Regions Financial Corporation (RF) Q2 2012 Earnings Report, Transcript and Summary

M. List Underwood - Director of Investor Relations O. B. Grayson Hall - Vice Chairman, Chief Executive Officer, President, Chief Executive Officer of Regions Bank, President of Regions Bank and Director of Regions Bank David J. Turner - Chief Financial Officer, Senior Executive Vice President, Member of the Executive Council, President of Central Region, Chief Financial Officer of Regions Bank and Senior Executive Vice President of Regions Bank Barbara Godin - Chief Credit Officer, Executive Vice President and Head of Credit Operations - Regions Bank

Ryan M. Nash - Goldman Sachs Group Inc., Research Division Marty Mosby - Guggenheim Securities, LLC, Research Division Josh Levin - Citigroup Inc, Research Division Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division Matthew D. O'Connor - Deutsche Bank AG, Research Division Craig Siegenthaler - Crédit Suisse AG, Research Division Paul J. Miller - FBR Capital Markets & Co., Research Division Leanne Erika Penala - BofA Merrill Lynch, Research Division Michael Rose - Raymond James & Associates, Inc., Research Division John G. Pancari - Evercore Partners Inc., Research Division Gregory W. Ketron - UBS Investment Bank, Research Division Betsy Graseck - Morgan Stanley, Research Division Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division Gaston F. Ceron - Morningstar Inc., Research Division Kenneth M. Usdin - Jefferies & Company, Inc., Research Division Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division

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

Good morning, everyone. We appreciate your participation on our call this morning. Our presenters today are our President and Chief Executive Officer, Grayson Hall; our Chief Financial Officer, David Turner; and also here, and available to answer questions, are Matt Lusco, our Chief Risk Officer; and Barb Godin, our Chief Credit Officer. As part of our earnings call, we will be referencing a slide presentation that is available under the Investor Relations section of regions.com. With that said, let me remind you that in this call, we will make forward-looking statements which reflect our current views with respect to future events and financial performance. Forward-looking statements are not based on historical information, but rather, are related to future operations, strategies, financial results or other developments. These statements are based on general assumptions and are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. Additional information regarding these factors can be found on our forward-looking statement that is located in the Appendix of the presentation. With that covered, let me turn it over to Grayson Hall.

Thank you, List, and good morning, everyone. We appreciate your interest in Regions and your participation in our second quarter 2012 earnings conference call. Regions delivered another quarter of improved financial results, building on our momentum from earlier this year. In short, the company reported prudent and profitable growth, driven by solid business performance and we continue to see broad-based improvements in our asset quality. Second quarter pre-tax pre-provision income was $503 million, 15% higher than in the first quarter, and earnings from continuing operations were at an improved level of $0.20 per diluted share. As you're aware, earlier in the quarter we repaid the U.S. Treasury's preferred stock investment, and therefore, incurred accelerating accretion charges. Excluding these charges, and the final preferred stock dividends, earnings from continuing operations would have been $0.25 per diluted share. While our results reflect some encouraging and positive trends, the U.S. economy continues to improve on an uneven and slow pace. The economy continues to work through structural headwinds, including de-leveraging, high unemployment, a weak housing market and fiscal consolidation at the local, state and national levels. Within Regions' markets, job growth has been approximately on par with the U.S. as a whole. Importantly, with respect to housing, we are seeing modest and incremental improvements in most of our markets. In particular, the Florida metro markets. While housing remains soft in many markets, there are signs of recovery. We are pleased that we're able to deliver solid business results despite the challenging economic landscape. Looking at several important metrics, our second quarter results demonstrate that we are executing well against our business priorities. Despite the persistent challenge of a low interest rate environment, our margin expanded for the third consecutive quarter. The improvement largely reflects lower deposit cost, declines in nonaccrual balances and a reduction in excess cash reserves at the Federal Reserve. There's still an opportunity for further improvements in deposit cost which will largely support a stable margin, even if market interest rates remains at these levels. And while our long-term debt levels are low, relative to our peers, we continue to evaluate liability management opportunities. Although total outstanding loan balances were down less than 1%, total loan production increased a healthy 15% linked-quarter. We experienced improved growth in our commercial and industrial portfolios, which helped to offset the favorable decline in investor real estate portfolio. Our loan-to-deposit ratio remains conservative and provides considerable flexibility to continue to take advantage of profitable lending opportunities that will benefit future revenue growth. Our mortgage loan production and related fee income improved significantly this quarter, as customers continue to take advantage of historically low interest rates and HARP opportunities. We experienced growth in both refinancing and new home purchase. We continue to be disciplined and rigorous in our focus on improving operating efficiency. At the same time, we are continuing to invest in new technology and people where appropriate. In the second quarter, we began implementation of new technology in our banking offices that will enhance our cross-sell capabilities, streamline and enhance our customers' experience and reduce our overall operating expenses. We also posted another quarter of broad-based improvement in asset quality, exceeding our own internal expectations, confirming what we believe was a pivotal turn in the first quarter. Importantly, improving asset quality is enabling us to focus more of our resources and energy on executing strategies that profitably leverage our opportunity for revenue growth. With respect to capital, our improved ratios, bolstered by recent capital actions, position us well for the future. We're still reviewing the latest notices or polls [ph] we're making, regarding capital. We expect to be fully compliant well before the rules are officially phased in. The first half of 2012 has been transformational for Regions, and with several quarters of solid results and continued successful execution against our plans, we believe Regions is better positioned for ultimate out-performance. I'll now turn the call over to David Turner who will discuss second quarter financial details. Afterward, I'll come back and make a few closing comments. David?

Thank you, Grayson, and good morning, everyone. I want to begin on Slide 3, with a quick snapshot of our second quarter 2012 financial results. We reported net income available to common shareholders of $284 million or $0.20 per diluted share. Income from discontinued operations totaled $4 million, primarily related to the gain on the Morgan Keegan sale. Early in the second quarter, we repaid the Series A preferred stock investment made by the U.S. Treasury. In conjunction with this repayment, earnings were impacted by the acceleration of the accretion of the discount. And along with preferred dividends, totaled $71 million or $0.05 per diluted share. Pre-tax pre-provision income from continuing operations, or PPI, was $503 million. Net interest income increased $11 million or 1% linked-quarter and the resulting net interest margin increased 7 basis points. Noninterest revenues decreased 3% on a linked-quarter basis, while noninterest expenses were down 8%. From a credit standpoint, net charge-offs were down 20% and the total loan loss provision declined 78%. Let us get into the details, starting with the balance sheet. Average loans for the second quarter were down $498 million or less than 1% linked-quarter. Despite a low interest rate environment, our loan yields remained steady. Balances were impacted by a decline of $664 million or 7% in the investor real estate portfolio. At quarter end, balances stood at $9.4 billion, down almost $4 billion from one year ago. This portfolio now comprises only 12% of our total loan portfolio compared to 17% a year ago. We expect this portfolio to continue to decline at a moderate pace over the next few quarters. Commercial and industrial loan demand remained healthy in the second quarter, driven by our specialized lending groups. On an ending basis, commercial industrial loans grew $892 million or 4% first to second quarter. The growth in this portfolio was aiding to offset the decline in the investor real estate portfolio. While growth was broad-based geographically, we experienced particularly strong growth in healthcare, asset-based lending and the real estate corporate banking division which provides refinancing. Pipelines remain solid and are slightly above the same level at this time last year, as our clients funded capital expenditures, working capital needs, and increasingly, M&A activity. Lien utilization on commercial industrial loans was up 130 basis points linked-quarter to just over 44%, and commitments have increased 11% over the last year. And moving on to consumer services, average mortgage balances declined 1% linked quarter, reflecting our continued strategy to sell fixed-rate conforming mortgages. The company also experienced additional loan declines in the home equity portfolio, as consumers continue to refinance and/or de-leverage. At the end of the second quarter, we started our rollout of our new credit card product line and an enhanced Relationship Rewards program. Additionally, we will convert these cards onto our system in the third quarter, which will allow us to better control the customer experience and should enable us to increase sales production going forward. Indirect auto continues to be an area of growth, as loan production in this portfolio increased 15% over last quarter, and average loan balances increased 6%. Notably, total consumer loan production totaled $2.8 billion in the second quarter, up 24% linked-quarter. Total loan balances for the remainder of the year are expected to remain relatively stable with second quarter's balances. Let's move on to deposits. As shown on Slide 5, deposit mix and cost continued to improve in the second quarter. Average loan cost deposits increased $1.7 billion from last quarter, and over $5 billion from one year ago. Average higher cost CDs declined almost $2 billion linked-quarter and $5.3 billion from last year. Total average deposits were relatively steady, linked-quarter, and year-over-year. Average time deposits fell to just 18% of total deposits, down from 23% a year ago, as a result of our continued success in growing low-cost deposits. This positive mix shift resulted in deposit cost declining to 32 basis points for the quarter, down 5 basis points for the first quarter and 21 basis points from one year ago. We expect to drive additional improvement in deposit cost. We have approximately $2.9 billion of CDs that are scheduled to mature in the third quarter, that carry an average interest rate of 1.2%, and an additional $3 billion at 2.1% that will mature in the fourth quarter. Now looking ahead to 2013, we currently have $6.5 billion of CDs that will mature. Of that, $4.6 billion mature in the first half with an average rate of 1.8%, and $1.9 billion in the second half, with an average rate of 0.8%. Now this compares to our current average going-on rates for new CDs of approximately 20 basis points. Our total funding cost improved 5 basis points, linked-quarter, to 60 basis points. And we will continue to evaluate the capital and liquidity benefits of our 2 outstanding trust preferred securities, as well as other liability management opportunities. Let's turn to net interest income on Slide 6. For the quarter, taxable equivalent net interest income was up $11 million or 1%. The resulting net interest margin was up 7 basis points to 3.16%. The net interest margin benefited from reductions in overall deposit cost, reduction in nonaccrual balances and a decline in low-yielding cash balances at the Federal Reserve. Last quarter, we deployed some of our excess cash into higher-yielding corporate and consumer mortgage-backed securities, thus decreasing the negative impact of the excess cash reserves by 5 basis points to 8 basis points in the second quarter. At the end of the quarter, cash at the Federal Reserve totaled approximately $1.8 billion, which is in line with our target operating level. The negative impact of non-accruals on the margin declined 3 basis points to 7 basis points in the second quarter. Now currently, our investment portfolio amounts to $27.2 billion or 25% of average earning assets. The future size of the investment portfolio will largely depend on the dynamics of the rest of the balance sheet. Loan demand remained somewhat soft relative to the availability of stable deposits, and we expect to continue to sell conforming mortgages to the agencies in favor of retaining that exposure within securities. In the latter half of the second quarter, long-term rates declined to record lows. And should rates persist at these levels, growing net interest income in 2012 will be challenging, as fixed rate securities and loans are prepaid, or mature, and are replaced by lower-yielding assets. However, as previously noted, the opportunity to continue to improve deposit cost will be an important factor supporting net interest income and the resulting net interest margin. Consequently, we do expect net interest income and the resulting net interest margin to remain at relatively stable levels. Let's turn to noninterest revenue on Slide 7. Second quarter noninterest revenues were down 3% linked-quarter. Mortgage banking revenue was particularly strong in the quarter, driven by new home purchases and refinance activity aided by the government's HARP 2 program, which is serving to increase refinance volume. Mortgage revenue was up $13 million or 17% over the first quarter. Mortgage loan production of $2.1 billion during the second quarter reflects an increase of 28% from $1.6 billion in the first quarter. While we estimate that HARP 2 will add over $1 billion to our full year 2012 mortgage refinance volume. As we evaluate the mortgage refinancing opportunities, we believe our capacity to handle refinancing activity more expeditiously is enabling us to take market share. In fact, almost half of our HARP 2 loan applications are new mortgage customers. Account service fees and charges were down $21 million linked-quarter, due to the establishment of a reserve for certain customer fee refunds resulting from a change in our non-sufficient funds policy. Excluding this item, total service charges would've been consistent with the first quarter. And moving to expenses on Slide 8. Noninterest expenses were down 8%, linked-quarter, and 12% year-over-year. During the quarter, credit-related expenses were down $31 million. Notably, other real estate expenses declined 57%, linked-quarter, and 73% year-over-year. Within held-for-sale, we incurred $26 million in net gains related to property sales. Also, staffing was down during the quarter. And over the past year, we have experienced a decline of 544 positions or 2%. Looking ahead, we expect overall 2012 expenses from continuing operations, excluding goodwill impairment, to be down from the 2011 level as a result of our continued, and disciplined focus, on cost control. Let's move to our credit metrics on Slide 9. For the second quarter in a row, we experienced broad-based asset quality improvement, with virtually all credit metrics improving. Net charge-offs were down significantly, resulting in a decline of $67 million linked-quarter or 52% year-over-year and exceeded the loan loss provision by $239 million. Inflows of nonperforming loans declined to $315 million or 17% from last quarter. This is down 81% from the peak, which was in the second quarter of 2010. Inflows have now reached what we would characterize as a normal range, somewhere between $250 million and $350 million. Nonperforming loans, excluding loans held for sale, decreased $236 million or 11% linked-quarter. This is the first time since the first quarter of 2009 that our nonperforming loans have been below $2 billion, which is down 48% from the peak in the first quarter of 2010. Total nonperforming assets declined $1.3 billion or 35% from the prior year. Much of this improvement was driven by resolutions rather than charge-offs, another favorable indicator of future trends. Notably, Business Services' criticized and classified loans continued to decline, with criticized loans down 9% or $543 million from the first quarter, and down $3.4 billion or 38% from the fourth quarter of 2009, which was the high point. As a reminder, criticized and classified loans are one of the best and earliest indicators of asset quality. Our coverage ratios remain strong. At quarter end, our allowance for loan and lease losses to nonperforming loans stood at 120% or 1.2x, up 2 basis points from last quarter. Meanwhile, our loan loss allowance to loans remained strong at 3.01% at the end of the second quarter. In light of the backdrop of an uneven and slow economic recovery, forecasting asset quality improvement with certainty is difficult. As Grayson previously noted, our improvement in asset quality exceeded our own internal expectations. And each quarter will have its own unique characteristics and some volatility should be expected. However, our credit quality indicators continue to be encouraging. Now, let's look at our capital liquidity on Slide 10. Early in the second quarter, we repaid the U.S. Treasury Department's $3.5 billion preferred stock investment. This transaction follows the completion of the sale of Morgan Keegan and a highly successful common equity offering. In connection with the repayment of Series A preferred stock, the company repurchased the outstanding warrant for $45 million. As a result of these capital actions and events, our estimated Tier 1 ratio at the end of the quarter stood at 11%, and our estimated Tier 1 common ratio increased 40 basis points to 10%. And we continue to review the capital NPRs that were published on June 7. The proposed minimum capital levels, and definitions of capital, are largely in line with Regions' expectations. However, we are working to understand all of the proposed changes to risk weightings and are collecting the data to quantify the impact. Based on our interpretation of the NPRs, we estimate our pro forma Basel III Tier 1 common ratio will be approximately 8%. The NPR comment period ends in early September, and changes could be made, and those changes could result in materially different capital ratios from what we have estimated. Liquidity at both the bank and the holding company remains solid, with a loan to deposit ratio of 80%. Lastly, based on our interpretation, we are well-positioned with respect to the liquidity coverage ratio. Overall, this quarter's results demonstrate the continued progress that we have made on several important fronts. Our operating results continue to improve, driven by solid business performance. We delivered another strong quarter of substantial improvements with respect asset quality, and we further strengthened our balance sheet from a capital standpoint. And with that, I'll turn it back over to Grayson for his closing comments.

Overall, this quarter's results really demonstrate the continued progress that we've made in entering the second half of 2012, with both positive and encouraging momentum. While there's still work to be done, we are successfully executing our business plans, making substantial progress in taking actions that positions us to maximize our opportunity for out-performance. We continue to make progress even in the face of challenging markets. In the second quarter, we completed the sale of Morgan Keegan, and as a result, we are a simpler organization focused on the fundamentals of serving our banking customers. We're now able to offer our Wealth Management customers segment enhanced banking, trust and investment products with outstanding customer service. On the Business Services and Consumer front, we have been taking steps that expand and enhance our product offerings, as well as simplify and improve the delivery of customer services, and the customer focus is central to our business model. Our associates are working hard to ensure Regions is providing competitive products and services to satisfy customers' individual needs. We have a competitive team that consistently provides award-winning customer service, which we believe is a differentiating factor in today's marketplace. With this in mind, we are continuing to manage efficiency and selectively add to our team. For example, recently hiring additional bankers for growing specialized industries. We continue to invest in people and technology to build the best foundation for delivery and execution of our business plans and to take advantage of opportunities present in our markets, and in this economy. Although economic growth is expected to remain modest over the balance of the year, Regions has levers in place to continue to strengthen our financial performance and deliver improved returns by shareholders. Operator, we are now ready to take questions.

[Operator Instructions] Your first question comes from the line of Ryan Nash of Goldman Sachs.

Just first on the Basel III NPR. I understand you are still reviewing it. Can you just give us a little more detail on some of the moving parts? And maybe you can talk about some of the areas that there could be further mitigation and how big those can be.

Sure, Ryan. As I've mentioned -- this is David. The biggest change for us came in the form of risk-weighted asset changes. And more specifically, within that, those consumer products that are tied to real estate, in particular were our resi mortgage and our HELOC book. And I will caution this is still an NPR, there are changes that can be made and I'm sure will be made, that we need to incorporate. That being said, we will look at starting to analyze our business and changes that we need to think through, in terms of how that would impact going forward. Clearly, as is, you will be holding more capital for those 2 products that I just mentioned. And those, holding more capital clearly would have an impact in terms of the availability of that credit at the prices that we have today. And so we will look at restructuring those if we have to, to minimize the capital impact to us. I would also tell you that the changes in the risk weights don't take effect until 2015, as proposed. That, too, could change. But we have time to overcome and will modify our business, such that we have an appropriate amount of capital at the date that is implemented.

What's in line is, as we look at the NPR and we're studying this very carefully to make our comments and recommendations for change. When you look at our balance sheet, most material impact, as David said, is on the Consumer segment. And in particular, the real estate-related products. Obviously, as these rules are passed in the form they're in today, or in similar form, it will require some adjustments to our products and will also change somewhat in how we approach that market with those products. And so even though they won't be implemented until 2015, as it stands today, I do believe that the industry and ourselves in particular will start making business model adjustments as soon as we know what the definitive rules will be.

Got it. And then, just on credit. It seems like the provision came in a lot lower than I think a lot of us expected. And with NPL migration now back in a more normal level, I recognized credit can be volatile from quarter-to-quarter. But is it your expectation that we could see the provision running at these levels for several quarters as the reserve begins to come down? It seems like you had some positive comments on housing and it seems like disposals of assets are coming in at better prices than I think we would have expected. So can you give us a little bit more color there on the provision and the reserve?

Yes. I think, clearly, when you look at our credit metrics, we're continuing to see favorable trends. As a result of our conservative nature, we have clearly communicated that we think that recovery can be uneven. Although in the metrics, we continue to see our metrics perform really at levels better than we had internally forecasted. But we continue to see an improving landscape from a credit standpoint. We have seen some recent recovery in some of our markets that relate to housing. These have been modest recoveries, but been more widespread than we would have anticipated at this juncture. But I do think, that when you specifically look at our division, our charge-offs remain elevated above normal levels, although continue to improve. But when you look at the provision, that provision obviously will also normalize as our asset quality normalizes. And I'll ask Barb Godin to make a few comments, if you will, on the same subject.

Yes. If you look at the impact of our provision, really there's 3 factors: One is the reduction in our overall charge-offs that came down quarter-over-quarter; the second would be in the number of resolutions that we saw. And by that, I mean we had a number of payoffs. So substandard loans and even nonperforming loans, where the entire loan was paid-off, we were able to reduce or release the reserve on that, on those loans; and lastly, the mix shift, which is, as we're putting on much better quality loans, we need less reserve than those that we're taking off the back end. So all in, that led to just a $26 million provision. I would not call that a normalized provision level. Clearly, it's going to be somewhat above that. But again, it'll be in line with what happens with our charge-off.

And if you look at it, clearly, nonperforming loans were down quarter-over-quarter or 11%, about 48% from the peak. If you look at migration, and migration was down 17% quarter-over-quarter and 81% from the peak. So clearly, improving numbers from what we had seen historically. But if you will, the migration is starting to fall in what we'd categorized as normalized rate.

The next question comes from the line of Marty Mosby of Guggenheim.

The question on the deposit service charges. David, you were saying that if you take out the reserve that you put in place for the customer refund, but that would put you back in line with the first quarter. But typically first quarter is seasonally depressed and you would typically get about a $15 million to $20 million uptick. So would we still expect to see a level that would be higher than the first quarter level as we move into the third and fourth quarters?

Yes. I think that what our guidance was there to try and give you information that would guide you for the rest of the year, that we felt would be fairly consistent with that first quarter number or the as-adjusted second quarter. Clearly, from deposit rate policy changes that we've made, there will be some impact going forward. It's in the $3 million to $5 million per quarter. Not a big number, but we expect that to be fairly consistent with what you see as-adjusted.

And then on the net interest margin, 2 things: One is, we have the CD repricing that's coming through, especially in the fourth quarter. Should there be -- we had kind of been looking for a little bit of further improvement. We've got a little bit more this quarter than we expected, but maybe a basis point or 2 as you kind of went through the end of the year. The bias maybe why you're saying stable, still towards a little favorable move in that interest margin?

Marty, I'll tell you that we did have a little bit of a more favorable move in the quarter due to our improving our credit metrics. So there are 2 or 3 points there, and we wanted to guide to the consistency or stability of the margin from where we are right this minute. Because of that, we'll see if things of that nature, the improvement in nonperformance continue in the third and fourth quarter. You're right to point out that our repricing in the second half is very strong from a deposit standpoint, but we also are looking at historically low 10-year and the reinvestment rates will serve to work against us. The question is, how long will this remain? And so we've been a little cautious and wanted to kind of guide towards the stability of where we are right now. And if it's higher than that, then that will be a plus.

Marty, we continue to see, and as we said earlier, our loan yields appear to be stable and we think that will continue. But we think there is also still room for improvement in the deposit cost or deposit pricing itself. The question we have, as David just said, is where do reinvestment rates go on our investment portfolio? But when we net all of that together, we still are indicating that we believe we will maintain a fairly stable margin.

The last thing is, David, as you kind of move in the mix of deposits, is the CD runoff just customers taking their money and shifting it into the lower cost? So it's really a transfer of deposit balances or is it an influx of new balances into the lower-cost deposits and then exit of the CDs going to try to find higher yields someplace else? Or is it something that as soon as rates change, you'll see a kind of shift back to the CD level once you can get reasonable rates there?

Marty, what we're seeing is, is that when CDs renew, we're retaining about 70% of those CDs in the CD product. The other 30% of the CDs, some of that is migrating into other depository accounts or migrating outside our bank. But clearly, we've seen a strong improvement in our low-cost balances, deposit account balances. And believe a healthy portion of that money is being retained by the company. And I'll also point out that a lot of our liquidity and deposit accounts is with business customers, and we continue to see above-normal levels of liquidity in our business checking products.

Your next question comes from Josh Levin of Citigroup.

Some of your peers have suggested that over the last month or so customers are becoming a bit more reticent about investing in their businesses and borrowing, given all the macro uncertainty. Are you hearing that or detecting that from your customers?

I would say that the numbers don't appear to support that. When you look at our numbers, our sales pipeline still remains strong, still above this time last year. And if you look at our numbers in terms of growing our commercial industrial loans, we saw good growth in the second quarter. That being said, anecdotally, I would say you're correct. What we've heard from our customers, as we meet with them, is that risk appetite of our commercial customers has softened. I think we have some of the uncertainties here in the marketplace today, and all are well-described in the media each and every day. I think a number of our customers are taking a less aggressive risk appetite position. And anecdotally, we're hearing that. Numerically, it hasn't quite shown up in our business yet.

Okay. And then also, one of your peers said last week that it's going to close up to 5% of its branches. As you think about navigating through this very challenging environment for banks, is closing branches -- is that on your radar screen?

We were fairly aggressive early on in branch consolidation and branch rationalization. If you recall, we closed over 46 branches in 2011. That's embedded in our expense run rate today. We have consolidated 7 branches in 2012. But I would tell you, in summary, when you look at it from the top of the bank, we were aggressive early in branch rationalization and took some pretty strong steps over the last 3 years. We believe, in large part, our branch franchise today is going to be fairly stable. We will make some moderate changes, but you shouldn't expect anything of a major level in that regard. It'll only be making moderate adjustments to our business model. That being said, we are seeing transaction volumes of monetary transactions in our branches decline, but we continue to see improvement in sales transactions. And we are trying to transition our offices with more focus on sales and meeting customers' needs and realizing that monetary transaction volumes will continue to slowly decline through that channel. We're investing an awful lot of money in our other channels. We're seeing some remarkable growth in our mobile channel. But also in our web-based product offerings. So we're trying to invest in those channels that the customers want most. But quite frankly, our branches continue to be one of our most effective sales channels that we have.

Your next question comes from the line of Jefferson Harralson of KBW. Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division: I want to ask a question about normalizing expenses. The explicit credit-related expenses have come down all the way. We think about OREO expenses. But I guess can you kind of point us in the direction to think about the further benefit that can come in maybe in the personnel line or the other line as the credit-related expenses, the environmental expenses come out? Can you do it in number of employees or just type of business types of things that are going to naturally shrink down over time?

Jeff, one of the things we try to guide to is looking at 2012 expectation over '11, which we are confident that we would have lower, and this is excluding last year's goodwill impairment, we'd be lower in 2012 than in '11. Now we clearly have improvement in our credit cost, our environmental-type expenses, which are OREO and held-for-sale expenses. And we reported the net gain that we had in held-for-sale. So you should expect some unevenness relative to that. As our nonperforming loans continue to come down, and a number of loans in our special asset group comes down, we certainly have cost saves that we get there. That being said, we also have an increasing compliance environment where we have to shift and hire people to cover the compliance cost. We have a new regulator in as well. And so, I think our best guidance right now is to stick with really kind of global year-over-year where we are. That being said, we focus on expenses intently and intense focus on expenses. We are down year-over-year about 544 positions. Salaries and benefits is our #1 expense line. We continue to watch that, we watch occupancy cost in our furniture and fixture expenses, the top 3, very closely. Where we have opportunities to tighten up, as credit improves for instance, we will take advantage of that.

And Jefferson, this is a topic that we spend an awful lot of time on. Clearly, as we're looking at what we believe our future earnings potential will be in a low-rate, slow-growth environment, we continue to believe that we have to have a very rigorous and disciplined approach to expense management. We're doing a number of things. There's a number of initiatives across the organization to improve efficiency. Part of that is people. Clearly, a big part of our expenses is in salaries. But we really are trying to focus on processes that we can change and improve that allow us to do things more effectively. We've got new technologies rolling out into our branch systems, that allow us to reduce a considerable amount of overhead expenses in our operating environment. We don't necessarily have a named program, like many of our peers do. But don't misinterpret that. We've got a very distinct and clear focus on trying to reduce our expense base. That being said, I would agree with David. Part of our expense savings are to fund headwinds that we're facing, as we're having to add stamping and adding technology to make sure that we are effectively managing all of our compliance risk, and so there are some offset to our savings.

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

If I could just follow-up on the service charge. Just to be clear, as we think about the back half of the year, we should look at the 1Q level, the $254 million, and that would include the $3 million to $5 million drag?

That's right, Matt. We've kind of guided to roughly equal that. Maybe slightly up from there, but not a large change from that quarter.

Okay. And the change that you made, did that relate to the sort order, the highs to low [ph]?

No, Matt, what we've done is, really, we try to focus on our funds availability policy, as well as our non-sufficient funds policy to ensure that, one, it is in concert with our focus on service quality. And as we've looked at that, we continue to challenge ourselves every month as we analyze customer activity and customer responses to make sure we're taking the appropriate steps. This particular adjustment we made to our processes are not around sort sequence, but really around the way we handle customers who have come in and preestablished overdraft protection lines, and how we handle transactions that come in that exceed the capacity of those preestablished lines.

Okay. Then just separately, on the reduction to capital, the Basel III under the NPR. I don't know if you have a sense of how much of that 200 basis point reduction is from the undrawn lines. I guess I'm hearing from some folks that there's a lot of confidence in mitigating the impact of the undrawn home equity lines and commercial lines over time. I'm wondering if you have any of those numbers at this point.

Matt, I don't have the precise numbers. I can tell you that the impact on unfunded commitments is going to impact some of our peers a lot more severely than us. And it has to do with the proportion of unfunded commitments that are 365 days, and shorter, versus longer. So there is an impact related to that, but it is not the major mover, the major one is related to our risk-weighted assets on resi mortgage and the HELOCs.

Your next question comes from the line of Craig Siegenthaler of Crédit Suisse. Craig Siegenthaler - Crédit Suisse AG, Research Division: Just first starting out on NIM. I'm just wondering, if you think about this mathematically, where your loan yields are stable, your securities yield have some depression but there's actually very significant deposit repricing in the second half of this year. What's actually going to hold the NIM down, not allowed to go up? Is there any swap off we should think about or maybe any large changes in the securities and liquidity portfolio?

No, Craig, the primary driver is just the reinvestment risk that we have in this low rate environment. Currently, we have about $500 million rolling off of our -- is cash roll-off of our investment portfolio and having to reinvest that as the lower yields continue to drag that down. So we don't have anything that really sticks out other than that. Again, we caution a little bit on the stability of the margin because we had about 3 points that we picked up in the quarter related to better-than-we-had-anticipated improvements on nonperforming loans. If we get that kind of improvement in the third, fourth quarter like we had then that 3 points would be there. But we're trying to guide to a little more stable -- stability there. Craig Siegenthaler - Crédit Suisse AG, Research Division: David, your securities yield only declined by 3 bps in the second quarter. So it's actually much smaller than we thought. Any commentary there would be helpful. And then, do you expect a much sharper decline in the third quarter? And I wondered if you can share with us your new money yield for securities acquisitions.

Yes, we didn't expect there to be some added pressure on the investment portfolio in the quarter. Our going-on yield, today for securities, is in that, right just below 2%, 1.70%, 1.75% for the mortgage-backed security products that we would be purchasing. So over time, you would see that that's going to put more pressure in the third and fourth quarter.

Your next question comes from the line of Paul Miller of FBR. Paul J. Miller - FBR Capital Markets & Co., Research Division: On the securities portfolio, I mean, it looks like your duration is probably around 3 years, is that correct?

A little shorter than that, it's closer to 2 years. Paul J. Miller - FBR Capital Markets & Co., Research Division: Closer to 2 years. And what type of -- because we've seen different companies have had different prepayment rate speeds across-the-board. What type of prepayments are you getting off that?

About 20. In the 20 range. Paul J. Miller - FBR Capital Markets & Co., Research Division: And you're reinvesting I guess. You're reinvesting at the 2-year level or the 3-year level?

Yes. Closer to the 3-year level, we'd be reinvesting. Paul J. Miller - FBR Capital Markets & Co., Research Division: That's about like a 1.7%, 1.8% level?

That's right. We said about 1.75%. Just... Paul J. Miller - FBR Capital Markets & Co., Research Division: 1.75%. Yes, okay. Just following up on the last question is, is that do you think your deposits can reprice down? You do have some room in deposits to offset that. So I'm guessing that, with rates where they are and you're guiding to stabilized NIM, that you're depending on the deposit rates to reprice along with this to offset that.

Yes. We have a fairly significant amount of deposits repricing in the second half of the year and that's a big part of how we are confident in the stability of our net interest margin. And one other follow-up, in terms of the investment portfolio, we talked a couple of quarters ago about trying to invest in more corporate securities. We've kind of isolated about 10% of our portfolio in those type nonindustry mortgage-backs. And those are going on the books in the 3.25% range, which also will help stabilize a little bit of the investment yield. But our biggest benefit that we see in the back half is that deposit repricing on the CD book. Paul J. Miller - FBR Capital Markets & Co., Research Division: And along with corporate security, are you taking a look at munis? There are some banks that look at munis and increasing that portfolio also.

No. We used to have roughly 5% to 7% of our investment portfolio in munis before we got into the economic environment we're in today. And so we divested all of those and we're a bit reluctant to go back into the muni market thus far.

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

My first question is a follow-up to Ryan's question on the provision. I recognize that this dollar run rate is going to be quite lumpy as you continue to work through the credits. But I was wondering if you could help us get a sense of -- as you look at your -- if the improve -- most of the improvement is behind you, and you look at where your loan book is today, what a normal charge-off rate would look like for Regions in 2 or 3 years, and how you look at a normal provisioning rate. Do we look at reserved loans? Do we look at reserved average loans?

Erika, it's Barb Godin. Relative to what we look at for a normalized loss rate, we would target somewhere around that 75 basis points of loss through a cycle, is what you can expect as we get down to that range. In terms of what our reserve would be, it's not going to be the same as what it was pre-crisis. I don't think that was horrible neither. And I think we're just going to have to hold our capital to somewhere between 150 and 200.

Okay. And David, I appreciate all the color on the margin, but can you give us a sense of what the loan yields would've been if you excluded the impact of the NPLs getting worked out of the balance sheet this quarter?

Yes, it would've been about 3 basis points on the loan yields.

That was on the loan yield, not on the total margin?

3% or 4%. I mean those numbers can be fairly close. It's about 3%.

Your next question comes from the line of Michael Rose of Raymond James. Michael Rose - Raymond James & Associates, Inc., Research Division: Most of my questions have been answered but I wanted to get a sense for where you stand in your mitigation efforts related to Durbin.

I'll just make a couple of comments. One is that we continue to look at our consumer business model and see where we can enhance our products, but also expand products. As you are aware, we entered the credit card business a little over a year ago. And we introduced a number of new products in that line in the last few weeks. So we tried to address our interchange revenue in terms of adding credit customers that will use the credit card for purchases. But we continue to push the debit card. We continue to see success in increasing the penetration of the debit card product into our checking account base. We obviously have seen the revenue on a per transaction basis decline there, but we're obviously trying to make up some of our loss through growth. I would tell you, we've introduced a number of new products in terms of prepaid cards, that we hope enhanced the view of that customer segment. And as you are well aware, we've continued to migrate our checking accounts from, really, the free-checking environment to one where accounts are fee-eligible. We continue to believe that we can mitigate the impact of Durbin over time. We will not completely mitigate it in '12, but we believe that we can mitigate it over time. And we continue to be positive about the progress we've made, thus far.

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

Can you talk a little bit about your thought process around the potential redemption of your $840 million in TruPS? I know you mentioned that you are evaluating it, but if you can just give us more color around what you're looking at there and what the thought process is.

Sure. We have 2 issues in that 8.45, there's a 3.45, there's price of debit, 8 7/8, and there's 500, that 6 5/8. The 6 5/8 clearly is business capital treatment as this other one. But we look at that as a reasonable long-term debt yield today. The other one, the 8 7/8 is one where we think we have opportunity to -- as we think about liability and capital strategies via NPR, that we could look at and perhaps call, given the regulatory event that occurred. So we're trying to lead it to -- as we are investigating that, we'll be putting together our thoughts on that and get back to the investors and analysts regarding that.

Okay, all right. And then secondly, around the reserve level. Could you talk about the pace in the expected decline in the reserve over from your current 3% of loans to that 1.50% to 2% that Barb had indicated?

Yes. I think that clearly, the pace is what's harder to predict, given that we think clearly the economy's where it is there's going to be unevenness relative to charge-offs as we've indicated earlier on charge-offs are higher than where we want them to be. Although we have reserve for. The biggest determinant of how that 3% comes down closer to that 1.5% to 2% that Barb mentioned is going to be the level of charge-offs. As we continue to get clarity around that number, the pace of that change to get to the 1.5%, 2%, will become clearer.

As we've said earlier, we've looked at the migration of loans to nonperforming status. We were 3 15 this quarter, that exceeded our internal projections. It's actually less than our internal projections. The pace of economic improvement in the country really drives that. That really is an indication of the health of our customers. And we continue to ask ourselves that same question, it's a great question. It's what's the pace of that improvement going to be? We continue to believe it will be an uneven recovery. But we would love to see it faster, but predicting that pace of recovery is a very difficult thing to do at this juncture.

The only comment that I would add to that is, as we think about the third quarter and what we think might be a potential problem loan at this point. We would think somewhere in that $300 million to $400 million range in terms of migration to NPL.

And you'll see that range when we follow our queue. But we do believe that it will fall in that range of $300 million to $400 million.

All right. Then lastly, just real quick. Around the securities portfolio, do you have what the premium amortization expense was for the second quarter? And then what your unamortized premium balance was as of June 30?

We don't have that readily available, but we can get back with you on that.

Your next question comes from the line of Greg Ketron of UBS.

Just a couple of questions around the loan portfolio. You've had really good growth in commercial. Some of the consumer loan categories, we continue to run off in areas you had noted previously. Do you have a sense, to the degree you can control the runoff, when we may see the loan portfolio bottom out and you actually may start to see net growth come to the bottom line?

What you're seeing, the loan portfolio, this time is good growth in commercial industrial lending. We saw good growth in mortgage. We saw good growth in indirect auto. We did not -- when you look at the balance sheet, we've elected not to place any fixed rate product on the resi mortgage portfolio or to out that production on our balance sheet. And we've done that predominantly because of our cautiousness around the duration of that asset. How long it might be on the balance sheet given the low rate environment that we're in today. So the consumer portfolio continues to decline, predominantly because of that decision. I would say the equity portfolio continues to decline about $100 million a month. That's consumer de-leveraging. And we continue to see that de-leveraging. The ability for people to refinance continues, I think, to add to that issue. The good news we saw in our mortgage production is about 60% of our production was refinance and 40% was purchase. And so the purchase part of that activity really encourages us from first to second quarter. We saw not only refinancings go up, but purchases go up. So we have some strength, I think the housing market's starting to show. It's slow and incremental, but improvement, nonetheless. On the commercial side, I just think what you're seeing is that most of our activities in the higher end of commercial middle market, and the small business owner, the small commercial customer. It is still behaving an awful lot like a consumer, it is still de-leveraging. And I think, as we get more confidence in the economic outlook, you'll start to see that segment improve. What we had said earlier as we felt that our loans outstanding would, by the end of the year, would be approximately what they were at the beginning of this year. I would say we have less conviction in that today. Although we've seen our rate of decline slow, we've seen more production on commercial real estate than we saw this time last year, and we're seeing that commercial real estate portfolio still declining but at a slower pace. So we think we'll be close by the end of the year, but I think it's a great question.

And then one other question, your loan yields have held up very well, really going back over the last 5 quarters. And then it looks like some of it's a mix issue, you put more indirect into the portfolio. But is this something that you anticipate that you'll be able to maintain close to, despite the rate environment, as we look forward into later this year and maybe even into 2013?

Okay, this is David. I think Erica's question was really trying to get there, too. So we had 3, call it maybe 4 points, related to loan yield that we had related to end of the performance of nonperforming loans this quarter, that hopefully, they'll repeat. But if they do, then that'll benefit our margin outside of what we're telling you. Persistently low rates from a loans standpoint, yes, we'll continue to have some pressure. But it's really the reinvestment risk on investment portfolio is probably the greatest impact to us from a NIM standpoint. We are trying to change our mix of our loan portfolio to more to the consumer side. I've mentioned in my prepared comments about the changes we were making to our credit card program that we purchased last year, about a year ago, that we'll be converting into our system in the third quarter, and we're rolling out new cards and Rewards program. The purpose of which is to control the customer experience and assist us in increasing our sales production with credit card. We think that also bolster -- to the extent that we can execute on that, bolster our loan yields.

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

A couple of quick follow-ups. One is on the interest rate outlook, there's some debate as to whether or not the Feds going to keep the paying rates on reserves. Obviously, the EU stopped doing that. What is your kind of game plan for if that were to happen here?

Well, I think to the extent that we're not getting 25 basis points anymore, everybody will move to going back to what we used to do. It'll be more credit risk in the system as we go overnight, with other counter-parties probably be compensated some for it. Front-loaded compensation will offset the risk relative to having a 25 basis points with the Fed. But today, we've got net amount that we have on deposit with the Fed down to about $1.8 billion. It's about the level where we want to be, maybe in the $2 billion range, and we'll see if that movement is going to happen. I'm not sure what the odds are on that right now.

Okay. So it would be partial mix into more loans to the degree you could and then offset whatever you couldn't do there, you'd be doing with other financial institutions.

That's right.

Okay. And then just second quickie is on HARP 2. You mentioned that $1 billion in mortgage fees you're expecting in 2012 due to HARP 2. How much of that have you seen already in 1Q, 2Q?

That was mortgage production of $1 billion.

If you recall, we did about $1.6 billion in total mortgage production in the first quarter and $2.1 billion in the second quarter. The HARP 2 production is running about 24% of total production. And that's up significantly from first quarter. But we're pretty steady. Right now, about $700 million originations a month. We don't see that increasing a lot from this point. But we think, right now, looking at our application pipelines, that at least for the third quarter, that looks very sustainable.

Okay. So at least sustainable is what you're guiding to?

That's right.

Your next question comes from the line of Kevin Fitzsimmons of Sandler O'Neill. Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division: Just a quick question, I think this is still a ways out. But as far as the CCAR process for 2013, when you all start to put your plan together in the fourth quarter, I know there's a lot of uncertainty regarding risk weightings as far as Basel III. But what's your appetite and priority in terms of raising the dividends, about doing buybacks and is the trust preferred redemption you mentioned earlier -- is that part of the plan that was already put through the regulators or is that something that you have to include in your 2013 submission?

Well, let me talk about kind of our capital plan and kind of stay away from the regulators. From a capital plan standpoint, we will continue to evaluate all capital actions. You asked specifically about returning capital to shareholders. The way we view that is we generated the capital and raised the capital, so we think our shareholders expect that we redeploy that in our business, to grow our business, to invest where we can get the best risk-adjusted return back to the shareholders. And so that's our first priority. To the extent that growth is not there, acquiring product lines, entities, those kinds of things would be what we would go to second. And then to the extent we have capital and expect to generate capital, returning it to the shareholders in the form of increased dividends and stock buybacks. That being said, we do acknowledge that our dividend payout ratio is below our peers to date. Now we just repaid TARP and so expectations were that we would put together a capital plan that would include an appropriate use of that capital, and we will submit that in January. The trust preferred, clearly the NPR, provides an opportunity for the regulatory call on the trust preferreds. And as we're trying to guide through our prepared comments on liquidity and capital strategies, that we would seek to do something, not only the trust preferred but other subordinated debt instruments as well.

Your next question comes from the line of Gaston Serendah of MorningStar Equity.

I just had a quick question on following up on economic conditions. I know you gentlemen spoke a little bit about this already, but I'm wondering if you can just give us some color on some of your key markets, especially Florida. There's been some reports of the housing situation kind of improving there, but things still seem a little mixed and unsettled. Just kind of wondering what you're seeing on the ground or in Florida in all the key markets.

Yes. I mean, I think, obviously when you look across the 16 states we operate in, there are some mixed metrics around housing. But generally, what we've seen is some pretty steady improvement, although incremental, in most of our markets. I would tell you that, generally speaking, inventory levels are down. And in some markets, inventory levels are down at levels we haven't seen in a number of years. In Florida, in particular, I would say most of the strength we've seen have been in metro markets. And in particular, we've seen the condominium segment improve faster than we had earlier forecasted. We're seeing some strength in our business in Florida, that have been exceeding our internal forecast. And we think that while Florida was probably one of the harder hit markets we've seen from a housing standpoint, and it's going to take some time for recovery, that we continue to be encouraged by some of the signs. When you look at our mortgage production, there's an awful lot more home purchase in Florida. And in the other markets, use of refinance is not an option for a lot of homeowners in Florida, but you are seeing home purchase there. And so, I would say the strength is, at this point in time, seems predominantly located in the metro markets. Barb, would you like to...

Miami, as an example, seems to have rebounded clearly in terms of pricing. We're seeing increases in the Panhandle area in Florida and we're even seen increases now starting to happen in places like Ft. Myers. So clearly, we're seeing that the bottom has been hit, generally, across most of the markets in Florida, and is on the way up.

Your next question comes from the line of Ken Usdin of Jefferies. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: The 2 questions. First of all, David, following your earlier comments about other liabilities, and with deposits down at period end, you had some redemptions this quarter, of some debt. I'm just wondering, with the kind of flat loan growth, underneath that, are we still just going to see assets continue to shrink? And at what point do you think the earning asset base will stabilize?

Well, we were trying to guide to, in particular within earning assets, the loan portfolio being stable from here on out. So we think we've had good growth, we've shown you, in C&I. The decline in the investor real estate portfolio slowed almost $500 million this quarter. And we see that continuing to attract some, but not as rapidly as we have had. But we'll be de-leveraging on the consumer side, and we aren't changing our resi mortgage strategy. So we think we can have stability there related to our earning assets, in particular, our construct of our loans. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: I was getting more at the total balance sheet size, right? Because the right side of the balance sheet continues to shrink. So if loans are flat, and you're happy with where your cash deposits are now with the Fed, it kind of implies that you'll be just shrinking the investment portfolio. I just wanted to make sure that I was not misunderstanding that.

Yes. From a deposit side, we did have declines and our average deposits were flat, but they down due to the repricing. We think we can hold where we are with earning assets to be fairly, fairly stable from here on out. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Got it. And my second question just relates to salaries and you mentioned that you had a 500-person decline in headcount year-over-year, but the salaries line was still up 8% on relatively flat revenue. So I was just wondering if there's some moving parts inside the salaries line and what we could expect from that going forward.

As we mentioned earlier, we continue to watch salaries and benefits expense. We did have our merit increases actually took effect at the beginning of the quarter. And that's probably the single biggest item. The other is pension expense continues to be higher as a result of this extraordinarily low interest rate environment. So we'll see those 2 things impact us. But we've continue to look at headcount and that's really, from a cost control standpoint, our primary lever.

Your next question comes from the line of Gerard Cassidy of RBC.

The question I had was coming back to your comments about the new charge-off ratio through a full cycle of being about 75 basis points. Since your net charge-off ratio was north of 300 basis points in 2010, does that imply that we should see a net charge-off ratio, then, in the good years, that might be coming up in '14, '15 in the 30 to 40 basis point range?

Well, it's going to move around a bit. As you can imagine we're going to try to keep the volatility as down as we can, as well as we can. But clearly, if you're going to have 75 basis points through a cycle, you're going to have some years that are below 75 and other years that are above 75. But I wouldn't want to give you a kind of a range right now.

Okay. On the total classified and special mention loans that you guys reported this quarter, at $5.4 billion, is that considered a normalized level or is there still improvement here as well? I know your nonperforming assets will likely continue to improve as we go forward. But how about the classified and special mention?

Yes. We should continue to see those come down. If you look at the 90-day past due levels, while they were up in Business Services by $34 million this quarter, that was 1 account got cleared in the last couple of weeks just didn't make quarter end. Consumer was down, we anticipate that those levels will continue to move in the right direction. Our 30- to 59-day delinquency levels as well, relative down to the quarter. And again, depending on what happens in the economy, we're at a track to the economy. But those are my very early indicators of what I would expect to see in special mention, in classified and criticized.

Should we think of a more normalized number instead of the 11.7% that you reported here? Is it something after that or 6% or 7%, is that considered to be more of a normal number that you've seen in a normal economy?

Yes. I'd hate to point to a specific number, because we don't track it the way you're talking of the 11%. As if we're looking at my criticized loans and my criticized loans are not at that level, they're at 8.49% for criticized, which includes the classified loans. And that includes my special mention. So my 8.49% includes my special mention.

And during a normal environment, is 8.49% normal or is it somewhere closer maybe to 5% or 6%?

Right now, it's clearly, it's elevated. And yes, it would be somewhat reduced. I'd give you a range, probably a 5% to 7%.

Okay. And then in all the nonperforming assets results that you reported this quarter. Do these results reflect the Shared National Credit exam where you may have participated as a H&O lead or a participant?

Yes, they do.

And then, one final question. On the loan pricing for loans, the CNI loans in particular, the Federal Reserve data is indicating that it seems like pricing is holding up. Are you guys sensing that? That, yes, it is competitive but there isn't really any slash and burning pricing going on or is there really that type of pricing going on?

No. I think what we've seen is, clearly, there's pretty intense competition for loans, obviously, in this environment. We saw some pricing compression early on, that I think part of that was because pricing would hit -- the spread, it really expanded during the recessionary period. And we saw some compression. But still, pricing is holding up above pre-recession levels. But it seems to be steady at the moment. And I'm not saying there isn't the odd transaction here and there where one gets priced at a level we don't understand. But I would say that is infrequent. The norm seems to be fairly stable.

I know this may sound too optimistic, but with all the new challenges that the industry is confronting particularly with the higher regulatory costs and certainly efficiency ratios for most banks are elevated, do you think more rational pricing could enter the picture where it doesn't get so cutthroat and people realize that they can't cut prices because expenses are just going to be permanently higher as we go forward?

A couple of things. I think one, as this environment extends for long period of time there's going to be some rationalization on the part of competition. There has to be. There can be some irrational behavior on the short term. But on the long-term, it has to rationalize. I think the other issue too is the Basel III rules coming out. Obviously, there's going to be the entire industry stands to revisit our pricing models with those capital allocations and certainly will alter pricing in a number of different lending products.

Your final question comes from the line of Matt Purnell of Wells Fargo.

Quick question on your deposit, your expectations for deposit growth. I'm just curious, how you're thinking about the potential for the guarantee of non-interest-bearing deposits going away at the start of the year, relative to your debt ratings. I know you've had an upgrade from S&P in March, but just curious as to how you're thinking about what your trends in deposits might be at the start of the year?

Yes. I mean, we continue -- we continue to deliver a considerable improvement in our deposit cost without demonstrating much of a decline in our outstanding deposits. And in fact, other than the time deposit segment of our deposit portfolio, we continue to grow that segment. We've gone through quite extensive analysis of the deposit guarantee program. We believe that would have a fairly nominal impact on our deposit base. We know which customers we work with our customers closely that might be an issue with. But I think given the capital levels of the industry and where we're at today, but that's not as material an issue as it was a couple of years ago. And so, we don't anticipate that being an issue for us at this juncture. We do not know how to handicap that event and would not speculate on that.

Grayson, you mentioned that anecdotally in some of your conversations with clients that clients are getting a bit more risk-averse given the headlines that we're all reading every day. I'm curious as to, if you combine that with your comments about the potential for pricing on loans going up post-Basel III, do you get the sense that your clients understand that that industry-wide pricing is very likely to change in the relatively near term? For commitments and other types of commercial loans?

I do not think that the anecdotal information we're hearing as a result of perceived pricing issues going forward at all. I think the average customer is seeing such a healthy level of competition between financial institutions at this juncture I think most of our customers continue to believe that they're going to have a fairly robust level of competitors competing for their business and pricing would be fair. I think most of the risk aversion is really over economic uncertainty as opposed to any sort of implications from capital requirements.

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

Listen, we appreciate again, everyone's participation today and your interest. We had some great questions, and we thank you for that. But without any further conversation, we'll stand adjourned. Thank you.

This concludes today's conference call, you may now disconnect.