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Regions Financial (NYSE:RF)

Q3 2011 Earnings Call

October 25, 2011 11:00 am ET

Executives

Matthew Lusco -

Barbara Godin - Chief Credit Officer, Executive Vice President and Head of Credit Operations - Regions Bank

O. B. Grayson Hall - Vice Chairman, Chief Executive Officer, President, Chief Executive Officer of Regions Bank, President of Regions Bank and Director of Regions Bank

M. List Underwood - Director of Investor Relations

David J. Turner - Chief Financial Officer, Senior Executive Vice President, Member of the Executive Council, President of Central Region, Chief Financial Officer of Regions Bank and Senior Executive Vice President of Regions Bank

Analysts

Robert Placet - Deutsche Bank AG, Research Division

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Leanne Erika Penala - BofA Merrill Lynch, Research Division

John G. Pancari - Evercore Partners Inc., Research Division

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Betsy Graseck - Morgan Stanley, Research Division

Unknown Analyst -

Brian Foran - Nomura Securities Co. Ltd., Research Division

Operator

Good morning, and welcome to the Regions Financial Corporation's quarterly earnings call. My name is Melissa, and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to Mr. List Underwood to begin.

M. List Underwood

Thank you, Operator, and good morning, everyone. We appreciate your participation on our call. Our presenters today are our President and Chief Executive Officer, Grayson Hall; our Chief Financial Officer, David Turner; and also available to answer questions this morning are Matt Lusco, our Chief Risk Officer; and Barb Godin, our Chief Credit Officer.

As part of our earnings call, we will be referencing a slide presentation that is available under the Investor Relations section of regions.com. With that said, let me remind you that in this call, we may make forward-looking statements, which reflect our current views with respect to future events and financial performance. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results or other developments. Those statements are based on general assumptions and are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. Additional information regarding these factors can be found on our forward-looking statement that is located in the appendix of the presentation.

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

O. B. Grayson Hall

Thank you, List, and welcome, everyone, to Regions' third quarter earnings conference call. The third quarter results provide additional evidence that our disciplined efforts are paying off, that we are successfully executing our business plans as we deliver another quarter of progress. Regions earned $101 million or $0.08 per diluted share this quarter. Adjusted pretax pre-provision income rose to $540 million, up 19% year-over-year and the highest level in more than 3 years, demonstrating ongoing improvement in our core business performance.

Further, adjusted pretax pre-provision income exceeded the loan loss provision for the second consecutive quarter, which is critical to Regions' achieving sustainable profitability. Although results met our expectations and demonstrated incremental progress, signs of a weakening economic recovery and reduced consumer and business confidence began to surface during the third quarter, causing us to take an increasingly cautious and disciplined stance on credit quality. This environment led to a $200 million linked quarter rise in gross non-performing loans, inflows largely driven by investor real estate credits. David will provide much more detail, but it's important to note that 63% of these gross inflows were still current and performing as agreed.

Our credit metrics showed improvement linked quarter as total non-performing assets declined 6%. Net charge-offs decreased 7%. Business Services' criticized loans fell 8%, and delinquencies, both early and late stage, improved.

While we remain cautious given the current uncertain economic backdrop, we do expect credit costs to resume their downward trend in the fourth quarter and credit quality metrics overall to continue to improve. Our investor real estate exposure continued to decline this quarter with total outstandings down $4 billion or 25% thus far this year. Within this portfolio, construction loans are down 48% so far this year. I'm particularly pleased with the progress we're continuing to make in fundamentally improving Regions' business model, both from the standpoint of generating profitable revenue streams and enhancing productivity. Our ongoing focus on customer needs and superior customer service has enabled us to grow adjusted revenue to 1% year-to-date versus prior year despite greater economic and regulatory challenges. At the same time, we have focused on controlling the expenses, as evidenced by a 3% decline in year-to-date adjustment noninterest expenses versus the prior year.

In the third quarter, we generated $14.7 billion in new or renewed loan commitments. In Business Services, loan production totaled a solid $12.5 billion, down linked quarter but stable year-over-year. Commercial and industrial loan growth remained strong, with ending balances up 3% linked quarter and nearly 13% higher from that a year ago. Importantly, commitments increased approximately 3% during the quarter, and line utilization rose to 43%. Middle market C&I lending, particularly specialized industries such as energy, healthcare and franchise restaurant, continue to drive the growth. We do expect commercial loan growth to continue even as economic uncertainty weighs on customer confidence, which does have a moderating effect on investment by businesses. While we are seeing incremental pricing competition, especially in the middle market space, our relationship banking approach and brand differentiation has, for the most part, mitigated this impact. Our spreads remained above those experienced prior to the recession.

On the consumer front, loan production totaled $2.2 billion in the quarter, a 7% increase over the prior quarter led by higher mortgage and credit card production. Looking specifically at mortgage production, this quarter's low rates resulted in solid origination volumes totaling $1.5 billion or 9% higher than the prior quarter. Additionally, indirect auto lending provided a steady source of loan growth with balances up 4% on a linked quarter basis. Demand for home equity lines and loans remained low. As a result, this portfolio continues to decline at a pace of $90 million to $100 million per month. Customer deleveraging continues to affect overall consumer loan balances as runoffs exceed new production.

Efforts to improve funding mix and cost continue to produce good results in the third quarter as well, as deposit costs declined another 7 basis points, total average deposits were stable linked quarter, with average low-cost deposits growing 2% linked quarter, we continue to see the opportunity to further reduce deposit costs, most significantly through properly repricing maturing CDs. Of which, they declined this quarter 22% of total deposits. As a result, we will likely continue to observe a favorable shift in deposit mix and a further reduction in funding costs. Notably from September 30 of this year to the end of next year, approximately $13.1 billion of CDs are scheduled to mature. These CDs on average carry an interest rate of 1.54%, which compares to expectations in the current rate environment for average rates in new CDs coming on at a 25 to 40 basis point range.

One other important note this quarter on deposits is according to the latest FDIC summary of deposits report, Regions maintained its #1 market share in Alabama, Tennessee and Mississippi, and also maintained a position of fourth or better in Florida, Arkansas and Louisiana. This was achieved despite our efforts to reduce our CD portfolio and lower deposit costs 26 basis points during the same time period.

Despite economic, legislative and regulatory challenges adjusted non-interest revenues were down only 1% linked quarter and stable year-over-year. Relationship banking, not single one-time transactions, are at the core of our business plans. We are making steady progress in deepening and expanding customer relationships with strong cross sell of products. We are continuing to adapt our product line to meet our customers' changing needs while maintaining a best-in-class customer service.

Credit card revenues, including increased branch card sales, are already benefiting from our credit card portfolio purchase late in the second quarter. We expect benefits to increase further once we assume servicing in portfolio next year, and we increase our focus and intention on cross-sell efforts in our branch offices. I've mentioned implementation of the Durbin Amendment on October 1. This has presented the industry and Regions with another financial hurdle in growing fee revenues. While we have already begun to implement plans to mitigate the estimated $170 million annual impact, and between changes to our checking account, fee structure and other new revenue initiatives that we have implemented in the second half of this year, we do expect to make up this revenue shortfall over time during the balance of 2012.

Improving productivity and efficiency is another key element of our business plan, and we have continued to make progress on this front end of the third quarter. We're fundamentally changing our cost culture, continuously seeking opportunities to improve and control efficiency while still making appropriate investments to enhance our competitive position and remain a superior service provider.

Year-to-date, our headcount is down 1,000 positions with further reductions expected by the end of the year. Also it's occupancy expenses are declining as we have eliminated approximately 1 million square feet of excess space in the company this year. Our capital continues to build as we generate earnings with our Tier 1 common ratio at 8.2% as of September 30.

And let me mention one other item before I turn it over to David. As you know, we are reviewing strategic alternatives for Morgan Keegan. We're not in position to comment on this further today, but I can tell you that we're making good progress. Progress is on schedule and in line with our expectations. And we would do expect to have more say on this issue in the very near future.

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

David J. Turner

Thank you, and good morning, everyone. Let's begin with a summary of our third quarter 2011 results beginning on Slide 3.

Overall, our results reflect stable revenue, lower expenses and improved loan loss provisions. Earnings per share totaled $0.08, and net income available to common shareholders amounted to $101 million. Adjusted PPI amounted to $540 million, an 8% increase versus prior quarter. Within PPI, total revenue was down 1% linked quarter, and the net interest margin declined 3 basis points to 3.02%. However, non-interest expenses, adjusted for the prior quarter's branch consolidation and other property charges, were down 5% sequentially, reflecting a decline in FDIC premiums, as well as a reduction in salaries and benefits expense.

Let's now take a detailed look at credit quality trends beginning with nonperforming loan inflows. As shown on Slide 4, inflows of nonperforming loans rose $200 million linked quarter to $755 million. This quarter's increase was primarily driven by the Land/Condo/Single Family and income-producing Investor Real Estate portfolios. However, it is important to note that 63% of this quarter's inflows were current and paying as agreed. In addition, as shown on the right side of the slide, 45% or over $1 billion of the September 30 total Business Services nonperforming loans were current and paying as agreed, a 3 percentage point increase versus the prior quarter.

Turning to Slide 5. Non-performing loans, excluding loans held for sale declined $74 million or 3%, and non-performing assets decreased 6%. This quarter, we executed a strategic sales of problem assets totaling $660 million. Additionally, we moved $384 million of problem loans to held for sale.

Early and late-stage credit indicators again demonstrated improvement, with total delinquencies declining 7%. Additionally, Business Services criticized loans were down approximately $595 million or 8% from second quarter's level and have declined $3.3 billion since this period last year. Despite the challenging economic backdrop, we expect overall credit trends to continue to improve.

The $1.2 billion increase in accruing troubled debt restructurings, or TDRs, reflects this quarter's new accounting guidance. Importantly, this change has no material impact to our allowance. In fact, commercial and Investor Real Estate loans modified as TDRs increased the allowance for loan losses by less than $20 million.

Moving on to Slide 6. Third quarter's net charge-offs were impacted by the disposition activity discussed earlier. Net charge-offs associated with this activity totaled $198 million. However, markdowns on the disposed assets had largely been provided for earlier in our loan loss allowance. Net charge-offs totaled $511 million and exceeded the loan loss provision by $156 million, marking the second consecutive quarter we have provided less than charge-offs. Excluding net charge-offs related to this quarter's disposition activity, net charge-offs were down 8% linked quarter. Our loan loss allowance for non-performing loan coverage was 109% at September 30, while our loan loss allowance to net loans totaled 3.73%.

Turning to the balance sheet. Slide 7 breaks down this quarter's change in loans and loan yields. Average loans declined less than 1% linked quarter, with declines in Investor Real Estate offsetting healthy C&I growth and second quarter's credit card portfolio purchase. The aggregate loan yield increased 4 basis points compared with prior quarter to 4.31%, and was driven by our credit card portfolio. We believe there are attractive opportunities to grow this portfolio over time as currently, only 1 out of 10 of our customers has a Regions credit card.

On the Business Services front, we continue to see strength in the commercial and industrial loan portfolio with average and ending loans up 12.4% and 12.9% from one year ago, respectively. Demand continues to be broad based as we experienced increases in 55% of our markets. Total commercial and industrial commitments rose $700 million linked quarter, ending the quarter at $28.7 billion, and line utilization increased to 43.3%, which still remains below our historical levels.

We continue to make progress in derisking our Investor Real Estate portfolio as well. Over the past year, we have reduced this portfolio by 32%, and it now comprises only 15% of our total loan portfolio, down from nearly 21% one year ago.

Moving on to deposits. As noted on Slide 8, average and ending deposits were both stable linked quarter, driven by our strength in gathering low cost deposits, particularly noninterest-bearing deposits, offset by reductions in our time deposits. Average time deposits declined $1.1 billion during the third quarter. As a result, average low cost deposits, as a percentage of total deposits, have risen from 73.5% in the third quarter of 2010 compared to 77.8% this quarter. This positive mix shift led to another 7 basis points decline in third quarter total deposit cost to 46 basis points, which is down 24 basis points since the third quarter of 2010.

Our shift in funding mix to low cost deposits is also favorably impacting total funding costs, which declined another 5 basis points to 75 basis points. As was mentioned earlier in the call, we will continue to benefit from the repricing of maturing CDs. Much of this benefit will come in the latter half of 2012, but we do have to $2.4 billion of CDs maturing in the fourth quarter of 2011, which carry an average rate of 1.32%.

Turning to Slide 9. Taxable equivalent net interest income declined $6 million, with the resulting net interest margins declining 3 basis points to 3.02%. This quarter's drop was due to higher levels of prepayments and the resulting negative impact on investment portfolio yields, along with a larger impact from cash reserves at the Federal Reserve. Recent changes to the Fed's large-scale asset purchase program, or Operation Twist, among other reasons, resulted in a sharp decline in long-term interest rates. This in turn led to higher prepayment rates, causing an increase in premium amortization on mortgage-backed securities. Since long-term interest rates declined in the latter half of the quarter, we do expect prepayments to increase in the fourth quarter as they typically lag a couple of months.

The major drivers of the outlook continue to be the levels of long-term interest rates, which drive prepayment and reinvestment rates in the investment and mortgage portfolios. However, barring any significant moves from here, we expect the net interest margin will remain stable through 2012.

Let's now shift gears and look at non-interest revenue on Slide 10. Excluding securities transactions and leverage lease terminations, third quarter non-interest revenue amounted to $748 million, down 1% sequentially but unchanged year-over-year. Third quarter's non-interest revenue reflected higher mortgage revenues and stable service charges offset by a decline in brokerage, capital markets and in banking -- in investment banking revenues. Mortgage revenue was positively impacted by third quarter's decline in interest rates. Origination volume rose 9% as customers took advantage of historically low rates. Service charge income remained strong due to the ongoing restructuring of our checking accounts to fee eligible and an increase in spending activity, lifting debit card revenue. Incremental debit card usage has driven an 11% increase in total transactions year-to-date, resulting in 13% higher interchange income. We have already begun mitigating loss interchange income through account changes, implementation of fees and new products and services for our customers. Brokerage, investment banking and capital markets income was down, reflecting pressure from greater market volatility during the quarter.

Turning to expenses on Slide 11. Non-interest expense declined 5% linked quarter, excluding the prior quarter's branch consolidations and property and equipment charges. The key drivers of this quarter's improvement were a $32 million reduction in salaries and benefits expense and a $25 million reduction in FDIC premiums. Now going forward, we currently expect FDIC premium expense to be approximately $50 million a quarter. Partially offsetting these are credit-related expenses, which include other real estate expense, net gains and losses from sales of loans in our held for sale bucket, and credit-related personnel costs increased $8 billion and accounted for 9% of third quarter's adjusted non-interest expenses. Over time, a significant amount of credit-related costs should be eliminated. Additionally, we reduced headcount another 1% in the third quarter, resulting in a 3% year-to-date reduction. We will continue to focus on driving expense savings without sacrificing investment opportunities or compromising high service levels our customers have come to expect and deserve at Regions.

Slide 12 provides a snapshot of our solid capital ratios and favorable liquidity position. Tier 1 common increased to 8.2%, and our Tier 1 ratio stands at 12.8%. Liquidity at both the bank and the holding company remains solid with a loan-to-deposit ratio of 83% and cash held at Federal Reserve totaled approximately $6 billion.

Overall, this quarter's results shall continued to progress. We are improving our core business performance, reducing our credit risk and further strengthening our balance sheet.

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

O. B. Grayson Hall

Thank you, David. While Regions continues to face some headwinds, we have a business plan in place that we believe will enable us to achieve sustainable performance and ensure attractive long-term returns for shareholders. And importantly, we are successfully executing our plan as demonstrated by our third quarter's results. We can't control the economic environment, but we are focused on those factors we can control. At Regions, we made it our priority to keep focused on our customers. To illustrate this, let me point out that approximately 80% of our associates are customer-facing, out in the field, in our branch offices, focusing on winning our customers' respect and loyalty, taking market share and profitably growing our business one customer at the time.

We are building sustainable profitability by diversifying and expanding our revenue streams and controlling our operating expenses. We are quickly adapting our product offerings and services to be more innovative and to compensate for the negative impacts from legislative changes, as well as customers' changing needs and expectations. We are enhancing enterprise-wide risk management by derisking our balance sheet, maintaining pricing discipline and prudently managing our capital. Perhaps lost in the market turmoil is just how far Regions has come in the past few years.

Let me highlight a few examples. Investor Real Estate portfolio has been reduced by almost $14 billion. Our loan loss allowance at $3 billion today is over 2x higher than it was just in 2007, and our Tier 1 common ratio has increased 150 basis points. And today, we're core funded, attributing to a 25% increase in low cost deposits. We are clearly a much stronger franchise today, and we are profitably moving forward.

Operator, we'll now take questions.

Question-and-Answer Session

Operator

[Operator Instructions] Your first question comes from the line of Matt O'Connor of Deutsche Bank.

Robert Placet - Deutsche Bank AG, Research Division

This is Rob Placet from Matt's team. First question, just on your outlook for credit quality. You mentioned you expect overall credit trends to continue to improve from here. As we think about NPA levels, how should we think about non-accrual inflows from here versus additional asset dispositions?

O. B. Grayson Hall

Rob, obviously, we're facing a challenging economic backdrop. But as we said in our comments, we do believe that as we look forward, we'll continue to see a favorable trend in our credit metrics. I'll just stop there and ask Barb Godin, our Chief Credit Officer to make a few comments on that regard.

Barbara Godin

If you look at our early late stage delinquencies, our late stage criticized classified again there, they're all down. So that too was to suggest that we're seeing a little bit of stability. But as Grayson has mentioned, we are obviously tied to what we're seeing in the economy. As we think about the inflows that we've seen this quarter, a lot of the inflows is adjusted 52% repaying current and as agreed, but it was based on conversations from our customers that they're seeing some of the trends in the overall economy softening. Based on those conversations, we went ahead and had moved those to the nonperforming loan status. All that on the non-performing asset side, however, we’re going to continue to dispose of assets. You saw that we've closed $660 million this quarter. We moved an additional $384 million into held for sale for disposal next quarter. So we're going to continue with our aggressive derisking.

Robert Placet - Deutsche Bank AG, Research Division

Okay, great. And just to follow up on your asset disposition this quarter, I think the market took on the loans, it was around 20% this quarter, which compared to around 30% last quarter. So just a question on what drove the decline? Is it a difference in the type of assets you sold or is it a pickup in interest on the buyer's side?

Barbara Godin

No, what we actually saw, Rob, is that we had roughly a -- the old 10% liquidity over and above what we would've reserved the loans for. So we really didn't see a big difference in that. We did saw a lot more of the smaller amounts. If you take our average loan size we sold this quarter, it was under $1 million. If you look at -- compared to a year ago, it was $3 million on average in terms of the size of loans we sold. We're getting a lot more granular.

Operator

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

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

Can you just talk about -- give us some any more color you can on the higher inflows of problem loans this quarter versus the second quarter? I know you gave us the categories that it was mostly coming from, but can you give us any more color that you can?

O. B. Grayson Hall

Jennifer, I would say that really, the composition of the inflows from second to third quarter really haven't changed that much. It's still the same relative to the same mix. We continue to have dialogue with our customers in terms of both capacity to repay and commitment to repay. We've had a number of those kinds of dialogues. Obviously, we have a continuous credit review process. And as we come to the quarter, we have identified certain credits that we felt like that it was prudent to move to a non-performing status. It's up slightly from -- as you've seen, from the second quarter, but we've sort of said all along, there's going to be some level of volatility in this. Obviously, as the economy softens, some of our customer confidence is softened as well. That being said, as we pointed out earlier in the presentation, there is a higher percentage of these loans paying as agreed, than what we've seen in the second quarter, and our overall nonperforming loan days continues to have yet even a higher level of paying as agreed. Barb, anything you'd want to add to that -- the mix?

Barbara Godin

No, I think you’ve hit on all the major points. Again, if you look at the migration that we had, it really was -- for the vast majority did come from our Investor Real Estate portfolio, which we all have agreed will be lumpy as we come out of the current economic climate that we're in.

Operator

Your next question comes from the line of Jefferson Harralson of Keefe, Bruyette & Woods.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

I have kind of a broad question. I'm trying to see if you can figure out, if you can keep your pretax pre-provision earnings fairly stable here. Along those lines, a big piece of that will be the margin and I was a little surprised you gave flat margin guidance given that you've got so much firepower in the margin, I suppose from potential better credit or potential use of liquidity. But do you think that you can keep your pretax pre-provision earnings fairly stable even if loans continue to shrink a little bit here?

David J. Turner

Yes, this is David. In terms of if we look at margin clearly having this interest rate environment that we're in, very volatile environment on the loan side, causes us to reinvest our cash at lower rate environment, which puts pressure on our margins. That being said, we've been able to hold that margin because of our benefit we receive on the deposit side of the house as we continue to reprice maturing CDs. So I think being able to hold that from a loan standpoint, we have had a nice growth in our C&I loan bucket. We have offset that on a net basis with the continued derisking in Investor Real Estate, which we think will slow the decline of that will slow somewhat in the fourth quarter. So we feel good about being able to maintain that margin. Now we do have $6 billion of cash at the Federal Reserve, they’re paying 25 basis points today that is pretty conservative from a liquidity standpoint as our ratings continue. If we can get our ratings to improve, then we can be less defensive with that cash and get it invested on a more efficient basis. So we have some upside and we're not calling that right now, perhaps when we get the rating changed, we will have further progression in the margin.

O. B. Grayson Hall

Jefferson, this is Grayson. I think that when you look at the margin, we have guided to a stable margin. There are obviously some opportunities for upside to that as there is for downside. But I would say that the deposits, when we look at our cost of deposits, there's an opportunity there for improvement to the margins on the loan side, as we're repricing loans, we went into this cycle with a relatively small percentage of our loans fixed versus variable. So we're not having a repricing pressure, most of our repricing is actually to our advantage at this juncture in the cycle. Where most of our pressure on margins is going to come from is from the investment portfolio. And depending on which rates -- which way rates go over the near-term is really going to drive how much pressure that we'll actually receive from that front. And the fourth element is the effort to provide more favorable refinancing opportunities for residential mortgage holders and what level of prepayments does that result in. Because as you'll recall, our investment portfolio is very heavy in mortgage-backed securities.

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

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

David J. Turner

Yes, I think that, if you kind of look on a net basis, it's going to be driven largely by the economy and how strong that is for us to continue the C&I growth, which has been a great driver of offsetting the decline. We've been declining that Investor Real Estate portfolio about $1.5 billion each quarter, and we've had great growth in C&I. So the question is how long will the economy kind of hang in there where our C&I can continue to move along. But we do see a slowdown, as I mentioned earlier in Investor Real Estate. So we'll have to see how those 2 work themselves out over the long haul.

Operator

Your next question comes from the line of John Pancari of Evercore Partners.

John G. Pancari - Evercore Partners Inc., Research Division

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

O. B. Grayson Hall

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

Matthew Lusco

I'll be glad to. Our allowance level, we believe is at about 109% I guess of our non-performings right now. And as you've seen, we've been able to under provide our charge-offs for 2 quarters in a row now. We believe that we're seeing some shift in our loss given default in our model. But we believe that's offset by a lower probability of default as we kind of continue to work through some of the things. That being said, I think we are in the back -- latter half of this credit cycle, and I think you'll kind of see the trends that we've shown with our allowance levels, at our provision levels continuing into future quarters.

O. B. Grayson Hall

I think we've been pretty disciplined in our allowance process. We've strengthened that process over time, and we're going to stay very disciplined in how we execute that. We've been conservatively modest in what we've done over the last 2 quarters, and I think you can continue to see the conservatism come through in our actions. But we're going to let our methodology and our disciplines drive the results of that. And as Matt said, we are seeing a forecast of more favorable trend, but with maybe a slower pace than we would have seen 90 days ago.

John G. Pancari - Evercore Partners Inc., Research Division

Okay, that's helpful. And then my follow-up will be on the loan growth. You mentioned that you're seeing, impressively -- you're actually seeing loan yields hold up, particularly on your new loan growth largely concentrated in commercial. Can you just give us some color on those new yields? What yields are your new commercial loan generation coming on at?

David J. Turner

Let me answer it this way, John. We have seen pricing pressure clearly in the upper end of the middle market portfolio. That being said, spreads are still better than some of the earlier years. I think that a lot of folks also want to grow C&I, and we see the pricing pressure coming through that. We want to maintain our discipline in this environment because we want to make sure loans that go on the books have the right risk-adjusted return. And we will not go in and put low spread product on our books just to grow the loan portfolio. We've been able to use our relationship with our customers as our predominant sales tactic, and that relationship allows you to maintain the spreads that we started with. So I think all in, we should be able to maintain those spreads. The question would be, what does the economy give us for actual loan growth in that type of competitive environment.

O. B. Grayson Hall

And John, most of that pricing pressure really come from the upper end of C&I. Lower end of C&I, middle market and small business lending that pricing competition has been substantially less. But that being said, we're doing comparative pricing with third parties. We sort of know we're at from a spread standpoint. And I would say we have seen that spread compression in the upper end of C&I, but still above historical level. And we're very comfortable with where we're pricing today and the discipline we're using in that.

Operator

Your next question comes from the line of Ken Usdin of Jefferies.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

I know we're not going to be able to talk about timeframes of either Morgan Keegan or eventual -- potential TARP pegs here, but I just wanted to ask you to go through with us, what things you need as far as markers or the glide path, I guess, as you're thinking through getting Morgan Keegan completed one way or the other and then starting to think about eventual TARP repayment.

O. B. Grayson Hall

Ken, we really are not in position to comment on our strategic review with Morgan Keegan this morning, and we hope that those -- that commentaries forthcoming in the near future, but as of this morning, we're not in position nor should we attempt to comment on that today. And our strategy on TARP repayment really has not altered. We still are being patient and prudent in that regard. We believe we're doing the things necessary to put us in position to be able to do that at the appropriate time and really no change in that regard.

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Okay. And my follow-up question, just regard to the remaining risks left on the balance sheet, you mentioned that you'd expect dispositions to slow in the context of continuing to see asset quality improvement. But can you just give us some color on where you still see the opportunities to dispose of assets in the portfolio and related to our side to that, obviously, there wasn't a big improvement -- a big increase in the TDRs, which you had put forth to us in the 10-Q, but the magnitude is still pretty big. So can you just remind us again like what the reserves are already against the TDR book as they've already been migrated through the portfolio?

Matthew Lusco

This is Matt Lusco. As David stated earlier, the disclosure of incremental TDRs is consistent with the new literature really did not materially in any way change our allowance composition on that. But I'll tell you that as been said, we continue to see, in terms of all of our non-performing book, we did continue to see a higher percentage of paying as agreed, which we do believe provides us with a higher level of opportunity to dispose of those assets, where we continue, as Barb said, to be aggressive in looking at our derisking activities, our higher content loss in Land/Condo/Single Family as just slight at little north of $2 billion. That's the segment we've continued to try and work down by derisking activities, and I think we'll continue to be just as aggressive as we can on that. It varies market to market. We see better opportunities in some of the larger metro market than we do in others. But we do continue to -- that is a critical part of our plans, and we're working it as aggressively as we can.

O. B. Grayson Hall

This is Grayson. I'll just add to Matt's comments, as Barb had said earlier, our stressed loan portfolio is getting more granular in nature, and these loans are in a smaller denomination than what we've seen a year ago substantially. And we do still have many interested buyers, and we are still able to dispose of assets at economic positions that makes sense. We haven't seen a lot of change in that. Obviously, the valuations are still under pressure in many markets, and we have to adjust to that in each and every month. But so far, our strategy remains intact, and we're still executing that strategy.

Operator

Your next question comes from the line of Erika Penala of Bank of America Merrill Lynch.

Leanne Erika Penala - BofA Merrill Lynch, Research Division

The first question I had is a follow-up to Ken's question and is for Barb. And I apologize in advance, that this will probably be a compound question. With regards to the additional $1 billion of Investor Real Estate TDRs that were identified under the new accounting policy, could you tell us specifically what in the change in accounting guidelines caused you to reclassify this? What composition of this billion is income producing today? And what in your restructuring or the way you restructured these notes, gives you confidence that you don't need to further provide for this $1 billion?

Barbara Godin

Okay. The literature itself suggested that when you do a renewal, you need to ensure that you obtain a market rate because these loans are substandard in nature, which means they have a deficiency that we have noted. That brings that into question what is the appropriate market rate, and we don't believe that, that is an easy number to find. We believe that we would be talking something probably double digits. So on the majority of these credits that we’ve gone ahead and renewed -- we have gone ahead and renewed them for increased interest rates in many instances or even additional collateral support. But clearly, we're not able to get ourselves comfortable with that. We would go ahead and make a substandard loan today at any rate. And that's really that defining factors is that we won't go ahead and put new substandard loans on the book. So by definition, all loans that are in the Investor Real Estate portfolio that we are renewing that are substandard, will be considered as troubled debt restructures and again, that's what led to the increase in the TDRs. But as Matt and Grayson and others have pointed out, as we think about our reserving methodology, these have all been generally reserved for. As we said, it was less than the $20 million in tax all in, as we lift it with the impact of our TDRs were. So we're feeling comfortable with our process, number one. And then number two, as we continue with an ongoing dialogue with our customers, which really is ongoing, it's not stop and start. We're able to look forward and say, there will be a number of these credits and in due course will be restructured, and they are no longer considered as a substandard loan, they get back to a profited category. And at that time, we would hope they will come out of the TDR status.

David J. Turner

Let me add one thing to that. The TDR designation is an accounting matter. And as Barb mentioned, it does not have anything to do with how we calculate our reserves. These aren't restructurings, the bulk of which you saw the increase were not restructurings, they were renewals in ordinary course. And so as you look at the TDR, the disclosures, and you’re going to see a lot of disclosures going through 10-Q, the better disclosures that we have are the criticized and classified loans and the reserves related to that, and that really gets back to Ken, your question that you had earlier if you're still on, reserves with TDRs. You need to look at the criticized and classifieds, and that's some better information available out there.

Leanne Erika Penala - BofA Merrill Lynch, Research Division

That's helpful. And just as a follow-up, could you, I guess, give us a sense of -- on how much of the total accruing TDRs are income producing? And also during the renewal process, if you get updated appraisals during renewal?

Barbara Godin

I'll answer the second part of the question, which is we do get updated appraisals as we do our renewals. We have a pretty standard process around that, and we've ensure, Erika, that we keep our tenders short of bills. So generally, what we've done is it has been a strategy of ours is to keep the tenders short to make sure that the renewals is done in one year increments that we may stay close to the customer, close to their financial situation versus renewing something for a 2 or 3-year period, which you could actually lose sight.

O. B. Grayson Hall

This is Grayson. A point Barb made is important to note, I mean, at the beginning of the cycle, we made a very conscious decision to start reducing our tender. And most of our -- as a big percentage of our commercial real estate loans did all the tenant in one year. And so, when these loans come up for renewal, to David's point, when we look at TDRs as an accounting designation, and we looked at we're renewing a credit that we've got risk rated substandard, then the first question is, is it a substandard loan? Yes or no? If it is, then you have to ask yourself the question on the literature, what is the correct market rate that you would do that loan at. And if you would look historically, most of the loans moving into a TDR status were restructured. In our case, it would be predominantly consumer mortgages that we have made some sort of concession on that moved in there. On the commercial side, it's was really the restructures that we had done in an A B note methodology. But today, under the current literature, you're going to see renewals, where renewals go in, and if it's substandard and we can't define a market rate, then by definition, it's going to get designated as a TDR.

David J. Turner

Just to let you know, you asked how much is in TDR related Investor Real Estate. The total is about $1.5 billion.

Leanne Erika Penala - BofA Merrill Lynch, Research Division

I guess my question was income producing versus still in construction phase.

David J. Turner

Yes, we'll have to get back with you. We don't have that breakdown in front of us.

O. B. Grayson Hall

But Erika, I would mention, I guess out of our total Investor Commercial Real Estate portfolio, construction now just comprises slightly over $1 billion of the entire portfolio.

Operator

Your next question comes from the line of Brian Foran of Nomura.

Brian Foran - Nomura Securities Co. Ltd., Research Division

I guess just more broadly on credit, one of the issues. It feels like everyone is trying to get their arms around is for the past 2 years, 3 years, it's been easy to explain why you have more credit issues than the average bank because you were heavy in real estate and you were heavy in the Southeast. And now that we all see a lot of the real estate heavy banks improving at a faster and more consistent rate. And we see some of your Southeast peers improving at a faster and more consistent rate, I guess when you go through the same process of benchmarking, why do you think your credit is slower to improve at this point in the cycle than some of your peers?

O. B. Grayson Hall

Clearly, when you look at our portfolio, we went into this with cash attrition in the Southeast, and in particular in Florida and Georgia, which had been some of the more stressed markets in the country. But certainly, in our footprint, the most stressed. And clearly, when you're seeing improvement, with questions -- the pace of improvement and the consistency of improvement, we continue to work through the challenges we have in the portfolio. The progress is being made. That being said, the pace of economic recovery in the markets we're operating in, in large part are going to drive the recovery of our customers. We're working through it. You're seeing improvements month after month, quarter after quarter, but it's incremental, this juncture. Obviously, we would love to see a faster pace and are taking actions to accelerate that on our own balance sheet. But in the absence of real economic recovery, this is going to be slower than we had anticipated. Barb?

Barbara Godin

Brian, the other thing that I would add is that as I look at what did come into the migration for the non-performing loans for this quarter. Between the Atlanta, Sandy Springs area and Miami that accounted for 22% of the inflow. So I would consider those to be our most stressed markets, clearly the rest of our markets as you look in terms of the percentage that they provided on the NPL migration in, was not great, but those 2 markets themselves drove, as I said, the 22% of the inflow. And it really speaks to what's happening with valuation and just the soft economy in both Atlanta and Miami that continues.

David J. Turner

I'll add one thing too. This is David. In terms of acknowledging that we have the credit that you laid out, that's why we have a $3 billion loan loss reserve, which is 3.7%, 3% of the total loans, which is higher than most as well.

Brian Foran - Nomura Securities Co. Ltd., Research Division

That's all extremely helpful. And if I can follow-up the Atlanta and Miami -- can you remind us, I mean, assuming most of those inflows are in Atlanta and Miami Investor Real Estate, how much Investor Real Estate is there left in those 2 markets?

Barbara Godin

Well I don't have that number off the top of my head. Again, we can get back to you on that.

O. B. Grayson Hall

We'll get back to you. We don't have that with us this morning.

Brian Foran - Nomura Securities Co. Ltd., Research Division

Great. And then if I could sneak in one last one. How significant is the roll-off of swaps next year? And is that factored into the outlook for kind of a flattish NIM going forward?

David J. Turner

In total, which is factored already into my comment that we should be able to maintain the stable margin, but if you kind of broke it apart -- the pieces apart, you'll be in that 7 to 8 basis point range.

Operator

Your next question comes from the line of Betsy Graseck of Morgan Stanley.

Betsy Graseck - Morgan Stanley, Research Division

Couple of questions, one on the asset sales that you did this quarter. Can you give us a sense as to where you ended up marking them relative to what they were on the books for?

Barbara Godin

Yes, we did a couple of bulk sales of smaller loans. And again, with or within that 10%, again, I would call that the liquidity premium on the bulk sales. On the balance of the sales that we did, we were right on where our marks were.

Betsy Graseck - Morgan Stanley, Research Division

Okay. And did that at all factor into NCOs or is that embedded within the expenses?

Barbara Godin

No, that would be again, as we move them into held for sale, they show up in the net charge-off line. When they're in held for sale, they would show up as an expense. When we sell them out of held for sales, and we sold a total of $660 million overall, of which coming out of held for sale, we sold $244 million of the non-performing and a further $163 million of accruing loans. OREO sales this quarter were $146 million.

David J. Turner

I would add that our experience continues to be pretty consistent over this year with our derisking activities that we really have. As Barb said that 10% liquidity discount has just been what's flowed through, beyond a levels of marks and allowance we’ve already provided.

O. B. Grayson Hall

Predictability and consistency in marks has just gotten much better as this cycle has gone along.

Betsy Graseck - Morgan Stanley, Research Division

Okay. And so on a Q-on-Q basis, the impact into the NCR ratio is fairly flat or it's a little bit lighter? Is that right?

O. B. Grayson Hall

Our net charge-off percentage is slightly elevated by the derisking activity. If you really take out the derisking activities and looked at more of a normal flow of streams, we'd be down from 250 to more like 170 or so.

David J. Turner

Betsy, if you try to get it from each quarter, that liquidity discounts been about the same and we actually have dispositions in each of the quarter transfers roughly close to the same numbers. So it's flattish when you look at the provision component of that.

Betsy Graseck - Morgan Stanley, Research Division

Okay. And then just separately, and it might be too early to answer this question, but I just wanted to get it out there, the FHFA did announce yesterday some new program guidelines around HARP? And it sounded like investor properties were going to be eligible. They're talking about small numbers, maybe doubling the size of the program under the new guidelines. I'm wondering if you've taken a look at that to the degree that, that might be helpful or impactful for you?

David J. Turner

We did. This is David. We looked at some rough numbers to see what that might impact us. There's been, you've seen all kinds of numbers in terms of how many mortgages that might affect, maybe 1 million mortgages. For us, we think that number, in terms of prepayment exposures that we would have would be in the range for a period of $20 million to $40 million perhaps.

Operator

Your final question comes from Gerard Cassidy of RBC.

Unknown Analyst -

This is Steve joining in for Gerard. I just got one question on the NPL inflows. You guys had 63% that was current and paying. Do you know if that's consistent with the last couple of quarters?

O. B. Grayson Hall

It's higher.

Barbara Godin

It's higher than the last few quarters. 48% last quarter, and it's been tracking up each and every quarter as we've gone along. So as you look at just really quickly, as you look at the third quarter, again, overall non-performing loan portfolio, 45% paying as agreed, last quarter 42%; a year ago, 36%. So you can see it's been tracking up incrementally every quarter.

Operator

Thank you. I will now turn the call back over to Mr. Hall for closing remarks.

O. B. Grayson Hall

Well, thank you, everyone, for their time and attention today. We very much appreciate it. Hoped that we answered some of your questions, and we will stand adjourned. Thank you.

Operator

This concludes today's conference call. You now disconnect.

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