Regions Financial Corp (RF) 2008 Q2 法說會逐字稿

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

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

I would like to remind everyone that all participant's phone lines have been placed on listen-only.

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

(OPERATOR INSTRUCTIONS).

I will now turn the call over to Mr.

List Underwood, before Mr.

Ritter begins the conference call.

Thank you, Operator.

Good morning everyone, and we appreciate your participation today, a very busy day overall.

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 of financial or other performance measures, statements about the expected quality, performance, or collectability of loans, and statements about Regions' general outlook for economic and business conditions.

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

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

Information on the Risk Factors that could cause actual results to differ is available from today's earnings press release in today's Form 8-K, our Form 10-K for the year ended December 31, 2007, or our Form 10-Q for the period ending March 31, 2008.

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

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

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

And now I will turn it over to our Chairman and Chief Executive Officer, Dowd Ritter.

Dowd?

Thank you List.

We appreciate all of you joining us for Regions second quarter earnings conference call.

With me this afternoon are Irene Esteves, our Chief Financial Officer, Bill Wells, our Chief Risk Officer, Mike Willoughby, our Chief Credit Officer, and Barb [Goden], our Head of Consumer Credit.

As all of you are well aware, credit quality deterioration and capital adequacy are today's overriding issues for the financial services companies, Regions among them.

Earnings are being pressured by rising credit costs, particularly related to residential home builder, condominium, and home equity portfolios.

As a result, second quarter earnings from continuing operations were below expectations at $0.39 per diluted share, excluding merger charges.

We believe that we are prudently managing our credit risk in establishing the necessary reserves, as I will discuss in a few minutes.

Given the current operating environment, and it's potential pressure on earnings, we have decided to build our capital by reducing our quarterly common cash dividend to $0.10 per share, at current share prices, that dividend rate represents a yield of 4%.

The dividend reduction will provide additional capital of approximately $1.2 billion by year-end 2009, and will significantly strengthen our regulatory capital ratios.

We remain committed to a strong capital position.

Turning to credit, in the second quarter, we continued to increase the allowance for credit losses, while aggressively charging off problem loans, a $309 million provision for loan losses exceeded net charge-offs by $100 million.

This lifted our period end allowance for credit losses to 1.56%.

Given the continuing deterioration in residential property values, especially in Florida, and a generally uncertain economic backdrop, we expect credit costs to remain elevated.

While we are not predicting the duration of this economic downturn, we think it is prudent to plan for no real improvements until 2010.

Credit Management is clearly our top priority.

While it is difficult to have a great deal of confidence in projections, as to the depth and duration of this credit downcycle, we do know that it's successful navigation requires a proactive approach.

We have been, and will continue to aggressively deal with problem credits.

As I previously mentioned, loans to residential homebuilders, condominiums, and home equity lending are the main sources of our portfolio weakness.

During the second quarter, we experienced unprecedented deterioration in home equity lending, mostly in Florida, where property valuations in certain markets, have experienced significant and rapid deterioration.

We have and will continue to implement measures to mitigate portfolio risk, particularly in our more problematic portfolios.

Specific to our residential homebuilder portfolio, we have transferred some of our most experienced bankers to our special assets department, so that they focus on risk mitigation of problem credits.

We have established a loan disposition program, one that evaluates opportunities on multiple levels, through three different independent working groups.

We have intensified our credit servicing function, through more in-depth and frequent builder contact and reporting.

We standardized credit policies and processes across our franchise, and adopted a more rigorous and disciplined underwriting and review process.

We placed a moratorium on certain types of loans, including land and condominium loans.

Those two categories have declined 1.6 billion and $1 billion respectively, since the end of 2006.

We have also taken significant action in the management of our home equity portfolio, including the completion of a portfolio valuation analysis, the results of which provide us with valuable information in portfolio work outs.

In addition, we have continued to develop our Customer Assistance Program, which aids our customers on several fronts, and Irene will provide additional information on those initiatives in just a few minutes.

There is no quick fix to today's housing related issues, and their negative effect on segments of our loan portfolio.

But the actions that we have taken, we feel are important steps in the right direction, steps that will help minimize earnings impact, and strengthen Regions as we move through the current cycle.

Even with our real estate exposure, with a couple of exceptions, we feel good about the diversity provided from our 16 state footprint, and the overall diversity of the loan portfolio.

Also keep in mind that we have no Structured Investment Vehicles, no Collateralized Debt Obligations, no credit card loans, and less than $90 million of subprime mortgage exposure.

Although capital and credit are front and center, we continue to work hard to take full advantage of quality revenue growth opportunities.

For example, we grew loans at a healthy 6% annualized pace in the second quarter, up from first quarter's 4%.

Commercial and Industrial loans were the primary driver, where new initiatives to selectively leverage financial needs of our commercial clients, by emphasizing usage of additional services is starting to pay off.

On the expense side, we are taking actions that will further reduce expenses, and improve our operating efficiencies.

For instance, at the end of June, we eliminated another 600 positions, most relating to the ongoing centralization of back office and operational facilities, as well as corporate overhead following our late 2007 merger related branch conversions.

This and other cost reduction efforts, such as our previously disclosed efficiency and effectiveness initiative, enhance our confidence in achieving an all-in cost save run rate of greater than $700 million by year-end 2008.

In fact in this second quarter, we are nearly there.

Our second quarter merger cost saves totaled $165 million, which equates to an annual run rate of $660 million.

As a reminder, this is well above our originally targeted merger cost saves of $400 million.

There is no doubt that the environment is challenging, but we are confident in our ability to successfully manage through these tough times.

We are realistic about the environment, and we are aggressively dealing with the credit issues.

We have taken actions to bolster capital and fortify Regions balance sheet.

We are developing and implementing revenue initiatives, that will enable us to capture market share, and enhance our longer term growth prospects.

Finally, we are diligently managing expenses.

Let me now turn it over to Irene.

Thank you, Dowd.

As you have seen, higher credit costs pressured second quarter operating earnings, driving our earnings per share to $0.39, excluding merger charges.

Credit quality deterioration primarily caused by declining residential property values, necessitated a $309 million loan loss provision, $128 million above the first quarter level, and $100 million higher than our current quarter's net charge-offs.

As a result, the allowance for credit losses increased to 1.56% of June 30th loan balances.

This is up 7 basis points linked quarter.

Non-performing assets were up 35%, and net charge-offs increased [66]% linked quarter, largely driven by deterioration in our residential homebuilder and home equity portfolios.

Non-performing assets climbed $416 million linked quarter to 1.65% of loans and foreclosed assets, driven by migration of residential homebuilder credits and condominium projects.

A majority of the condo increase came from a handful of larger projects in South Florida.

Through our newly established loan disposition program, we disposed of approximately $147 million of properties in the first quarter.

One example of our proactive approach to our credit quality issues.

The majority of these assets had been classified as non-performing prior to their disposition.

We will continue these transactions in the future on an opportunistic basis.

At the same time, net loan charge-offs increased $83 million linked quarter, equating to an annualized 0.86% of average loan.

Home equity credits caused over half the increase, rising to an annualized 1.94% of outstanding lines and loans, up from 57 basis points last quarter.

We are clearly experiencing greater deterioration in this portfolio than originally expected.

Mostly due to Florida based credits, which account for approximately $5.4 billion, or 1/3 of our total home equity portfolio.

Of that balance, approximately 1.9 billion represents first liens.

Second liens which total $3.5 billion, or 22% of our home equity portfolio, are the main sources of loss.

In fact, the second quarter annualized loss rate on Florida 's second liens was 3.5 times the rate of first lien home equity loans and lines.

4.74% for second liens, versus 1.37% for first liens in Florida.

So to emphasize this point, 22% of our total home equity portfolio, or $3.5 billion, had a 4.7% net charge-off rate.

The remaining 78% had about a 1.1% net charge-off rate.

The problems in this portfolio are very concentrated.

Within Florida, we are seeing particularly high losses in the Bradenton, Sarasota, Fort Myers, Cape Coral, Naples, Marco Island, and Fort Walton areas.

Customers who did not live in the properties, but purchased them to be used as an investment home or second home, were more prevalent in Florida than our other markets, and have been especially problematic.

As property values have dropped, so has the equity supporting these loans, exacerbating home equity write-offs.

Significant income losses are also negatively affecting a growing number of borrowers ability to repay home equity loans.

Now we have been taking steps to proactively address the impact of the real estate market on our overall home equity portfolio.

First of all, you should know we are recognizing losses when they become apparent.

In many cases, this means we are charging home equity loans and lines down to market value, before they become 180 days past due.

We review the strength of our equity positions, based on the current appraisal and take appropriate charges, regardless of the payment status with Regions.

Second, we have a Customer Assistance Program in place to mitigate losses.

For example, we are educating customers about what work out options, and contacting customers in short order as quickly as five days in some cases, after a home equity loan or line is delinquent to discuss options.

Finally, late in the second quarter, we completed the valuation assessment of our home equity portfolio, providing granular up-to-date property level information, that will help us in making timely informed work out decisions.

The assessment results are also being used in a pilot program, to reach out to customers who are not delinquent, to see if they are in need of assistance.

If they are, we immediately make use of the tools within our Customer Assistance Program.

In part due to these and other actions taken, Regions 90 day past due home equity loans and lines dropped 20 basis points linked quarter to 1.08%.

30 day past dues improved to 2.36% from 2.67%.

Let me now turn to our residential homebuilder portfolio.

Second quarter losses in this portfolio were also higher, but generally in-line with our expectations.

During the quarter, we charged-off $34.2 million of these credits.

In total, our residential homebuilder portfolio now stands at $5.8 billion, a $473 million decrease versus first quarter.

The loans within the portfolio that have been identified as exit credits, increased from $1.2 billion from the first quarter, to $1.8 billion at the end of the second quarter.

Looking at commercial 90 day past dues, total business services declined 6% versus first quarter.

Drivers of the net decline included both migration to non-accrual credits, and credits that were brought current during the quarter.

Shifting to revenue, non-interest income was relatively steady linked quarter, excluding securities transactions in the first quarter's income.

Higher brokerage and service charge fee income largely offset lower levels of mortgage and commercial credit fees.

Commercial credit fees were lower by $28 million versus the first quarter, primarily due to a drop in swap fees, however this was offset by a decline in the related market position adjustment reported in brokerage income, which increased $28 million.

The service charges rose $23 million in the quarter, driven by both seasonal factors and pricing adjustments.

Mortgage income was affected by an approximate $15 million second quarter loss, on the sale of the mortgage servicing rights related to $3.4 billion of Ginnie Mae loans.

Also factored in the linked quarter change was the absence of first quarter's FAS 159 one-time adoption benefit of $9 million.

Morgan Keegan posted a $7.3 million increase in net income linked quarter, excluding merger charges, which was driven by lower expenses.

With respect to revenues, fixed income Capital Markets activity was especially strong, up $8 million linked quarter, as customers sought the relative safety offered by these products.

However, somewhat weaker equity capital markets revenue offset, causing Morgan Keegan's total revenues to remain relatively unchanged linked quarter.

Notably, second quarter write-downs on investments in two Mutual Funds totaled $13.4 million, compared to first quarter's $24.5 million charge.

The Mutual Fund investments market value was approximately $22 million at quarter end for these two funds.

Consistent with our expectations, net interest income totaled just under $1 billion in the second quarter, $38 million below prior period.

A 17 basis point drop in the net interest margin to 3.36% was the primary reason.

The margin continues to be pressured by a negative shift in our deposit mix.

The flow through of recent yield curve movements, and Federal Reserve interest rate cuts, as well as higher non-performing asset levels.

Also, our proactive approach to capital and liquidity positioning including second quarter's issuance of $750 million of sub debt, and $345 million of hybrid capital, further pressured the margin in the quarter.

Average low cost deposits declined $489 million, or an annualized 3% linked quarter, primarily from declines in low profitability, public funds, and money markets.

Non-interest bearing and savings balances partially offset the money-market decline, increasing $323 million combined.

We have a major initiative under way to build our low cost deposits.

We have better aligned branch incentive plans, to drive checking account production and deposit growth.

We are offering new product enhancements such as a relationship focused checking and savings, that offer inducements to build relationships through additional products and services, and we are creating a new unit, which has an end-to-end responsibilities for growing deposits including product management, product delivery, and deposit acquisitions.

Turning to loans, growth picked up in the second quarter to an annualized 6%, driving solid gains in average earning assets, and helping net interest income.

Importantly, Commercial and Industrial loans drove this growth, primarily in central Alabama, Southern Mississippi, North Carolina, and Virginia.

With respect to operating expenses, we made very good progress in realizing targeted cost saves.

Nonetheless, operating expenses adjusted for unusual items were relatively flat linked quarter.

While the second quarter reflects solid personnel related efficiencies, these were offset by increasing credit related costs, such as higher other real estate expenses and professional fees.

Second quarter's effective tax rate excluding merger charges declined to 28% due to income mix, as well as recovery related to tax information reporting.

With the adoption of FIN 48, the volatility of the effective tax rate has increased significantly, with fluctuations of 200 to 400 basis points a quarter becoming more common.

Regarding capital, our Tier 1 and total risk-based ratios increased to an estimated 7.47% and 11.77% respectively, as of quarter end.

Both of these capital ratios will benefit from the reduced dividend rate.

In fact, the estimated $780 million annual dividend related savings, will add approximately 65 basis points a year on a pro forma basis to our regulatory ratios.

The Board's decision to reduce the dividend was based on a very thorough assessment of our capital needs over the next couple of years.

Of course, one of the key variables considered was asset quality trends, which we looked at under different portfolio stressed scenarios.

Our conclusion after reviewing these scenarios was to prudently build capital in a measured way over the cycle.

From a regulatory standpoint, we view Tier 1 capital as a priority, and are fortunate to have approximately $1.2 billion of additional hybrid capital capacity.

If this market opens up with reasonable terms, we will be opportunistic in tapping into it.

In summary, we believe the credit environment will continue to pressure the industry, and we are taking the actions necessary to successfully navigate through this unprecedented environment.

We are directing substantial resources toward working through our credit related issues, at the same time we remain focused on our customers, increasing branch efficiency, gathering low cost deposits, and enhancing our market share, and driving down overall costs.

Finally, the dividend action we took strengthens our capital base, and helps position us for future growth.

All of these initiatives will help drive results both during the current cycle, and as we transition to a more favorable operating environment.

At this time, Operator, we are ready to take questions.

(OPERATOR INSTRUCTIONS).

Your first question comes from Matthew O'Connor from UBS.

Sir, go ahead.

If I could just follow-up on your comment that you will be opportunistic with respect to capital, if the market opens up, can you just go into more detail on that, with respect to would it be common, non-common?

Thanks, Matt.

Yes, as I mentioned we have quite a bit of capacity for hybrid capital, which would be our target for additional Tier 1 capital.

We see no reason at this point to be raising dilutive capital.

Okay.

And then just separately, net interest margins have been under a bit of pressure the last couple of quarters here, and with the market rates, or at least the Fed rates relatively stable, should we expect more stability going forward to the NIM?

Performance of the NIM is as expected, given our asset sensitivity.

It also has to do with us being conservative on our funding and liquidity position.

I would expect a continued compression on that, what will have a big swing factor is what happens on deposits, and what happens on competitive pricing.

Okay, any thoughts on the magnitude, should we expect it to be as meaningful as it was this quarter, next quarter in terms of the decline?

I think you can get a good idea from looking at our disclosures in our 10-K of what interest rate reductions will do to our margin.

Okay.

All right, thank you.

Your next question comes from Steven Alexopoulos of JPMorgan.

Go ahead.

Maybe I could start first with the dividend cut.

Could you maybe walk us through, how you determined $0.10 to be the right number?

We looked at a number of factors.

As I mentioned, we are looking out at various scenarios of what could happen on the credit front, and what that would do to our pay out ratios and our capital conservation under those different methodologies, looking at our dividend pay out ratio along with our dividend yield, are some of the issues that we were looking at.

So was there a long term targeted pay out ratio in mind?

We don't have a formal policy on that.

What were the charge-offs associated with the sale of the 147 million in properties?

This is Bill Wells, Steven.

We teed up a good bit of properties to take a look at.

We sold about 147 million.

We had about a 30% discount on that, I think around 20 something, $25 million, is that about right?

So that is what we had.

Okay and maybe just a final question.

When you look at the home equity book, how high do you model home equity net charge-offs to get over the next year?

Just some color on the quality of the book, and what your thoughts are, and how high losses could go near term?

Well what we do is we look at an ongoing basis, and we go back and try to look at what we see the roll rates are going to be.

We don't really give any guidance on what we think the projections might be.

I am sorry, Steven but we take a hard look at it, and do it under various scenarios, we look at our underwriting standards, we look at how our customer selection, we are going back to the values.

Irene mentioned a little bit earlier, I think it was a good point, that when you look at the portfolio and you take the home equity book, you boil it down to Florida, and then you look at about that 3.5 million that is second lien, and that charge-off was about 4.74%.

You compare that to first lien in Florida at 1.37, so we identified what that book of business is under the most pressure, and then I go back and say the rest of the book is performing pretty well.

The rest of outside of Florida, the home equity book.

If you look at that second lien Florida piece though, could it get materially worse from there over the next couple of quarters, just that one segment of the home equity book?

Well I think for us, it really looks about where we think the economy and property values will go.

I will let Barb Goden speak a little bit more to the exact point.

We do look at the home price appreciation and look at the normalized trend, and we do again look out over time as we think when will we see that normalized trend, the Florida properties and the rest of our portfolio, so we feel pretty good about what our thoughts are, on where these numbers are going to go.

Are you saying that you feel okay with the under 5% charge-off, your near term in the Florida second lien book?

Is that what you are saying?

Right now what we are seeing in Florida is that the numbers that are coming in on a daily basis, we look at them every day.

They stabilize and that is the short-term outlook, and as Bill Wells has said, again there could be impacts from economic factors that could happen in the future.

Steven, we look at an ongoing basis, and a lot of it is going to be what we see what property values will continue to do, and from the credit side we have always said what unemployment will do, and how that will factor in, so you are asking for a lot of predictions that we may not, we just don't have the answers for right now, but I will say that we are looking at an ongoing basis that as Irene mentioned earlier, identifying our problems, identifying our losses as they come through the portfolio.

Okay, appreciate the color.

Thank you.

Your next question comes from Mr.

Jefferson Harralson from KBW.

Go ahead, sir.

Thank you, guys.

Some questions about your first lien home equity business.

What kind of severity are you seeing in your in your NPAs, for both Florida and the overall book?

Well, the way I look at it, we go to a rules base in how we look at our past dues, so what we are seeing is as we approach from past due 90 days and going to the NPA, that is what you are seeing charge-offs come through.

You might see a little bit of it, if you got the value there that might be from Florida for the foreclosure side, but on first liens, in Florida it is about 1.37%, and the rest of the book is about 0.60.

And for each house that you foreclose on on a first lien portfolio, is it like the seconds where you get pretty close to 100% severity, or is it because they are first lien is it somewhat lower loan to value, are you getting some value out of a foreclosed first liens?

Instead of foreclosed first lien, we are typically getting and again it depends where you are in Florida but $0.60 to $0.70 on the dollar.

Okay.

And the next question comes from Ed Najarian from Merrill Lynch.

Sir, go ahead.

A couple of questions.

First one, can you give us any insight as to how much reserve build do you feel you have to go?

I mean, we have seen a lot of companies with more aggressive reserve building actions this quarter and I am just sort of wondering, to what extent you think you might have to continue to build the reserve over next several quarters?

That would be the first question.

Second question would be, with the 7.5% Tier 1 capital ratio, you are clearly below most of the other large peer banks, large regional banks.

Obviously cutting the dividend to try to preserve capital.

Could you outline any capital raising initiatives that you would consider, assuming that the convertible preferred, or trust preferred markets remain locked up, or are out of the question at least in the near term.

So any kind of balance sheet initiatives or other things you might consider to try to preserve or enhance capital ratios?

And then third question, $67 million MSR recapture, is there anything that we should consider as one-time, other than the merger related costs that might have offset that?

Thank you.

Hi, Ed.

This is Bill Wells.

I will take the first one, and let Irene handle the next two.

On the reserve build, what we do have is we have a reserve methodology that we go through on an ongoing basis.

We have had this methodology in place for a number of years, and what I can define it as consistent.

We take a look at different stress factors that we see within the different portfolios, we look at the migration of problem loans over a period of time, and that is what we do on an ongoing basis, so we are not projecting out what we think the reserve build will be, but what I can tell you is the methodology has been applied consistently over time.

It takes in historical factors, what we think will happen with the market, by different product lines, and geography, as well as problem loan migration, and that is how we look at our reserve methodology, and I will let Irene handle the capital and MSR.

If I could just jump in, would it be fair, or do you not even want to go this far, would it be fair to say we should expect at least as much reserve build in Q3 and Q4, as we saw in Q2, or is that not even --?

Ed I think what you have to do is we have to do an internal assessment of what our problem loan migration would be, and what our movement to non-performing assets.

That is what I would be looking at really when we are looking at our reserve methodology, so I can't say what that number would be for any particular quarter.

We have got to look what is happening within the marketplace, and within our own portfolio.

Okay.

Ed, this is Irene.

On the Tier 1 capital as we mentioned we are at 7.47% now, with the dividend change, we will get another 65 basis points a year, so we will have another 97 basis points by year-end 2009, and of course, our next preferred capital raise would come from convertible preferreds, and if we felt we really needed capital, and that market was still closed, we would would go to straight preferreds, but as I said earlier, we do not see a need to go to common at this point.

Okay.

But you would consider a convertible preferred offering if you were able to do that?

It all, I don't want to predict what we would or wouldn't do.

It all depends on what we are looking at on the capital, on the credit front, as well as the terms available at the point in time.

And then lastly, would it not be reasonable to exclude the $65 million MSR write up, typically when we have seen you write up MSRs in the past, we have seen an equally offsetting amount of securities losses, or something of that ilk.

We didn't see that this quarter.

You have seen in times when we have had some MSR write-downs, that we had other security gains, and I think there is only one other time where we saw the reverse, but we did have the $14 million loss on the sale of the Ginnie Mae business, and we did have a $13 million write-down on the Morgan Keegan funds, which I would also exclude, but as you alluded to, there are a number of things going through our statements each quarter, so I would call it unusual this quarter, but that doesn't mean it may not happen next quarter.

Okay, all right, thank you.

Sure.

Your next question comes from Mr.

Ken Usdin from Banc of America Securities.

Go ahead, sir.

First question is just back on the overall credit picture.

Dowd, your comments in your prepared remarks about expecting elevated credit costs through potentially, or thinking through it at least into 2010, I am just wondering, when we think about the fact that charge-offs really accelerated this quarter, plus you did still overprovide, how should we be thinking about just the basis of overall provisioning expense from here?

Are we going to continue to see not just over provisioning, but just the absolute dollars or provisioning continue to grow, as both charge-offs and reserve build continues?

Any additional color would be helpful.

Sure, Ken.

Let me first, in those opening remarks what I was talking about was real estate values, the decline in real estate values, and although we aren't beginning to predict when we will have a flattening of the declines, when we will have an improvement in residential property values, what I was saying for conservatism, we are assuming no improvement in property values until 2010.

I didn't mean to infer that we saw no improvement in credit quality.

We just see no improvement in property values near term horizon, and I will let Bill Wells.

Bill, you might want to add something.

Yes, sir.

What I would tell you to go back and look at our charge-offs.

They went from 53 basis points up to 86, but when I break that down, the story for us continues to be residential homebuilding, condo, and also home equity.

If you look within the numbers, really commercial and industrial, commercial credit is actually down.

We had a little blip up in the last quarter, due to a national homebuilder credit, and then one large unsecured business line, but commercial charge-offs are down, so for us, when I look at the $80 million increase, it comes in from continued pressure on residential, which we talked about earlier, and then the increase in the home equity book, which is about 50 million of that $80 million.

Right, so but it seems like the trends on both those two books, and Dowd, thanks for that clarification on the prices, it will continue to increase or decline incrementally is what it seems like through the delinquency trends, et cetera.

So I am just not quite sure I understand the direction from here?

Are we going to continue to see a meaningful increase in charge-offs from here, just based on the frequency and severity continuing to go the wrong way?

No, Ken, I don't know if I could characterize as your words say meaningful.

I mean, what we would see is we saw an increase over quarter-over-quarter, again what we have been telling you over a period of time is that continued pressure on the residential homebuilder book, as well as now the home equity, what we tried to do this time, is clarify as best we can, where we think that problem is within the home equity book.

Where I think the story is is just where property values are in general, and we are going to be a reflection of that, so I can't, we are not in making any prediction of what we would see for the next quarter.

There is going to be continued pressure.

We have talked about that, you can see a rise in your non-performing assets, you think that there are going to be more pressures as we come through it.

I step back and look at our portfolio, and see residential homebuilder, condo, and also home equity, is kind of where we see the pressure within our portfolio.

Okay, and my last question is just on the first mortgage real estate book, the largest book of the portfolio, charge-offs are still relatively low there, but they did also double 21 basis points to 43 basis points.

Can you just talk through what you are seeing in the first mortgage, the regular residential mortgage book, and if that is showing any incremental signs on it's own?

Well the one thing I think from the construction book you saw the increases go up, and that is a reflection of some of our sales coming through and I will have Barb, if you want to talk about residential just in general?

Yes, the residential mortgage book, we saw that delinquencies have held their own.

We have also seen that losses did go up but they only went up marginally, on that book of business.

Average FICO scores remain strong, and if we are having any pressure at all on that book, it is a little bit in Florida, but again because we are in a first position there, so we certainly aren't seeing the same issues we are are in the home equity book.

Okay, thanks very much.

Your next question comes from Jennifer Demba from SunTrust.

Go ahead, ma'am.

Thank you.

In the residential builder book, it looks like about 30% of your loans are considered problem loans, but your charge-offs in that category look particularly low in the quarter.

Can you kind of give us some color around that, and what kind of loss severities you are seeing on those types of loans?

Yes.

This is Mike Willoughby.

We are seeing, depending on the property type for lots and lands, I would say we have seen not a lot of loss severity like I think you are meaning it, when we are selling, we might see, we might get $0.60 on the dollar in that category.

Mostly the charge-offs result from having to reappraise these properties, and write them down to value, so you have got a combination of sales, where we would be testing the market, and then write-downs based on appraisals, and I think as you have looked back, at the beginning of the year, we had identified 850 million in problem loans, and that went to 1.2 billion at the last quarter, and now it is to 1.8 billion this quarter.

Were you expecting your charge-offs to get higher in those categories over the next few quarters, given I am sure there are going to be a lot more problem loans on the market?

Yes, Jennifer, this is Bill Wells.

No, we will continue to look at the residential book.

One thing that I have seen is that the overall balances are coming down, we reduced the homebuilder overall portfolio about 470 million.

Some of the positive things we have done, we think we have got our arms around the whole portfolio.

We have shifted a lot of the residential lenders that have a lot of experience.

We have moved them into special assets.

We have developed work out plans, so we are working very hard to move this portfolio, either to a work out situation, or resolve them, or shore them up in some way.

I think you are going to continue to see pressure overall in the residential portfolio, but I think that goes back to what a lot of the other financial institutions are saying about their portfolios too, kind of a reflection of what is happening within the market.

Thank you.

Your next question comes from Scott Valentin from FBR Capital Markets.

Go ahead, sir.

Thank you for taking my question.

Just had a question on credit quality outside of construction and HELOC and single family, namely commercial real estate and C&I.

Just wondering if you are seeing any weakness in maybe the Florida market?

Scott, what we did as you would expect is we have gone thank you our commercial portfolio, in fact we did a review recently and as we did with the residential, we have increased the amount of credit servicing we have done, and right as of now, we have not seen any significant change or deterioration in the commercial real estate portfolio.

On the C&I side, some of our numbers, past due numbers show that actually past dues are coming down a little bit, a lot of it due to our hard work of managing that portfolio, but we have not seen any pressure on those types of products yet.

Those portfolios.

And just a follow-up on the home equity line of credit portfolio, are you seeing changes in usage by customers, or are you aggressively reducing lines?

We are, and I will let Barb talk about that.

Our home equity portfolio sits on a credit card platform, and because of that we have the ability to do line management, limit management, et cetera, all of those types of tools, and we have been aggressively doing them since 2003, but we are also doing the revaluation of the portfolio, also looking for opportunities where it is appropriate for us to free the line, or cancel a line on customers, and continuing to keep that program ongoing.

Is that activity increasing in this environment?

It is increasing in this environment, yes.

Thank you.

Your next question comes from Chris Marinac with FIG Partners.

Thanks, good afternoon.

I just wanted to get a little more color on C&I trends, particularly the fact the charge-offs did not go down this quarter.

Is that an anomaly compared to the last few quarters, or what would you expect?

Well what we saw last quarter, was we had a couple of large charge-offs go through print, and it dealt with a national homebuilder, and a large unsecured credit, so it popped up a little bit.

Also in our small business area, you probably saw rates trend up a little bit, and overall what I saw in this quarter is charge-offs came in in the commercial book pretty much as we suspected, and then the small business area seemed to moderate a little bit over the quarter for us, so what I would say is we got more back in-line where we were at the fourth quarter.

Okay.

And then a separate question just about opportunities to win market share, whether it is in Florida, or elsewhere in your footprint.

Are there any markets in particular that are better than others where you see opportunities in the next few quarters?

We absolutely think there are opportunities to increase margin share, both on relationships on the commercial side, and deposits and relationships on our consumer and Wealth Management sides, and we really are putting a lot of emphasis on that, as we are all sitting on this call, we are spending our time talking about the real estate values and credit issues in the industry, and I try and spend an awful lot of my time as I did this morning talking to our employees, about focusing on taking business away from other people, that may be having more trouble than we are in this environment, and we have got an awful lot going on across all lines of business, and particularly in some of our southeastern geographies doing that.

Okay.

Good.

Thank you.

Your next question comes from Todd Hagerman from Credit Suisse.

Go ahead, sir.

Good afternoon, everyone.

A couple of questions for you, just circling back first off, in terms of the homebuilder portfolio.

Bill and Mike, if you could just a little bit more clarification in terms of if I think about the land only and the lot portfolios, again given the commentary in terms of the real estate price declines I would have thought we would have seen a little bit more impairment within those buckets, and again Mike, as you talked about kind of the appraisal process, give us a better sense of kind of what your reserve allocation there, what kind of impairment you have seen, particularly as I think about the raw land component?

Okay.

Starting with homebuilders, we are at between 9 and 10% non- performing loans in that portfolio, and the portfolio has come down a good bit since we first started talking about this at the beginning of the year, all to say that when I look at this, I see a fairly quick increase in non-performing loans.

I think the loss piece is right where it should be, so I don't know that I have a lot to add to where we are on homebuilders.

We are happy that we were able to get our land exposure down this quarter.

We are also happy we were able to get our condo exposure down, and frankly part of the way of looking at it, is to isolate what the issues are, which would be condos, homebuilders, work those as aggressively as we can, and that is where we think the pay off is going to be for us.

And also I would add that to me, identified overall land exposure back before the merger as a key issue, and we have been bringing that down significantly over a period of time, and we have worked extremely hard and dedicated a lot of resources to doing that.

You talked a little bit about the appraisal process.

What we have seen, we have implemented an independent appraisal process, and it is outside the line of business.

We look at values on an ongoing basis.

We identify I guess if there is a particular credit, or whatever, we look at it on an ongoing basis quarterly.

We identify whatever reserve or discount we think it might be, and as I mentioned earlier, that goes into our overall methodology that we build for the allowance.

Okay, I just see 3.2 billion of land related exposure, and given the level of non-accrual loans that you show there, I just would have expected to see a little bit more impairment in the quarter given the decline in real estate values.

Well, this is Mike Willoughby.

You have just got to remember that as this process takes place, and you think about it from how quickly things have changed going back perhaps in the fourth quarter of last year, and what we have done is we have identified markets of concern.

We get more frequent appraisals done in markets of concern, just to make sure that our carrying value is appropriate, and I think one of the issues is in markets of concern, the historical comps, and what that may be telling us right now.

So I guess in summary, we are following our process.

We are doing it revalidating the values in those markets every six months, and we haven't gotten to the point that you are thinking we should be at this point.

Okay, thanks, Mike.

And then just separately for Irene, again, can you talk about or speak to any balance sheet strategies that you may be thinking about, in terms of your capital planning?

Beyond the Tier 1 capital that we discussed?

Beyond the Tier 1 capital and the organic growth, and the prospects for hybrid capital raised, but specifically any deleveraging that you are considering?

We are open for business, and we are bringing in additional clients, and we have no plans to reduce our activity in that regard.

So the balance sheet will continue to grow?

Yes.

That is our objective.

Terrific.

Thank you.

The final question will come from Al Savastano from Fox-Pitt Kelton.

Sir, go ahead.

Good afternoon.

Could you give us a sense of the loan loss reserve Bill that happened over the past couple of quarters?

Is that just for the homebuilder, home equity, and condo portfolios?

Yes, Al, what we have done, I think we put in about 55 million in the first quarter, and then a $100 million this quarter.

We go back to that reserve methodology that we put in place several years ago, and we look at it from a different perspective.

Homebuilder would be one, but we look at different portfolios within our loan book, and also, we look at migration of problem assets, so I would say that there is any one particular product that we look at.

It is a combination of looking at the overall loan portfolio.

I guess in the higher reserves then in the consumer portfolios, what has to happen?

Is it just delinquency driven?

Say that one more time?

To get a higher consumer loan loss reserve, is it just delinquency driven, or what else has to happen to get that reserve to go up?

Well, I mean, we look at on an ongoing basis, and it may be a combination of what we have seen happening within the different geographies, we look at our past due, which you mentioned delinquency, but we also would look at our charge-offs from that perspective also too, so it would be a combination of factors that we would look from a consumer book.

Okay, thank you.

Operator?

If there are no more questions, let me thank everyone for joining us today.

We appreciate it, and we will stand adjourned.

Thank you for joining the Regions Financial Corporation's quarterly earnings call.

This concludes today's conference.

You may now disconnect.