base since last quarter, driven by continued strong low cost deposit growth; especially interest free and money market accounts. Much of the success is being driven by a strong new consumer and business checking account openings which totaled 270,000 in third quarter alone.

We've also improved our customer attrition with household retention at historical high. Annualized retention rates have improved to 89% for consumer checking from a year ago 88%; while business service retention rate is now 87% versus 85% last year. Also helping our funding mix, higher cost, certificates of deposit, balances declined $889 million this quarter versus last. And we've had the opportunity to reprise a meaningful amount of the remaining balances recently.

This solid low cost deposit growth has been a catalyst to our improving net interest margin and should continue to benefit the margin as we move into 2010. We're also beginning to reap rewards on the pricing front, where deposit costs continue to decline and loan spreads have improved significantly.

Let's keep in mind that over the next several quarters drags from rising non-performing loan, as well as the impact of maturing interest rate swaps could mitigate a positive effect on our margin. So bottom line, we expect the margins remain relatively stable in the near term. However looking further out, we believe our balance sheet is positioned well to the eventual rising rate environment.

On our non-interest revenues, we are significantly lower than second quarter, which have benefited from sizeable gains related to a trust preferred exchange, piece of shares and other security sales and leverage lease termination. Excluding these items, non-interest revenues were essentially unchanged linked quarter.

A highlight on the quarter, service charge revenue was up $12 million or 4% benefiting from a high level of customer transactions and newer account growth. And $11 million decline brokerage revenues largely offset as investment banking and fixed income capital market results were down slightly.

Mortgage revenue was solid, increasing $12 million, primarily the result of favorable MSR and related hedge performance. The mortgage interest rate environment turned higher during the quarter driving down origination volume of $1.8 billion compared to second quarter's 3.1 billion.

Refinance activity represented 54% of originations, down from the first quarter level of 76%. Importantly, our service quality has been outstanding. We were recently ranked highest in customer satisfaction among primary mortgage servicing companies by J.D. Power and Associates.

Now let's take a look at Morgan Keegan's third quarter results. Overall, Morgan Keegan had a very solid quarter, while slightly behind second quarter fixed income continued its record setting pace driven by institutional customers demand for government, mortgage backed and municipal securities.

Private client revenues increased 6% versus the prior quarter, reflecting incremental improvement in the equity markets as well as the addition of new financial advisors. Both trust and asset management revenues improved link quarter, benefiting from strong markets, which drove customer and trust assets up 6% and 4% respectively. Lastly, new account openings continue to rise with the addition of 16,200 in the current quarter, bringing year-to-date new account additions to 64,500.

Our progress in reigning and non-interest expenses continues to be masked by higher credit related and unusual charges. Third quarter reported expenses increased 1% linked quarter, adjusting for unusual items such as second quarter's FDIC special assessment, second and third quarter securities related impairment charges and third quarter's $41 million of branch consolidation charges, expenses were up 9%.

This increase was tied to three areas: First, OREO costs were $37 million higher than last quarter driven by marked to update as appraisal value. Professional and FDIC fees also rose driven by higher credit related and other legal costs; partially offsetting these increases for lower incentive compensation as well as meaningful incremental account reduction driving $8 million or 1% improvement in salaries and benefits.

Let me give you some specifics regarding our branch consolidation plans. We've got one of the most geographically diverse branch networks in the industry, which provides us with many opportunities for efficiency improvement. Based largely on profitability and proximity measures, we have identified 121 branches for consolidation. These branches which are spread throughout footprint will be closed in early 2010.

In total, we reported costs of $41 million this quarter and we expect to realize net cost savings of $21 million annually. In addition to this 21 million, we have identified other core expense reductions of over $200 million. This includes personnel, occupancy, technology and other discretionary spending. Unfortunately, these won't be evidenced until product related expenses subside; but these measures making it more efficient and more effective.

On the next slide, we show the quarter-to-quarter decline in core PPNR which largely reflects with just described higher OREO and professional fee expenses. While these costs are certainly something we'll have with us over the near term, they will moderate at some point in coming quarters; leaving a PPNR base driven higher by strengthening net interest income, solid non-interest revenue and efficiency initiatives.

Turning now to the comparison of the SCAP results. If we straight line the SCAP results, one ace per quarter, we can compare very favorably to their stress case by just under $1.2 billion over the first three quarters. And looking at net charge-off loan versus the SCAP straight lined, you'll see that this quarter's net charge-offs were near the upper end of our range, but still far bellow the SCAP stress case.

Switching to capital; this slide shows our strong ratios. Our Tier 1 Capital ratio now stands at 12.1% far in access of the regulatory minimum, while Tier 1 Common ratio is a very solid 7.8%.

In conclusion, while we certainly don't want to go further the reported loss, it's important to recognize that in these credit driven factors, we are transforming Regions into a more efficient organization with good core earnings power. We're profitably growing our customer base and deepening our ties to existing customers. We stabilized our net interest margin and we're implementing initiatives that will further enhance operating efficiency and profit potential. As a result, we believe that when credit crunch return to more normal levels, Regions is poised for a significant profit rebound that will translate into attractive return for shareholders.

So at this time, operator we'd like to open it up for questions.

Question-and-Answer Session

Operator

(Operator Instructions). Your first question comes from Betsy Graseck of Morgan Stanley.

Betsy Graseck - Morgan Stanley

Good morning, thanks. A couple of questions: One is on the asset sensitivity and if you could just help us understand the duration that you have for the loan book and the securities book and then just walk us through the NIM impact that you are anticipating from the front end of the curve going up versus front end of the curve potentially steeping; I'm just wondering what's more important for you?

Irene Esteves

We are expecting that our NIM is to going to be about flat and not have to do with our expectation that interest rates will not be increasing into the latter part of next year. But we do expect with that increase that our NIM will run substantially and you can see that in our 10-Q...

Betsy Graseck - Morgan Stanley

Disclosure yeah, okay.

Irene Esteves

And what we have said is that our deposit pricing and loan spread improvement was beyond expectations which drove the 11 basis point increase this quarter, the roll off of our derivative portfolio which is about 7 basis points, this quarter it will be about 14 basis points next quarter. But our progress on deposit pricing in loan spreads has offset that.

Betsy Graseck - Morgan Stanley

Okay. And is there anything that you would do as we are approaching the second half next year as interested rates rise, as business off even more of a rate hike in the loan book or the securities book?

Irene Esteves

We are still very asset sensitive compared to our peers, but we think we are well positioned.

Betsy Graseck - Morgan Stanley

And then just other question on as we look out to what normalize earnings should be. Could you give us a sense as to where you think the organization can get to on a normalized ROA?

Irene Esteves

That's a difficult question, as you know; that the various moving parts and what timeframe we are looking at -- it would be difficult for me to answer that.

Betsy Graseck - Morgan Stanley

Okay. So I guess different way of asking the question is we hear a lot about what's going on with regard to pricing for different types of products and particular in the consumer space on insufficient funds and there is other kinds of regulatory changes that are going to be coming with capital, et cetera.

And I guess what I am asking is, when you look at your business model and when you look at how your customer base is responding to what you are doing, do you feel that your going forward normalized ROA would be materially different from what you have been experiencing pre-crisis?

Irene Esteves

One thing to point out is that -- and if our history is quite different from the bank we are today given the history is legacy regions alone versus the combined and south regions banks that we are today in new regions. So it's difficult to compare to the past. But we certainly believe that there is tremendous upside as we roll-off these credit related expenses both in our loan loss provision as well as the credit related expenses buried in PPNR.

Obviously, with the recession, our fee income is down significantly. Consumers are not transacting as much as they have in the past. So we see there is great upside there and as well as and our Morgan Keegan franchise. And as we mentioned earlier, the net interest income has upside as interest rates get back to more normal level. So here is certainly quite a bit of upside potential in that normalized numbers.

Betsy Graseck - Morgan Stanley

Okay. And just lastly on TARP repayment, could you give us an update on your views as to what kind of timeframe you are thinking about there?

Irene Esteves

Yeah. Obviously, what we're going to do what's prudent and shareholder friendly. There isn't any direct information on what it will take and when it'll be positioned to pay back TARP. But we are taking every action necessary to be prepared for that.

Betsy Graseck - Morgan Stanley

And are you holding some excess liquidity you think right now as the function of being prepared for that?

Irene Esteves

We have as I said, at quarter end we had, I think $6 billion that's now about $2 billion, but we have significant liquidity in our investment portfolio that we're able to budget at any moment.

Betsy Graseck - Morgan Stanley

Okay. Alright, thank you.

Irene Esteves

Sure.

Operator

You next question comes from Matt O'Connor of Deutsche Bank.

Matthew O'Connor - Deutsche Bank

Good morning. I was wondering if you can elaborate a little bit on the 200 million of cost savings that you expect to get overtime. In terms of what's in the current run rate? When you expect to realize them? And a little more color on what's going to drive those savings?

O. B. Grayson Hall, Jr.

This is Grayson Hall. As Irene has said a little bit earlier, we've had an initiative underway literally for several months in terms of trying to generate expense reductions. And as Irene mentioned, we got a run rate -- we will exceed $200 million in '09 and we'll actually go north of that in '10. It is largely in staff reductions which is that Dowd has mentioned earlier, since the first year we're down 1700 positions.

We continue to trend downward in staffing levels. We disposed a little over $800 million -- 800 million square feet of excess space. We will continue to reduce our space requirements probably by another 800 million within the next six months. And 800,000, I am sorry, 800,000 square feet, my apologies. We have roughly, as we mentioned 121 branches, that we'll consolidate; if you recall, we consolidated a little over 200 branches at merger. We've consolidated 12 already this year and we'll do 121 first quarter. We've literally looked at every single discretionary spending category from legal to travel and entertainment to telecommunications and we have reduced our discretionary spending in many categories in excess of 30%.

Matthew O'Connor - Deutsche Bank

Okay. And then just separately with the tightening of credit spreads in 3Q, your OCI is now positive; what's the outlook for potential security gains in the fourth quarter?

Irene Esteves

We're not planning any major sales of those securities in the fourth quarter.

Matthew O'Connor - Deutsche Bank

Okay. Alright, thank you very much.

Operator

Your next question from Craig Siegenthaler of Credit Suisse.

Craig Siegenthaler - Credit Suisse

Thanks and good morning.

Irene Esteves

Good morning.

C. Dowd Ritter

Good morning.

Craig Siegenthaler - Credit Suisse

First, just on the residential mortgage and home equity book, it looks like some of the credit quality metrics like delinquencies NPLs in these two portfolios were down and improved, while, and excuse me the credit quality metrics in these portfolios got worse, but on the other hand losses got better. I am wondering do you expect losses to kind of reverse and go higher in these two specifically, or can you kind of relate these two trend?

Barb Guidon

Yes Craig, this is Barb Guidon on the consumer side. And as we mentioned last quarter, if you recall in the earnings call we had noted that we had anticipated that our delinquencies within DP Down are 90-plus and the reason for that was because of things like income-tax returns and stimulus checks and we anticipate that they would go back closer to the first quarter levels which indeed they have moved up, but certainly they haven't even hit the first quarter levels. Of course with the 90-plus delinquency going down last quarter, one would anticipate that some of that as I mentioned would rollback into delinquency and another portion of course didn't rollback at all and impact here and its not the reason for the low in our charge-off.

Craig Siegenthaler - Credit Suisse

Of course, it's purely seasonal.

Barb Guidon

Seasonal and of course the other kind that we think so is as we think about the consumer broker, it's highly sensitive to unemployment. We anticipate there will be pressure depending on what the economy then.

Craig Siegenthaler - Credit Suisse

Well, Barb, talk a little bit about what we have already been through the portfolio and losses in going to the investor piece in the second lien?

Barb Guidon

Yes, as Dowd mentioned or Irene mentioned in the comments, we started off during the cycle with investors some of them known to us, some of them not known to us what I mean by investors is consumers who came in said, there are large purchase of property and turn around and use it as a rental property, as an example.

So the underwritten differently, and they are priced differently. We also had other to back held those asset actually in turn and do that property as well. Those were the first that actually came through in terms of a wave of loses and a wave of delinquencies that was then followed by consumers with second homes who hang on as long as they could, but indeed turned around and said, I need to keep my first home, and therefore I need to return the second home to you or return the keys to you or at least let me do a short sale.

And now we're working with generally, we only fill up some of the other two that generally is consumers that are in their primary homes that maybe want to stay in their homes and we're much more able to work with those consumers.

Craig Siegenthaler - Credit Suisse

Got it, thanks. And just one question on really the NIM guidance was flat guidance in the fourth quarter. I am wondering, what moving pieces on the balance sheet is this dependent on, is this dependent on further expensive deposit shrinking, I am just wondering there?

Irene Esteves

It's a lot of it has to do with the deposit continues decline deposit costs, were also as we have loans coming up for renewal, we are improving the loan spread and also our mix up deposits is improving with much more and low cost deposits.

Craig Siegenthaler - Credit Suisse

Great. Thank you for taking my questions.

Irene Esteves

Sure.

Operator

Your next question comes from Peter Wagner (ph) of Central Capital.

Unidentified Analyst

Hi Guys.

Irene Esteves

Hi, Peter.

Unidentified Analyst

I've got two questions. On the gross NPA inflows, I mean I am kind of eye balling the slide, but it looks like income producing CRE was around 650 roughly double the Q2 level. And maybe you can just give me a little bit of an indication as to whether that's being driven by regulators or how uniform the standards are in terms of when you move a cash flowing loan into NPA.

And then also if you could just let us know kind of what the marks are moving that into NPA. I mean we in terms of overall migration into NPA you are giving us now kind of about a 50% mark in Q4; then it was 35, 25, where are we in this quarter. And also talked about restructuring those loans being a little bit easier because of the cash flow, what about disposing of them? Are you seeing liquidity for that type of NPA?

And then my second question is on operating expenses, was to that about 1.24 billion in the quarter and even when I back out the restructuring costs and I back out some of the higher OREO which at some point is not going to be recurring. I took them up with a about a 1.15 operating expense level, which is kind of where you were trending in the first half of the year.

But maybe you can take a stand on what the recurring level is, I mean if I use that 200 million of cost saves going into the next year and the year beyond, it gets me to kind of like a 900 to $950 million operating expense level, is that the right way to be thinking about it or it's not what's the right way to be thinking about it?

C. Dowd Ritter

Yeah let me first start on the credit, on the gross NPAs, what I would tell you first, our non-performing gross migration was down a little bit slightly this quarter. It was higher than expected really because of three things, share national down grades of $109 million that I and Irene mentioned, but when you look back, that was a very good story. And as you pointed out, there is a deterioration in the multi-family that was happened a little bit quicker than expected.

And then we are still working, I going to get far to your question through the issue of a loan that is currently paying has agreed, that goes on non-performing that was about $225 million versus about a $169 million. So we're looking at it, you're seeing a more deterioration in the multi-family portfolio, when I look at the gross NPAs, what I am seeing is more positive efforts of bringing down our condo and homebuilder books, so you're seeing that.

As far as the marks are going, when we did our first big disposition, the number you refer to was about 50%, remember that was some of our worse credits we dealt within the fourth quarter of 2008.

First quarter is roughly in that 30-33% then last quarter we saw about 25% discount in that. The reason for that liquidity was not had not come really back in the market first month of -- I guess first part the quarter we just didn't see a lot of liquidity there. We started to see it picked up. At the end of the second quarter and as you can see from our sales, this continued in the third quarter. So our marks are about 33% for this quarter.

So they are up a little bit. But part of that is just our ability to move some more products. So there is more liquidity coming back and we're dealing with strategic buyers instead of doing bulk sales and I think that why our marks have been holding very, very well. And I hope restructuring, what I would tell you is that 18 months ago when this company was facing land and condo and the homebuilder book, that was pretty tough to deal with. We didn't have that much restructuring opportunities although we did some, with the multi-family, any time you have cash flow, you have a better ability to restructure.

So I feel better about looking what's ahead of it, while we still can't see what deterioration or pace would be; when I am looking at loan severity that gets into our ability to be able to restructure our credits.

O. B. Grayson Hall, Jr.

And then Peter, what I would also say about our asset disposition. Since 2009, we've disposed of over $2.3 billion. And we've had very active market in our sales this quarter. We did see the market move a little bit, as Dowd mentioned overall discount, we're also seeing or we're in the way of short sales which is the indicator in certain markets we're seeing values on properties begin to level out Barb, I think you've seen that on the consumer side as well.

Barb Guidon

Absolutely.

Unidentified Analyst

Okay. And on maybe Irene on the recurring operating expense line?

Irene Esteves

The operating expenses, besides the OREO, just looking at the quarter-to-quarter change; you'll also have to look at the professional fees including FDIC. And as far as ongoing as I mentioned we have a number of headwinds where you're not going to see that $200 million right away, because we have these other credit related costs like OREO, professional fees and reserving fund, funded commitments and are also in that line; that you're not going to see it immediately. It's the underlying improvement and the efficiencies so that you will see once credit related costs in our P&L have come back down.

Unidentified Analyst

Yeah, we can all make our guess as to when credit stabilizes and starts to improve. Again my question was, because I know there is a lot of moving parts in there. At that point whether its next year or sometime thereafter we're going to be in the sub $1 billion operating expense run rate if I'm hearing you properly. Just want to make sure I am hearing you properly?

Irene Esteves

Yes, that you are.

Unidentified Analyst

Okay. Thank you.

Operator

Your next question comes from Chris Mutascio of Stifel Nicolaus.

Christopher Mutascio - Stifel Nicolaus & Company, Inc.

Good morning and thanks for taking my question. Irene, I was looking back on slide 22, your charge-offs, below the stress test level, perhaps I should think more accompanying that or not. It doesn't look like that you're going blow through your own stress test charge-offs by next quarter?

William Wells, II

Well this is Bill, when you look at that chart, what we are trying to do is what we and recognizing that when you do a presentation like this is not linear, but what you start to see is our still forecasting, believe that last quarter we said would be in that in the middle between the green and the blue line, as we don't do more and see a little bit more the deterioration in the multi-family, you're probably moving up a little bit, but well below where we see the blue line ending up. So I think you have to look that in some part it will peak and start to trend down.

Christopher Mutascio - Stifel Nicolaus & Company, Inc.

Okay.

William Wells, II

That deals with the credit cycle. So I don't think you'd see it just going straight up quarter-after-quarter, you have to recognize one that we dealt with some of our most troubled credits earlier. We were dealing with land, condo and homebuilder and now you're dealing with a little bit of a multi-family portfolio. But it is more geographically dispersed, that what dealt within homebuilder and condo. So when I look at submarket I start to see about multi-family that gets a stress portfolio and you're seeing issues in it, but we are able to one restructure it, two it has lots of variety and it's more geographically diverse.

Christopher Mutascio - Stifel Nicolaus & Company, Inc.

Okay. If I can ask one follow up, as the your Union deal over the summer where we kind of see most, maybe you're seeing some stabilization in credit quality. Do you all envisioned greater than 20% increases in non-performing loans, 90 days past due and restructured loans this quarter. Is that within a room of stabilization or the things deteriorate in third quarter more than you thought that agreement will stay over in summer?

William Wells, II

Well, firstly, I think you have to breakdown the 90 days and I'm going to I'll talk about that. In the business services side, are actually a 90 days are down. We worked very hard quarter-over-quarter to get that number down and that gets into how our ability to restructure. What you see in the increase in the 90 days came out of the consumer services side and I believe we're also talking about trouble of that restructuring a little bit too. So, I'll let Barb speak to that.

Barb Guidon

Yeah. I'll go back and I won't repeat my comments, so with the seasonality of the book that's the reason I talk about second quarter over third quarter. And again as we have noticed previously, we thought it'd go back up to first quarter levels and we were presently surprised that its different.

The other comment I would make with the other trouble debt restructures, you are correct, it moved to up to some 1.178 billion in the second quarter to a 1.460 billion in this quarter and anything we do on the consumer side will actually modify or change any of the terms of the loan, we actually call that loan as trouble debt restructure. And we have not as of yet, moved any of those troubled debt restructure back into our current portfolio.

William Wells, II

And also on the TDRs, remember that, very active customer assistance program that we have underway. So you're taken a customer, and you may change the interest rate which is still a pretty good interest rate and they are paying. So its again working with that customer to put amount though, it does have the same feel of a TDR, I used to see back in the 90s back on the commercial business services side.

Christopher Mutascio - Stifel Nicolaus & Company, Inc.

Okay. I think but in general the credit quality play out like you thought early in the summer or does it get worse in the quarter than you originally anticipated back at the Analyst Day?

William Wells, II

I would tell you that we always thought that non-performing would be up. I mean we have talked about that, well probably I saw a little bit more this quarter then anything with the pace of the multi-family coming in then what I anticipated.

Christopher Mutascio - Stifel Nicolaus & Company, Inc.

Okay. Alright, thank you so much.

G. Timothy Laney

Hey, Chris this is Tim Laney. Just to build on Bill's last point. When you look at land, condo and homebuilder and the rate of deterioration and the fact that that deterioration has decline it's very consistent with our internal forecast. And our confidence in estimating future deterioration and losses in this particular portfolio only continues to strengthen.

Christopher Mutascio - Stifel Nicolaus & Company, Inc.

Thanks. I appreciate it.

Operator

Your next question comes from Jefferson Harralson of KBW.

M. List Underwood

This is List Underwood, well I need to interject something. We have got a number of questioners remaining and to be able to get everybody in; if we could limit each questioner to just one question please.

Jefferson Harralson - Keefe, Bruyette & Woods

I can do that. Let me ask you guys about the pace of disposition, do you expect that the pace of disposition is to continue at this billion dollar pace, or do you think it's going to decline from here?

William Wells, II

We're seeing more liquidity come back in right now, as Irene mentioned, we've already sold about $27 million since quarter end. We just had our sales managers in to work on selling this premium program and to continue to dispose the problem asset. And I'll let Tom speak a little bit about what he is seeing already.

G. Timothy Laney

Bill. Again, as Irene mentioned we had $27 million worth of sales in the first week after the quarter end. We stay focused. I certainly believe that our strategy signifies our overall approach to deal with these problems through very aggressive dispositions and sales programs. So I've seen that activity staying about the same or picking up.

Jefferson Harralson - Keefe, Bruyette & Woods

Alright, thanks guys.

Operator

Your next question comes from Phillip Gutfleish of Elm Ridge Capital.

Phillip Gutfleish - Elm Ridge Capital

Hi, I actually don't have a question.

Operator

Your next question comes from Al Savastano of Fox-Pitt Kelton.

Albert Savastano - Fox-Pitt Kelton

Good morning, guys. How are you?

Irene Esteves

Great.

Albert Savastano - Fox-Pitt Kelton

Just wondering on the NPL formation in the income credit portfolio; is there any of that driven by the 3.3 billion in non; especially underwritten portfolio. I mean is there any noticeable differences in that portfolio versus the remaining income credit portfolio in terms of performance?

C. Dowd Ritter

Could you say that one more time?

Albert Savastano - Fox-Pitt Kelton

Alright. The NPL formation in the income credit portfolio for the -- is any way driven by the non-professionally underwritten portfolio? And then the second part of that is there any difference in performance between that non-professional underwritten portfolio and the rest of income credit portfolio?

O. B. Grayson Hall, Jr.

Our business banking portfolio has been centrally underwritten. And again when you say it professionally I mean it is not a specialist and commercial real estate. But the growth is overall then holding up fairly well and I go back by looking at our past dues in general. What I am really seeing its coming income producing or some of the larger credits that really deal with lease up phase or whatever. So I would, Tim can speak to it.

G. Timothy Laney

Yeah, Al, as you would expect we are monitoring our income property portfolios very closely with the primary focus on multi-family and retail; when you bifurcate the small business and small commercial real estate portfolio from the professionally underwritten, what you see is a pretty descent granularity in both cases.

In the business banking, you are talking about loans typically less than $1 million and in fact in the commercial real estate book, you are talking about loans with an average size that ranges from 3 to 3.5 million. So would emphasize the granularity and as Bill mentioned earlier in both cases, obviously, when you're talking about loans, for example contrasted with securities, in most of the cases here, we have recourse and some cases take-outs and greater flexibility and working with our direct borrowers.

O. B. Grayson Hall, Jr.

And it goes back to what Bill also said it was centralized underwriting, that smaller booking and what Tim said about granularity, if you look at the loan portfolio risk view in the supplement starting on page 23, you can see where the non-owner occupied and community and business banking are actually performing very well; excuse me -- it's page 15 in the supplement.

Albert Savastano - Fox-Pitt Kelton

Okay, thank you.

Operator

Your next question comes from Edwin Groshans of Ladenburg.

Edwin Groshans - Ladenburg Thalmann & Co. Inc.

Hi, guys I am almost done.

Operator

Your next question comes from Kevin Fitzsimmons of Sandler O'Neill.

Kevin Fitzsimmons - Sandler O'Neill & Partners, LP

Good morning everyone.

Irene Esteves

Hi Kevin.

Kevin Fitzsimmons - Sandler O'Neill & Partners, LP

Given, what you announced this morning in terms of the branch consolidation plan. Can you give us a sense, is this the end of a long process in terms of scrutinizing the franchise and we could say this is it for a while or are there further opportunities out there and this is an ongoing process. And I guess what I'm specifically getting at, there is always a little bit of speculation around whether you might do something with the Midwest part of franchise or you're not really a market share leader there, or does it makes sense to keep it or is it more something that you'd be looking to do something with? Thanks.

C. Dowd Ritter

Kevin, this is Ritter Dowd. Let me start off by saying, it is an ongoing process and if we're doing our jobs properly it'll never end. If one of that will go that we brought the two companies together to form this new Regions, and if you remember, the headcount at that time was almost 38,000 people and we said, we got $400 million in cost saves as the financial justification for the merger.

You fast forward here about 15 to 18 months and we've got almost 800 million in cost saves and you come forward today, without these branch consolidations and we're down almost 900,000 employees in the company, 23% productivity as up at all time high, our customer service and quality metrics are at all time high. And the answer is it's something we'll never stop doing trying the compare our sales and find better ways to work smarter.

The Midwest part of that question and particularly it does come up time to time. It is a small franchise for us, but it generates some very good profitability. And so, as we look at what would we do with it, always comes the question of how would you replace that revenue and so we'll never stop right sizing if you will the franchise, but as we look at that, it made no sense for a shareholder stand point to exit that.

Kevin Fitzsimmons - Sandler O'Neill & Partners, LP

Okay. Great, thank you.

Operator

Your next question comes from Todd Hagerman of Collins Stewart.

Todd Hagerman - Collins Stewart LLC

Good morning, everybody. I've really a question for you in terms of pre-provision profitability numbers. How should we think about just in terms of the outlook, there you've talked about kind of a run rate of 450 to 500 million or so. How do we think about that given kind of the record results that have been posted in mortgage and Morgan Keegan as I start to think about 2010?

Irene Esteves

Obviously, we've got some benefit coming into the, with Morgan Keegan and our fee revenue as the cost comes out of its slump. But as I mentioned earlier, we also have some headwinds we do expect to have more foreclosures which will create more OREO expense. We continued to have growth in our professional fees as we mitigate and continue to go after getting our money back. So there are pluses and minuses as we look out and we think that we are going to continue our efficiency and effectiveness and considerations, but do have some headwinds in front of us.

Todd Hagerman - Collins Stewart LLC

Again, aside from the credit cost issue, most specifically talking about the revenue side, but you believe that with an improving economy that you are going to continue to see an increase year-over-year in terms of mortgage and the Morgan Keegan fixed income capital markets?

Irene Esteves

The testing with mortgage as we had very strong '09 right, with the rates coming down as much as we have. So while we made expect it to be a strong mortgage here, may not be as strong as '09 was. And with Morgan Keegan, we're continuing to see increased financial advisors come to Morgan Keegan or picking up new accounts all the time. So we're hoping that that overshadows any drag on the economy.

C. Dowd Ritter

Still in this environment, adding even though when I talk about productivity and you ask about efficiencies, we are adding headcount for more regional originators, because we deal a lot of our footprint, we are capturing the share that we should be. So we're still adding there, and it's our interest to we're still adding people at producers on the Morgan Keegan side. And so we will continue to do that.

Todd Hagerman - Collins Stewart LLC

Thanks very much.

Operator

Your next question comes from Heather Wolf of UBS.

Heather Wolf - UBS

Hi good morning. Just a quick follow up question on the commercial real estate non-accruals; I see roughly $350 million increase in that business services non-owner occupied non-accruals. How much of that comes from well established projects versus new projects?

O. B. Grayson Hall, Jr.

Most of it comes from projects that are coming out construction are in the lease up mode.

Heather Wolf - UBS

Okay, that's very helpful. Thank you.

Operator

Your next question comes from Christopher Marinac of FIG Partners.

Christopher Marinac - FIG Partners

Yes, good morning. Could you clarify the point you made about the TDR's not being moved to current, does that mean that the net interest income -- the interest margin do not include approvals from the TDR's?

Irene Esteves

What I meant, they include it. What I meant by being move to current years, we will continue to capture to make sure that we cover debt restructures we do not since we moved into the current portfolio without attached TDR assignment against it.

Christopher Marinac - FIG Partners

Okay. But they're included as part of the margin and I calculate...

Irene Esteves

Yes, they are.

Christopher Marinac - FIG Partners

Okay, great. Thank you, very much.

Operator

Your next question comes from Marty Mosby of FTN.

Marty Mosby - FTN Equity Capital Markets

Good morning. Irene, I wanted to ask you about the net interest margin improvement to make sure, we have loan and deposit pricing that were kind of hanging or had on in the sense of producing the improvement. Had we done any of the incremental things or strategies to kind of extend that and take advantage some of the yield curve or any other strategies to help the net interest margin at this point?

Irene Esteves

Yes we have. We've taken some measures to improve our -- the short-term where we feel that the interest rates are going to stay flat for the next several quarters. So we've become less asset sensitive for the first for the next few quarters, but still leaving the upside potential in the back half. So we have taken measures there.

Marty Mosby - FTN Equity Capital Markets

And how much of the 11 basis points would you equate to the asset liability versus the pricing?

Irene Esteves

It's almost all pricing.

Marty Mosby - FTN Equity Capital Markets

Okay. Alright, thank you.

Irene Esteves

Thank you.

Operator

Your next question comes from Jason Goldberg of Barclays Capital.

Jason Goldberg - Barclays Capital

Thank you. I guess while down I guess the 1.7 billion addition to -- I guess is still big number and while I appreciate your comments seeing slowdowns in the land and constructions, all those are stuffed mitigated by your FDIC and up with the multi-family. Is there a kind of concern in next quarter, we are talking about office and retail and hotels and kind of get rolling kind of CRE inflows. And then just secondly, Dowd I think at our conference probably you alluded to the you told NPAs would decline in the back part of this year, early next year, is that still your view?

C. Dowd Ritter

Jason I'll take the second part and let someone take your first part. Our view has still not changed. The economy while everybody talks about green shoots, it continues to -- unemployment still increases. Who knows what the outlook will bring, but from what we see sitting here today our best guess is that our gross level of NPAs will indeed peak at the end of this year early first quarter, we still see that.

G. Timothy Laney

Jason to your first question, we should note that we only have 3.1 billion in office exposure, 1.6 billion in industrial and 1.1 billion in hotels. So we have already talked about our focus on multi-family and retail and the three numbers I just shared with you may help you draw your own conclusions on the other three. But, the message is low exposure in all three categories.

William Wells, II

And Jason, Tim is exactly right; when you go down to look at problem on this and even our forecasting. Just we've seen a few offices here and there, not any in particular in any market, but we have gone through there, a couple of hotels that they have been more isolated in that. I think, what Tim said is actually about exposure. What happened this quarter probably from where we were with you not long ago was a little bit more the pace in the multi-family portfolio that we saw.

And what we've done on that is aggressively got our hands around it, dealing with it; much as we did with the land, the condo and the homebuilder. And I've got to tell you, I said this earlier, we go back 18 months ago. I'd rather be dealing with a multi-family portfolio where I have one its more geographic diverse. Two, I've got a lot of severity when I'm looking at that portfolio. And three, I've got cash flow which means I can restructure.

So things that you're seeing are starting to transform but, we're in a much better position to deal with it. And there has been a lot of things talking about the company, but I'd go back and look at the 18 months how we dealt with problems identified early. Put action plans in place, but the right resources towards it and deal with our issues as they come before us. So someone asked earlier, is this playing out as I thought, yes it is. They might the parts might move around a little bit, but its got working out as we thought we'd see the portfolio.

Jason Goldberg - Barclays Capital

Helpful. Thank you.

Operator

Your next question comes from Scott Valentin of FBR Capital Markets.

Scott Valentin - Friedman, Billings & Ramsey

Thanks for taking my question. Just quickly, you mentioned the marks are improving on asset sales, I was curious, one how as make shift meaning less construction, higher severity and more lower severity multi-family and in comparison commercial real state, maybe you can give us an idea of the 27 million you've sold this quarter, how much of that is maybe the income producing commercial real state and where you're seeing marks there?

Tom Neely

This is Tom Neely. We sold income producing impaired assets this quarter. We had a $120 million of sales and I would say the majority of that is in the income producing. The marks are improving. Bill mentioned that if you have cash flow tied to impaired asset, it's A, easier to sale and B, you get a better price for it.

William Wells, II

And I would say going forward you're still going to see it, because we are seeing more the inflow coming in. We are going to be selling some of the income producing.

G. Timothy Laney

And that's continue in this quarter. as we have sold $27 million in the first week.

William Wells, II

And we go back and we're still seeing we have got four identified sales executives that are out there strategically meeting with strategic investors and we believe we will continue to push forward and do as well as we did last quarter in sales. That's correct.

Scott Valentin - Friedman, Billings & Ramsey

And so the 25% in the second quarter I mean I guess that the mark should be lower going forward as the mix of CRE increases is that correct implication or...?

G. Timothy Laney

That's correct. We mark each assets on merits and so we are seeing improved marks, if you compare in particularly with the homebuilder and the condo marks, that we were talking about at the beginning of the year.

Scott Valentin - Friedman, Billings & Ramsey

Thanks, very much.

Operator

Your last question comes from Carole Berger of Soleil Securities.

Carole Berger - Soleil Securities

Hi guys. I was just wondering and can you guys talk a little bit about your slide on appropriate reserve coverage. I am not sure whether that side makes me feel better or worse. Specifically, it looks like you have only quite two times results in the non-performance for the larger loans and are although you seem to have almost twice loans.

And so -- and I suppose, I don't know whether you think about you know you've already tracked down the specific loans so much that with that amount of the coverage or you are loosing how much more on all other loans that you need a much higher coverage ratio. So could you...

C. Dowd Ritter

Carole, I am going to let Bill Wells to answer you, but the purpose of the slides is make you feel better.

Carole Berger - Soleil Securities

I know, I know that's why I asked the question.

William Wells, II

Yes, exactly right and you had a great point, because you know our initial, we bring a credit into non-performing, we take that initial charge. And one thing we haven't said is, we look at our valuation charges for the quarter about 85% or our first time valuation charges.

So when I look at that specific analysis on the loans that's talking about a group of loans we've taken the charge in and we've gone through an individual reserve analysis, we have FAS 114 analysis and you're saying this is the amount of reserves that you had allocated toward it. What it shows is a pretty low, a pretty good amount of number against that reserve and then when you look at all other loans, when you see what you have, you start to say we have a high coverage of our reserve dedicated to that portfolio.

And remember what we have talked about our shared national credit portfolio, our business banking and community banking that's certainly underwritten or as talked about consumer. So when you look at that other number, we see that's a very good number and we have a very good reserve.

Irene Esteves

And just to add to that the, the specific analysis loans I think you mentioned as, we take a significant mark on those loans as they come in NPLs and over the last several quarters it's been around 30-31%. So when you first initiate the loan, you have some equity in the deal. Then you mark that down 30% and now you have reserved another 20%. So we feel quite good about that reserve, so what is that leave for everything else. And that's a point is there is a lot there for everything else.

Carole Berger - Soleil Securities

So you are not suggesting that you need a lot more outside the others because you loose more on them?

Irene Esteves

I don't understand your question.

Carole Berger - Soleil Securities

While you have big reserves for all of the smaller loans, my question is, are you having much higher losses or do you not write them down when they go into non-performing, I am sure they are not?

Irene Esteves

The other coverage covers all loans, the other 90 billion of loans.

O. B. Grayson Hall, Jr.

That's the entire list of the company's loan portfolios, the point Irene was making on that slide.

Carole Berger - Soleil Securities

Okay. Thank you.

C. Dowd Ritter

Okay. Operator, if there are no other questions, let me thank you everyone for joining us this morning and we will stand adjourned.

Operator

Ladies and gentlemen, that concludes the Regions Financial Corporations Quarterly Earnings Conference Call. We appreciate your time. You may now disconnect.

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