Regions Financial Corp (RF) 2004 Q2 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Quarter 2, 2004, Regions Financial Corporation's earnings conference call.

My name is Amanda, and I will be your coordinator for today.

At this time, all participants under a listen-only mode.

We will be facilitating a question-and-answer session towards the end of this conference.

If at any time during the call you require assistance, please key star, followed by a zero, and a coordinator will be happy to assist you.

As a reminder, this conference is being recorded for replay purposes.

I would now like to turn the presentation over to your host for today's call, Ms. Jennifer Goforth, Director of Investor Relations.

Please proceed, ma'am.

Thank you, Amanda.

Thanks, everybody for being on the call today.

Carl Jones, our Chairman and CEO, Jack Moore, Regions' President, Bryan Jordan, Regions' Chief Financial Officer, and Rick Horsley, Regions's Chief Operating Officer, will be commenting on our second quarter earnings and on the integration progress with the former Union Planters organization.

Our earnings release and supplement have been filed on Form 8-K, and they are located at regions.com in the investors release earning release section of the website.

I will also remind you that we do not provide specific earnings guidance; however, we will be happy to answer your questions after the presentation as thoroughly as we can.

As always, I should also remind you that certain statements made in this call might be forward-looking statements.

These forward-looking statements reflect Regions' current views with respect to future events and financial performance.

Actual results could differ substantially and materially from what we have projected.

Such statements are made in good faith, pursuant to the Safe Harbor Provisions of the Private Securities Litigation Reform Act of 1995.

Please refer to our search release that was filed on Form 8-K data today, July 16th, 2004, for factors that could affect the accuracy of our expectations or cause our future results to differ materially from our expectations.

With, that I'm going to turn it over to Mr. Carl Jones.

Carl Jones, Jr.: Well, thank you Jennifer, and good morning, everyone.

This is an historic day.

For the first time, Regions and Union Planters are speaking to you as one company, because as you know, Regions merged with Union Planters, effective July 1st, 2004.

It was an exciting moment in the history of both our organizations, and now we're busy into chapter one of our new history.

We are pleased to report that both Regions and Union Planters posted positive results in the second quarter, which Bryan is going to talk about in just a moment.

But the really good news to share with you concerns the progress of our merger integration and our cost saving initiatives, which Rick will discuss in more detail.

Also with us, as Jennifer mentioned, is Jack Moore, Regions' new President and CEO designate.

Jack's going to speak with you, tell you on where we are headed as a banking force in the South, the Midwest, and Texas, after which we'll open up the call to questions.

First, though, I would like to make some overall comments on the quarter.

This second quarter is much more complex to look at compared to other quarters, as we are reporting on two companies and two sets of quarterly results.

At first blush, it will be a bit complicated, especially when you consider the new company's share count, the new accounting presentation for EPS, restructuring efforts and one-time charges.

But the important points to focus on are, first, core earnings were very much in line with our expectations.

Second, we made excellent progress in positioning ourselves to being successful in the future; and thirdly, we're off to a great start in integrating our two banking organizations.

I want to stress, again, how happy we are about the positive results we achieved in the second quarter from both Regions and Union Planters.

I would especially like to recognize and thank all of the associates throughout our combined organizations for their achievements in the last several months, and their commitment to making the new Regions the best financial services company in our part of the country.

It is their skill and dedication that will lead us successfully into the future.

With that, I'm going to turn the complicated part over to Bryan and let him discuss the second quarter results.

Thanks, Carl.

Good morning.

First, we are pleased with our quarterly results, the progress we've made on positioning the company for integration and the position of Regions for the future.

As Carl said, this is a complicated quarter to discuss -- with any luck, the most complex quarter we'll ever have to present.

As such, we'll try to give you a high level view of our results, so you can grasp the general trends in the company's performance, rather than getting lost in the many details associated with EPS presentation.

We will be happy to answer any questions on the specifics during the Q&A portion of the call, or on a one-on-one basis after the call.

To present the financials as clearly as possible, I'm going to discuss Regions' second quarter first, and then I will talk about Union Planters' performance in the quarter, and then I'll look at how the company is positioned for the next few quarters.

Let me begin with Regions.

Regions posted solid results in the second quarter, once again relying on the strength of our broad and diverse product set.

Our core earnings totaled 76 cents per share for the quarter on a premerger share basis, or 61 cents per share on a postmerger share basis.

Net income, as you are accustomed to seeing it, totaled $162 million, and included about $6 million or 2 cents per postmerger share in after-tax, merger-related and other non-recurring charges.

This quarter, we adopted EIPF 03-6, which requires to us report net income available to common shareholders.

The difference in net income and net income available to common shareholders is related to an allocation of net income to the floor contract and our accelerated repurchase agreement.

This allocation equates to one cent per share.

Fully diluted EPS totaled 58 cents per postmerger share.

You probably also noticed that we have restated our earnings to reflect the exchange ratio effective when our merger closed on July 1.

Had we not done this, earnings would have been reported as 72 cents per fully diluted share, excluding the one cent effect of the EIPF change and 3 cents of merger-related and other non-recurring charges.

Core earnings totaled 76 cents per share, an increase of 1 cent compared to the first quarter of this year.

All of this is laid out for you on a table on page 2 of our earnings supplement, so that you can follow the various components.

Our banking franchise had a very nice quarter.

Regions' low-cost deposits increased 2.7% annualized over the first quarter and 5.7% from one year ago, reflecting continued success in our deposit acquisition campaign.

We've now opened approximately 113,000 new accounts ,representing 45% of our stated goal of opening 250,000 new accounts this year.

These new accounts brought in $555 million in new deposits in the first six months of this year.

Total deposits grew over 9% in the second quarter compared to the first quarter.

You will notice that an increase in wholesale deposits contributed to overall deposit growth.

This growth came primarily from Euro dollar deposits that were an attractive wholesale funding source in the quarter.

On the asset side of the balance sheet, it bears mentioning that we've stopped originating indirect auto loans for securitization and sale in the second quarter.

Our decision to stop originating indirect auto loans was part of our ongoing effort to invest capital in businesses that provide adequate risk-adjusted returns on capital.

The indirect auto loan portfolio held for sale at March 31st has been moved to loans held for investment.

Taking this move into account, organic growth in the loan portfolio was 6% link quarter annualized, and 5% year-over-year.

Commercial real estate and Regions' equity asset lines continue to generate most of this growth.

Commercial and industrial lending was down very slightly from last quarter, as it contracted towards the end of the quarter.

On an average basis, the commercial loans increased 4.5% link quarter annualized.

We continue to see encouraging signs of future C&L growth.

We are still waiting to see consistent financial results.

Regions' credit quality remained solid during the quarter.

Non-performing assets were down $22 million, or 9% from the first quarter, to $225 million.

As a percentage of total assets, non-performing assets declined 8 basis points in the second quarter to 67 basis points.

Net charge-offs in the second quarter were $27.9 million, while our provision for loan losses was $25 million.

Net charge-offs were up from the low levels of first quarter; one $6 million -- one $6 million lease charge-off was the main contributor to the increase.

Our allowance for loan losses as a percentage of total loans was $1.35%, compared to 1.39% in the first quarter.

In addition, Regions' coverage ratio in non-performing loans has grown to 241% at June 30th, compared to 168% one year ago.

Taking into account Regions' non-performing asset levels, net charge-offs and the overall quality of the portfolio, we are comfortable with the reserve level at June 30th.

Regions' total revenues declined slightly to $728 million.

Net interest income increased, while fee income trended down slightly quarter over quarter.

Non-interest expenses were down $12 million on a link quarter basis, excluding MSR impairment and MSR impairment recapture, advanced losses and other merger-related charges.

Regions' net interest income increased 2% link quarter; on an annualized basis, the $381 million, while net interest margin contracted to 3.53%, compared with 3.56% in the previous quarter.

The margin was impacted by the maturity of fixed rate assets, but was offset by an increase in the average earning assets to give rise to the increase in overall net interest income.

We retired 1.1 billion of federal home loan bank advances at a loss of $39.6 million during the second quarter.

At the same time, we recognized a $40 million recapture on our mortgage servicing rights valuation allowance.

The retirement of these FHLP advances will likely have a positive impact on our net interest income over the next few quarters.

We intend to use the net interest income benefit of the advanced prepayments to offset the costs due to the statements of the yield curve of additional fixed rate funding to enhance our interest rate sensitivity and to invest in customer relationships during the transition period.

Morgan Keegan continued as a significant contributor in the second quarter, earning $19.4 million on total revenues of $170 million.

We're pleased with Morgan Keegan's results and revenue trends, especially when we consider lower commissions and principal transaction revenue due to lower customer activity in the second quarter.

Please keep in mind that revenues in the first quarter included $10 million in fees related to the sale of a proprietary closed end fund.

Our mortgage business once again proved to be a solid performer.

Servicing and origination fees and gains on sale revenues were up compared to last quarter, reflecting the strong pipeline at the end of the first quarter, as well as continued growth in our EquiFirst non-conforming mortgage business.

Regions Mortgage contributed $5.1 million to net income, excluding the MSR recapture.

Regions Mortgage origination volume was $952 million, compared to $731 million in the first quarter, an increase of 30%, but off some 40% from 2003.

They end of the quarter with a strong pipline of $746 million, down slightly from $804 million at March 31st.

EquiFirst contributed $7.8 million to net income in the second quarter.

The loan origination volume was up 50% to nearly 1.5 billion, from $985 million in first quarter.

About $150 million of the increase in volume was attributable to our West Coast operations.

The remaining increase is a result of seasonal increases that occur in the second quarter, and an increase in account executives in the East Coast operations.

EquiFirst's gain on sale of loans also increased 15% on the increase in productions, offset somewhat by lower premiums in the second quarter compared to the first.

Overall, we believe Regions continued to produce solid, consistent growth in the second quarter, as well as control expenses, and is well-positioned for the future.

Now, turning to the key highlights of Union Planters' second quarter performance and the significant items included in their results.

Union Planters second quarter earnings of $12 million or 6 cents per diluted share included pretax merger-related and other non-recurring items, totaling $114 million or 39 cents per diluted share after tax.

I will discuss the nature of these items in a few minutes.

The Union Planters -- the results of Union Planters core banking activities were in line with our expectations for the quarter.

Some of the more notable highlights for the quarter as follows: Union Planters continued to make significant progress in improving credit quality.

The combination of non-performing assets and past due loans 90 days or more is still accruing of $288 million, declined from last quarter, by $151 million or 34%.

During the quarter, $61.4 million of mortgage loans 90 days past due and still accruing were reclassified to non-performing as a result of a non-accrual policy change that I will discuss in a minute.

Loan growth was 1.5% annualized compared to the prior quarter.

Excluding the transfer of loans to available for sale, the annualized growth rate in the loan portfolio is 6.7%.

Union Planters experience continued growth in core products, as momentum in the home equity product extended into this quarter as period end balances grew by 26% annualized from last quarter.

Strong growth was realized in all of their major markets.

Additionally, they experienced strong growth, and one to four family mortgages for the second quarter, as outstanding balances increased over the prior quarter by 16% annualized.

Continued growth in single family ARM residential loan categories will continue to reduce the overall risk for [INAUDIBLE] loan portfolios.

On the deposit side, on a link quarter basis, Union Planters experienced strong growth in average non-interest bearing balances of 4.6%, fueled by growth in mortgage escrow deposits, offset somewhat by a reduction in other time deposit balances by 4.6%.

Financial services revenue grew 10% compared to the link quarter, primarily on the strength of annuity sales; and mortgage origination activity increased almost 35% to $2.7 billion.

The $114 million of charges taken in the second quarter by Union Planters principally relates to credit, mortgage operations and the merger.

They can be summarized as follows: One, a $40 million charge to provision resulting from a change in intent to hold $286 million of asset-based loans in capital factory.

These loans were reclassified to available for sale.

This reclassification -- and right now, coupled with the move last quarter of the car's portfolio to available for sale, narrows the capital factors portfolio to factory receivables, their core business.

The factory and receivables totaled between $5 and 600 million at June 30th.

Two, an additional provision of approximately $36 million, resulting from an intense review of credit qualities.

This review resulted in aggregate net charge-offs of $71.5 million, or 1.28% of outstanding loans.

Number three, a reduction of mortgage-related income of $19.2 million, primarily related to the disposition of certain low-performing mortgage loans and other real estate.

Impairment in mortgage servicing rights related to out of footprint mortgage servicing under agreements to be sold and the charge -- the change in estimate in the recourse reserve associated with previously sold mortgages.

Number four, a reversal of net interest income of about $3 million, resulting in a change in the non-accrual policy of residential mortgages that I discussed earlier.

And fifth, merger-related expenses and other miscellaneous charges of proximately $17 million.

These items are summarized for you on page 22 of the financial supplement.

These actions will accelerate efforts to improve overall credit quality, as well as provide momentum for the successful integration of our mortgage operations.

In summary, the performance of Union Planters this quarter was consistent with expectations.

Initiatives taken this quarter that target the improvement of credit quality and right sizing of mortgage operations will facilitate the success of a smooth integration.

Rick is going to talk in more detail about the integration efforts in a moment, as well as the status of our cost-saving initiatives.

But before we get to that, I will talk briefly about what we're doing as a combined company to position ourselves for the future.

I've already touched on the efforts to reposition Union Planters credit portfolios and how these actions should have an immediate and positive impact on credit losses in the third quarter, accelerating the decree leverage in the Union Planters franchise.

Additionally, we reached an agreement to sell $6 billion of Union Planter servicing portfolio on the West Coast, and their West Coast production offices.

The sale of the non-strategic servicing and the West Coast offices moves us one large step down the road of right sizing our combined mortgage business as a footprint-oriented retail organization.

We're also changing the hedging strategy for Union Planters mortgage servicing portfolio to Regions' practice of holding bullet agencies in the securities portfolio as an economic hedge.

As such, we unwound some options that had a P&L cost of $15 million in the second quarter.

We expect an immediate positive impact to fee income of the combined company as a result of this change in hedging strategy.

The securities portfolio of the combined company totals $14 billion or 17% of total assets.

The mark-to-market on the Union Planters portfolio should increase overall portfolio yield approximately 40 basis points.

The yield of the combined portfolio is 4.4%, with a duration of 3.4 years -- 3.4 years on July 1.

Please keep in mind that as we mark-to-market the other assets and liabilities on the Union Planters balance sheet, it will have some offsetting impact.

We expect to complete our preliminary purchase accounting adjustments over the next few weeks.

We will file proforma financial statements at that time.

In addition to the previously discussed initiatives, we are also well positioned with respect to our core banking operations.

The earning asset and funding mix trends for our company are moving in the right direction, and our interest rates sensitivity is fairly neutral as a combined company, with a slight bend towards asset sensitivity.

Our modeling indicates a plus-100 basis point gradual increase in rates over the next six months, should improve net interest income by $13 million.

As I mentioned earlier, the benefit of the prepayment of the federal home loan bank advances affords us the ability to invest in customer relationship stability through the integration, and provide stability to the margin through opportunistic fixed rate funding.

With respect to capital, our board has authorized the repurchase of up to 20 million shares and declared a dividend of 33.34 cents per share to shareholders of record on August 2nd.

The dividend is payable on August 16th.

We plan to use the historical Union Planters dividend payment schedule; and looking at media sources this morning, there still seems to be some confusion about our dividend rate of 33.34 cents per share per quarter.

We will continue to evaluate and balance our potential uses of capital, including re-investment in the business, dividends and share repurchase.

Overall, we feel very positive about the position of the company during the merger integration, as well as the outlook for the third quarter and the remainder of the year.

To talk more about our integration efforts, I'm going to turn the call over to Rick Horsley.

Rick?

Good morning.

Well done, Bryan.

We'll give a test on that in a few minutes. [ LAUGHTER ] As Carl reported, the -- our integration program is on schedule and proceeding as planned.

We basically completed the planning phase, and are in execution mode.

As you know, the transaction was completed on July the 1st, as expected.

Significant associate and customer communications occurred on day one, and are continuing as we speak.

We believe that associate morale is good.

We are experiencing a great deal of excitement about the opportunities at the new Regions.

Incidentally, in the second quarter, there were two significant transactions announced in our footprint, and with South Trust and National Commerce both announcing their transactions, and we believe both of those transactions are positive to -- to the accommodation of Union Planters and Regions.

I can report that all of the Regions' management structure, board, board committees, management committees, and corporate governance policies are in place, and are operational.

As previously reported, we have an integration plan that should be fully executed by mid '06.

Big events for this quarter, the third quarter, include the transfer of our brokerage and mortgage supervision of licensed UP -- Legacy UP represents to Morgan Keegan.

With the transfer, Morgan Keegan will be approaching 1,000 registered Series 7 reps.

Additionally, Regions will have approximately 2,000 associates licensed to sell fixed annuity products throughout our banking platform.

Consolidation of our mortgage servicing platform will also occur in this quarter.

As Bryan mentioned, as part of our plan to right-size our conforming mortgage operation, our West Coast offices were closed and we have initiated the sale of the West Coast servicing portfolio.

As we previously reported, we expect to begin banking customer systems and branch system conversions in the second quarter of '05.

In the meantime, we are launching an early branding initiative we call Customer One.

As you recall, we have very little overlap in bank markets of the Legacy Regions and UP.

This affords us the opportunity to gain some of the advantages of the new Regions in advance of systems conversions.

Customer One is an early branding initiative accompanied by fine changes, new products, pricing, and sales process.

We plan to have Customer One in place in the first quarter of '05 in all markets that do not have significant branch overlap.

With regard to cost savings, we continue to believe that our target saves are achievable.

To assure success, we're building the appropriate infrastructure to track and assign accountability.

We are having some early success in the procurement and contract renegotiation area.

For example, we remarket our insurance programs.

We expected savings of $3 million.

We achieved savings of four.

We will provide you with periodic reports of our progress.

Finally, on a strategic front, the new management team has created and published a vision, values and focus statement for the new Regions.

We will be measuring our success using a balanced score card, focused on customers, associates, and shareholder returns.

In conclusion, we're very pleased with where we stand with this integration process.

We'll continue reporting to you on a quarterly basis.

With, that I will turn it over to Jack.

Thanks, Rick.

I do want to say that Rick has been doing an outstanding job with the transition integration team, and leading that effort, and we're all excited we will now be entering the execution phase of that project.

Let me begin by saying how excited I am to be a part of this combined company.

All of the Union Planters management team are thoroughly enjoying working with the Regions' leadership team, and everyone else in our new organization.

I'm also pleased with both companies' second quarter results.

Both Regions and Union Planters made a strong showing, especially in the performance of the banking units and in the progress of our integration units.

Our six regional CEOs and the rest of the banking leadership team are working very well together, focusing on the customer and growing our customer base across our expanded footprint.

The Union Planters Legacy banking team has begun to embrace and integrate the Morgan Keegan product set and their capital market capabilities.

I'm particularly pleased to see loan growth and deposit growth in both companies, positive trends in non-performing assets, and continuing significant contribution from our fee income-based units, especially in light of the integration efforts that so many of our associates are involved in.

As Rick mentioned, there's a lot on tap for the second half of this year.

We've done the leg work of comparing our two product sets in choosing the best of both companies to form a combined product set.

At this point, we're starting the process of making that happen on all fronts: Programming, product package development and development of sales initiatives around them.

As Bryan mentioned, Regions' deposit acquisition campaign is well underway and having very good results.

We plan to roll that out across all of our branches by the end of the year.

Rick mentioned our Customer One integration project, which begun on July 6th, to deliver the new company's sales process, product changes and branding to select Legacy Union markets in the first half of next year.

Our Customer One is the opportunity to introduce the new Regions sales process, select product changes and branding to select Union Planters Legacy markets ahead of their scheduled data processing conversion, which will accelerate revenue growth and create brand awareness and momentum in key markets across the Union Planters footprint.

Some of the things that we'll be doing will include, as Rick said, the full signage change and brand change to our new brand for these markets;

Movement to common pricing and products, including our new fee schedule; movement to standardized sales methodology and sales campaigns, handling selected crossover transactions and high impact market promotional events.

Our combined footprint, complimentary product and service offerings and focus on deepening customer relationships are going to open up many new opportunities for growth as we move forward.

We're off to a great start on all fronts.

I'm excited about the future of our company and the opportunities that we have for increasing shareholder value.

With that, we would like to open up the call for questions.

Ladies and gentlemen, at this time if you wish to ask a question, please key star one on your touch-tone telephone.

If you wish to withdrawal your question from the queue, please press star two.

And your first question comes from Jason Goldberg of Lehman Brothers.

Thank you.

Good morning.

Good morning, Jason.

Short of just reconciling some of these numbers, if I look on page 22 for the Union Planters, it looks like you come one 43 cents operating in the first quarter and 45 cents operating in the second quarter, which would imply EPS of 88 cents in the first half of the year, or $1.76 annualized, versus the merger presentation where you assumed Union Planters would earn $2.25, or 50 cents more.

Am I missing a piece?

Or are these numbers not exactly -- I guess how we thought?

Well, there's clearly some things that played out differently.

The mortgage banking business is not as strong this year as it was anticipated when that merger plan was put together late last year, beginning of the year.

And we think there's plenty of upside from where we are today.

I mentioned the opportunity to -- to use a different strategy for hedging the portfolio.

We think there's good growth in the balance sheet, and particularly in the Union Planters franchise through the home equity product that they're selling so well.

And we think we're going see improvement in the margin.

So I think we can get to sort of the last half of that part by the end of this year, Jason.

Okay.

Well, with that being said, you know, the 241 number you used in the presentation for proforma GAAP earnings for this year.

Yeah.

I guess, how do you feel about that number?

Well, as you know, we said in the past, Jennifer said in the opening of the call, we don't give guidance; but we feel that the assumptions used in that set of proformas are still reasonable, and we think that -- that clearly purchase accounting is going to change.

The mark-to-market -- or the CDIs and the mark-to-market will have some impact on it, but as I sit here today, I think those assumptions are still reasonable.

Okay.

Thank you.

And then secondly, are you guys going to provide us with a second quarter average balance sheet for Union Planters?

I did not intend to do that.

That may be helpful, just to see, I think, how effective the purchase accounting adjustments --

Well, there are no purchase accounting --

Well, will see them in the third quarter?

Yeah, you will see all the purchase accounting adjustments in the third quarter.

The merger was not consummated until July 1, so everything is getting affected in the second -- in the third quarter.

There was a little bit of merger-related expenses, some goodwill impact on the Regions balance sheet due to the capitalization of some costs that go into goodwill, but all the purchase accounting adjustments will be laid out for you in the third quarter.

Great.

Thank you, Bryan.

You're welcome.

And your next question comes from Jefferson Harrelson of KBW.

Thank you.

I will also kind of focus on page 22 a little bit.

The -- off that $114 million in charges at UP, how much of that served to increase the provisions?

The provision was $117 million for the quarter.

We had -- we had net charge-offs of roughly 72, 73 million dollars.

There was a move of credit reserves associated with the assets available for sale to the available for sale portfolio.

Right.

But if you take what you guys are doing, and taking this GAAP number, taking it to an operating number --

Yeah.

It is how much of this 114 is -- is serving to reduce that provision?

It looks like maybe the $39 million, the charges incurred --

Yeah.

-- in connection with the creditor review.

The other way to approach it is we said, let's assume 80 basis points or $42 million, roughly, of run rate level of provisioning, and then you have the $39 million on the available for sale portfolio, and then you have another 35, 36 on the review of the credit portfolio.

All right.

So in your 45 cent operating number, you are calling for UP, what is the level of provision assumed there?

42.

$42 million?

Yeah.

So I guess there's not that much more improvement to come in this provision line then.

Well, again, I don't want to get into pinning down what we think credit losses are going to be in the last half of the year, but we think there's significant credit leverage -- but we'll see.

Okay.

The $20 million MSR writeoff at UP, was that offset somewhere, or was that included in the -- in this case, 22?

The MSR write-up?

It looks like it was -- It was offset by the cost of the hedging.

Losses or the amortization of the hedging costs.

Mortgage banking-related revenue was roughly 50% or so, where it was in the first quarter.

Okay.

And lastly, can you comment on the margin pressure at UPC?

It went from -- looks like it went from 382 to 365, is that what -- you guys were expecting that sort of margin pressure?

Yes, if you go back and you think about the last part of last year, and the first quarter of this year, there was security portfolio, there's some significant security gains taken to offset the impact of the MSR impairment in the first quarter.

That, coupled with the maturities of fixed rate loans and fixed rate security portfolio, we expect it to decline.

Okay.

Thanks a lot.

You're welcome, Jefferson.

And your next question comes from Mr. Jeff Davis of FTN Securities.

Gentlemen, good morning.

Good morning, Jeff.

Bryan, can I get you to walk us through the major purchase accounting adjustments?

I know you touched on them here, but you were moving kind of fast and there's a lot to go through here this morning.

Maybe starting -- starting with UPC's MSR, as you touched on the bond portfolio; and then also if you could overlay again on the -- to the extent you true up UPC's balance sheet, with your thoughts on asset management going forward.

Any -- any shifting in that balance sheet where I assume the costs will be capitalized into the purchase price?

Yeah.

Let me -- I will try to start with the first question, which is the purchase accounting adjustments.

Nothing is really reflected here in the mark-to-market.

Right.

The only adjustment that I have a real good sense of clarity on is the mark-to-market on the securities portfolio, because both portfolios were marked and adjusted on June the 30th.

So I have a pretty good sense there.

What I described was an overall enhancement to the securities portfolio yield of about 40 basis points related to that mark-to-market assessment.

Excuse me, Bryan, let me just -- That's 40 bits for just UP's side?

Well, it's really 40 basis points on the whole portfolio.

The 14 billion portfolio on July 1 had a yield of about 440.

I think our portfolio was, say, three months ago, I would have quoted 4%, or thereabouts.

Then we'll go through the process over the next several weeks of market-to-market, the various loan and deposit categories.

Now, based on the proformas that we filed in the spring, we would anticipate that the net impact on operations -- based on December 31 valuations -- the net impact on operations on the margin would be about $22 million or $20 million associated with the mark-to-market on other loans and liabilities; but we will work through that over the next couple of weeks.

We'll also calculate evaluation for the quarter positive intangible.

We assumed a 1.75% rate.

The rates are a little bit, so my guess is that valuation will come in a little higher than we had anticipated in those proformas.

But we'll have those calculated out and filed probably by the time we file our 10-Q, in oh, probably three or four weeks.

And Bryan, let mow just stop you there, though.

From what you had in the S-4, the net of that wasn't that huge of a swing for proforma net income.

That's still your expectation?

Yeah.

Okay.

I think that's right, yes.

Okay and then on UPC's balance sheet, you terminated the swaps.

You are going to use bullet agencies to hedge the MSRs?

Yes.

Any other major --

No.

Where you can incur the cost and capitalize it, where you get your chance to do it here?

And any other major shifts that -- ?

We've got -- we made the securities portfolios July 1, July 2, that we anticipated making, and that's reflected in the 3.4 year duration in the portfolio I talked about.

You know, that's my 17% of total assets.

I mentioned the asset-backed portfolio, [INAUDIBLE].

There's some small portfolios like that that we will continue to evaluate; but Jeff, there's nothing major at this point that we have a bead on right now.

Okay.

Thank you.

And your next question comes from Matthew Clark of Deutsche Bank.

Good morning.

Good morning.

You talked about a number of, you know, positives and some partial offsets, I guess going to forward, the mark-to-markets, and have you a benefit, immediate benefit in interest income.

You will see a pop in fees.

You know, yields are going to be up.

Can you talk more about credit and, I guess, how much is left on the UPC side?

With what's occurred here?

Well, we -- we think that -- that -- I think if you -- if you go back and you -- and you read or if you participated in the spring conference down here, I think you heard Chris Stone talk about getting to 50 basis points or better on that portfolio, and we expect that the actions that have been taken, the work that's been done, we've -- we've made a lot of progress in that regard, and we think that one of the key things that we've talked about all along is accelerating that credit leverage, and we think we have gone a long way in that regard.

Okay.

Then I guess with the selling of the $6 billion servicing portfolio, when is that -- when do you expect that to be done, and what kind of impact do you expect from that?

It will be in late August or early September.

It was sold within a handful of basis points of a book basis.

There was a -- I guess it will be what you would consider a small loss on that, that was included in the items taken in the second quarter; but essentially, it was sold within a handful of basis points of book basis, which I think on the servicing portfolio was 148 basis points at June 30th.

Okay.

Great.

All right.

Thank you.

You're welcome.

Your next question comes from Todd Hagerman of Fox [INAUDIBLE].

Good morning, everyone.

Good morning, Todd.

Bryan, I was wondering if we could touch a little bit on Morgan Keegan for a moment.

I'm wondering if you could just give us a little bit more color on the results this time around.

If memory serves, you know, I think Carl, beginning of the year you were expecting kind of flat revenue growth for the company in '04.

And I was really interested in hearing kind of your thoughts on, you know, private clients this quarter slipped a little bit, and you know, where things -- you know, what kind of activity you are seeing, like, equity capital markets and fixed income as we look towards the second half of the year?

Yeah.

I will talk about the numbers and then Carl can talk about the field.

On the year-to-date basis, their revenues are right on top of where they were in the first six months of last year.

If you -- if you think about what last year was, May, June time frame was -- was really the peak of the fixed income market.

As we look at this year, we feel like we've done very, very well there.

We have seen the balance in equity capital markets and private client that we expected.

Second quarter results were down for a couple of reasons.

One, we had the $10 million of fees or revenues associated with the IPO of the strategic income fund in the first quarter; but in particular, customer volume was down significantly, particularly in the month of May.

Fixed income trading and fixed income investment banking was also off in the May -- in the month of May and June.

So we really feel good.

They came in at about $19.5 million after tax, versus $21 million in the first quarter.

The second quarter of last year is their toughest comparable, it's a high -- highest quarter for them ever, and it's really -- that was based on the fixed income market.

But net/net, six this months this year, versus six months last year, revenues are right on top of where they were in the first six months of last, and earnings are within $150,000 or so of where they were within the first six months of last year.

Carl Jones, Jr.: Yeah, I think -- this is Carl.

We did say at the beginning of the year that we expected revenues to be flat this year, with maybe a different mix, and we also expected bottom line to be flat; but again, with a different mix.

And it's not working out exactly the way we said in January; but still, the overall net is that revenues are right on top of each other, and net income is right on top.

The volumes, as all of you know, in the stock market are down right now.

And so to get that private client income up, we've got to have some more -- some more volume in the stock market.

But the private client area is up considerably over the six months to six months comparison, and the other parts of the business are doing fine.

So we -- we still feel good about Morgan Keegan.

More investment banking activity this year which has been a real positive.

All right.

That's helpful.

Bryan, maybe -- can you give us -- in terms of private client, maybe just some of the moving parts in terms of, you know, net new business activity, relative to how the pressure that you may have felt relative to overall, you know, market values in the quarter?

Yeah.

How that affected the business?

Market values in customer accounts were fairly flatish, at $41 billion (PH).

It didn't move much.

It was really just a lack of activity.

There was no trading going on.

If you look at the volumes on the major exchanges, the volume really dropped off, particularly in the month of May.

Then had you the market close an additional day, I think, in connection with the funeral for Ronald Reagan; so it just -- it just sort of very low level of customer activity it.

Didn't impact much.

In fact, we had a net new opening of accounts.

So there's no negative -- nothing negative about it, just customer activity.

Carl Jones, Jr.: And we're still optimistic enough to have, oh, 15 or 20 additional brokers on the roll at the end of the June, as compared to the end of March.

Great.

Thank you.

If I could just ask a quick follow-up.

Bryan, you mentioned on the wholesale deposit, just kind of the influence with the Euro deposit, I was curious if in like UPC, there was -- what kind of affect you guys may have seen as it relates to mortgage escrow, account balances or customer balances in the quarter for Regions.

It wasn't a significant contributor to deposit growth on our side.

We did see a little tick up, but it was not significant.

I think it was reasonably small.

Okay.

Thanks very much, gentlemen.

You're welcome.

And your next question comes from Jerry Cronean of Sandler O'Neill Asset Management.

Good morning.

Good morning.

Congratulations on closing the deal.

Thank you.

I just wanted to ask Jefferson's question in a slightly different way.

Where do you -- where would you place today the run rate of Union Planters' net charge-offs?

And I guess on a Union Planters stand alone basis, how much additional improvement do you see as you work through that portfolio, kind of move it to the Regions' platform?

Yeah, I think -- I don't want to -- I don't want to tell you what I think charge-offs are going to be for the third and fourth quarter of this year, so I won't do that.

But I will say that I will pay the second quarter level of core charge-offs, call it 80 basis points or roughly $42 million, that's how we calculated the adjustments that you see on page 22.

Okay.

So assuming 80 basis points, $42 million, I think you can -- you know our goal of being at 50 basis points of net charge-offs in that portfolio over time, is -- is very reasonable, and I think the actions that we have taken help accelerate us towards that goal.

Okay.

So if I looked at legacy Regions, historically the charge-off rate on average as been maybe 30 basis points.

Right.

So the 50 basis points, assuming this is, you know, two companies coming together of roughly the same size, it does still seem to me that you are assuming close to another 20, 25% improvement in credit costs from the Union Planters for interest.

Yeah, we would -- when you put it together, given we're a little bit bigger, you get to a -- sort of a target of around 40 basis.

Okay.

Very good.

Thank you.

And congratulations.

I hope I answered it better this time.

No, it was my confusion, not yours.

Amanda, we've probably got time for just one or two more questions.

Absolutely, sir.

Okay.

And your next question comes from Christopher Merrinack of SIG Partners.

Thanks, guys, good morning.

Good morning, Chris.

I want to follow up on Jerry's last question, just one more angle.

The decision to reclassify the capital factors loan, was that done for competitive reasons because the pricing was not what you wanted, or do you see something strategic different than you thought before?

Well, it wasn't as much -- it was more strategic.

Which is, we wanted to get the business back down to the core business of factoring, and first quarter reclassification of the car's portfolio, and this asset back reclassification allows us to get capital factors back down to that core factoring business, and it was -- it was really nothing more than that.

Okay.

So we can interpret that the intention is to keep capital factors going forward?

Jack, why don't you answer that one?

Well, we continue to evaluate portfolios and business lines; and strategically, if we determine that it should remain a part of the consolidated company, we'll make that decision.

And we do need to get out the non-factoring portfolios out of the company, get it down to its core and get it right sized from a FTE standpoint, from a -- an expense base standpoint, and the core revenue standpoint, and assess its profitability and growth potential over the next several quarters.

Okay.

That's helpful.

Separate question on the mortgage business.

Obviously, the pricing pressure on the Regions side on sales, do you see any change of that so far here in July or any expectation of that being different in the future?

No, nothing in the early part of July.

It -- the volumes, I think are going to continue to be fairly strong.

It looks like rates might rally a little bit, but who knows what they do long term.

They backed up in the second quarter.

That puts pressure on the premiums; but the early part of July, we haven't seen great expansion there.

Okay.

Do you have an average servicing fee that you get on the entire portfolio?

On the Regions mortgage portfolio?

Or maybe the entire piece?

The entire thing(Ph).

Yeah, we get 33 basis points, but that's all conforming mortgage and Regions mortgage.

We don't service any of the capital factors portfolio.

Okay, or EquiFirst?

I'm sorry?

Yeah, EquiFirst.

I apologize.

Not a problem.

Thanks, Bryan.

Appreciate it.

Mm-hmm.

And your final question comes from CB Amrich of Millenium Partners.

It's Casey Amrich, thank you.

Hey, Casey.

Just one quick question for you, Bryan.

A lot of the analysts seem concerned about the kind of the lack of additional [INAUDIBLE] leverage at UPC.

But I was wondering if we should see some leverage, kind of some recash on some of the write-downs from your quote/unquote intense credit review.

Well, there's always that chance.

We did make our best effort of what we think the loss on that portfolio is.

We're going to work as hard as we can to recover as much as we can and then, I mean -- I guess the corollary to that question is, is there any potential upside of what you sell, some of these assets available for sale?

Again, we took what we thought was a reasonable estimate of market value, and we're going to work real hard to do better than that.

Okay.

That's Good.

I guess the one last concern, though is that, you know, if you -- you bleed back in some of those recoveries, qualities to earnings could kind of come up again, though.

Yeah, I understand.

That's why it is our intent to get it right and not have it go one way or the other.

Yeah.

Okay.

Thank you very much.

You're welcome.

And that does conclude your questions.

All right, Amanda, thank you very much, and thanks to -- thanks to all who participated and listened in this morning.

Have a great day.

Ladies and gentlemen, thank you for your participation in today's conference.

This does conclude your program.

Have a wonderful day.