Regions Financial Corp (RF) 2005 Q4 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the fourth quarter 2005 Regions Financial Corp. earnings call. [OPERATOR INSTRUCTIONS] 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. Jenifer Kimbrough, Director of Investor Relations.

Please proceed, ma'am.

Thank you.

Good morning.

We're glad you've joined us this morning.

Commenting on our fourth quarter 2005 earnings results will be Jack Moore, Regions' CEO and President; and Bryan Jordan, Regions' Chief Financial Officer;

In addition, Rick Horsley, Regions' Vice Chairman and CEO of Business Enterprises is in the room and will be available for questions after the prepared comments.

Our earnings release and supplement has been filed on Form 8-K and is also located at regions.com in the investor relations earnings release section of the website.

Certain statements made in this call may be forward-looking.

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 were made in good faith pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Please refer to our press release filed on Form 8-K dated today, January 20, 2006 for factors that could affect the accuracy of our expectations or cause our future results to differ materially from our expectations.

Now I will turn over the call to Mr. Moore.

Thanks, Jenifer.

And thanks to everyone for joining us this morning.

Fourth quarter results at Regions were strong.

Rounding out a year of broad-based progress and a great integration and positive earnings momentum.

Operating earnings increased to $0.62 per share this quarter compared to last quarter's $0.61 and nearly 11% higher than the fourth quarter of last year.

Growing net interest income, record Morgan Keegan results and slightly lower core expenses contributed to the linked quarter profit improvement.

I am proud of Regions' accomplishments in 2005.

In the fourth quarter, our merger integration was successfully completed ahead of original plan and targeted cost saves were achieved.

Throughout the process, our customers experienced minimal disruption and we grew accounts. 1.3 new checking accounts were opened in 2005 for every one that we closed.

Our focus on operating leverage led to improving our operating efficiency ratio from 62% to 60% due to revenue gains and cost containment efforts.

Morgan Keegan's balanced business mix helped them post record earnings.

The private client retail business, equity banking, and asset management all experienced profitable growth.

Full-year net losses from our loan portfolio declined to 23 basis points of average loans.

Well below our 30 to 40 basis point long-term goal.

As you know, being disciplined in our balance sheet management is a key part of our strategy.

Our net interest margin and net interest income rose significantly despite a challenging interest rate backdrop and our balance-sheet management permitted us to repurchase 16.5 million common shares during the year.

Non-core businesses were exited.

Freeing up capital to be redeployed in the core segments with better growth and higher return potential.

2005 also required dealing with unprecedented hurricane-related issues.

Our efforts to serve the Katrina-affected markets continued in the fourth quarter.

We reduced the number of closed branches to 11 and in most cases have branches or temporary branches in the vicinity of those closed branches for customer access.

An increase of approximately $830 million in the fourth quarter's average community banking deposits was due to new account openings and balance increases in the Hurricane Katrina-affected areas.

Deposit growth has remained strong in these markets.

Recently, there has been some moderation in account openings, but to date insurance proceeds have been a less significant driver of deposit growth.

We expect customer retention levels in the Katrina-impacted area to be high, providing us an opportunity to deepen customer relationships, especially our new customers with Regions' full product set.

Regions' quick response to community and customer needs, rapid return to operational stability, widespread distribution system, and extensive product capabilities are serving our customers well as we continue to attract and retain hurricane area customers.

Thus far, net loan charge-offs in the Katrina-related portfolio have been a little under $1 million.

We have seen an uptick in past dues as the payment deferral period ended on November the 30th.

We are working with these customers on a case-by-case basis depending on the circumstances surrounding their situation.

We expect to know much more about this portfolio as we approach the latter part of the first quarter.

We will continue to evaluate our loan exposure, but for now we are comfortable with reserves previously set aside for potential Katrina-related credit losses.

With the merger integration completed, which was the primary focus for us over the past 24 months, our 2006 focus is on improving the profitability of Regions' existing franchise and building on 2005 successes.

We are in the process of implementing Regions' Next, a strategic initiative that will allow Regions to maximize long-term profitability and increase the value of our company.

Profitable revenue growth through a consistent business model with business and customer segmentation will be the thrust, but through this process we will also improve efficiency.

This is a longer term plan aimed at helping us reach our goal of a mid-20% return on tangible common equity and positioning us to be more responsive and opportunistic as the industry continues to consolidate.

We believe we have solid achievable opportunities to drive greater revenue from our existing franchise and do it more efficiently.

As the year progresses, and our plans develop, we will provide more specific information about our Regions' next initiative.

In 2006, we expect a combination of moderate revenue growth and flat to slightly lower core operating expenses to further improve our operating leverage.

Greater emphasis on cross-selling and business development should produce healthy non-interest income gains.

Morgan Keegan expects another record year.

However, mortgage banking results will likely be hurt by reduced EquiFirst contribution.

We expect moderate loan and deposit growth for the next few quarters as we continue to focus on profitability.

Credit quality, not considering Katrina, is expected to remain good, assuming moderate economic growth, but charge-offs could edge up toward the lower end of our 30 to 40 basis point normalized range.

Operating expenses will benefit from full realization of merger saves and our emphasis on driving greater profitability.

And, we will continue to actively manage our balance sheet, buying back shares as appropriate.

In sum, while 2006 isn't without challenges, Regions' is well positioned to deliver improved profits.

We are very pleased with 2005's quarterly operating earnings momentum. 2005's accomplishments support our belief that Regions has the footprint, the business mix, the talent, and skills to achieve above-average return for its shareholders.

Bryan will now give you financial details about the fourth quarter.

Thanks, Jack, and good morning.

As Jack said, we ended 2005 with strong fourth-quarter operating earnings and good momentum.

Operating earnings per share of $0.62 were $0.01 ahead of third quarter and up $0.06 year-over-year.

In the fourth quarter, our retail and commercial banking performance was good.

We were very pleased with our 12% annualized average community banking deposit growth.

Interest free deposits accounted for about half of the $1.5 billion jump helping the margin and net interest income.

A deposit marketing campaign and in-flows from hurricane impacted areas were the primary drivers.

Loans were essentially flat from the third to fourth quarter, as Jack said earlier, we expect moderate loan growth over the next few quarters.

There are several key factors driving our expectations.

First, commercial real estate lending, which historically has been a significant part of our lending business is slowing.

Second, although we're confident in our ability to originate and manage commercial real estate exposures, our appetite for additional exposure on the balance sheet has reduced.

During 2005, we led the syndication of $1.6 billion of exposures, which impacted December 31, outstandings by $300 million.

A third driver is our focus on profitability, as we continue our focus on long-term profitability and growth, loan portfolio volumes are impacted in the short run.

Single product, loan-only customers are, as a general rule, a less effective use of capital and, as a result, we expect on an overall basis to reduce loan-only relationships where we do not have the opportunity to build out full-service relationships.

In other words, we expect to continue our focus on lending relationships where we have the opportunity to deepen the relationship.

Finally, as we adjust our business models in connection with Regions' next to drive greater revenue per FTE and efficiencies, we expect to impact some relationship officers.

District tells us that when we lose a relationship officer, we lose part of his or her portfolio.

Although these factors may slow near -term loan growth to low single-digit percentage increases, we feel strongly that for the long-term profitability of Regions and driving superior return for shareholders, they are important steps to take.

Credit quality remained outstanding.

Nonperforming assets dropped 8% third to fourth quarter and 10% year-over-year.

Resolution of a large commercial credit explained the link quarter decline.

As expected, charge-offs ticked up slightly to an annualized 28 basis points of average loans.

Including a little less than $1 million of Katrina-related losses.

Total charge-offs improved versus fourth quarter 2004's annualized 33 basis points.

After a $40 million loan-loss provision, Regions' year-end loan loss allowance was 1.34% of loans, steady with September 30.

Taxable equivalent net interest income rose $9 million linked quarter and $53 million year-over-year fourth quarter.

Improvement was driven by a respective 8 basis point and 25 basis point increase in net interest margins to 4.01%.

The favorable shift to low-cost deposits as well as our balance sheet positioning positively affected the net interest margin.

In the fourth quarter, we sold $665 million of securities yielding 4.5% at a $17.6 million loss in conjunction with an $18 million MSR reserve recapture.

Subsequently, we repurchased $740 million of securities with a yield of 4.8%, which should add about $2 million to this year's net interest income.

Net interest income growth is likely to slow a bit in 2006 as higher deposit costs dampen margin expansion.

Modest earning asset growth should offset some of this effect.

So far, we haven't seen significant upward pressure on our deposit rates in our key markets, but we expect deposit costs to continue to move up, narrowing the lag versus past interest rate hikes.

The wild card is how much and that depends on how competitors behave and how aggressively customers pursue yield.

A strong growing level of interest free deposits, however, should help temper the effect.

Factoring in moderately higher deposit costs and a generally flat yield curve, we estimate our full-year 2006 margin in the mid-390s.

The margin, though could significantly differ from current expectations, depending on critical variables such as deposit pricing and balance sheet growth.

Non-interest revenues, excluding securities transaction, declined about $31 million linked quarter, almost entirely as a result of the expected decline in gain on sale of mortgage loans at EquiFirst.

Gross premiums declined over 100 basis points to the lower 2% range from the third-quarter levels, above 3%.

Excluding mortgage sale gains, non-interest revenue was up $8 million.

Morgan Keegan boasted another quarter of record earnings bringing full-year profits to a record $101.7 million, 22% above 2004.

Linked quarter, earnings increased $2.9 million to $27 million.

Revenue was up $11.6 million.

Fixed income capital markets was a major contributor to the linked quarter revenue gain, rebounding from third quarter softness.

Most of the other divisions experienced improvement also.

We are optimistic that Morgan Keegan will achieve another year of record earnings in 2006, given early market activity in banking pipelines.

Greater number of offices and producers, and our emphasis on cross-selling.

Conforming mortgage earnings increased to $6.1 million, excluding MSR reserve recapture.

And about $2.5 million above the third quarter.

Lower MSR amortization costs are the larger -- largest driver of increasing profits.

Conforming mortgages total originations were down $200 million to $1.5 billion linked quarter.

EquiFirst profits fell to $6 million, $11 million below the third quarter.

Origination volume matched loan sale volume at $2.2 billion, both down from third-quarter levels.

But as I mentioned, a sharp decline in gain on sale of premiums was a big driver.

At flat yield curve, industry-wide competitive pressures, and concerns about collateral values are pressuring premiums.

EquiFirst profits aren't likely to rebound until premiums begin to recover.

Premium erosion has continued into the beginning of the first quarter, but we expect that it will improve somewhat as the year progresses.

We are currently seeing premium bids today up to 2%.

In the meantime, we will continue to focus on driving down the cost of originating our loans.

Deposit-related service charges increased $2.9 million linked quarter.

This was mostly due to legacy Union Planters branches adopting legacy Regions lower fee structures as part of our systems conversions.

We made the decision to use Regions' less aggressive fee structure to enhance customer retention, which should more than offset the reduced service charges.

Operating expenses were down $2 million linked quarter to $719 million.

An incremental $1.5 million of merger saves were realized, raising fourth quarter's total saves to over $41 million and aggregate 2005 saves to $135 million, in line with expectations.

As Jack noted, 2006 operating expenses should be steady or slightly below 2005's.

This includes implementation of FAS 123R, that requires expensing stock options.

FAS 123R will have a minimum effect on our income statement.

We expect the expense to be approximately 2 million annually after tax, which is less than $0.01 per diluted share.

We have total merger saves approximating $200 million in place, $65 million above year 2005's level.

Ongoing streamlining and efficiency improvement efforts will also help us keep a lid on operating expenses.

One caveat, however, incremental costs directly tied to stronger than expected revenue growth could cause higher 2006 expenses.

Merger and storm-related costs totaled $53 million in the fourth quarter, with merger costs representing 47 million of the total.

With the completion of the integration, we do not expect further charges for the merger in 2006.

We also do not expect significant further charges related to the hurricanes.

We do, however, expect much of the storm-related expenses we have incurred to date to be offset with insurance proceeds.

Fourth quarter's effective tax rate dropped 29.4%.

The true-up of estimates of investment tax credits recognized in the first three quarters of 2005 caused a fluctuation.

We expect the tax rate to run around 31% for 2006.

Finally, we purchased 3.8 million shares in the fourth quarter, leaving our December 31, tangible common equity ratio at 6.64%.

We have 27.6 million shares still available for repurchase under existing authorizations.

In 2006, we expect to generate excess capital, which we will use to continue our repurchase activity.

We are pleased with our progress in 2005 and with our results in the fourth quarter.

We expect to improve on these results in 2006.

As always, our first quarter's linked quarter comparison is difficult.

There are seasonal factors that negatively affect the first quarter results.

Lower day count impacting our net interest income and fee businesses, the impact of payroll taxes restarting and approximate $12 million subsidiary dividend.

Having said that, we expect 2006 to be a good year in which we make substantial progress on our initiatives.

Operator, Jack, Rick, and I are now ready to take questions.

Yes, sir. [OPERATOR INSTRUCTIONS] Your first question comes from the line of Gary Townshend with FBR.

Please proceed.

Good morning, gentlemen, how do you do.

Good morning, hi, Gary.

Congratulations, a good quarter.

Could -- one thing we noted was that loan growth was flat on an average basis sequentially.

Could you give us some additional color on that?

We had expected a bit more given just repair and construction activities in your markets.

Gary, this is Bryan.

We had a couple of drivers.

Some of the things that I talked about influencing 2006 were key elements of that.

We continued to focus on our profitability.

We securitized, syndicated some commercial real estate exposure due to our lessened appetite for holding it on balance sheet.

And we're focused on our profitability.

In addition to that, we saw declines in some lines of business, like Regions' Funding, which does wholesale -- it does mortgage banking wholesale warehouse funding.

That business was down probably 175 to $200 million on an average basis.

So it's a combination of the same things that we think will drive modest loan growth in 2006, coupled with a couple of key lines of businesses being down quarter to quarter.

Gary, this is Jack.

And I would add to that, which may be specific to your question.

There has not been a great deal of reconstruction in the Katrina-related areas yet.

It has been fairly slow in developing.

We would expect certainly to participate in that.

We've obviously seen, as we reported, significant deposit growth down there.

Under a lot of the new initiatives past, the Gulf area, tax laws where you can finance with tax-free bonds, business-related reconstruction, we're a big bond player down there through Morgan Keegan.

So we think we'll see some great opportunities, not only on the lending side but also on the bond underwriting and bond issuance side, in that area.

Thank you.

Then actually now your securitization activity in the last quarter, just generally can you talk about the demand for loans in your market as you see it and directions there?

This is Jack again.

We clearly, in most of our markets, which are more southeastern geographically dominated, commercial real estate, commercial real estate-related projects have been a big driver for, as you know, the past several years.

I think Bryan indicated there is a natural conservative slowdown, not necessarily from the lenders but from the developers in that area, be it beach front condominium, land development.

There has just been some slowdown in that.

We've been focused on remixing our loan portfolio as well.

So we have syndicated some of those opportunities.

I think about $300 million last quarter that we could have -- would have historically balanced, put on our own balance sheet.

In the Midwest -- I mean we're -- it's a competitive market there but we see slower growth probably in that geography, or slower demand in that geography than we see in the other areas.

Demand in the Texas markets continues to be strong and in the south, southeastern markets, ex the natural expected slowdown in commercial real estate, continues to be -- I wouldn't call it extraordinarily robust, but continues to be fairly steady.

Thank you for your comment.

Your next question comes from the line of Todd Hagerman with Fox-Pitt Kelton.

Please proceed.

Good morning, everybody.

Good morning, Todd.

Jack and Bryan, I was just wondering if you could comment a little bit more about the current quarter in terms of reinvestment that you may have done, particularly with respect to the cost saves.

And then if you look out into '06, what plans you may have in terms of either reinvestment or on the branch side, either openings or closings for the year.

Well, I think this year we opened 49 new branches.

We've got 14 currently under construction and we closed or consolidated -- and a lot of this was driven through the merger integration, somewhere around 60 branches.

We probably won't build that many new branches this year as we have talked about in previous conversations, we're focused more on improving the density in our markets, so we've got branches under construction and planned in areas where we already have a strong market and need to grow that market, to further protect our market share in there.

So we do not anticipate as much investment in '06 from a capital standpoint or from an expenditure of cost saves that arose out of the merger as we saw in '05.

Okay.

Could you -- is there anything to add or a little bit more color in terms -- if we think about the Regions' next program and referring to your remarks earlier about potential -- improving the revenue opportunities per FTE, if you will.

Any more specifics around that that we can think of or incremental save costs associated with that?

I really don't have -- or would not want right this second to give out specifics around that.

I will say on both sides of that, revenue -- our revenue per FTE and efficiencies built into our '06 plan, built into our incentive comp plans, built into our corporate bonus plan, which goes all the way up to the top of the house, including all the folks in this room, one of the major components is a percentage increase related to revenue per FTE and as you drive that down throughout the organization, there's a further significant component for those at the operating unit levels, the group bank levels, the regional bank levels for delivery on specified efficiency opportunities, business models, FTE count and that type of thing.

So it's a very quantified focus that we have.

That's very helpful.

I appreciate that.

And then just Bryan, was there anything in the quarter specifically, just to offset the incremental cost saves in terms of reinvestment?

There was -- there was a core level of reinvestment that's fairly consistent with the third quarter -- third and fourth quarter sort of like the second was in that 13, $14 million investment level, around new branches, disaster recovery, things of that nature.

So it wasn't a big incremental change.

Okay.

Great.

Thanks very much.

Sure thing, Todd.

Your next question comes from the line of Ken Usdin with Banc of America Securities.

Please proceed.

Thanks.

Good morning.

Good morning, Ken.

Two questions.

First on the cost side as well.

Can you just clarify the incremental stepdown of expenses fourth to first?

Are you going to that full 50 million run rate in the first quarter?

And does that mean we actually see a step down of that 9 million difference in the fourth -- in the first quarter?

Only -- with respect to the first quarter, we fully expect to go from 41.5 million or so in the fourth quarter to $50 million of incremental cost saves.

In terms of a direct step down, you've got to sort of marry that up with all of the other expenses that I've touched on that do hit us in the first quarter like the restart of payroll taxes, subsidiary dividends, things of that nature.

But with respect to the cost saves, we should be at the $50 million per quarter run rate on incremental cost saves.

And then taking that up the next step, that pretty much plays into the fact that if you're expecting flat year-over-year that you pretty much -- those issues all kind of wash each other out.

Like the cost saves plus the step-ups.

Yes.

That would kind of get you to that same--?

Yes.

Over the long haul of the year, yes, we expect to hold expenses as Jack and I both said, steady to down slightly.

And we're looking for opportunities to be more efficient, as part of our incentive programs for this year.

Okay.

And my other question for Jack.

You mentioned that -- in your comments that over time your rebuild of capital and since post the integration, that you'd want to be opportunistic with regards to say future consolidation.

I was wondering if you could just give us your thought process on where does Regions next put you as far as your willingness and appetite to do additional bank deals and when do you think the Company might be ready to handle additional bank deals in the future?

Well, I think we're ready to handle them to date.

I mean in -- we've got great expertise around that, coming out of our very successful merger and integration with Union Planters and Regions that we -- we've got 24 -- 26 months invested in that educational process.

So from a handling standpoint, we've got capital to do it and we've got the expertise to do it.

From a timing standpoint, that is much more of a strategic issue and an opportunistic issue.

We think -- I think that the industry will continue to consolidate, as I indicated in my comments.

We expect to be a participant in that and we've got a good platform, a lot of Regions' next strategy is to build a greater platform, a consistent platform so that when that opportune time comes, we'll have the chassis in place that we can add incremental banks or bank or banking operations to.

So I wouldn't expect anything in the near term.

We are certainly going to put a lot of strategic thought around that as we get into the latter half of this year.

Okay.

Great.

Thanks a lot.

Your next question comes from the line of Christopher Marinac with Region, please proceed.

Hi, guys, I wanted to ask about your relative lag on cost of funds.

Bryan, it seems like it's actually getting better the last couple quarters.

Just kind of curious on can that continue?

I know you've sort of alluded to that question mark in your comments.

Yes.

It -- we've done pretty well and I'll let Rick talk about the specific markets but we've done pretty well in just about all of our markets, competition has been fairly rational.

We did see a little pickup this quarter in the money market accounts, which you would expect after 13 or 14 rate increases.

It's going to get a lot more -- well, you see a lot less -- it's a lot more elastic.

You got money market accounts, were up essentially the same as fed funds, so you're going to see some of that come out over time.

As we've talked about in the past, we see -- as rates go up, the balance sheet reprices more quickly than the liability side.

So we expect that to catch up a little bit over time.

But we don't see any real severe competitive pressures that's going to accelerate our think around that.

This is Rick, Chris.

We priced at the market level generally and so some of the markets are more competitive.

The Midwest tends to be a more competitive pricing market right now as far as deposit growth.

But we -- we've had good discipline with our buying, so I think we've got a good process in place to take advantage of the marketplace, the -- generally competitors in the market are not pushing rates too aggressively right now.

So we've been able to maintain -- we -- we've kept the cost side rising much more slowly.

There will be more pressure on that as the year goes forward, I think.

In terms of the fourth quarter, we probably did a little bit better on deposit cost side than we had originally modeled.

Don't know if that continues.

The last several quarters we've overestimated the amount of rate increase that we've actually experienced.

So we're hopeful we can continue that.

Great.

And I guess a follow-up, separately, I guess would be sort of what would your interest be in the Carolinas or even in the Virginia from an M&A perspective the next year or two?

We have -- we've entered the Virginia market.

We've got one branch and a couple LPOs in that market now and that's been a -- been a very successful entree for us.

Carolinas as well, we have expanded in the Carolinas again very successfully.

It is a growth opportunity market for us and we look to continue to grow there.

Great.

Thanks very much, guys.

Sure thing.

Your next question comes from the line of Ed Najarian with Merrill Lynch.

Please proceed.

Good morning, guys.

Hey, Ed.

You outlined 830 million of deposits that have come into the bank.

I guess over the past three or four months based on insurance settlements related to Katrina.

Two questions related to that.

One, could you give us the percentage of those funds that are in noninterest bearing deposits?

And secondarily, could you maybe provide some perspective on how quickly and to what extent you expect those funds to reexit the bank over time?

Yes, Ed.

This is Bryan.

We may not have been clear.

The 800 and some million was the impact in the fourth quarter.

Through yesterday we -- from August 26, through yesterday, the in-flow was about 1.350 billion , 1 billion 350 million.

Somewhere close to $650 million of that is of the interest-free balances.

Our expectation is, is that that is going to be fairly sticky deposits.

That is substantially new account openings.

There is some insurance proceeds embedded in that, but the insurance proceeds really have not been a significant driver of deposit growth at this point.

You may recall the amount of deposit growth activity we're talking about at the end of the third quarter.

We were seeing five to six times the number of daily account openings in these markets like Baton Rouge and Mississippi and places like that.

And so we've seen very good new account openings.

And we expect that this part of it will be sticky over time.

We expect the insurance proceeds will continue to flow over 2006.

So we're optimistic that these balances will stay on the balance sheet for quite a while.

Is there any way to get an understanding if those new account openings are coming from other banks or -- I guess we're just trying -- I'm just trying to get the sense of how sticky they'll be if other banks -- some sense of if customers are potentially shutting down accounts at other banks and opening accounts at your banks, or just opening secondary accounts that may not be filled quite as much over time or just any sense of that?

Ed, this is Rick.

We did see a significant increase in account openings immediately after the hurricane.

And I think we've had something like 45,000 new account openings in that market, in that defined marketplace during this period of time.

Some of those -- in fact, probably many of those came from other institutions where people have relocated into new markets, business accounts moving into Baton Rouge, places like that.

I would -- my guess is, is that's probably basically over by now.

That type of influx of new accounts is probably over.

I do not think that the influx of deposits is nearly over.

I think we'll continue to see that.

We were talking yesterday about our big experience here in Alabama was Frederick.

And in that case, which hit Mobile head on.

And in that case, we saw deposit increases associated with all the business activity that lasted for two years.

And it never really left the bank.

That was our Mobile bank.

I think Katrina's going to have a much longer tail on it because this is going to take -- this rebuild of that whole area's going to take much longer than the impact of Frederick.

Jack was joking a while back that we should have probably done a better job of keeping score where these accounts were coming from but in the heat of getting it done we had so much activity going on in the marketplace, we had associates and everything.

We were really just focused on serving customers, getting our branches open and so we didn't do as good a job of keeping up with where folks were coming from but we feel very good about the trends.

But Bryan when you outlined that 1.35 billion you're saying the bulk of that is actually not what you would consider to be insurance proceeds, correct?

I don't think -- you can't -- it's hard to tell, but our sense from what we can tell about it talking to the folks in the markets, some percentage, a small percentage of that is insurance proceeds.

It has not been the big driver.

Okay.

Thank you.

You're welcome, Ed.

Your next question comes from the line of Christopher Chouinard with Morgan Stanley.

Please proceed.

Hello, good morning, guys.

Hi, Chris, how are you.

Doing well.

A quick question on the guidance that came out a couple weeks ago from the OCC on commercial real estate.

When you look at that guidance, what are your concerns that the need to hold more capital in the commercial real estate business might change the profitability of that business, given your concentration there?

We've clearly been focused on it.

We do a lot of commercial real estate lending.

We do think that our capital levels today are adequate.

We do think that it could potentially over time have some small impact on the kinds of capital that we hold.

For example, we haven't issued as much Tier 1 as others might have and hybrid-type capitals.

That would drive up the cost of being in that business.

But as Jack mentioned earlier -- and as I have sort of alluded to, we've reduced our appetite for commercial real estate lending, part of the business cycle.

And part of it is looking at how we have capital deployed and balancing out our loan portfolio.

And so we think it'll have some potential impact.

We don't think it'll be a significant driver of our business in the near term, Chris.

Okay.

And just more broadly on just returns and how you guys are thinking about return hurdles.

When you look at your loan relationships today, I mean I think that's -- you intimated that's part of why we're seeing slower loan growth and why we should expect it next year.

Right.

What are the hurdles that you're looking at in evaluating some of these loan relationships?

Well, the -- if we look at the loan-only, we're looking at it relative to a cost of capital that runs around 10%.

But that's not to suggest or say that we look only at the loan relationship.

The important thing for us is not only acquiring the lending relationship, but having the opportunity to be a more full-service provider of services to that customer and deepen that relationship, bringing cash management, deposit products.

And so we look at it in the aggregate.

The first cut is looking at the loan, then we look at the relationship and so our bankers have the pricing tools to allow them to look at it both ways.

And so when we look at a loan-only relationship and we don't expect to get any relationship, additional relationship out of it; i.e., deposits, cash management, then we look at it to provide something in excess of our cost of capital.

And when you look at the 2005 loan results, how much of unit decline in C&I, for example, this year came from loan-only relationships?

There was some small part of it.

If you look year to year, C&I was impacted by the capital factors, the sale of capital factors.

Part of it was just change in the integration.

But clearly -- we've been using economic profit as a key driver of business unit performance measurement and incentives for a couple of years.

And by definition, when you use that as a driver, you have pricing tools that link up to it, people that go through their mindset when we make decisions about lending transactions.

And so I can't put my finger on an exact number, but I'm certain it's had a big impact on sort of the trends we've seen in loan growth over the last several quarters.

Great.

Thanks very much.

Sure thing.

Your next question comes from the line of Jackie Reeves with Bryan Beck & Company.

Please proceed.

Good morning.

Morning, Jackie.

I know you're going to be outlining additional Regions Next kind of initiatives later in 2006 and I think you had mentioned that you have 14 kind of new offices under construction.

Could you give us some indication, maybe net new openings that you plan to do in 2006, or just even new locations that you plan to roll out this year throughout your footprint?

This is Rick.

Don't -- I mean as Jack suggested, this is not -- we don't consider 2006 to be a big year for new branches, new locations.

We do have those 14 under construction, we've got another probably two dozen or so under consideration for now.

So you need to be thinking in terms of 20, 30, 40 branches -- less than -- probably less than -- well less than 50 branches this year that would be approved and in some form of opening.

Did you -- had you mentioned a specific time frame in which you would talk more about the Regions Next or is it just going to come out over the course of the year?

This is Jack.

We'll update you on where we are and the structure of it on a quarterly basis as we have these types of calls.

And really it's broken down between the retail side, the commercial side, mortgage, private banking, which brings in the Morgan Keegan products, the private banking-related customer base.

So it's -- there's a lot of structure and organization behind it and a lot of resources around the implementation and there's some, internally very finite results that we expect from it.

But initially, we won't see anything because we'll be going through that implementation phase.

We won't see cost increase as a result of it, but we'll be able to measure and monitor the progress against very specific objectives that we have on an internal basis.

As I've said, Jackie, in the past, it's not about reinventing banking, it's about the everyday blocking and tackling of the business, our customer segmentation, our understanding where our profits are driven, how we serve those customers, and getting more efficient in the business driving greater revenues out of our relationships and being more efficient in the way we do it.

And so it's probably more appropriate that we talk about it as we do it.

Okay.

And then just a follow-up to Ed's question on the deposits.

Are there specific -- or is it a big number for you guys, like kind of the escrow deposits tied to your first lien mortgages as it related to the various hurricanes?

No.

That's not a big number.

We didn't have a very significant piece of our servicing portfolio in that market.

It was -- it's a very small number for us there.

Okay.

Thank you.

You're welcome.

Your next question comes from the line of [Erin Jacobson] with KBW.

Yes, hi.

My question's have largely been answered, but can you estimate the margin impact from the deposits related to Hurricane Katrina?

In this quarter?

In this quarter, yes.

It was probably 2, 3 basis points.

And that would have been a positive?

Yes, it would have been positive.

Okay.

Great, that's it.

Thank you.

You're welcome.

At this time, there are no further questions in the queue.

Well, we thank you all for joining us.

Happy new year and prosperous '06 to all of us.

Thank you very much.

Thank you for your participation in today's conference.

This concludes the presentation.

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