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Regions Financial Corporation (NYSE:RF)

Q1 2008 Earnings Call

April 15, 2008 10:00 am ET

Executives

C. Dowd Ritter – Chairman, President and Chief Executive Officer

William Wells – Chief Risk Officer, Senior Executive Vice President

Irene Esteves – Chief Financial Officer, Senior Executive Vice President

List Underwood – Investor Relations

Analysts

Steven Alexopolous - JP Morgan

Kevin Fitzsimmons - Sandler O’Neill & Partners

Edward Najarian - Merrill Lynch

Chris Mustacio - Stifel Nicolaus & Co

Todd Hagerman - Credit Suisse

Matt O’Connor – UBS Securities

Ken Usdin - Bank of America Securities

Jefferson Harralson – Keefe, Bruyette & Woods

Jeff Davis - FTN Midwest Securities

Jennifer Demba - Suntrust Robinson Humphreys, Inc.

Operator

Good morning and welcome to the Regions Financial Corporation’s quarterly earnings call. My name is Jennifer and I will be your operator for today’s call. I would like to remind everyone that all participants on the line have been placed on listen-only. At the end of the call there will be a question-and-answer session. If you wish to ask a question please press *1 on your telephone keypad.

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

List Underwood

Welcome and good morning everyone. This is List Underwood and we appreciate very much your participation today. Our presentation will discuss Region’s 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 Region’s 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 8K or in our form 10K for the year ended December 31, 2007. As a reminder, forward-looking statements are effective only as of the date they are made and we assume no obligations to update information concerning our expectations. Let me also mention that our discussion 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.

Dowd?

C. Dowd Ritter

Thank you List and good morning everyone. We appreciate you joining for Region’s first quarter earnings conference call. With me this morning are Bill Wells, our Chief Risk Officer and Mike Willoughby, our Chief Credit Officer. Also joining us is Irene Esteves who just last week began as our new Chief Financial Officer replacing Al Yother who is as most of you know recently retired. We all miss Al and certainly wish him and his family the best, but at the same time we are very excited to have someone with Irene’s impressive background and experience on board.

Since Irene has only been with us about a week, List will provide a detailed discussion of our quarterly performance later in the call after which we will as usual take any questions that you might have.

Despite a very difficult operating environment, Region’s achieved first quarter earnings from our continuing operations of $0.55 per diluted share excluding the merger charges. At the same time we continued to pro-actively address the ongoing challenges of the slowing economic growth and a worsening credit cycle. We increased our allowance for credit losses to 1.49%, increased our tangible common equity to tangible assets ratio to 5.90% and took additional steps to improve our cost structure, wrote down our Morgan Keegan mutual fund investments and implemented some new broad based revenue initiatives.

In other words we are taking actions that continue to position us to successfully manage through this current economic cycle as well as prepare us for longer term profit potential.

I want to spend a few minutes elaborating on some of those actions but first let me share a few additional thoughts about the first quarter.

Our first quarter earnings were solid given this current operating environment. Unusual revenue and expense items largely offset one another and List will take you through those in a few minutes. As expected our credit quality did deteriorate during the quarter. We remain comfortable with our overall loan portfolio, however with the exception of that residential home builder portfolio which we are managing as we outlined to you last quarter.

With the widespread decline in residential property values, our home equity portfolio losses also increased from the fourth quarter but we feel remain manageable. Much of the relative strength in our portfolio stems from the fact that we have historically shied away from non-traditional mortgage products; things like option ARM’s, negative amortizing loans, loans with teaser rates, and at the same time we have originated and underwritten our portfolios in house. As a result while we fully understand and expect mortgage related losses to increase as we progress through the cycle we also expect these to continue to compare favorably to others in the industry. List again will give you some additional details on our entire portfolio and its performance this quarter.

Region’s security portfolio is straight forward. We view that portfolio primarily as a source of liquidity rather than a source of earnings. It contains no exposure to collateralized debt obligations, no structured investment vehicle exposure and is very conservatively managed with minimal exposure to the sub-prime market. Average loan growth picked up to 4% late quarter on an annualized basis. On the funding side we saw a reduction in our low cost deposits, partly seasonal but also driven by commercial customers using their deposits to pay down debt in this slowing economic environment.

Consumer low cost deposits on the other hand remained steady during the quarter. Overall we expect deposit growth as likely to remain a challenge for us in the industry throughout 2008. Total non-interest revenues if you exclude securities transactions and the Visa IPO gain grew an annualized 11% late quarter, very encouraging I believe given seasonal effects. This helped to offset somewhat the effect of slightly weaker net interest income.

We have also made good progress in developing and implementing some new revenue generating initiatives. You may recall we mentioned in our last quarterly call a formal company-wide process to identify and capture revenue from fee based opportunities as well as look for new revenue streams.

In the case of fee based opportunities we have a working group focused on identifying and implementing programs to realize appropriate and competitive fees related to product offerings while maintaining customer loyalty. Another group has the mission of identifying and launching new streams of revenue and/or they could significantly enhance some existing revenue streams.

Both groups have identified a number of opportunities. They have set their priorities and have begun implementation. I would expect those efforts to translate into some tangible results as early as this quarter. Ultimately our goal is to identify and capture somewhere in the $200-$300 million range in annual incremental revenues from these efforts as we get to 2010.

We are also pleased in our continued success in containing our core operating expenses. In the first quarter we achieved quarterly cost savings of $127 million, which equates to an annual run rate of $510 million putting us ahead of our upwardly revised run rate goal that we set last year.

As you may have read recently in late March we eliminated about 700 positions across the company. These were primarily back office and operational positions that had not been contemplated in our original cost-save estimates when we announced the merger. With these eliminations we have now reduced our net staffing from May 2006 to 15%. Again, you may recall that during the last quarterly earnings call we mentioned that in addition to our incremental revenue initiative an initiative to further improve our operating efficiency. This effort, which we internally talk about it in terms of efficiency and effectiveness initiative, has begun in earnest. Our goal is to improve the efficiency and effectiveness throughout our organization by leveraging our new scale and continuing to consolidate selected back office and operational functions while increasing standardization and if you will organizational chart modeling.

Most importantly we believe that this initiative plus the recent staff reductions will allow us to see $700 million in cost savings by the end of 2008 if you look at our all-in cost save run rate.

With that let me turn it over to List for greater detail.

List Underwood

Thank you, Dowd. All in all, first quarter operating earnings of $0.55 per diluted share excluding merger charges were solid. However, it was a noisy quarter with several unusual revenue and expense items that largely offset.

Specifically we received $63 million from the rendition of a portion of our ownership interest in Visa’s recent initial public offering and reported a $92 million gain on the sale of investment securities early in the quarter.

On the non-interest expense side we were able to recognize a $28 million expense reduction related to the Visa IPO. You may recall we reported nearly $52 million of Visa related litigation expenses in the fourth quarter of 2007.

Non-interest expenses also include a $42 million mortgage servicing rights impairment charge, a $65 million loss on early debt extinguishment and $24.5 million write down of our investment in two Morgan Keegan mutual funds.

I’ll discuss some of these items in more detail to clarify core trends in just a moment but first I want to update you on Region’s credit quality.

As anticipated both net charge offs and non-performing assets rose fourth to first quarter. Net loan charge offs were an annualized 53 basis points of average loans, up 8 basis points on a late quarter basis. The provisions for loan offices totaled $181 million, $55 million above net charge offs. As a result the allowance for credit losses increased to 1.49% at quarter end.

The late quarter increase in net charge offs was primarily driven by the deterioration in the residential home builder portfolio and losses in the company’s home equity portfolio, both of which of course are closely tied to the housing market slow down.

Losses in our home equity portfolio increased to an annualized 57 basis points in the first quarter. As Dowd mentioned this was primarily driven by lower residential property values. Despite the increase, we still believe our home equity portfolio will fare better than most and while it is not immune to broad economic and market pressures we like this portfolio for several reasons. It was entirely originated in house, not through brokers or correspondents. It contains high FICO scores, low LTV’s and most importantly it also has a high proportion of first lendings, 41% in fact.

Non-performing assets increased to 1.25% of loans in foreclosed assets, up 35 basis points from year end 2007. As expected, the late quarter increase in non-performing assets was primarily driven by our residential home builder portfolio. In fact, home builder credits accounted for about $140 million in the increase of non-performing loans and approximately $40 million of the quarter-over-quarter uptake in other real estate owned.

We continue to make progress in effectively managing the risk in this portfolio. As discussed last quarter we have fully implemented and executed our proactive strategy for this portfolio. This strategy, which involves some of our most experienced real estate lenders, includes frequent borrower contact, continuous local market review and comprehensive internal analysis of resolution and exit credits.

The residential home builder portfolio declined $1.3 billion the majority of which relates to pay downs. Partially off setting this decline was $340 million of additional funding. The total portfolio stands at $6.2 billion as of March 31, 2008. While the portfolio declined in size as expected given current market conditions, loans within the portfolio that we have identified as exit credits increased from last quarter and now total $1.2 billion. Our focus for this portfolio remains centered on identifying the most sensible exit strategy, one that best serves our shareholders in the long run.

Turning now to other aspects of the quarter, non-interest income excluding security transactions and the Visa income grew an annualized 11% late quarter. Commercial credit fee income was especially strong up $19 million fourth the first quarter, driven by a surge in quarter finance activity by our customers in an effort to manage their interest rate risks. Insurance fees were also strong reflecting our January 1 purchase of a multi-line agency in Mississippi plus some other seasonal factors.

Mortgage income climbed nearly $18 million for the quarter with about half the pick up due to a one-time adjustment related to the adoption of Financial Accounting Standard 159 for mortgage loans held for sale. A fourth quarter servicing loss of $4.4 million also contributed to the quarter-over-quarter improvement.

Conversely, service charges declined late quarter reflecting seasonal factors as well as an increase in waivers due to fourth quarter conversion events.

Notably, brokerage income remained healthy despite market turmoil up 23% comparing first quarter to the comparable year ago period. Morgan Keegan’s first quarter core operating results were solid driven by higher fixed income revenues. Equity capital markets revenues were also significantly stronger than in the previous quarter reflecting increased oil and gas advisory activity coupled with an overall pick up in investment banking. As you might expect, both private client and asset management fees were somewhat weaker than last quarter, a result of slower demand for traditional retail products and generally lower asset valuations.

On the expense side, Morgan Keegan earnings were again impacted by losses on investments in two Morgan Keegan mutual funds; this quarter totaling $24.5 million. These investments carry an approximate $38 million market value at March 31.

Fully taxable equivalent net interest income totaled $1 billion the first quarter, slightly below the prior period. Seasonality was a factor but an 8 basis point drop in the net interest margin to 3.53% was the primary reason for the decline. The margin continues to be pressured by a negative shift in the funding mix given the lower level of low cost deposits. Changes in the term structure interest rates are also providing pressure as interest rates on loans re-price down and it is becoming more difficult to reduce funding costs.

Rising non-performing asset levels are also having an unfavorable effect on the margin. Average low cost deposits declined an annualized 8% late quarter driven by a mixed shift resulting from customers seeking higher returns in the current environment. As Dowd mentioned, commercial deposits were also a driver as these customers increasingly used their deposits to pay down debt. Importantly, we did see a sign of stability in the quarter with March average total low cost deposits increasing nearly $300 million over February and that does reflect some seasonality.

Positively, the previously mentioned up tick in average loans fueled 6% annualized growth in total average earning assets late quarter. Commercial credits, mainly originated in Tennessee and Florida, drove first quarters loan growth partially offset by a decline in residential mortgage loans.

We continue to make good progress in curtailing operating expenses. As I highlighted at the beginning of my comments a number of unusual items impacted reported first quarter expenses. However, adjusting for these items in both periods core operating costs were stable between quarters despite first quarter seasonal jump and benefits in FICA costs.

Full flow through fourth quarter conversion benefits led to first quarter merger costs saved to $127 million, which as Dowd covered exceeds our goal of $500 million on a run rate basis; a great start to our new year end run rate goal of at least $700 million.

First quarter’s effective tax rate excluding the merger charges returned to a more normal 33%.

Finally our tangible common equity to tangible assets ratio increased to 5.9% as of March 31. While we are very comfortable with our capital wells, like most banks these days we are in a capital conservation mode. So, as you would expect we have no immediate plans to repurchase shares any time soon.

In summary, the economic and credit environment is likely to remain challenging for the foreseeable future. But we believe we have taken and will continue to take actions that enhance core earnings power, manage credit risks and further strengthen an already strong capital position and balance sheet. As a result, we believe Regions is well positioned to take advantage of opportunities as they occur in the future.

With that, operator, we are ready to take questions.

Question-And-Answer Session

Operator

Our first question comes from Steven Alexopolous with JP Morgan. Your line is now open.

Steven Alexopolous - JP Morgan

First question, with the dividend pay out ratio at around 75% or so can you talk about the sustainability of the current dividend rate and what you feel might be related to a deeper equity capital down the road?

C. Dowd Ritter

Sure, I’d be glad to. Obviously we feel like our earnings and our dividend it is a higher pay out than would be a normal policy. Our board looks at that and at this time given the earnings stream that we see going forward taking into account the credit difficulties in this market we are comfortable with our dividend at that level and as List noted we saw a little up tick in our capital ratios and we would expect with no share repurchases if I look at our capital plan, which is basically on a two year rolling cycle the more detail of it, we would expect to see in that plan those capital ratios strengthened keeping the dividend at its current level and that is what we are operating under.

Steven Alexopolous - JP Morgan

Could you share what that level is that the board is typically comfortable with in terms of a payout ratio?

C. Dowd Ritter

Our pay out ratio, we talked about our policy before and basically it is in a 50-60% range. Obviously we are above that right now.

Steven Alexopolous - JP Morgan

Okay. Just some other quick questions. In terms of home equity the second lien that went delinquent or is in default for the quarter, what were you typically doing there? Were you writing down? Holding the judgment? Or are you going through with buying out the first and going through foreclosure?

C. Dowd Ritter

No, obviously basically the jump there that you see is when we talked about valuation decline and probably anybody you talked to in any bank that lived through the late ‘80s and early ‘90s to me the biggest difference in what is happening right now is I’ll use the word velocity. It is how fast things have changed and the biggest change that we’ve seen quarter-over-quarter and even if you go back and look at third to fourth and comparing them it is property value issues in certain markets. I would tell you that in a few of those that you saw us basically write off. We did not write them down because some of those they did have a first but they are cases where people as early as 24 months ago had one value on that property and as they started to sell it or refinance it they realized that valuation was 40% below what it was that 18-24 months ago and they are walking away from those homes in those markets.

Steven Alexopolous - JP Morgan

That is real helpful. Just one more thing. Looking at the land that is in non-accrual, $94 million or so, is that written down to what you believe it is worth in terms of current market value?

William Wells

Yes, Steven, this is William Wells. We have an in house appraisal review function so any time any credit starts to move into a troubled phase we are requesting current evaluations as best as we can tell what the value of that land is.

Steven Alexopolous - JP Morgan

Okay. Thanks guys.

Operator

Your next question comes from Kevin Fitzsimmons with Sandler O’Neill & Partners. Your line is now open.

Kevin Fitzsimmons - Sandler O’Neill & Partners

Good morning everyone. I was wondering…I heard your comments on credit and you specifically mentioned the home builder portfolio and the home equity portfolio obviously. What I was wondering was if you can give some commentary on [CNI] non-owner occupied commercial real estate and altA because while maybe they haven’t been big moves in prior quarters…they seem when you look at non-accrual loans and 90-day past due they had pretty healthy increases and just how you characterize those increases at this point?

William Wells

Again, this is Bill Wells. We have been all the time looking at commercial portfolio to see we see what the worries [contagion] and see if we started to see anything spread over to the portfolio. Our losses in commercial were up. What I will tell you, part of that is a large unsecured debt through the national home builder and then we also had a business person loan on an individual basis unsecured so those are probably the two pieces that made up the majority of the loss increase. On our 90-days past due which is on thing that we track pretty intensely within risk…most of those are coming to some type of work out phase where they have moved into our special asset area and we are working with the customer to try to work to resolution. I’ll let Mike answer the altA piece.

[Mike?]

We’ve had the altA for at least 15 years now so it has been tested through a cycle. It is underwritten primarily in house and unlike a lot of altA that has gotten a lot of discussion our altA isn’t because of high LTV’s or low scores or low debt coverage ratios it is because of the structure of the credit having to do with making them non-conforming like cross collateralization. So we are very comfortable with the altA piece of our business.

William Wells

I’d also say altA means a lot of things to a lot of different people and we take a very conservative view about how we would categorize a credit as altA.

Kevin Fitzsimmons - Sandler O’Neill & Partners

Okay. Could you just as a follow-up update us…I think you gave the number somewhere in the release, but what the total amount is in the special asset group and is that number…just clarify for me again, is that included within the non-performing asset total or is that separate?

[Mike?]

I think you are talking about our home builder book and we have got $1.2 billion that we have designated to be in special assets. It runs the gamut. Most of it is what we would call classified. There is a good sized chunk of it and it is in the supplemental piece to the earnings release that is non-accrual but there is also part of that which is things we have concluded we are not comfortable with through the cycle but they would not be officially adversely rated.

William Wells

Kevin, also…we took this step probably in the latter part of 2007 and what we tried to do is identify as much as we could issues around the residential portfolio. We took several steps and one of those is moving more experienced people into our special assets work out area and with that what we try to do is identify all the threat we thought we should be looking at and working with the customers to exit them as best we could. As you continue to go through that process a little bit of what List mentioned earlier as you work with your buyer and you are doing your market analysis and you are working with that customer and looking at the portfolio you are probably going to see that number move around as we start to get better at understanding what is in that portfolio. So seeing movement up and down is what we would hope we’d see from a risk perspective.

Kevin Fitzsimmons - Sandler O’Neill & Partners

Okay. Just…I don’t want to belabor this but of the portion of home builder loans in the special asset group that have not been adversely classified, have they been written down to what you think they are valued? Because typically that trigger of putting it in the non-accrual bucket triggers that write down and I just want to know…are these loans that you have you gone through that process or have not because they have not gone through that…into the classification bucket?

[Mike?]

Well if you look at the chart that covers this we have about $400 million of the $1.2 billion that is on non-accrual those have to be marked to market. The remainder of the portfolio while we want to exit those credits are performing, so they are paying interest and principle as you would expect and we would not write those down at this time.

William Wells

Kevin also too part of our appraisal review process we are looking at markets on an ongoing basis to see if we see changes in valuation that make us decide whether we should move something to non-accrual or not and we would be looking at that valuation at that time.

Kevin Fitzsimmons - Sandler O’Neill & Partners

Okay. Great. Thanks very much.

Operator

Our next question comes from Ed Najarian from Merrill Lynch. Your line is open.

Edward Najarian - Merrill Lynch

Good morning. Just a quick question in terms of the commercial credit losses just from a mapping standpoint so I understand this correctly. You had a chart on page 12 I guess – or a table on page 12 and then another table on page 13 that don’t seem to line up with respect to commercial loan losses. One shows 94 basis points in terms of a charge off ratio and the other one looks to me to show either 67 basis points or 61 basis points depending on how you read it. I guess I was wondering if you could sort of indicate the difference and then secondarily when you talked about the large unsecured home builder loss, national home builder loss, as well as the personal business loan loss…is that lumped into the commercial loan losses that I see in the 94 basis points on page 12.

William Wells

Ed, this is Bill Wells. On the first part when you look at that other page where you’re trying to reconcile to we tried to get it a little bit more granular for you and what you are seeing is the [Myrtle] and what is called business and community banking loans. You have to kind of put those together. The difference on the business and community banking loans if you look at December fourth quarters they really just had one month of charge off numbers. Remember we were going through the big conversion at the time so we’re trying to get better about our MIS as we go forward. What I would always do is go back to that front section and that is how we look to see of our true [CNI] loans charge off rate. The two loans that you mentioned yes are in the [CNI] loss number.

Edward Najarian - Merrill Lynch

And that is what predominantly drove it to 94 from 60 last quarter?

William Wells

Exactly and we looked at that residential home builder line unsecured…that is not reflective of what we see in the rest of our portfolio. That was to us an isolated incident.

Edward Najarian - Merrill Lynch

Okay. Secondarily – and maybe you have a chart in here that I’m just not seeing…oh yeah, it looks like you do. Forget it. I’ve got the answer to my second question. Thank you very much.

Operator

Our next question comes from Chris Mustacio from Stifel Nicolaus & Co. Your line is open.

Chris Mustacio - Stifel Nicolaus & Co.

Good morning all. Just two quick questions. You said a lot of the home builder exposure that was relinquished during the quarter was from pay downs. I was just curious if there was any actual home builder loan sales that might have occurred during the quarter and if so what was pricing on those? Then somewhat related I’ll just follow-up now…the loan loss reserve ratio as a percent of NPAs, and that covers NPAs at about 1.1 times right now, are you comfortable with allowing that to fall below one if non-performing assets continue to rise at the current level or current piece?

List Underwood

Could you ask that second question again?

Chris Mustacio - Stifel Nicolaus & Co.

The reserve to NPA ratio, where the reserve is covering NPAs 1.1 times right now if I did my math right and I’m just curious if you are comfortable allowing that to fall below that 1:1 ratio if indeed non-performing assets continue to rise at the current pace?

List Underwood

Okay. The first question…we had some sales during the quarter but they were kind of one or two off as we’ve done. We continually look at our portfolio and talk to people about potential sales. In fact we had a meeting last week. We’re trying to get a couple of groups in to take a look at always our portfolio and what we can sell not only from a residential side but looking at all our non-performing assets and non-performing loans. As far as the 1:1 ratio what we do is we have a pretty detailed methodology quarterly that we look at how we assess the risk within the portfolio. We go through several different scenarios. We try to understand what we see happening in the shifts within the portfolio. That is one of the factors that we look at. We feel very comfortable with where the reserve is today. We will look at it quarter by quarter as we see what is happening within that loan portfolio. But I will tell you I don’t necessarily look at one specific ratio. We look at several of them as we do our methodology.

Chris Mustacio - Stifel Nicolaus & Co.

Could you disclose what type of price you are getting on the few sales you had during the quarter on the home builders?

[Mike?]

Generally those are what we call strategic buyers and we did not take much of a haircut.

Chris Mustacio - Stifel Nicolaus & Co.

Okay. Thank you.

Operator

Your next question comes from Todd Hagerman with Credit Suisse. Your line is open.

Todd Hagerman - Credit Suisse

Good morning everybody. If I could Bill and Mike just get a little bit more detail on the home equity portfolio. Roughly $15 billion turned outstanding in the quarter. Could you give us a sense of what the current un-funded commitments are against that portfolio? Then a little bit better sense of kind of the geography break out similar to what you give for the home builder in terms of the various regions how that would split out?

[Mike?]

Well the easiest way to answer your first question is we are about 40% funded and that has been if you want to know very consistent. So we have not seen net funding up under those lines. In terms of where our exposure is, we are in really all of our geographic markets. I guess we’ve probably seen more stress in terms of what Dowd talked about for values in some of our higher growth markets.

List Underwood

I’d also add it goes back to Legacy [Anthem]. Most of to me the portfolio is written out of Florida, Alabama and Tennessee. Very little exposure over in the Georgia and the Carolina areas which I think is a differentiation from a residential home builder if that is what you are trying to get to.

Todd Hagerman - Credit Suisse

Yeah. Just as an example the Florida region and the central region what would the composition be there in terms of the total?

[Mike?]

Our biggest concentration would be in Florida and central would probably be right after that because it would include Alabama.

Todd Hagerman - Credit Suisse

And roughly how much is that, Mike?

[Mike?]

Well I’m going to give you just kind of rough percentage basis…Tampa/St. [Pete] is around 7%. It drops off around Orlando to about 4%. Those are kind of two of our main areas.

Todd Hagerman - Credit Suisse

Again, you mentioned about 40% is funded. Have you done much in terms of modifying the outstanding lines in terms of cutting those off or scaling them back in terms of the region or customers as well? Then could you give us a better sense of how much of the portfolio would say exceed 100% LTV?

[Mike?]

The answer to your last question is none. On the first part, can you prompt me with that again, please?

Todd Hagerman - Credit Suisse

Sure. The 100% LTV in terms of…you have a weighted average LTV on the entire portfolio of 74%. How much would you say exceed 90-100% LTV? Again I’m more focused on the roughly $9 billion of second lien product.

[Mike?]

On our second lien product we have ensured our second position over 80% LTV’s for quite some time. That was something that AmSouth did pre-merger and after merger that has been part of our standard practice. So we shy away from second position high LTV’s.

William Wells

Also you mentioned about underwriting, we go on a constant basis looking at our individual customers and underwrite them as we start to look at different factors that may come up. Maybe a re-approval of lines or looking as we go through the credit process so we do underwrite again as we look at the home equity book.

Todd Hagerman - Credit Suisse

Again, not to beat the issue to death here but you mentioned some of the geographies but as you look at the portfolio, Mike, outside the geography is there a particular product or customer segment that is showing more stress? Again as I look at the past due and delinquency buckets there are there any kind of tell-tale signs that you can share with us in terms of where you are focused?

[Mike?]

Well Id say we are seeing more stress both in terms of defaults and in terms of less [on sale] in some of the higher growth markets in Florida and if I had to pick one that is probably particularly troublesome it would be the Ft. Meyers/Cape Coral area.

Todd Hagerman - Credit Suisse

And that is presumably less than 5%?

[Mike?]

Yes.

Todd Hagerman - Credit Suisse

Terrific. Thanks very much.

Operator

Our next question comes from Matt O’Connor from UBS. Your line is now open.

Matt O’Connor – UBS Securities

Hi Dowd and List. I was just wondering what type of loans were the $700 million that you transferred from the construction portfolio to the mortgage book?

C. Dowd Ritter

Oh. You’re talking about what went out of the home builder book?

Matt O’Connor – UBS Securities

Correct.

C. Dowd Ritter

They would be a variety of loans that between the combination of our conversions which we did in the fourth quarter and if you remember part of when we created this home builder group and took all the home builder credits they came from community banks…they came from a variety of places within the company and the whole idea was to put professional residential construction lenders in charge whether it was in special assets or otherwise. The purpose of that was to be very close to the customer, to be internally focused and to scrub those portfolios and in the process of that plus the conversions there were loans that primarily lent that were coded to residential home builders that were not correctly coded. You would expect that frankly in a merger like we’re doing is part of what we were looking for when we really started intensifying our focus on this portfolio.

List Underwood

And also too, Matt, there is a part of it as you go from construction phase into permanent phase and that is part of our reclassification too.

Matt O’Connor – UBS Securities

Okay. Within the residential real estate how much additional loans are there on this $700 million of this…related to this quasi land that one could use also some sort of residential construction?

C. Dowd Ritter

I’m not sure where that question is coming from. I just would point you to the home builder chart and statistics that are on page 15 of our supplement to the earnings release. I think it gives you a pretty good run down. That is what we think the different pieces of that are by lots, land, pre-sale, and so on.

Matt O’Connor – UBS Securities

Right but that $700 million is no longer included in that $6 billion, right?

C. Dowd Ritter

Correct.

Matt O’Connor – UBS Securities

So I guess I’m just wondering are there additional loans similar to this $700 million that would be classified within residential real estate?

William Wells

Matt let me jump in here for a minute. I think we had a drop or decline in our total home builder portfolio of $1.3 billion in the quarter. $730 million of that was pay offs. We had another $580 million that was recoded or reclassified, what Mike was talking about. In addition to that we had another $340 million of additional fundings where we were funding up construction projects for completion. So that sort of gives you all the components. So we end up today with $6.2 billion in that portfolio. I hope that clarifies it a little bit.

Matt O’Connor – UBS Securities

I think I’ll follow-up less specifically on my previous question just to not tie it up here. I did have a separate question on capital actually. I might have missed it but what was your tier 1 capital at the end of the quarter?

List Underwood

We don’t publish the tier 1 at this point. We don’t expect it to change a whole lot from year end if at all.

Matt O’Connor – UBS Securities

Okay that would make sense given what your tangible capital did. So if I recall correctly it was around 7.3% and I can look at that on the one hand the quality of your capital is very high because it is I think all or mostly common. But on an absolute basis the 7.3 seems kind of low or is at the lower end of many other banks and I’m just wondering how you think about that and is there a pressure to increase it?

List Underwood

Well one thing you’ve got to look at is also the bank level ratio and it was at year end 8.7% and of course it makes up more than 100% of the holding company. In this environment in particular I think we want to look at continuing to find ways to conserve capital. The markets are very tough right now as you know but we will continue to look there for any opportunities to raise that number and we will continue to.

Matt O’Connor – UBS Securities

Okay so the real number that the regulators will be focusing on right now would be the 8.7 as opposed to 7.3?

List Underwood

Well that is the bank level and certainly they are both important but the bank is very strong.

Matt O’Connor – UBS Securities

Okay. Do you have any interest in trying to bring some [sure line hybrids] or preferred into the market? It’s kind of a tough market out there right now.

List Underwood

Like I said I think we want to remain opportunistic there. The market is really tough but in today’s environment if you can find a window we certainly would take advantage of it at this point.

C. Dowd Ritter

You know Matt going back to your comment at the start, we do think it is a high quality capital base and as we put the two company’s together one of the things we did was we said as we compared ourselves to our new peer group we knew we didn’t have the amount of hybrid that some of them had but frankly the market that isn’t available right now but in a perfect world we would have absolutely taken that hybrid percentage up just for competitive reasons as we looked in the market place. But if it is not available we’re not going to do something foolish. As List said we are out there looking and if an opportunity presents itself we will take advantage of it.

Matt O’Connor – UBS Securities

Okay. That would make sense. When you are having conversations with the regulators and the rating agency their sense is that while the [chairman] might be low the quality of that is high so that kind of balances it out at least in the near term?

List Underwood

In the case of the rating agencies for example they don’t think those are particularly low ratios. We again compare favorably in our category…rating categories.

Matt O’Connor – UBS Securities

Okay. Thank you very much.

Operator

Our next question is from Ken Usdin from Bank of America Securities. Your line is now open.

Ken Usdin - Bank of America Securities

Thanks. Good morning. I just had a bigger picture question on credit quality. In January the company had spoken to a couple of specific pieces of credit guidance and taken into consideration some of your commentary already I am just wondering if are there any changes to your view of overall NPA growth and charge off expectations as you had detailed a quarter ago and I guess if not given everything we have seen what would be the key reasons for it not to have changed at all?

C. Dowd Ritter

Jim, this is Dowd. Good morning. You know we did that last quarter and we put out there those guidance on charge offs and non-performers. A quick digression as I read most of you that published none of you paid attention to it anyway so basically as we got ready for this conference call I said the world is changing so fast why in the world do we need to be forecasting charge offs and non-performers in this environment? So while we sit here today and I would tell you from the comments we have made we are pretty comfortable with where we were. We don’t think it makes much sense to keep updating that quarterly as rapidly as this environment is changing.

Ken Usdin - Bank of America Securities

Sorry about that. Just in a broader notion then, Dowd, forgetting quantitative updates to it can you just kind of sum up the all the credit characterization we have talked about on an individual basis and just say do you just feel net better or net worse?

C. Dowd Ritter

As I said the velocity is changing on a consumer side it is home equity driven and it is property valuation driven. An earlier question…our real concern is not any particular customer segment it is a geographic location of a customer where real estate values are falling so rapidly and significantly. On the commercial portfolio if you look at that it is the residential builder book and again we think both of those near term as we look out through the remainder of this year I think you will see those metrics deteriorate and that is what we’ve said all along. I don’t see anything that has happened in the last quarter that would change that.

Ken Usdin - Bank of America Securities

Okay. If I could ask one follow-up…can you give us a little context on Morgan Keegan? Obviously there was the charge this quarter. Can you give us some color on your expectations for that business as we move ahead obviously given the challenging market environments the company has held up very, very well as far as top line revenue but I was wondering if we should expect some type of deterioration from here given the challenges and the capital markets?

C. Dowd Ritter

Ken, no I appreciate it. You are right I think they had a very strong first quarter. We’ve all got to remember they do have many more offices now than they would have had this time a year ago. They are continuing to add staff…the people dealing with the customers and the brokerage side. We think it is still a real opportunity and as we look at our ongoing business Morgan Keegan in partnershiping with the bank whether it is on the commercial side, the investment banking side or on the consumer and private banking side we think there are huge opportunities to increase that penetration. John Carson, the new CEO and his team are working very closely with their counterparts in the bank to see that happens and three months ago probably none of you or us would have maybe said they’d have that strong of a quarter in this market but they did and we continue to see good things happening in their marketplace. The real negative, as you pointed out, was we did have to mark down those funds we purchased by that additional $25 million but on the bright side the value of those that is left is only $38 million.

Ken Usdin - Bank of America Securities

Okay. Thanks a lot.

Operator

Our next question comes from Jefferson Harralson from KBW. Your line is now open.

Jefferson Harralson – Keefe, Bruyette & Woods

Thanks guys. I wanted to talk a little bit about the balance sheet too. Two of the last three quarters you had some negative earnings asset growth. This time it was very nice at 6%. You grew the securities book a little bit. Do you think that kind of balance sheet growth can continue and can you talk about the loan growth you had this quarter and what drove it?

C. Dowd Ritter

Jeff, I think that we will continue to see low single-digit type growth. As we look out that would be what we expect. A lot of what is on the books and the growth you see is the result of some planning and some internal efforts that have been underway for several quarters and it is good to see that the…frankly the net new business increases more than payoffs this past quarter. I would tell you that is primarily what you saw. We had pay downs but frankly we had some good new business production and it is really primarily I’m thinking first quarter would have been our Tennessee market and Florida on the commercial side. Those would have been where the two greatest pieces of new business came from.

Jefferson Harralson – Keefe, Bruyette & Woods

And just to follow-up on some peoples questions…have you guys contemplated or done some line cutting on customers? Possibly maybe in your most weak…where the home {percent] have gone in the most and maybe Cape Coral, Ft. Meyers or other most negatively affected markets?

William Wells

Jeff this is Bill Wells. Yes, we look at that all the time and we look at the customers ability to repay and we are reducing some lines as we go forward.

[Mike?]

It might be worth noting that we can re-score the portfolio quarterly and we also can refresh values quarterly. So we’re able to look carefully at this.

Jefferson Harralson – Keefe, Bruyette & Woods

Alright and finally on the…I noticed that the condo piece of your book…it is not a big book but it has shrunk by $400 million. Is that also pay downs, reclassifications or sales?

List Underwood

It is primarily pay downs. What I would say is on our condo book while we are continuing to see stress it has performed very well in my opinion. We do see some problems come out of it here and there in different parts of our footprint but overall the condo portfolio has done really well and you’ll continue to see reduction in it principally from pay downs.

Jefferson Harralson – Keefe, Bruyette & Woods

Alright. Thanks a lot guys.

Operator

Your next question comes from Jeff Davis from FTN Midwest Securities. Your line is open.

Jeff Davis - FTN Midwest Securities

Thank you. My questions have been answered.

Operator

The last question comes from Jennifer Demba with Suntrust Robinson Humphreys, Inc. Your line is open.

Jennifer Demba - Suntrust Robinson Humphreys, Inc.

Thank you. Dowd I just wanted to clarify something from an earlier question. So you don’t wish to update your previous net charge off and non-performing guidance range at this point?

C. Dowd Ritter

That is correct.

Jennifer Demba - Suntrust Robinson Humphreys, Inc.

Okay. Thank you very much.

C. Dowd Ritter

If there are no more questions I would just thank all of you for joining us today and we will stand adjourned.

Operator

This concludes today’s conference call. You may now disconnect.

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