Jul 21, 2009
Executives
Dowd Ritter - Chairman & Chief Executive Officer Irene Esteves - Chief Financial Officer Bill Wells - Chief Risk Officer Mike Willoughby - Chief Credit Officer Barb Guidon - Head of Consumer Credit List Underwood - Investor Relations
Analysts
Craig Siegenthaler - Credit Suisse Matthew O’Connor - Deutsche Bank Kevin Fitzsimmons - Sandler O’Neill. Kenneth Usdin - Banc of America Brian Foran - Goldman Sachs Chris Mutascio - Stifel Nicolaus Jason Goldberg - Barclays Capital
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 participant phone lines have been placed on listen-only. At the end of the call, there will be a question-and-answer session.
(Operator instructions) I will now turn the call over to Mr. List Underwood, before Mr.
Ritter begins the conference call.
List Underwood
Thank you, operator and good morning everyone. We appreciate very much your participation.
Our presenters today are Chairman and Chief Executive Officer Dowd Ritter; and our Chief Financial Officer; Irene Esteves. Also joining us and available to answer questions are Bill Wells, our Chief Risk Officer; Mike Willoughby, our Chief Credit Officer; and Barb Guidon, our Head of Consumer Credit.
Let me quickly touch on our presentation format. We have prepared a short slide presentation to accompany Irene’s comments.
It’s available under the IR section of www.regions.com. For those of you in the investment community that dialed in by phone, once you are on the Investor Relations section of our website, just click on via phone player and the slides will automatically advance in sync with the audio of Irene’s presentation.
A copy of the slides will be available on our website shortly after the call. Our presentation this morning will discuss Regions business outlook and includes forward-looking statements.
These statements may include descriptions of management’s plans, objectives, or goals for future operations, products and services, forecasts of financial or other performance measures, statements about the expected quality, performance or collect ability of loans and statements about Regions general outlook for economic and business conditions. We also may make other forward-looking statements in the question-and-answer period following the discussion.
These forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially. Information on the risk factors that could cause actual results to differ is available from today’s earnings press release, in today’s Form 8-K, our 10-Q for the quarter ended March 31, 2009 and in our Form 10-K for the year ended December 31, 2008.
As a reminder, forward-looking statements are effective only as of the date they are made and we assume no obligation to update information concerning our expectations. Let me also mention that our discussions may include the use of non-GAAP financial measures.
A reconciliation of these to the same measures on a GAAP basis can be found in our earnings release and related supplemental financial schedules. Now, let me turn it over to Dowd.
Dowd Ritter
Thank you, List and thank all of you for joining us this morning for our second quarter earnings conference call. Earlier this morning, we reported the second quarter loss of $0.28 per fully diluted share, reflecting our actions to realize and provide for losses in Regions loan portfolio.
Although, I certainly don’t want to downplay the second quarter’s sizable credit cost and their bottom line effect. I do want to take for a minute about the fact that those costs are masking favorable progress on several fronts.
Our net interest income increased, our deposit growth remains strong. Our new account openings were at record level for the second consecutive quarter and our brokerage income rebounded.
At the same time, we significantly strengthened our balance sheet, meeting the requirement to increase our capital buffer by $2.5 billion including adding approximately $2.1 billion of Tier 1 common equity and successfully fulfilling the regulatory stress test requirements. In fact with our total risk based capital ratio and an estimated 16.2%, our Tier 1 capital ratio with 12.2% and our Tier 1 common ration with 8.1% as of June 30, we would compare very favorably with our peers, and further strengthening our balance sheet are allows for credit losses was increased as of June 30 to 2.43% of loans.
Irene will provide more detail on second quarter results, but first I did want to spend a few minutes talking about some of the initiatives that are enhancing Regions earnings power as we continue to proactively de-risk the balance sheet. Providing excellent customer service and a broad range of quality products is at the core of our focus on building profitable client relationships and we’re experiencing very positive results.
In the second quarter, our average customer deposits were up 3% from the preceding quarter. Year-to-date June, 30 new retail and business checking account openings are higher about 29% and were a record 491,000 new accounts putting us well on track to achieve a goal that was set at the start of year of over one million new checking accounts, further confirmation of our efforts in this recent national recognition that we’ve received, the most important of which relates to our relationships with customers.
A recent J.D. Power associate survey measuring customer satisfaction with their primary bank, Regions rates as the most improved retail buying passing 29 other banks in the ranking process.
Also, in a recent Gallup poll, Regions ranked second highest among banks that were tested, when it comes to customer confidence and trust in your primary bank. Finally, just last month we were ranked as the number three of small business lender in the United States by the small business administration.
From a customer profitability standpoint, we’re also making headway. For instance, you take our enhance risk adjusted loan and deposit pricing discipline, it’s notably improving spreads.
Our average interest bearing cost declined 24 basis points first to second quarter bringing the year-over-year drop to 54 basis points. Our loan yields are improving, reflective of the work that we’ve been doing to appropriately price risk into all transactions.
As a result, we’ve been able to stabilize our net interest margin. At the same time we’re working to diversify our revenue stream and enhance the fee based component.
As an example, our mortgage business continues strong originating a record $3.1 billion in new mortgages this quarter. We’re also more effectively leveraging our brokerage and insurance businesses with progress here exemplified by Morgan Keegan adding $1.4 billion in net new assets under management during the quarter bringing back year-to-date total to $3.1 billion in net new assets under management.
Further, the growth in our customer base mention previously is helping to have service charged income, which increase 7% linked quarter basis. Expense control and productivity improvements are also key components for earning power enhancement.
It was second quarter cause directly tied to revenue generation along with sharply higher FDIC premiums and securities related impairment charges, obscure the productivity successes that we’re achieving through extreme learning systems and processes and continuing to strengthen our performance management. All-in-all, we believe that we’re implementing some solid strategies to enhance Regions earnings power and ensure that the company not only successfully manages through today’s difficult environment, but it’s well prepared to capitalize on the opportunities that an eventual economic recovery will offer.
As I said earlier, attracting and retaining profitable customers is critical. One measure of our success today is a significant improvement that we’ve been able to achieve in our branch performance with customer loyalty been a critical component there.
Since June 2008, this past year the number or Regions lower performing branches is measured by customer service and satisfaction scores, which are developed and tracked on a monthly basis by Gallup, have declined by 65% for our half performing branches have increase to 133%. Turning for a moment to credit quality, there is no doubt that the challenges are clearly not behind us, but we remain confident in our ability to deal with them and continue to take the actions to identify and address problems credits.
Our stressed assets or world of finance and primarily relate to our $3.8 billion homebuilder portfolio. Our Florida home equity second liens and the condominium portfolio, which in aggregate we’ll reduced another $554 million during this prior quarter.
We will continue to manage these assets down. For instance, we expected by year end we will substantially eliminated our condominium exposure, which today’s stand at $711 million, down from $2.2 billion just two years ago.
Early problem assets identification along with early loss recognition has been and remains our focus. The majority of our loan portfolio continues to perform relatively well including commercial real estate.
Nonetheless, non-performing assets continue to rise as Irene will discuss and credit costs are likely to remain elevated throughout this year and into 2010. The history of [Inaudible] turn around and credit quality will lag an economic turnaround, and while there’s some signs that we maybe near to bottom of this recessionary economics cycle, we can’t presume a near term rebound.
Ultimately, there will be an economic recovery followed by an improvement in banking industry, credit quality and a decline in those related cost. When that times comes the earnings power and enhancement the regions is achieving will no longer be obscured by the outside loan loss provision and OREO costs, which in the second quarter alone combined to total $0.66 for fully diluted share.
As a reminder our Institutional Investor Day is next week in New York on July 29, we will provide additional inside about our initiatives and talking much greater depth about why we feel Regions is increasingly well positioned for the future. With that let me turn it over to Irene.
Irene Esteves
Thank you, Dowd. Let’s begin with the summary of results for the quarter, which the slight a loss of $0.28 per diluted share included several underlying strong positives.
As shown on slide one, customer deposits continue to increase at a strong pace adding $2.5 billion on average linked quarter, driven by a pickup in the non-interest bearing deposits growth rate to 8%. Reflective of lower demand average loans were down across most categories.
With respect to credit quality, net charge-offs increased to an annualized 2.06% of average loans from first quarter 1.64%. Reflecting ongoing weakness in the economy, housing valuations in particular, we also increased the allowance for loan losses by recording a $912 million provision, $421 million above net charge-offs.
Non-performing loans excluding loans held for sale, increased $977 million primarily due to homebuilder and condo loans. Regions net interest margin steadied at 2.62%.
Net interest income rose $22 million on a slightly larger earnings base, this is inline with our expectations and is evidence of the unfavorable impact of falling interest rates has largely work it’s way through our assets sensitive balance sheet. Non-interest revenue excluding certain items that I’ll cover shortly increased 10% quarter-over-quarter, particularly benefiting from a rebound and service charges and brokerage revenue.
Higher non-interest expenses were attributable to the increase and brokerage related incentives as well as higher FDIC insurance cost. Lastly as Dowd said, we bolstered capital fulfilling our $2.5 billion SCAP requirements.
Our Tier 1 capital ratio is estimated at 12.2% and our Tier 1 common ratio now stands at 8.1%. Let’s take a closer look at our earnings.
This was a busy quarter with a number of items relating to our capital raise running through our P&L. So, let me take a moment to point these out.
First, we booked $61 million pretax gain on the exchange of trust preferred securities for common stock. The gain effectively represents the growth discount to par on tendered securities.
We also sold our remaining shares of Visa, recognizing $80 million pretax gain. In conjunction with our asset liability management strategies, other securities having book value of about $1.4 billion were sold at a $108 million pretax gain.
Partially offsetting those gains with an FDIC special insurance premium assessment of $64 million pretax and $69 million in pretax securities related impairment expenses. Additionally, we booked approximately $189 million of leverage leased terminations income in the quarter, which is more than offset by $196 million related tax.
These items combined for the quarter earnings element for this pretax, pre-provision, net revenue of $799 million. This core PPNR before unusual items was up 11% from the prior quarter.
These strong results will offset by our loan loss provision, the preferred dividend expense and taxes related to leverage lease termination. Before covering some of these topics in greater detail, I want to spend a few minutes focusing on credit.
Slide three shows our most stressed portfolios. Residential homebuilders, home equity second lien in Florida, and condominium, which dropped another $554 million in aggregate during the second quarter.
These have been reduced by over one third since year end 2007. Stressed assets currently comprise about 8% of the total loan portfolio, down from 13% at the end of 2008.
This represents a $4 billion decline in the last six quarters. We have however, seen some signs of weakness in income producing commercial real estate lending, including loans secured by retail and multifamily properties.
However, weakness in retail multifamily is not at the same velocity or loss severity as experienced in homebuilder and condo portfolios. Income producing property types will experience less loss severity due to the presence of some level of cash flow.
Unlike unsold homes, plots, or condo. Slide four, highlight the substantial progress we’ve made over the last several quarters and working down our homebuilder land and condo portfolio, especially in hard hit geographies such as Florida and North Georgia, where residential property values have suffered significant declines and unemployment levels are very high.
For homebuilders overall exposure has dropped by $3.4 billion or 47% since the beginning of 2008. Our land portfolio some of which is the subset of the homebuilder balance has been reduced as well, dropping by $2.8 billion or 45% since the merger.
Condo exposure continues to decline as well and is now $711 million in total, of which $400 million is in Florida where stress is most acute. We expect our condo book to reduce substantially through the rest of 2009 leaving only small portfolio by year end.
The takeaway here remains the same, despite continued economic weakness in the materialization of difficulty in certain loan types. The composition of our problem credit hasn’t materially changed.
We are focused on resolving them and we’re maintaining the conservative credit discipline. You may recall in the fourth quarter, brokerage and bank failures, government rescues and other market events all contributed to increase economic pressure.
We recorded the provision substantially in excess of net charge-offs due to analyses of credit quality and the expectation of problem assets would migrate to nonperforming and ultimately lead to charge-offs. Actions by the fed and treasury brought some stability to the credit markets during the first quarter.
As a result, we felt that a more moderate reserve build was appropriate at that time. During second quarter of 2009, several factors contributed to the need to increase the loan loss reserves, but mainly we experienced the highest level of migration of commercial real estate into problem loan status and additions to non-accruals since the beginning of the downturn.
The majority of these continue to be residential related CRE. Of note this quarter included $169 million of commercial real estate non-accrual, which are currently not behind on their payment.
In addition, we saw an increase in nonperforming loans secured by income producing properties. Unlike many of our homebuilder and condo non-performing asset, the loans that are current are secured by income producing project, which totaled approximately $356 million are much easier to restructure and return to accrual status.
Loss content in these types of non-accrual is smaller then the levels we have experienced in homebuilder and condo credit. We fully expect to return a substantial portion of these to accrual status.
Consistent with the lower loss content of some of our new non-performing loan, the coverage ratio or allowance for loan losses to divided by non-performing loan declined to 0.87 times at the end of the second quarter. Our period and allowance for credit losses of 2.43% of loans reflects our resolving methodology, which includes constant consideration of the stress and problem loan migration and an appraisal process that ensures we’ve accurate values even in our declining market.
This slide gives you some perspective on credit costs, which we have to find here as net charge-offs plus other real estate losses and held for sale gains and losses plus any provision over net charge-offs. In total these costs were $939 million or $0.66 per deluded share in the second quarter, compared to first quarter $0.40 per share or $446 million.
Stress portfolios continue to explain the bulk of loan losses. Accounting for $202 million or 41% of the second quarter charge-off, while the asset account for only 8% of our portfolio.
Florida, were unemployment has reached double digit threshold remains a drive of losses. A peak in loan losses will normally lag in economic recovery.
So, Regions net loan charge-offs are likely remain the elevated to over next several quarters given overall economic weakness including unemployment, which is still an upward trend nationally as well as in our footprint. Slide seven, gives you details on non-performing asset increases for the quarter.
As you can see second quarter NPAs were higher than the first quarter and went to large extent driven by further migrations of home builder and condo credit. However, the addition of currently paying loans as well as the higher improve loan secured by income producing properties, as I mentioned earlier were also drivers.
Moving away from credit, average loan balances were down slightly linked quarter without categories decline expect commercial mortgages, which reflects the migration of completing projects from the construction category. The drop in commercial industrial loans reflects runoff of dealer floor plan loans, as well as lighter demand.
Impacting both commercial and commercial real estate, we did fund approximately $2.2 billion, variable rate demand notes during the latter part of the quarter, but this had relatively little impact to the average balances shown here. On the consumer side, while down from the first quarter residential first mortgage production activity remain solid as refinance activity continued with still attractive mortgage rates.
Much of this production is sold in the secondary market. The other consumer category, which consists mainly of indirect auto lending, continues to shrink since this portfolio is being exited and has been a lot of note for several quarters now.
Slide nine shows the positive change in our deposit funding base since last quarter, driven by consumer strong customer deposit growth especially checking and money market accounts. Notably, since third quarter 2008 average customer deposits have risen $9.6 billion or 11%.
Clearly, introduction of new consumer and business checking products and money market laid off are paying off. Importantly interest rate deposits group for the third consecutive quarter with growth accelerating to $1.5 billion this quarter.
Savings balances were up again as well evidence of a cultural shift and consumer assessments with respect to spending and savings. Not only that the addition of no cost or low cost funding help drive down interest expense over the longer term is also stable source of funding.
A slide 10 shows the pickup in customer deposit growth coupled with modestly declined loan balances as lead to shortly improve deposits for loan ratio 98.5% a quarter end. As a result, we have no exposure to overnight wholesale market and have minimized the use of government funds.
As expected the second quarter net interest margins set it at 2.62% benefiting from continued low cost deposit growth, especially in the non-interest bearing products and improving loans spread due to better pricing discipline offset somewhat by the impact of the excess equity position we assumed in anticipation of the announcement of the SCAP results in May. Excluding the impact of the excess liquidity, the net interest margin would have improved six basis points versus last quarter.
All in taxable equivalent net interest income increased.3% linked quarter. Notably, a primary headwind for net interest income over the past few quarters post by dramatically falling interest rates has largely worked its way through our numbers.
Trends in deposit pricing and loans spread should continue to support a stable net interest margins during this period of historic low interest rates. Reported non-interest revenues were significantly higher then the first quarter, excluding the unusual items for both the first and second quarters non-interest revenues were up about 10% linked quarter.
Most of out fee based revenue lines post again to first and second quarter with service charges and brokers revenue especially strong. Service charges up $19 million of 7% benefited from a high level transactions, new account growth and seasonal factor.
Brokerage revenues were up significantly, compared to the first quarter of $46 million or 21% driven by the strong fixed income results and improved equity market environment, partially offsetting the strength in other fees, mortgage revenues loss still solid drop $9 million from the first quarter, but $64 million they’re almost double our fourth quarter ‘08 level. Despite somewhat higher mortgage interest rates, origination volume claimed to record $3.1 billion from first quarter $2.8 billion with refinance activity representing 76% of origination down from the first quarter level of 84%.
The key driver of brokerage income is Morgan Keegan. So, let’s take a moment to review their results.
Reflecting improved deal flows, second quarter fixed income capital market revenues will robust this quarter increased in 14%, as compared to already strong first quarter. Also contributing the fixed income division revenues, this group has played a major role in underwriting government sponsored debt.
Ranking 15, in overall volumes and ranking third in the numbers of issues underwritten during the quarter. Equity capital markets are also showed strength as revenues were more than double out of the first quarter.
Drivers here include a greater number of transactions as well as a healthy contribution from our newly acquired revolutions partners. Improved market conditions including increased evaluations levels, led to a pickup in private client trust and asset management division revenues.
We’ve also sustained momentum with respect to new account openings, which were over 48,000 of the first six months of 2009, this compared to 38,000 in the six months of last year. New asset inflows also continue to upper trend increasing by $3.1 billion year-to-date.
Turning to our non-interests expenses, it increase 4% linked quarter. During second quarter as earlier mentioned $64million special FDIC assessments and $59 million securities related impairment charges.
Morgan Keegan related incentive in a higher level of regular FDIC premium expense largely explain the quarterly rise in overall core costs. Also during the quarter, we incurred the $69 million of other than temporary impairment charges on investment securities that I described earlier.
We remained focused on reigning in discretionary costs and improving productivity. For the full year, we are still targeting at 2% to 4% reduction in our core non-interest expenses.
Switching to capital, this slide details how we successfully fulfilled the SCAP requirements, primarily through the issuances of new common and mandatory convertible equity. Our Tier 1 capital is now $6.9 billion in access of well capitalized minimum.
Here, we show you how we have performed versus the assumptions used in the stress test by the regulator. To-date, we are tracking better than SCAP at $1.1 billion with the majority of the out performance coming from the loan loss provision.
This slide shows our significantly strengthened capital ratio. Our Tier 1 capital ratio now stands at 12.2%, while Tier 1 common ratio is 8.1% up approximately 160 basis points linked quarter and both of these ratios are more than twice a regulatory minimum.
In summary, Regions offers a strong investment thesis. We have a formidable franchise, with strong share and attractive market.
We benefit from the outstanding diversification and contribution provided by Morgan Keegan. We are growing customer accounts and deposits, while improving service quality.
Our earnings power continues to improve from a more disciplined approach to loan and deposit pricing, enhanced performance management, diversified revenue stream, and ongoing cost containment effort. Credit quality remains a challenge for Regions and the industry, but we are pleased with the actions that we have taken thus far, not only reducing problem exposures, but in terms of changes we have made in strengthening our credit processes.
Lastly, our capital levels are strong, providing us with a solid foundation to navigate the remainder of the recession and to take advantage of opportunities as the industry emerges from the current cycle. With that operator, we’re ready to take any questions.
Operator
(Operator Instructions) Your first question comes from Craig Siegenthaler - Credit Suisse.
Craig Siegenthaler - Credit Suisse
Thanks and good morning. First I just wanted to discuss the sequential pickup in NPAs and more importantly the net inflows of NPA’s.
Was this more mostly driven by the natural seizing of the credit cycle, probably a lot in Florida or did management take a more proactive stance in downgrading problems credits in light of the higher capital levels.
Bill Wells
What I would say is that we continue to see stress coming out of Florida and Georgia portfolios primarily the story that we’ve been saying for a period of time, which was the residential homebuilder of the condo portfolio, as well as the second lien home equity, continued to see stress in that and just FY, that’s the old legacy east region that was based out of Georgia that also went down in Florida, so we continue to see stress come in that portfolio. Also this time we saw a little bit more increase in our income producing commercial real estate.
We had signaled a couple of quarters earlier about commercial real estate retail as being an item we are watching, and then also we’ve been watching a little bit of the multi-family now. That number was only about $160 million movement this quarter.
So, when I looked at the quarter for increase in non-performing loan, it really comes in from those stressed portfolio and continue to see deterioration in which has been expected and then we saw a little bit movement in the income producing. Also as Irene has mentioned there is some loans that as we look at those they are currently current paying as agreed, but there is some question about the continuing of that movement, and we believe that they are restructured or strength the credit will be able to bring those back on accrual.
I think we see just a continuing by this company to recognize its problems and to deal with those on a consistent basis and Mike do you have anything you want to add to.
Mike Willoughby
I think that’s right Bill if you take the income producing and the credit that are paying current we have on our accruals about $330 million and than we had over $400 million that were out of homebuilder and condo portfolios, so that’s the best both of our net increase in non-performing loans.
Craig Siegenthaler - Credit Suisse
Got it, and then you mentioned the deterioration in multi-family and retail. When I look at your net charge off breakout I don’t see deterioration of construction on a charge off side may be NPLs is telling a different picture.
Could you quantify the deterioration in these two groups?
Dowd Ritter
Well we have not seen the charge offs come through on those portfolios, we are just start to see as we would identify problems and our determination would be that it is more prudent to put them on a non-accrual status and also one thing that Irene has mentioned earlier as we see the movement of this portfolio one you don’t have the loss severity that we saw in our land and condo book. That’s really the first thing that I think about and two when I go back and look at the income producing movement, I don’t see at any particular shape or form in one geography its kind of spread out and I think its just overall the more of stress of the recession impact in these portfolios.
As opposed to what we saw really coming out of our land and condo book which is really a Florida and Georgia story.
Craig Siegenthaler - Credit Suisse
Were those series loans that you moved into non-accrual this quarter or they part of the 90-day plus bucket last quarter, the 30 to 89 day or were they denied delinquent at that point, a good part of them.
Dowd Ritter
There could be some that were in but the 90 days bucket from last quarter we had some that we knew we are going to back all of those we thought we are going to condo non-accrual or we would have put them on non-accrual, some of them perhaps one or two did but the vast bulk of over 90s last quarter got redone and are current today.
Bill Wells
Craig one thing I would to say, I am glad you brought the 90 days, we worked extremely hard on focusing on that bucket of loans and getting that number down.
Operator
Your next question comes from Matthew O’Connor - Deutsche Bank.
Matthew O’Connor - Deutsche Bank
I just wanted to follow up on the NPA in flow question here. I mean how any guesses on where they go from here, obviously it increased a quite a bit.
So, we expect still need for increases from stabilization, any guesses in next couple of quarters?
Bill Wells
One thing that I would say, first that I always keep in mind, we’re looking at the portfolio, our stress and we talked about that most of the movement has been coming out of our residential home builder, as well as our condo book. Irene talked a little bit earlier about our overall reductions in our exposures in those portfolios, but just I was going through numbers when we take Atlanta, North Georgia and Florida and the homebuilder and condo side, size of the portfolio.
At the end of the ‘07 it was about $4.5 billion book. As of the end of the second quarter that is now under $2 billion.
So, you seen a lot of hard work getting that exposure down, while we’re going to continues to see some stress on our portfolio, we’re starting to see a little bit of it coming in the income producing. We don’t see at the same rate as what we experienced over the past 15 to18 months on the land and condo book.
So, it’s little bit hard to gauge about were we think the non-performing levels will go. What I can always say is we’ve taken very solid identification resolutions steps to work those problems credits down as quickly as we can.
Matthew O’Connor - Deutsche Bank
Continue to ask different way here. I can appreciate the loss content will probably be less on what’s being added now versus earlier in the cycle.
Given your strong capital, I think decent loan loss reserves here and you have more flexibility to sell from these problem assets? Is the market openings up at all?
Bill Wells
Very much, when you got some type of the income stream, you’re going to get a better source or better price on that and when I was going back looking for the cooer, we probably moved or marked well over $150 million in asset. One thing that we saw back in the fourth quarter yet kind of put this in perspective of the company, we took a pretty big strategy of marking down a good bit of our non-performing assess and that was on an average mark of about 50% discounts.
Last quarter, I would say the mark was around 30% to 33% and as we see in them assets moved and what we call held for sale is that about 25% mark. So, it goes back to which I don’t think a lot of people have understood.
We’ve got a lot of our worse credits behind us, that was ours intent in the fourth quarter, yes we are seeing on non-performing loans go up, but we’re trying to work through those. Again I think, I’ll see it, when we see it in our marks.
As we’ve said Mathew, we’re gaining about what we made on those marks. So, we’re coming in pretty good and what we had initially valued at.
Dowd Ritter
I just add there that the idea of selling notes versus foreclosing is more attractive of those states that have judicial foreclosure process. So, in Florida it takes a very long time to get to foreclosure.
It’s more attractive.
Bill Wells
I also would say we’ve been selling assets for about six to seven quarters now and we built our own centralized unit and they are bringing consistency to the process. We are strategic seller.
We do see that there is a little bit more liquidity coming back in. I would say it moved out in the first quarter, starting to come in a little bit on the second quarter.
So, that is something that we think will help us and moving some of this problem assets in the latter part of the year.
Matthew O’Connor - Deutsche Bank
Then just separately, couple of questions here. Bit of a clarification, the mandatory convert that you did.
Is that included in the Tier 1 common from 8.1%. I guess I thought it would be, but there was a table in the back of your supplement backing it out.
So, just remind us how that accounted for?
Irene Esteves
Sure for SCAP purposes it was included as Tier 1 common, because it’s mandatorily converted on December 2010, but in our actual it doesn’t count as Tier 1 common yet.
Matthew O’Connor - Deutsche Bank
Okay, it’s not at 8.1 now, but if we rollout a year and half or so, we’d add that 25 basis points impact?
Irene Esteves
Correct.
Operator
Your next question comes from Kevin Fitzsimmons - Sandler O’Neill.
Kevin Fitzsimmons - Sandler O’Neill.
I was wondering if I know you discussed commercial real estate and the stress you are starting to see in retail and multi-family. I was wondering if you can give a little color on it also looks like the non-accruals went up linked-quarter, noticeably in CNI and owner occupied CRE, and I am wondered if you can address that by what’s driving that neither by loan, by industry or by geography and then, just second, if you can address what you are seeing early stage delinquencies doing at 30 day to 89 day past due.
Thank you.
Dowd Ritter
Let me try to answer that the CNI the owner occupied book is very widely dispersed and the results that you asked about, there is no particular concentration in that area. One thing that to bear in mind, I think too around the CRE portfolio, in particular, but all of credit portfolio, if you remember, the federal reserve issued its stress test results on Regions and the other 19 banks that went through that.
Their conclusion was that $9.2 billion in charge offs for 2009, 2010 cumulatively is the right number of Regions and Bill had eluded earlier to back that we have been aggressive to sellers and disposers of problem assets in the third and fourth quarter of last year and because of the way the stress test was put together, it was 2009, 2010 and what are we brought into the beginning of 2009 you just had impacted into consideration in that. We did our own stress case and expected case for 2009, 2010 cumulatively and I want to be clear about what these numbers are.
This would be where you take the expected loss in each quarter and add them all up, so the debt was $9.2 billion on a stress basis. Our stress case was $5.9 billion and our expected case was $3.4 billion.
If we were to go the end of 2010 and look back, we’d expect cumulative losses to be between the $3.4 billion expected case and a $5.9 billion stress case. So, that’s kind of our view on where we think we are going to be looking back at the end of 2010 and it’s consistent with the comments around some of that the new migration in the form of income producing properties that we think will have less loss content, that really aren’t part of the loss story today.
Bill Wells
What I want to say we looking at C&I own our occupied really offer rates C&I loan I mean that what’s you are looking at it for the cash flow of the individual. I don’t think we need to think from a particular geography of product in those and the good story that we had in the overall past dosage, our team works past dosage very, very hard and you can see that in the ninety plus number two, so there is no trend that we seen in our thirty plus or between the 30 to 89 day past numbers.
Operator
Your next question comes from Kenneth Usdin - Banc of America
Kenneth Usdin - Banc of America
Just want a comment to reserve adequacy and provision expense following on to your last point there about expected loss so I just want to understand how much you may had already written-down as far as the additional NPAs you are bringing in you are giving a sense of what you had already have in you at reserve as par as partial write-downs on the portfolio?
Bill Wells
Ken what we do is our reserve methodology is place over the past several past quarters, very consistent, very discipline and what I would to say is that we start with basis of looking at credit right now $2.5 million that we think the stress and we look at from the past of 14% perspective. Then we look at the migration profit loans and there may get into the so as we go through that we look at what our losses will be for that period of time trying to see what they expected loans with the we don’t go through there and look for category of how much loans we taken in the previous what that does account for the balances that you have go to your methodology, that how we account for any charge down that we may have had.
Kenneth Usdin - Banc of America
Can you give us some color on what last content you already captured in this spoken NPAs especially this additional billion that hit or the one seven of addition you did this quarter.
Mike Willoughby
If you look at our range slide seven there is actually at slide six there is a valuation loss line on that and you’ll notice that we took $129 million in value charge this quarter up from the 92 we did last quarter and what that is we go out for non-accruals better in market of concern we should be Florida, Georgia, North Carolina, South Carolina, we have that on the every six months cycle. So, what’s driving those value charges and time to get to the answer to your question, each quarter we look what new appraisals we brought in we review them we make sure that we think the assumptions are appropriate and I have to tell you at this point and the this cycle we had been through as much as we have for very careful and conservative about values and we take that final approve number and we take the charges.
In addition to that in our reserve methodology and Bill talk about this, we also looking every non-accrual over $2.5 million, under FAS 114 and we assigned a specific reserve. If you think about in this way, we reserve one quarter, the next quarter we get a new appraisal and we actually take the charge.
Dowd Ritter
Also on the valuation charges, if you look quarter-over-quarter I would say we were at $90 million. Last quarter we bumped up a little bit, but a higher percentage of those are the first time movement of non-accruals coming thing.
I’d say 93% of those evaluation charges. So, what it means is as I look at it, as we’re looking at various loans, we’re taking the appropriate charges at that time.
Kenneth Usdin - Banc of America
So, the question I guess then is the losses that are still bit of trail this provision expense build. So, is it fair to say that you guys expect just a net amount of charge-offs to be going up as we go ahead for several quarters at least?
As the charge-offs lag their reserve build. How much catch up that we still have to see ahead of us, before there is a stabilization of provision expense and charge-offs?
Dowd Ritter
Well Mike had alluded earlier in a comment that we have as our best case that it come out and looked under a stressed environment versus a base case. We think we’re going to continue to see charge-offs coming further, but not to the level that what has been reported by the Federal Reserve or even some of the analysts.
So, there is going to be continued stress coming through the portfolio, we recognized that and as we go through that, we’re going to be looking at the reserve methodology and make sure that the reserve is at an appropriate amount.
Kenneth Usdin - Banc of America
Last quick thing, can you tell us just what factors you really changed in your methodology? Was it severity?
Was it a change to a more recent loss experience? What are the fact three is not just the overall economic change that you did allude to earlier, but what are specific factors that you’ve changed in your modeling?
Dowd Ritter
What I would tell you, there is two things to that. The FAS 114 that we’ve talked about, which are the big specific reserves are non-accruals and they’re just what they are each quarter.
Then you have the FAS 5 piece, which I think as what you are asking about, where we break the portfolio down into a number of subsets. We re-look the factors each quarter, we did change factors as you would expect in an environment like right now and that will continue frankly until through this cycle and we’re back in a period of relative stability in terms of loss content.
Operator
Your next question comes from Brian Foran - Goldman Sachs.
Brian Foran - Goldman Sachs
I guess coming back to the NPL inflows and I don’t want to beat a dead horse, because I realize everyone asked this already, but the $1.75 billion number is just ticker shock to a lot of investors. I think the question we always keep trying to understand is whether that number in the second quarter is meant to be a little bit of a getting ahead of the problem, cleaning out some of the pipeline, and that all else being equal NPL inflows would moderate from here or whether that just the new run rate and the outlook really just depends on what the economy and the housing market does in your geography from here?
Mike Willoughby
,
I would also consider to look at the portfolios that have been more stressed the overall balance are coming down over the period of time one thing we’ve like to say is we are moving out of raw materials we just don’t have as much coming through as I mentioned earlier about the significant decline in the Florida, Georgia residential and condo book. Then I would say well yes your are seeing a little bit of movement and your income producing properties, but when you think it about the reserve methodology and charge offs they are not gone be at the loss severity that you see or that we have experienced before.
So I think you start to see a little bit of change in the portfolio that you would expect during this economic cycle that we are in right now.
Dowd Ritter
I’d just added of that; if you look at slide seven and you walk down through that look at the payments loan, $116 million, that’s up from $56 last quarter, and its suggested over the fact that we had more opportunities to do work outstand than we did when we were almost exclusively broken condos and homebuilder. I also point to the line right under that, which says return to accruing status; $10 million was the amount return to occurring status and if you were add up all five quarters, you would see that we’ve returned a cumulative amount of $116 million from non-accrual to accrual.
It’s a very small amount and particularly in the context of what we put on non-accrual of this quarter after charge offs and all of these numbers. We had $330 million of income producing or paying current and a chunk of those will be candidates for re-accrual, in part or in whole in the next quarter or two.
So I think you’ve began to see differences in the makeup of our non-accrual book.
Mike Willoughby
Brian, I call what you said a sticker shock. I mean as we’re going through this, one of the things that we are trying to do is identify the issues early on.
We believe that it is kind of corner stone of our process; identifying early on, put dedicated resources to them and then where possible, strategically sell these assets. It’s worked well for us in the past, we will continue to do that and that is one thing that I think you should see as the strength of the company and as we come through this economic cycle, our whole goal has been to bring a strong disciplined credit focus.
You’ve seen that in our moratorium that we put in place, you’ve seen in the reduction of balances and that’s what we want to have to position this company for when the turn around does come, that we can take full advantage of that opportunity.
Brian Foran - Goldman Sachs
If I could ask one follow up on the adjusted pre-provision schedule. It is helpful and it kind of frames the issues that how variable its been and some other recent improvements that we’ve seen back towards the $500 million per quarter level.
Any kind of guess or frame work you can give us for thinking about what a normalized level of pre-provision income would be and how long it might take to get there?
Irene Esteves
The purpose of that schedule was to get you to normalized pre-provision net revenue. So, it’s from that base that we’re looking at initiative that we talked about as far as building our customers relationship and our customer service that will build that core PPNR line.
Brian Foran - Goldman Sachs
So, $500 million run rate today and hopefully some growth going forward from some of these initiatives you’re talking about?
Irene Esteves
Correct.
Operator
Your next question comes from Chris Mutascio - Stifel Nicolaus.
Chris Mutascio - Stifel Nicolaus
Question I know, if you tell on that credit quality, I don’t want to deliver the point. Can you give the average write-down you had on the income producing CRE, NPAs in the quarter and the view that losses on the income producing portfolios being less than other CRE portfolios.
Will that continue to whole true if indeed, we see on employment rates raise and therefore vacancy rates start to increase?
Mike Willoughby
Right now, those are not part of the loss story, as of this quarter that part of the non-accrual story, but not part of a loss story. I think the question, I’m sure that eventually there will be losses out of there.
I can’t tell you at what level. Right now, we’re looking at both of those portfolios that would be multifamily in retail and signed our self.
The loss content is not the story. The non-accrual increased is way under where we ever got with homebuilder or condo.
So, right now they are both; I would say we’re watching them very closely, haven’t seen anything yet on the charge-offs of these.
Chris Mutascio - Stifel Nicolaus
I want to ask one question on the earning assets for the quarter, the other earning asset line item, whether for the $4 billion in the quarter. What was that attributable to and is that sustainable level?
Irene Esteves
That was just our excess reserves.
Chris Mutascio - Stifel Nicolaus
Will it be maintaining at $9 billion rate going forward, what would think?
Irene Esteves
No, we’re actually out of pass as of now. So, we’ll see that excess reserve comedown to about $5 million.
Operator
Your next question comes from Jason Goldberg - Barclays Capital.
Jason Goldberg - Barclays Capital
Just I want to make sure and there is still something, in terms of I think you said earlier that under your base case you saw at $3.4 billion of net charge-offs over the next ‘09, ‘10 and $5.9 billion in your stress and you are in thinking towards the middle of that, which I guess with the $4.7 billion?
Barb Guidon
Jason, what I would say is as you go through and remember that it’s done in the first quarter in conjunction of looking at our portfolio, we’ll continue to update that this we go forward. $5.9 billion is that the very top end of where you see based on continue deterioration in the economy are unemployment.
What we’re saying is, somewhere in there, you’ll see it peak and start to roll down hopefully into the latter part of 2003 and what Mike just saying on a average, you’ll think you’ll see somewhere in between there.
Jason Goldberg - Barclays Capital
So, then I guess in fact $450 million in charge-offs and so an average of $450 million charge-offs over the last couple of quarters, so look to that number to step up to the six in a quarter, $650 million area?
Mike Willoughby
Jason, we had $390 million the first quarter, $425 million in the second quarter and you’ll probably see at move off again as we talked about stress in the portfolio. We’re updated as we go forward it’s vary, I think you’ve seen a number of people say, its very tough to determine, where our loss is go on burn our best estimates that we are right now.
You will start to see losses continue to arrive. I believe Irene had mentioned that in her presentation to, but we don’t think that we are at this point and was something else dramatically happens within our portfolio and the economy will operate within at the end of 2010 will be those numbers.
Jason Goldberg - Barclays Capital
I guess secondly, I believe conference earlier this year you guys made the comments that result NPAs should not fall below 100% and I understand some of the new ones there but now are kind of operating close to 60 and its sound like NPAs continue to trend higher…
Dowd Ritter
Jason we did we also said that was kind of ruler bond that you looked at you really go above how your methodology bills quarter-after-quarter and one think I think you have to take it consideration as you go through that is that one we do have the loans that are right now that are current that we have some question about of there ability to continue paying and then also on the income producing you see that some of these will not have the loss severity. So, while it is rule of affirm it is not necessary how you drive your methodology in your pro-provisioning and I think your number you said 60% I think it is really about 87% and then if you put that kind of current in their you are getting close to about 93% 94%.
So, again it is something that you looked at, but what we do in this company is power our consistent methodology that is proving through for us over a number of quarter during the good times as well as the bad times.
Jason Goldberg - Barclays Capital
Then just lastly it is look like a your Florida second lien home equity book is up about 10% since I guess 04 you may please talk about just expand in terms of what you are seeing that in terms of severity and of those lines now and utilizations and the like.
Irene Esteves
The utilization rate has stayed about the same in the 50% range overall and what we’ve seen in terms of Florida, Florida’s continuing to trap our results. If we look at Florida from the loss perspective of the second lean, it represents 64% of our net charge offs and only 23% of our balances.
If you look at the other states that we have, it’s gone up a little, but they stayed relatively well behaved. In terms of overall balance you did note that we have gone up since the fourth quarter of ’07.
We have come down in the last three quarters in term of our balance however, and we are going to continue to see that go down. Again we follow Reg-G very closely as to customers that we can’t shut lines down on and again, customers who use their lines don’t fall into a distressed type of customer and therefore we keep their line open.
List Underwood
Operator this is List Underwood. I think we have time for one more question.
Operator I think we must have lost some of those last questioners, why don’t we go ahead and with that conclude the call. Thank you every one for joining us.
Operator
This concludes the question-and-answer portion of today’s call. I’ll now turn call back to Mr.
Ritter for any closing remarks.
Dowd Ritter
Alright everyone, as we said earlier, I don’t know what happened to this route here being after 11, something must have happened at the hour, but thank you everyone for joining us and we’ll stand adjourned.
Operator
This concludes today’s Regions Financial Corporations quarterly earnings call. You may now disconnect your lines.