Regions Financial Corp (RF) 2007 Q4 法說會逐字稿

Good morning and welcome to the Regions Financial Corporation's quarterly earnings call.

My name is Jennifer and I will be your operator for today's call.

I would like to remind everyone that all participants on lines have been placed on listen only.

At the end of the call, there will be a question-and-answer session.

(OPERATOR INSTRUCTIONS).

I will now turn the call over to Mr.

List Underwood before Mr.

Ritter begins the conference call.

Thank you, operator, and good morning, everyone.

We appreciate very much your participation today.

Our presentation will discuss Regions' business outlook and includes forward-looking statements.

These statements may include descriptions of management's plans, objectives or goals for future operations, products or services, forecasts, financial or other performance measures, statements about the expected quality, performance or collectibility of loans and statements about Regions' general outlook for economic and business conditions.

We also may make other forward-looking statements in the question-and-answer period following the discussion.

These forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially.

Information on the risk factors that could cause actual results to differ is available from today's earnings press release, our Form 10-K for the year ended December 31, 2006, subsequently filed Forms 10-Q, and the information furnished in today's Form 8-K.

As a reminder, forward-looking statements are effective only as of the date they are made and we assume no obligation to update information concerning our expectations.

Let me also mention that our discussions may include the use of non-GAAP financial measures.

A reconciliation of these to the same measures on a GAAP basis can be found in our earnings release and related supplemental financial schedules.

Dowd?

Thank you, list, and good morning everyone.

We appreciate you joining us for our fourth-quarter earnings conference call.

With me this morning are Al Yother, our Chief Financial Officer; Bill Wells, our Chief Risk Officer; and Mike Willoughby, our Chief Credit Officer.

Al will provide a detailed discussion of our quarterly performance in a few minutes after which we will certainly take any questions you may have.

Fourth-quarter 2007 was about without a doubt the most challenging period that our industry has dealt with in many years given the sharp downturn in the credit cycle and the slowing economic growth.

As we disclosed earlier this month, Regions took aggressive steps in the fourth quarter to address the effects of the weakening housing demand on our residential home builder loan portfolio.

That included increasing our reserve for credit losses to 1.45% from 1.19%.

At the same time, we announced that we would book other pretax charges totaling approximately $134 million excluding merger related expense.

Primarily due to these actions, Regions' fourth-quarter earnings from continuing operations dropped to $0.24 per diluted share again excluding the merger cost.

Al will provide financial details about the fourth quarter but first, I want to update you on our current operating environment outlook and how we feel we're positioned to navigate the current challenges and fully capitalize on our many long-term growth opportunities.

A major benefit of completing our merger integration early and having it behind us is that it allows our strong and talented employee base and management team to fully focus on handling today's industry challenges and on successfully executing the newly adopted three-year strategic plan.

During the fourth quarter, we successfully completed all of our branch consolidations, creating one common customer platform throughout our multistate organization that should enable us to serve our customers more efficiently and more effectively.

We have a second to none product set, industry leading support systems and highly trained personnel.

We're especially proud of the fact that we retained 87% of our customers going through the integration which is higher than you would find in a typical bank not undergoing a merger.

Further, despite our focus on integration in 2007, our household base has been stable since the merger and obviously as we enter 2008, we're shifting our focus to executing household growth strategies in each of our lines of business.

Overall, we agree that 2008 is going to be an extremely difficult year for our industry but we feel convinced that Regions has the tools and the ability to manage through these tougher times.

We have been and will continue to be proactive in recognizing credit quality issues and taking actions to mitigate earnings and balance sheet impacts.

For example last year, we launched I believe it was in March, a customer assistance program to proactively assist our customers who might be experiencing difficulty during these uncertain credit times.

And although we've never offered products such as payment option ARMs, negative amortization loans, or loans with teaser rates, the loan types that are a current source of much of the industry stress, we have actively sought out our customers who might need our help as their mortgage is repriced.

For instance since early 2007, we've been contacting those customers with adjustable-rate mortgages six months in advance of their rate reset to discuss their ability to make the increased payments.

Once we've identified those that might have difficulties, we've offered them credit counseling both internally as well as through agencies such as HUD and more recently, NeighborWorks.

We have also searched our customer base for any that might qualify for the FHA Secure Home Loan program and help direct them to this option.

Actions like these not only help our customers but they help the bank by reducing delinquency rates and mitigating credit losses.

As you look at specific portfolio metrics, our residential first mortgage portfolio carries a weighted average FICO score of 722 and an average loan to value ratio of 68%.

For our home equity portfolio, those same measures are a FICO score of 733 and an average loan to value of 74%.

Providing additional strength to our home equity portfolio, those home equity loans that are the highest risk portion of the outstandings, about $500 million of second lien lines with loan to values over 80%, we fully insure those against credit losses.

Also, all of our home equity portfolio was originated through our branch network, an important point since loans of this type are faring much better in today's environment than the brokered variety that are causing issues at some of our peers.

This is absolutely not to say that these loans are somehow needed to broad economic and market pressures but we firmly believe we are in relatively good shape and will continue to compare very favorably to industrywide statistics.

Shifting focus, our commercial real estate portfolio is characterized by good size, product and geographic diversification.

As an indication of its granularity, the average note size within that portfolio is $500,000, our largest five MSA concentrations are each less than 10% of the total portfolio.

And although most of our overall loan portfolio including the bulk of our commercial real estate loans is generally performing well, the one exception is our $7.2 billion residential homebuilder portfolio which is largely composed of loans to local or regional companies and exclude loans on land, lots, residential spec homes and presold residential properties.

Additional details about this sector are provided in our financial supplement.

In our review of the residential homebuilder portfolio, we've identified about $850 million that we would term relationships that we wish to exit.

And we've increased the related allowances for inherent losses.

We've also shifted experienced real estate lenders to oversee and actively manage the portfolio as well as establishing a detailed proactive workout program.

Our specifically tailored workout program calls for frequent borrower contact, continuous local market review, and comprehensive internal analysis in terms of resolution and exit options.

While I'm confident that we now have the right people and the right strategy in place to minimize our losses, we still expect both nonperforming assets and loan charge-offs to rise this year.

In a few minutes, Al will give you the amount and the estimated timing of these increases as well as outline the key assumptions we've made underlying these expectations.

In addition to aggressively managing credit risk, we're also very aware of the need to maintain a strong capital base during these uncertain times.

Regions is already well capitalized on a regulatory basis with a strong tangible capital ratio.

At year end, our tangible common equity to tangible asset ratio was 5.88% and we think it prudent to maintain the level at the upper end of our targeted range of 5.50% to 6%.

That obviously means that we will probably not repurchase stock over the next several quarters.

Our emphasis on cost containment will also help us weather 2008's challenges.

We will continue to work diligently to further improve our operating cost structure.

Merger-related cost saves which continue to exceed our initial targets are providing good momentum and I fully expect that we will see -- significantly exceed the $500 million of pre-tax annualized merger cost saves by midyear 2008.

This should enable us to reduce full-year 2008 operating expenses below 2007's $4.3 billion level despite higher loan workout expenses and ongoing business development investments.

We've also begun to focus on a number of new initiatives aimed at retaining and expanding existing customer relationships at the same time that we attract new customer relationships.

These initiatives are the result of an extensive and recent strategic planning process that provide our leadership a common direction for the next three years and give us a foundation that we feel to help us successfully manage through this economically challenging period.

From an enterprise basis, we are particularly focused on leveraging Morgan Keegan's capabilities with each of our lines of business, growing our emerging and mass affluent customer segment, using a fully integrated approach, increasing core customer deposits, enhancing overall Company productivity, and delivering consistent superior service across all lines of business.

Additionally, we're implementing two initiatives to identify incremental revenue streams and operating efficiencies.

Six business forms, each led by a line of business and geographic representatives will be responsible for driving these initiatives as well as our overall strategic plan.

We plan to leverage the momentum and discipline that we've built as a part of our integration efforts to generate early progress and sustain focus on execution of our plans.

In summary, we feel that Regions has the ability, the commitment and the strategies in place to successfully manage through this current difficult economic and credit cycle.

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

Thank you, Dowd, and again, good morning to everyone.

EPS, excluding merger charges declined $0.40 third to fourth quarter.

A sharply higher loan loss provision was the major reason for fourth quarter's weak bottom line although $134 million in pre-tax nonmerger related charges also significantly reduced EPS.

During the latter part of the quarter, our residential homebuilder loan portfolio was negatively impacted by a significant slowdown in housing demand which led to oversupply and declining residential real estate values.

As a result, we increased our allowance for credit losses by recording a $358 million provision which was $251 million above our net charge-offs.

The credit cycle has clearly and rapidly turned downward so credit costs are likely to be a key factor in determining 2008 banking industry profit.

Accordingly, I want to spend a few extra minutes updating you on Regions' credit quality and outlook as well as our assessment of market conditions and risks.

Importantly, as Dowd had pointed out, Regions loan portfolio is generally performing satisfactorily except for the $7.2 billion residential homebuilder segment which represents about 8% of our total loans.

Within this segment, our greatest asset concentrations are located in Florida and our east region, mainly in Atlanta.

Indicative of the granularity of the overall residential homebuilder portfolio, the average note size is $405,000.

Nonperforming loans represent 3.6% of the total homebuilder portfolio with the highest concentrations again located in Florida and our east geography.

The most pressured product types include speculative homes and lots and they contain the highest concentration of nonperformers in this portfolio.

Fourth-quarter net charge-offs over $1 million in size were approximately $11 million for the residential homebuilder portfolio as a whole.

As you might expect given the geographies just mentioned, Florida and the East were the major sources of the write offs with again, speculative homes and lots representing the most significant losses by product type.

As Dowd highlighted, we have specifically identified $850 million of residential homebuilder portfolio loans as exit relationships which will be managed by our special assets department.

And we've already made progress in our efforts to work through this portfolio.

Since December 31st of 2006, we've reduced our land concentration by $1.1 billion.

And not surprisingly, about 66% of the $276 million linked-quarter jump in Regions' total nonperforming assets came from loans to these residential homebuilders.

The residential homebuilder credits accounted for approximately 10% of fourth-quarter's total net charge-offs.

And we've included a schedule in the earnings supplement that details nonperforming assets, 90 days past due and net charge-offs by loan type.

Despite the issues with our residential homebuilder portfolio, it's important to reiterate that we believe that the majority of Regions' loan portfolio is in relatively good shape.

In fact, home equity, a product which has gotten a lot of industry attention lately, experienced net charge-offs that were unchanged linked-quarter.

We currently expect Regions' full-year 2008 net loan charge-offs to rise to a range of 55 to 65 basis points of average loans compared to fourth-quarter's 2007 annualized 45 basis points.

At the same time, nonperforming assets which ended 2007 at 90 basis points of loans and other real estate are anticipated to increase approximately 20 to 30 basis points over each of the first and second quarters.

They will likely continue to rise in the second half of 2008 but at a slower pace as compared to first and second quarter and could end the year at a range of 1.5% to 2% of loans.

Now these forecasts assume weakness in residential real estate markets along with continued secondary market weaknesses throughout 2008, the interest rate cuts such as the one this morning, sluggish economic growth and modest deterioration in our other portfolios.

Now let me address the other financial performance aspects of the quarter.

Fully taxable equivalent net interest income dropped $36 million or an annualized 13% linked-quarter reflecting a 13 basis point net interest margin decline.

Now the margin slippage was in line with our expectations and was driven by reduced level of low cost deposits, an increased BOLI purchase, and the full effect of a tax deposit we made in the third quarter.

In addition, reversals accrued interest on NPA inflows contributed to the decline.

And I should point out that both the BOLI purchase and the tax deposit are accretive to net income even though the net interest margin impact was about 5 points negative on a combined basis for those two issues.

Currently we expect some continuing compression in our 2008 margin compared to fourth quarter's 3.61%.

Changes from the 2007 year-end level will be influenced most significantly by the rate of growth in low cost deposits, the composition of the earning asset mix, the level of nonperforming assets and the shape of the yield curve.

Since we are slightly asset sensitive, today's Fed rate cuts will impact us somewhat negatively as well but less than 1% of our net interest margin.

As expected, average loans grew a modest 2% annualized third to fourth quarter, although there was an uptick to an annualized 4% at the quarter end.

Notably we have now completed all of our conversion related portfolio reclassifications so this will improve the loan transparency going forward as all loans as of the end of the year are in the right classifications.

On a linked-quarter basis, fourth-quarter's total average deposits were a little unchanged; however, we did experience a shift from lower cost deposits into foreign deposits and large certificates of deposits.

Noninterest income, excluding securities transactions, grew a strong annualized 16% from third to fourth quarter.

We saw particular strength in brokerage income benefiting from seasonal factors but also indicative of the progress being made in deepening customer relationships as well as attracting new customers.

Additionally, interest rate volatility continued to boost the level of customer derivative transactions which is a positive for commercial credit fees.

Our decision to increase bank-owned life insurance accounted for nearly $7 million of the linked-quarter gain in core fee-based revenue.

Full effect of the additional BOLI purchases will flow through and be reflected in 2008's first quarter.

The linked-quarter decrease in mortgage income reflected a $4.4 million loss on the sale of a small out-of-footprint portion of our servicing portfolio.

Other income also includes $9.4 million in impairment charges related to tax preference from low income housing investments.

Service charges also rose very nicely at an annualized 6% linked-quarter, primarily due to the seasonal rise in overdraft and NSF activity.

Now taking a look at Morgan Keegan's performance, revenue increased $32.5 million third to fourth quarter reflecting strength in the fixed income capital market activity as well as in higher private client revenues.

However, a $38.5 million loss on investments in two Morgan Keegan Mutual Funds caused earnings to decline overall versus the prior quarter.

Our investments which are carried as of year end at a market value of about $65 million were made in order to provide liquidity to support the funds.

These total mutual fund balances totaled $324 million as of December 31st which is down from $2.1 billion at June 30th of 2007.

Now we are satisfied with the headway we are making with Morgan Keegan in expanding customer relationships.

For example during fourth quarter, Morgan Keegan opened 21,000 new retail customer accounts compared to 17,000 a year earlier.

Now all in all we are very optimistic about Morgan Keegan's 2008 growth prospects given its current momentum and healthy capital markets transaction backlog.

So linked-quarter increase in fourth-quarter non-interest expenses excluding our merger costs was largely driven by $120 million of the items that we originally outlined on our January 3 call.

And the balance of the pretax number to charges were recorded as offsets through noninterest income.

The expense items include $38.5 million mutual fund investment loss at Morgan Keegan, which I just mentioned; $51.5 million related to our ownership piece of the Visa lawsuit exposures; $23 million of mortgage servicing impairment; $7 million in foreclosed real estate write-downs.

Their proceeds from Visa's planned IPO in 2008 should more than offset the $51 million Visa related charge that we took in the fourth quarter.

In addition to the items outlined in early January, fourth-quarter expenses were affected by higher commissions directly related to Morgan Keegan's strong revenue generation, and an increase of legal and other professional fees.

Additionally, we invested in new marketing campaigns as well as opened 21 new branches in the fourth quarter.

The completion of our branch conversions drove fourth-quarter merger cost saves to $108 million, bringing year-to-date cost saves to $345 million.

As Dowd stated, this gives us confidence that we will exceed our revised goal of $500 million versus the $400 million originally forecast in our merger announcement by the midpoint of 2008.

For the full year of 2007, core operating expenses totaled $4.3 billion which is in line with our year-ago January forecast of $4.1 billion to $4.3 billion.

Now assuming the full flow through of merger cost saves by midyear and ongoing efficiency initiatives, 2008 expenses excluding our merger charges, are expected to decline by 4% to 7% in 2008 versus 2007.

Fourth-quarter's affected tax rate excluding merger charges dropped to 26% reflecting our additional BOLI purchase and an overall increase in the relative portion of tax free to total taxable income.

Our 2008 tax rate is anticipated to return to more normalized levels of approximately 32%.

We repurchased 3.8 million common shares during the early part of the fourth quarter but pulled back as the quarter progressed, and as Dowd said, we're putting our buyback program on hold for now.

In today's uncertain environment, especially important to maintain a strong capital base and with this in mind, we strengthened our risk-based capital during the fourth quarter by issuing $300 million of long-term debt.

Our tangible equity to tangible assets ratio remained strong as well ending the year at 5.88%.

Now to sum it up, it was a tumultuous fourth quarter but with the actions taken, we believe that Regions is prepared to deal with industry challenges in 2008.

And operator, we would now like to open up to questions.

(OPERATOR INSTRUCTIONS) Steven Alexopoulos, JPMorgan.

Good morning, guys.

First question, related to the Fed cuts we are seeing, can you just expand a bit on the margin commentary you gave?

And how should we think about the basis point impact for the margin here from what is going on with the Fed near-term?

Well, again what I mentioned to you is a range of somewhat less than 1% impact to the net interest margin.

We don't give specific guidance on the net interest margin percentage.

We do see that we will get some continued compression for the year but we don't expect it to be anything like what you saw this past year.

We do have some continued compression but --

Steve, that less than 1% that Al is referencing, I mean that comes directly out of our [ALCO] and our monthly modeling and that is where a cut of this magnitude would show and that is why that number was thrown out.

All other things being equal.

Are you saying 1% of your net interest margin or your net interest income?

Net interest income.

Income.

Income, okay, that clarifies that.

Looking at the $850 million of the homebuilder loans that are now in the special assets group, how quick do you think you could run that down over the next several quarters?

Well part of the reason and I will let Bill Wells, our Chief Risk Officer comment, one of the things in the assumptions that Al covered is this secondary market staying like it is.

There's a pretty good bit of liquidity out there if we wanted to get these off the books at $0.40 to $0.50 on the dollar and we've just said we're not willing to do that and thus, the nonperformers grow a little bit.

But Bill, you may want to expand on that.

Well yes, Steven, what we did is we had been identifying problem credits we put in the first part of November of '06, a pretty robust problem loan identification program.

So we've been identifying problem credit and have identified these $850 million.

We take it by individual deals and look to see how we work out of the credit.

Some of these are not what you call problem credits.

These are ones that we have identified as may have some stress and that we think we can turn around and work through the cycle.

And so as Dowd mentioned, we think we might have to take them on as non-accrual right now but we do not believe that we see the loss potential what the market is currently giving us.

And Dowd, just a final question.

How are thinking about loan growth in '08, given a need here to preserve capital?

Well, when I talked about preserved capital, it's obviously stopping the share repurchase part of it but we saw a little loan growth if you annualize there in that fourth quarter.

And I would hope that -- who can predict in this operating environment what is going to happen?

But executing just our basic focusing on each of our lines of business, I would hope to see on the consumer side and on the commercial side some low single-digit loan growth.

And that is kind of what we are counting on is so many people that were focused throughout this organization on conversions and mergers, instead of -- if you think to it, the original plan laid out at the announcement would have had us working on merger conversions until midyear, we are now complete.

So we enter into 2008 with thousands of people that were working on the merger back focused on their customer and growing their business.

So, I feel even in these times that gives us a pretty good head start comparing to last year.

Great.

Thanks, guys.

K.C.

Ambrecht, Millennium.

Hi, thanks very much for taking my questions.

Sorry if you've already answered this.

I was on another call.

Can you just kind of go through and update us and see if you have any more information on that $7.5 billion residential builder book?

Do you have kind of updated LTVs and appraisals?

I tell you what we might do, K.C., because we did go through that in the call, why don't we have List Underwood give you a call and do that off-line so everybody else won't hear it again.

Okay.

What about -- okay I'm moving on.

What about reserve to loans?

What is a good target ratio we should think about right now?

Okay, we covered that as well and so --

Okay, then I will follow-up.

Okay.

Thanks very much.

We'll give you a call.

Ken Usdin.

Thanks, good morning.

I just actually do want to follow up on the reserve to loans.

Can you just walk us through -- you've given us some idea about where charge-offs are and where MPA's are going but I might have missed it then where you're talking about how much you might need to additionally provide?

And also, how do you get to a level where you anticipate being comfortable with that type of reserve level?

Ken, we've gone through this calculation.

It's a very detailed calculation and we've arrived at this level based on all of the factors that we look at.

Unless those factors change significantly, the levels that we are at at the end of the quarter should be a fairly respectable level.

If factors change, we will come back and we will let you know as the year progresses.

But right now, we will be covering charge-offs and maintaining those reserves at reasonable levels compared to where they are right now.

And then one follow-up to that, but doesn't the increase in nonperformers that you are expecting also invoke higher provisioning much less what might be going on below the surface as far as incremental reserving patterns?

So the banks are always saying we can't necessarily take it all and get to a point.

So why wouldn't you have to continue to incrementally provide?

Ken, this is Bill Wells.

What we do is we take a pretty detailed analysis of our problem loan portfolio, really of our whole portfolio, and we are looking out up to 12 to 18 months ahead.

And based on what our best projections of looking what Al covered, our nonperforming assets as well as our charge-offs and the exposure that we think we will have in the nonperforming assets, we believe that the provision that we made sets us in a very good range of where we see the portfolio in the next 12 months or so.

Now given market conditions, you always have to come back and revisit that but I don't necessarily see that our nonperforming assets going up, you can relate that directly to more provisioning unless you start to see some trends that are happening within those individual credits.

Okay.

Okay, I think -- I understand.

And one more question just on the -- on the home equity side of the book taking your comments already that you are relatively comfortable about the fact that they were in footprint in branch and had relatively good metrics.

Can you just give us some discussion about the extent of deterioration you are expecting in that book as just either normal seasoning occurs or -- and your expectations for home prices from here?

I will start first with the home equity.

You know, one of the things that I've been impressed -- I've been with the company three years and how we actually do our underwriting, the process we go through as far as looking at individuals and making our home equity loans.

And what has happened over the past year or so, you've proven that the quality has held up relatively well.

You will probably start to see some past dues going up a little bit in the home equity book.

But I think that would be a normal indication of what we've seen in the industry.

And we believe why the credit people always say you have to wait and see what unemployment does and what that may affect your market or your book of business, we feel very good about how we stand up relatively to what we are seeing elsewhere in the industry.

As far as home prices, I mean the weaknesses that we've seen really have come out, a little bit out of the Florida area that we talked about earlier in January, as well as the Atlanta area for our residential book of business.

And within particular, we've seen some pressure in the Fort Myers area as well as somewhat around the Miami area and then also Atlanta.

Okay and if I could just also just clarify, Al, your comment before that expenses should be down 4% to 7%, are you using the [four three] full-year as the comparison to that ex the merger charges?

Yes.

So we are talking like 4 to 4.2?

That would be about right.

Okay, thanks a lot.

Kevin Fitzsimmons, Sandler O'Neill.

Good morning, everyone.

Just two quick questions to clarify.

First on the $850 million that is getting transferred in special assets, is that -- are those already in nonperforming status or what -- if you can reconcile that with what is going on nonperforming with this?

And then secondly, if you can just touch on following up on Ken's question on home equity, can you give us a sense for what's branch originated, what's broker originated and what if any difference you are seeing performance of those loans?

Thanks.

On my $850 million, no I don't think you what I would -- it's a combination of credit that we have identified that are not all nonaccruals.

Those are, I forgot the percentage of those that may be.

But we went back, Kevin, and looked at the whole portfolio, residential portfolio and identified which credits that we thought might need some additional help through this cycle.

So some of those had been transferred to special assets; those had been transferred to special assets.

Some are what we consider problem credits that have well-defined weaknesses.

But those may not been on accruals as well as some of them are past loans right now that we feel very good about the borrowers but we might need to take some other type of actions again to help them through this credit cycle.

Mike talk about the home equity too.

Well, this is Mike Willoughby, I'll just comment on the $850 million.

About two-thirds of that is in special assets and would be problem loans; the other one-third is eminently going in but would not be considered problem loans.

They would be exits for some other reason.

And the nonperforming piece is about 3.5%.

So it is a subset of that two-thirds that is in special assets.

The nonperforming piece is 3.5% of that particular portfolio?

Of the 850.

Okay, okay, okay.

And then if you can just touch on the home equity.

Could you ask that question again?

I didn't hear it.

I was just following up on Ken's question.

It seemed that that is an asset class that we've heard about problems coming and it seems just that it seems prudent to assume you are going to see some deterioration there.

And particularly some companies have seen problems on the more broker originated -- channel than branch originated.

But if you could give us some color there and just generally what's making you sleep at night with that portfolio?

Well, we don't have anything that we don't originate ourselves, so there is no broker channel in the equity book.

The second thing is that we are a what I call a through the cycle underwriter meaning that we expect to be in that business through an entire economic cycle.

And part of our goal is to manage loss volatility in that portfolio and it's one of the reasons, as Al had mentioned, that for our high LTV second position book, we insure anything we originate where the credit score is under 740.

So -- and that is, as you know, that is where you are going to find the most volatility of results at this point.

And frankly, it is why our portfolio is flat linked-quarter when others are not.

Now we will as the cycle goes through, we are not going to be immune but I think you are going to see ours behave much more like it has and any increase will be gradual than as opposed to some others that you are looking at today.

Is there any reason to be concerned with -- you mentioned that you insure the high LTV loans and home equity.

Is there any reason to be concerned about the entities that are insuring those and just given what is happening in the environment?

No, it's a sub of a very well rated, still very well rated company.

We have one insurance provider and they have been I would say the star through the last 10 years of insuring home equity.

And no, we are not concerned about it.

I would also add too, Kevin, it's this high LTV which is the small percentage of our portfolio is usually to our private client group which are well-seasoned borrowers.

So insurance is an add-on factor that we decided to take because of the high LTV factor.

But the underlying borrower is a very solid customer.

Kevin, let me give you a couple of specifics, this is Dowd, in terms of your comment, how can you sleep at night with this.

One-third of the accounts have a first lien, HELOCs.

In other words, they are not second mortgages.

One-third of those outstandings we have the first mortgage on it.

The second point made earlier, is the high FICO and the low loan to value that 75%, but I think in full disclosure that is giving you the worst-case.

That is 75% loan to value if those lines are fully drawn.

They are not fully drawn and I guess today on that portfolio, you'd have about a 42% loan to value.

So there is an awful lot of room and over half of that portfolio was underwritten in 2005 or earlier.

So there is some good seasoning to that portfolio.

Just to follow up on that, Dowd, can you be based on what you've seen happen in certain markets, can you go out and try to bring some of those lines in, contract them just to prevent risk going forward from this point?

you mean of our existing lines, would we want to do something to shorten their life or cancel them or something?

Right, do you have -- you know it has been talked a lot about just industrywide that with the -- what has happened with the values of the properties, that it might represent an event that would allow you to go in and to actually reduce the line and I know that would be something you'd have to weight customer by customer but is it something that --?

Right.

We always look customer by customer, but as we've just said, we don't have that 90%/100% loan to value and are now under value.

The ones that we do, as Bill Wells said, are generally our private banking clients.

And so we just haven't seen any of that whatsoever.

We are still through our employees and our branch networks, we still are interested in home equity loans under the same terms and conditions that we've just described.

Okay, great.

Thanks, guys.

[Greg Katron], Citigroup.

Good morning.

I had a couple of questions.

One, and sorry to take you back to the reserve again.

But maybe more of a hypothetical question around the reserve.

You built it to 1.45% of loans and realizing -- trying to calculate the reserve is very difficult to do.

But if your trends play out as you expect in 2008 with charge-offs going to 55 to 65 basis points, is it possible that you've added to the reserve, brought it up to 145 and than as you work your way out through 2008, everything behaves as you expect that you could actually could draw down the 1.45%?

Well, I guess it is possible but in this environment, I don't think that is probable.

Until we get further into this year and see what is happening with the economy and see if our expectations play out as we have, I don't think that is very likely.

Okay, so it's not a situation where you've put aside reserves now you can charge off against those realizing that it is probably an oversimplification of reserving.

But it's not a situation where you can set it aside up front and then draw against it as 2008 progresses and everything is progressing to your expectations?

No, that is why Al said it that way and covered the assumptions that were made in terms of the nonperformers increasing, in terms of the charge-offs increasing into that 55 to 65 basis point range and that continuing throughout 2008.

Those are the assumptions we made in taking that reserve and that is what is modeled in there.

Obviously if things worsened or improved, that changes, either way that changes the possibilities.

Sure, understand, thank you.

And on the commercial net charge-offs, and just looking at the C&I portion, they were up to 49 basis points in the fourth quarter.

Is that a signal of maybe a trend or is that something that is more seasonally related?

What I would say you know, you don't necessarily look at the percentage because you had a shift of some reclassification of the numbers from the commercial loan portfolio.

What I looked at was just the dollar increase and when I broke that down, there were probably three things that I saw.

One, we had an isolated large fraud that we dealt with.

I didn't see anything that would be systematic throughout our portfolio.

The others, which I think was a very good risk practice, we shut down our Regions wholesale funding line which was about a little over $3 million of that increase.

And the rest of it really came out of business banking which I would tell you based on where we are in the industry and what we are going through and the economy, that was part of the loss too.

Nothing that would alarm me one way or the other.

Okay, great, thank you.

Christopher Marinac, FIG Partners.

Thanks, good morning.

Dowd, I wanted to ask you and Al about expected loss rates on some of these construction areas, particularly the land area.

If we were to try to be conservative and want to expect future losses from those, what is a fair rate?

I know you asked that of Dowd and Al, but this is Bill Wells.

You know, Chris, we started back earlier in the year looking at our land portfolio and one thing that I don't think the company has really gotten credit for is we identified from a risk perspective the land exposure with the combined company and actively have reduced that over $1 billion over the year.

What we also did is try to go to the market and sell some of the land on the front end before the market really had turned.

We were probably looking at a 8% discount.

As we got though the process, that number had gone up to 15% to 20%.

Now what you are seeing in the market, if you tried to go to market now, Chris, it could be up to, as Dowd had mentioned, 40%.

Now that depends on the individual properties, the location, the current build out.

So it would be very hard to look.

We look at them individually.

And when we started to see there is trouble, then that is what we do is move it to nonaccrual.

What we are looking at right now is looking at our nonperformings go up but not necessarily taking a full exposure or liquidation value of those properties.

Again, I think that is very hard to model in.

What I would do is take what Al had given you, talked about what are charge off range would be and that is factored in.

Okay.

Very good.

In terms of a pipeline of future issues, would you -- do you have clients that are still on interest reserves that may have those expired and therefore that is new NPA through six months?

There could be one or two.

It's certainly possible and where expecting some more defaults but as I look at the portfolio and look at what we don't have, I'm sitting here thinking we don't have subprime, we don't have the -- any option ARMs, we don't have any reverse [AM] mortgages, we don't have any exposure to SIVs; yes, there will probably be a little bit of deterioration, but I think we've talked about the one to four family builder portfolio because that really is our concentration.

And also too, we -- interest reserves as you are picking up on, is one of your key indicators.

You are looking at how long your interest reserves will go and that is what we are factoring in as our projection of our nonaccrual too.

Also what I would tell you is our early identification of these credits moving them into an exit strategy is exactly doing that.

It's identifying these credits that we thank may have some stress on those and trying to figure out ways we can work with the customer to make sure that they can, as what we are doing, manage through this tough economic cycle.

Our best options to -- I think someone had ask earlier at about exiting, our best options to exit will be to identify credits very early on and that is what this whole program is about.

Great, thanks for the color.

I appreciate it.

There are no further questions.

Thank you operator.

And thank everyone for joining us and we will stand adjourned.

You may now disconnect your lines.