Regions Financial Corp (RF) 2008 Q4 法說會逐字稿

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

My name is Stephanie Hanson, 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 and good morning, everyone.

We very much appreciate your participation.

Our presenters today are our Chairman, President and Chief Executive Officer, Dowd Ritter and our Chief Financial Officer, Irene Esteves.

Also joining us and available to answer questions are Bill Wells, our Chief Risk Officer, Mike Willoughby, our Chief Credit Officer and Barb Godin, our Head of Consumer Credit.

Let me quickly mention a change in our presentation format.

We have prepared a short slide presentation to accompany Irene's comments.

They're available under the Investor Relations section of regions.com.

For those of you in the investment community that dialed in by phone, once you are on the Investor Relations section of our website, just click on Listen Via Phone and the slides will automatically advance in sync with the audio of Irene's presentation.

A copy of the slides will be available on our website shortly after the call.

Our presentation during the next few minutes 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, forecast 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 and our form 10-Qs for the periods ending September 30, 2008, June 30, 2008 and 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.

Now I will turn it over to Dowd.

Thank you List, and good morning.

We appreciate all of you joining us for Regions' fourth quarter earnings conference call, especially on the historic occasion with today's inauguration later this morning.

As we announced earlier, we reported a loss of $9.01 per diluted share for the quarter, driven by a $6 billion non-cash goodwill impairment charge.

This charge was the result of recent impairment testing which indicated that the estimated fair value of our banking reporting unit was less than its book value.

While this charge certainly had a large impact to earnings for the quarter, it's important to note that this is a non-cash item, and our regulatory and tangible capital ratios were completely uneffected and remain solid.

Excluding the goodwill impairment and merger charges, our loss for the quarter totaled $0.35 per diluted share, reducing full year earnings to $0.74 per share.

These results reflect a worsening economic and credit quality environment as well as actions we have taken to aggressively recognize and deal with problem assets.

Specifically, we furthered our efforts to accelerate loss recognition, including aggressively writing down values of stressed housing related assets in the fourth quarter by either selling or moving to held for sale these non-performing assets.

Including these write downs, we recorded a total net charge-off of nearly $800 million.

The loan loss provision totaled $1.15 billion for the quarter.

As a result of these factors, the allowance for credit losses increased by $353 million to 1.95% of loans.

Irene will provide more details on these actions and fourth quarter's financial results, but first, I want to spend a few minutes discussing what is being done to steer Regions through these turbulent times and ensure that we're well positioned to take advantage of the eventual economic rebound.

From an operating earnings standpoint, the fourth quarter was the most challenging in our company's history.

And although we're encouraged by steps taken by the government to stabilize the housing market and revitalize the economy, there is no quick fix for credit quality issues that are plaguing the financial services industry.

We are working hard to minimize risks and ultimate losses in Regions' loan portfolio.

Nonetheless, I would expect 2009 to be another difficult year.

Provisioning and non-performing assets will continue to be elevated and the levels will depend on the depth and length of the economic downturn and it's effective particular on housing, commercial real estate and consumers' balance sheets.

This is by far the most difficult credit cycle we've ever witnessed.

Regardless, lessons learned in other credit quality down cycles remain valid such as the earlier a bank recognizes and deals with a problem loaner asset, the greater potential for reducing or limiting losses.

Few problems age well.

This thought was the catalyst for our intensified effort to dispose of troubled assets.

While the market for distressed assets softened in the fourth quarter, we were a hit of many potential sellers in creating a comprehensive process to dispose of these assets.

As a result, we were able to sell or move to held for sale approximately $1 billion of non-performing assets in the fourth quarter versus $430 million in the third.

Non-performing assets, excluding held for sale, declined $347 million quarter-over-quarter if you look at September 30 compared to year end due to the stepped up disposition effort.

Nonetheless, the inflow of new non-performing loans accelerated in the fourth quarter and it's unlikely that we've seen the peak for this cycle.

As the operating environment has worsened, we've added staff to our problem asset workout group in both the commercial and consumer areas and combined, they now total over 600 dedicated workout personnel.

We will continue to shift resources into this area as needed.

These experienced professionals are focused on identifying the most expedient solutions for mitigating loss content in our loan portfolio.

Problems continue to be centered in our home builder, Florida home equity second lien and condominium portfolios.

However, as unemployment rises, risks beyond these segments are building, especially commercial real estate categories such as retail properties as well as residential first mortgage loans in Florida.

We're making every effort to identify all potentially problematic exposures and take steps to reduce them.

At the same time, we will continue to maintain reserves that sufficiently reflect our overall portfolio risks.

During these tough times, capital and liquidity are especially critical.

Regions is in good shape with excellent liquidity and healthy capital levels.

At year-end, 2008, our regulatory capital ratios were considered above well capitalized minimized requirements and our tangible common equity to tangible assets was 5.23%.

As you are aware, Regions participated in the treasuries Capital Purchase Program, issuing some $3.5 billion of preferred stock in common warrants that raised our tier one capital ratio to an estimated 10.39% at year-end.

This incremental capital shores up our balance sheet and enhances our ability to prudently expand lending to our customers.

In fact, we're continuing to make credit available to consumers, small businesses and commercial companies as intended by treasury and the Congress.

During the fourth quarter, the government's investments strengthened Regions' capital as I noted earlier, which supported us originating almost $12 billion in new or renewed loans.

So 22,000 home loans and other loans to consumers, which totaled $1.3 billion and over 13,000 loans to businesses of all sizes totaling $10.4 billion.

That $12 billion in lending production was an increase of approximately 3% compared with prior quarters during an economic environment where lending typically is flat or reduced.

In addition, don't forget we're paying the government $175 million each year in dividends on this investment providing taxpayers a fair return while meeting the government's objective of making credit available to both consumers and businesses.

Operating expense containment is always important, but even more so when revenues and credit costs are being pressured by weak economic conditions.

In 2009, we will continue to actively explore ways to improve our operating efficiency.

At the same time, we will work hard to provide our customers with superior products and service.

I'm particularly pleased with our success in attracting new customer deposits and accounts during the fourth quarter.

Most of the growth came in the form of money market balances, which grew $1.7 billion and for customer certificates of deposits where we picked up an additional $3.1 billion.

In other positive note, net new consumer checking household growth picked up dramatically late in the year to an annualized rate of 3.2%, which is double our growth rate from 2007.

This increase certainly reflects an upward trend in service quality metrics where Gallop has showed our results are the highest marks that we've ever received in the fourth quarter for our branch service excellence.

In summary, we fully acknowledge the challenges that face us in 2009.

We have been aggressively preparing for those challenges and will continue to take appropriate actions to successfully steer Regions through this difficult environment.

Let me now turn the call over to Irene to review our fourth quarter's results in greater depth.

Irene?

Thank you, Dowd.

Let's begin with a summary of results for the quarter.

If we look at slide one, fourth quarter's loss was largely driven by the $6 billion non-cash goodwill impairment charge, the equivalent of $8.66 per share.

Full year earnings totaled $0.74 per share before the goodwill impairment and merger charges.

Beyond the goodwill impairment results reflect incremental weakness in housing valuations and the overall economy, but also the actions took to reduce exposures in our most stressed portfolios.

Consequently, our fourth quarter provision for loan losses increased to $1.15 billion.

That was $354 million above net charge-offs and $733 million higher than the third quarter.

Our allowance for credit losses now stands at 1.95%, up 38 basis points length quarter.

As previously announced on December 18, we recorded a $275 million tax benefit related to a settlement with the IRS covering tax years up to and including 2006.

This completely closes those years and removes that uncertainty.

In line with our expectations, Regions' net interest margin declined 14 basis points to 2.96%.

Both non-interest revenues and non-interest expenses were negatively effected by broad economic pressures.

Lastly, like many banks, the US Treasury invested $3.5 billion in our preferred stock.

We're paying a 5% dividend on this, plus we have issued warrants to them for 48 million shares of our stock.

This incremental capital is the primary driver in the increase in our tier one capital to 10.39%, and I'll cover each of these topics in greater detail.

But first, let's turn to slide two where we've shown the most significant drivers of our fourth quarter earnings per share.

Obviously, the non-cash goodwill impairment charge stands out, but in terms of other significant items, we recorded the $0.40 per share tax settlement benefit that I mentioned earlier.

Of course, higher credit costs were also a main driver, including about $0.42 directly related to our accelerated asset disposition program.

Either through losses on closed loans sales or marks taken on held for sale transfers.

As a reminder, in the third quarter, some $430 million of stressed assets were sold or moved to held for sale.

During the fourth quarter, we stepped up those efforts disposing of or moving to held for sale $1 billion of non-performing assets.

We took an average 51% mark on those loans at the time of sale or transfer, translating to $466 million, most of which is included in net charge-offs and the remainder in non-interest expense.

Other real estate write-offs totaled $14 million and are recorded in non-interest expense.

And as previously noted, we also took a sizeable provision above net charge-offs equating to about $0.32 per share.

Continuing declines in housing and residential related construction project values, as well as rising employment, necessitated the increased provisioning and allowance.

Fourth quarter's earnings per share was negatively effected by a $99 million or $0.09 impairment charge related to mortgage servicing rates, driven by falling interest rates.

Interest rate volatility has caused MSR valuations which are calculated based on market rates as of the end of the reporting period to fluctuate greatly from quarter to quarter.

You may recall that we booked a recapture benefit of $67 million just two quarters ago.

The issuance of preferred stock to the government under the TARP was also a drag on fourth quarter earnings per share.

The cost of this capital equates to $0.04 per share for the seven weeks it was outstanding.

The balance of earnings absent the items set out separately on this slide total a positive $0.12 per share.

Focusing on credit, slide three provides current data on the status of our most stressed portfolios, residential home builders, home equity second liens in Florida and condominiums.

Stressed assets currently make up about 9% of our total loan portfolio.

This slide highlights the progress we've made in working down this portfolio from 12% to 9% of loans.

In total, remaining exposure is $3.1 billion less than just a year ago.

To date, our credit problems and charge-offs have been concentrated in our smaller loan portfolios as shown on slide four.

The bar height represents 2008's net charge-offs' percentage by loan type, while the width represents the average loan balances by type.

As you can see, our highest loss rates are in the stressed portfolios.

Note that these loss rates reflect the loss taken on assets we sold or transferred to held for sale.

Fortunately, these high loss rate portfolios are relatively small in size, but we recognize that worsening economic conditions and rising unemployment are likely to begin to take a greater toll on other segments of our portfolio.

In fact, there is some recent evidence of this in our retail commercial real estate loan portfolio and in residential first mortgages in Florida.

We are expecting loss rates on these segments to climb somewhat as the year progresses.

Despite emerging portfolio stresses, the overarching credit message remains unchanged.

We're focused on proactively identifying problem assets and disposing of them as judiciously as possible, while at the same time, making sure that reserve levels remain appropriate.

Let me give you a quick prospective on housing across our foot print.

This slide is a good illustration of where housing pressure is and importantly, is not for Regions.

The spread of home price deterioration as indicated by the progressive color change is the real take away.

Note that in most of our markets, price declines average less than 5% in 2008.

But in our most stressed markets, nearly all of which are in Florida, prices have fallen much more precipitously, greater than 20% in many markets, in fact..

Another metric for the health of the Florida real estate market is the inventory of home for sale.

As of the end of the third quarter, available home supplies stood at eight months, an increase from the seven month level at year-end 2007.

Contributing heavily is Florida's high and rapidly rising unemployment rate.

Slide six lays out selective credit metrics for the last six quarters.

Looking at the chart on the left, you see the fourth quarter's spike in net charge-offs to an annualized 3.19% represented by the yellow line, but the context for the increase is important.

Note on the right hand chart both the corresponding drop in non-performing assets, represented by the green bars, as well as the increase in the coverage ratio shown by the red line.

At the same time that we're proactively recognizing losses, we are adding to our allowance for credit losses.

The increase at year end to 1.95% of loans incorporates not only up-to-date asset valuations, but our estimate of portfolio loss content using appropriately distressed economic assumptions.

This in essence shows that we're taking losses as quickly as possible.

Illustrating our thesis that few problems age well, these actions have also improved our level of non-performing assets and our coverage ratio of allowance to non-performers.

Slide seven provides a quarterly roll forward of non-performing assets for 2008.

Excluding assets to transfer to held for sale to help understand the migration of inflows and outflows.

On this basis, NPAs are down $347 million versus the third quarter.

While inflows were flat in the third quarter, they were up again in the fourth quarter, primarily due to Florida home builders.

Moving beyond credit quality, on a reported basis, net interest income grew $3 million third to fourth quarter.

However, adjusting for third quarter's one time silo charge, net interest income actually declined $41 million length quarter, and the margins slid 28 basis points excluding third quarter silo impact.

Following short-term interest rates have particularly pressured the margin, given that about 55% of our loan portfolio is tied to prime or LIBOR and immediately reprices downward while deposit rates must stay competitive.

The recent Fed rate decision on December 16 to put short term rates near zero and the subsequent declines in short term LIBOR will likely compress the first quarter margin by an amount similar to what we experienced in the fourth quarter.

However, with market yield curves now hovering around these historic lows, we expect the margin to begin to stabilize in the second quarter of 2009 with potential improvement thereafter arising mainly from our focus on loan spread expansion and the expectation that more rational deposit pricing will return to the market.

Slide nine shows the change in our funding base since last quarter.

Of note, total customer deposits grew 4% on average in the fourth quarter and almost 7% point-to-point reflecting strong CD growth in response to competitive offers and customer desire to lock in rates in the falling rate environment.

Note the Integrity Bank acquisition on August 29 had a full quarter impact in the fourth quarter as well.

But even without these deposits, we were still up 3.7% for the quarter on average.

Average low cost deposits, which are total customer deposits minus customer CDs, posted a 0.5% linked quarter decline due to customer moves to CDs or to treasuries, however, ending levels were up 4%.

Positive results from money markets and interest free categories were driven by money market rate offers and the introduction of new consumer end business checking products.

On the asset side, average loans increased at a 1% pace in the fourth quarter.

Within total loans, commercial and industrial lending increased $1.2 billion or 5% versus the third quarter.

As we reported last quarter, we are targeting new commercial business relationships that extend beyond lending to include deposits and fee based services such as treasury management products.

Commercial real estate construction balances declined as expected, reflecting the general environment for residential real estate.

Within the consumer categories, home equity balances increased slightly, but were more than offset by a decline in other consumer balances driven largely by student loan sales.

Non-interest revenues were $18 million lower than in the third quarter, largely due to a drop in service charge and trust income.

A weak economy is negatively affecting service charges with lower transaction volumes and overall activity.

The change in trust income includes the impact of lower asset valuations from declining markets and a third quarter benefit from energy-related broker transactions.

Excluding the impact of the goodwill impairment and mortgage-servicing rights charges, non-interest expenses were up 7%, primarily due to higher legal and professional costs and increased branch incentives tied to our strong deposit growth.

For 2009, we are targeting 2% to 4% reduction in total non-interest expense relative to full year 2008 expense base, excluding merger charges.

Switching to capital, our regulatory ratios, which are comfortably above the well capitalized minimums, were substantially bolstered by the US Treasury's investment in our preferred stock as detailed in slide 11.

With regulatory capital at comfortable levels, focus has now shifted to the tangible common ratio.

At year end, ours is 5.23%.

The largest driver of the decline versus third quarter is an increase in assets, primarily excess liquidity from preferred and debt issuances.

As the year progresses, we'll be opportunistic with respect to strengthening our tangible ratio.

We're in good shape from a funding and liquidity standpoint.

As summarized on slide 12, we have solid funding to asset ratios which are aided further by the ability to issue senior unsecured debt through FDIC's temporary liquidity guarantee program, of which we have already issued $3.75 billion of fixed and floating rate notes with maturities through December, 2011.

We still have over $4 billion of remaining capacities through this program.

As to liquidity, we have combined contingent liquidity available from a number of sources including the Fed, the Federal Home Loan Bank, unpledged securities and unused lines exceeding $45 billion.

As of December 31, we were holding excess reserve balances of $7.5 billion.

The holding company itself has a large cash position and only minimal long term debt maturities through the end of 2010.

Finally, our average loans to deposits stands at 111%, while our average non-interest bearing deposits account for 14% of our average interest bearing assets.

Wrapping up, 2008 was a difficult year, and we know that 2009 will be challenging for the industry, but Regions is entering the new year on solid footing.

We have strong capital and excellent liquidity.

We have plans in place to mitigate credit losses capitalize on opportunities to derisk our balance sheet.

We are proactively identifying problem loans and aggressively managing them.

We're taking steps to improve our net interest margin and at the same time, we're continuing to prudently invest in our key businesses with a focus on strengthening existing client relationships, attracting new customer and improving operating efficiency.

Lastly, we are implementing changes to reduce our cost structure.

To summarize, we are positioned to not only successfully manage the current credit and economic down cycle, but to fully participate in the recovery.

We're discretion the challenging environment was a strong team, a clear vision, confidence and a strong sense of resolve.

With that, I'll turn have to the operator to see if we can take some questions.

(Operator Instructions) Your first question is from Matt O'Connor with UBS.

Your line is open, sir.

Good morning.

Good morning.

Just want to say up front you guys provide very good loan and credit disclosure, so appreciate that.

Was wondering if you could provide a little more detail on the retail commercial real estate.

You had said losses will likely increase versus current levels.

For that one book that seems to about $4 billion, what's the current loss rate?

Yes, this is Bill Wells.

When we say this is one of the portfolios we're looking at, we have not seen any real hard stress factors come in as far as non-performing assets or comments or data points like that.

What we've seen is some of the stress in some of our projects, and I'll let Mike get a little bit more into what we've seen in that particular portfolio.

Well, you see what you would expect.

We've talked about the expectation that our real estate -- commercial -- our retail commercial real estate portfolio would be effected by rising unemployment, and what we've seen so far is exactly that.

So, we'll see some vacancies, but not to the point of impacting the paying capacity of the borrowers.

The point here would be we see early signs of deterioration, but they're not showing up in non-performing assets and charge-offs.

What we've also done too is we identified this portfolio probably six months ago, put a moratorium in this product line.

We've been watching it doing a credit servicing, so it's one of the things that we have been doing to proactively address the portfolio pretty much as seen us do throughout all of 2008.

Okay, then help me better understand, when we look at the roughly $11 billion of non-owner occupied commercial real estate, a loss rate went from 2.1% to 9.1% from 3Q to 4Q.

What's the biggest driver of that big increase?

Well the biggest driver's going to be the cost of asset dispositions in the quarter, which was -- the total of that was around a little over $450 million, and the bulk of that had to do with non-owner occupied commercial real estate.

Okay.

So is that -- I'm sorry, maybe I just misunderstand, is that just a classification issue, some of your home builder exposures and construction, some of it's in that category too, driving those losses?

Yes, I would take construction and the amortizing fees and put them together.

Okay.

And then just separately, we've seen a couple of the money center banks get another round of capital infusions.

There's a lot of talk in the press that the new administration is going to inject more capital into the banking industry or some kind of combination of big bad bank to take bad offsets off of the balance sheet.

Any of these things are something that you would consider doing going forward?

Matt, as far as our capital, we feel we have a very strong capital base at this point and don't envision asking for additional capital or needing additional capital.

And then as far as the asset disposition program, there's not enough information yet for us to judge if we would want to participate in that.

We would look at.

Remember, that's how it first started out, was the is having a problem asset disposition program and move it into capital, and now they're back.

We've set up a very good function internally that evaluates.

That's why we've been able to dispose of over $1 billion or to mark our sale being an asset.

So we've been doing that, but if there was an opportunity for the federal government to assist in that, we would take a look at it.

Okay, and then just lastly, your comment about the first quarter net interest margin declining similarly to what we saw in 4Q, would that be the 14 basis points decline in 4Q or the 28 basis points decline, ex the lease noise from the third quarter?

It would be the latter.

Okay.

All right, thank you.

Your next question is from Steven Alexpoulos from JP Morgan, your line is open.

Maybe I could start -- looking at the $423 million of non-performers and held for sale, how much have been been written down already?

Only -- what we did is -- and I'll go back a little bit to third quarter.

We marked or sold about $430 million and we said at that time we took an average mark of about 50%.

When we moved into the fourth quarter, considering having the tax monies available, we look at portfolio again and again, we're trying to deal with some of our worst problem credits.

What I would say is when we sold, we did a little bit better than 50%.

When we did a mark, I believe Irene said 51%.

So when we marked them as they moved over, we were a little bit above 50%.

I would say quarter-over-quarter, a 50% mark is probably the best number to give as we're going through what we've seen the -- for our products, for our loans or assets as well as what we'll be able to get into the market.

Maybe I could shift gears for a second.

Irene, it sounds like you're rethinking the importance of common in the capital structure.

What's the timeline you're thinking of to boost that up, and what level of TCU would be you be targeting ?

I think as we mentioned, we do feel our capital ratios are strong, but we will look for opportunities as the markets open up to shore up that tangible common, but we don't have a current plan in place.

Do you expect to earn the dividend this year and if not, why are you paying it?

As you probably know, we don't give earnings guidance, but the board just voted to issue -- continue the $0.10 dividend share, and we'll continue to look at that as the market unfolds and we look at what our credit losses are and how bad the economic downturn is.

I guess if you're balancing -- you're saying if the markets open up, you'll go and issue additional common, but you'll probably consume $275 million or so with the dividend.

I'm just trying to balance how important it is for you to actually raise more common here near term.

As you know, one of the big benefits of raising common is you can pay the TARP back sooner.

So that's one of the major items we're looking at.

Okay.

Thanks.

Thanks.

Your next question is from Kevin Fitzsimmons from Sandler, O'Neill.

Your line is open.

Good morning, everyone.

Good morning.

A little on the heels of a previous question.

In terms of what you said your average mark on the portfolio, can you -- the mark taken on the loans moved to held for sale.

What -- if we were saying it was a little more than 50%, what kind of mark would have been required if you actually physically sold those off of the balance sheet this quarter?

I'm trying to get a feel for that decision process you face this quarter.

And separately, just wanted to bring up the -- your subsidiary, Morgan Keegan.

On one hand, you've had a few recent deals -- small deals in early December, but I just noticed it really wasn't a source -- it wasn't even brought up on this conference call.

It wasn't really brought up much in the release.

So I guess what I'm wondering, is Morgan Keegan, do you view that as a source of new capital potentially in the future if there were any interested acquirers, or could that be the source of expense reductions going forward?

Thanks.

Kevin, I'll take the average mark question.

Again, for our fourth quarter, we probably did on the average mark around 47% discount.

When we looked at -- that's what we sold.

When you look at what we did for the average mark overall, down in portfolio, was about 51%.

So you're hovering around that 50% mark there.

Now I'll let Irene take the --

I think Dowd wanted it.

Let me just -- you were correct in that Morgan Keegan had a couple of small transactions to really add to their expertise going forward.

We've said it before, and I'll say it again, Morgan Keegan is an integral part of this company, and the long-term strategy is to continue integrating the two customer bases, and there is absolutely no thought whatsoever on our part of any kind of disposition of Morgan Keegan.

Okay, they did have a big increase in expenses.

Is that really mostly incentive related with the fixed income business doing so well this quarter?

Always with Morgan Keegan you'll see their expenses will go up in the quarter as you just mentioned when they have the revenues, exactly.

Okay.

Thank you very much.

Your next question is from Richard Bove from Ladenburg Thalmann.

Your line is open.

Hi.

I know that you don't give earnings guidance, but since the stock is down about 75% this year, I'm wondering if you have any thought as to what type of environment would turn earnings positive, whether it could happen this year or whether you see us waiting until 2010?

A good part of the decline, as you know in our earnings, is the credit outlook, and we've taken over $2 billion of credit charges to our P&L in 2008.

So that is the big swing factor for us, is how long and how deep is this credit cycle.

Is that still an unknown at this point, or do you have any feel in the way of budgeting 2009 as to when it might contract?

Dick, this is Dowd.

I think as I commented, as we look out into 2009, unfortunately, I don't see unemployment having reached its peak yet, nor do we see real estate values having bottomed to where they'll start to rebuild, and until we see either of those things, I just can't see bank earnings improving.

Okay.

Thank you.

Next question is from Jeff Harralson from KBW.

Your line is open.

Thanks.

I wanted to ask you guys a question on the changes in the balance sheet this quarter.

If you take out the goodwill impairment, the balance sheet grew by about $8 billion due to the debt and the TARP money, but can you talk about how you guys are thinking about the TCE ratio and as juxtaposed against liquidity, do you plan on shrinking this balance sheet at all going forward to help the TCE ratio out, or do you think that you just kind of amass liquidity and run with a lower TCE?

Jeff, as we mentioned, we'll look opportunistically at building our TCE, but one the things that is impacting our assets is that liquidity sitting on our balance sheet, and we have since then paid off task money which will bring down those assets.

Okay, is there any plan to shrink the balance sheet more?

Or do you think this is basically the level of the balance sheet we're going to have for most of the year?

We're reallocating resources within the balance sheet, but we're not expecting to significantly shrink it.

Okay.

And lastly, the $8 billion increase in other earnings assets.

What is that asset, and what is it yielding?

It's primary at the Fed.

Okay.

Thank you.

Next question is from Todd Hagerman from Credit Suisse.

Your line is open.

Good morning, everybody.

Good morning.

Bill, if I could just follow up, just in terms of the reserve action this morning, you mentioned that the coverage on the non-performing increased sequentially.

Could you give us a better sense of how the reserves are allocated?

Where a lot of reserve build is coming through as I think about between consumer and commercial and the construction portfolios?

Yes, sure.

One of the things we've been doing for the past two or three years is having a very consistent reserve methodology that we put in place, and we regularly review that.

And what we did this time is you go back and look at your large problem credits, which cause FAS 114 credits.

We went back to a single analysis on those, and then we go back and look at our individual pools of credit, and we went back and upped a little bit of our ratios and that when we were starting to look at what the impact would be for the overall quarter.

What I would go back and -- when I look at the reserves, you think about it right now that as of the end of the fourth quarter, we have about $1.50 billion in non-performing loans.

You add in REO, other real estate owned, about $243 million.

It comes up with empty A's about $1.3 billion, and we have got a reserve of almost $1.9 billion .

So when we look at it, we go back and see how do we allocate.

And we do that for --it could be for residential, it could be consumer, and it's just part of our methodology that we

Okay, but could you give us any kind a sense of, again, as you highlighted the residential or the retail commercial real estate and the Florida first mortgage as an example.

Obviously, commercial real estate is still a very meaningful part of the company's asset mix if you will.

Can you give us a better sense of kind of where you are reserved on that portfolio relative to other pieces of the pie?

Well again, we went back and looked at our reserve percentages when we looked at our FAS 5 pools, and we upped a good bit of that.

We feel like we're more than adequately reserved for any of the issues that we see still confronting the company, and again for us, it's still been in the residential home builder portfolio.

It's been in the home equity side as well as the condo portfolios.

Okay, and then just separately, the restructuring credit took another big jump this quarter.

Could you give us a sense, just in terms of the mix or restructure between the consumer versus the commercial in that bucket and maybe give us a sense of the success in terms of the cure rate, if you will, on the restructuring credit?

Well, I'll let Barb talk about that.

That mainly has the most of the restructuring coming through our customer assistance program that we have in our consumer area, Barb.

Yes, it was.

In fact, all of it but $1 million came out of the consumer book, and that goes back to our customer assistance program, helping customers who are stressed.

We've had some very good success in both the restructured loans as well as loans that we continue to modify, so a number of our modifications are included as part of our restructures.

As an example, bankruptcies were 2%, and only 2% out of that book of restructured loans.

The rest of the customers are continuing generally to pay us, and we're continuing to work with customers.

Okay, thank you.

And then just finally, Irene, if you could.

Could you just expand a little bit in terms of your margin outlook and specifically, as you guys have termed out some of your funding with some of the Fed programs and the like, and obviously there was quite a bit of incentives carrying through this quarter in terms of some of the deposit growth, and the company has talked a lot about the importance of deposit growth and how critical that has been to your -- to the margin, if you will.

Could you expand on that in terms of between what you have done on the funding side with some of the term debt facilities and the deposit flows -- again, where the deposit factors into the mix in terms of the stabilizing margin outlook?

Sure.

On the funding side, as you know, liquidity comes with a price.

So as we've termed out our loans, even though they're at pretty good rates, they're not as good as overnight rates.

So that has increased our funding cost, but we feel it's prudent in order to maximize our liquidity.

On the deposit side, we are beginning to see moderation in deposit rates.

They're very slow to come down, but near the end of the fourth quarter, we're starting to see that, and our rates are coming down, and we are counting on that to continue to moderate.

And then on the loan pricing side, we are looking at risk based pricing and not having exceptions to that pricing.

So all of those are efforts to moderate the decline in our net interest margin, and then the expectation is that it will level out mid year.

Okay, thank you.

Next question is from Scott Valentin, FBR, you're line is open.

Good morning, thanks for taking my questions.

The first question regarding asset dispositions, are you providing financing for any of the buyers?

No, we're not.

Okay and second question, you mentioned earlier on the call that asset prices on disposed assets were kind of soft in the fourth quarter.

It's still early in first quarter, but I imagine there's more people joining you in the strategy of bulk dispositions.

Do you expect prices to rebound somewhat or stabilize?

When you say bulk, what we've been trying to do for our company is use strategic investors, which gets away from a deeper discount than maybe what some other companies may be doing.

We do think over a period of time you are going to see more properties come onto the marketplace.

What I'd go back and point to is we did a little bit better fourth quarter than we did third quarter, and our mark pretty much held up to where it was before, so we think we're doing a very good job of identifying some of our most troubled property and identifying what the mark should be and holding it relatively to what that mark is.

As for the going forward, we're going to continue to try to dispose of these assets that we have held for sale, and we've already taken our mark on those.

So we think we'll have fairly good success.

In fact, since the end of the quarter, we've already sold about $15 million in property, and we have bids, I think, of about additional $45 million.

So we're continuing our process, but I will tell you, it will be impacted by what additional product will be be coming to the market.

Okay, just one final question.

You mentioned that based on your outlook, 2009 will be challenging.

I was trying to get a little bit of a baseline.

You mentioned increasing unemployment and declining real estate prices, but is there kind of a range?

Is it 8% to 9% unemployment?

Is that a range we should think about when you guys factor in when your forecasting and loss projections?

Yes, that is the range that we're looking at.

That 7% going up to 9%.

9%.

Thank you.

Next question is from Gordon Watson from Ore Hill Partners.

Your line is open.

Most of my questions have been answered, but I was just going to ask, when you move assets into held for sale, you are saying the coverage ratio has gone down over non-performing assets.

Isn't there some sort of a survivorship (inaudible)?

I was just wondering what the coverage ratio would be if those loans would stayed in held for sale.

When I talked about a coverage ratio, the point I was saying, these are loans that are still non-performing.

We haven't marked or sold those, and the question was talking about reserve methodology.

When you look at that, we have a got a little over $1 billion in non-performing loans, and we have a reserve of almost $1.9 billion.

So I look at it from a coverage ratio where we think we're more than adequately reserved where I think the question was talking about commercial real estate and you look at your pools.

What you do is when you move it into held for sale, you're taking your mark at that time, what you think you're going to get a bid for that piece of property.

We won't move a piece of property unless we think we have a very good chance to sale.

As you get into the negotiation phase of it, you may take an additional charge, but that has not happened all that -- in all those cases.

So you take the reserve deals with existing non-performing loans, is not talking about the held for sale.

I hope that clears up your question.

Okay, thank you.

I also wanted to add to clarify.

The coverage ratio went up.

From Q3 to Q4, our coverage ratio went from 1.07 to 1.81, and that's the allowance we have compared to our non-performing, so our allowance coverage went up dramatically given our non-performers.

Which is a more conservative approach.

Okay.

Thank you.

Next question is from Chris Marinac from Fig Partners.

Your line is open.

Thanks, good morning.

I just had a question on the restructured loans that went up in the quarter.

Is there any more color on those, and do you expect a higher pace coming up in the next quarter or two?

This is Barb Godin, and I would say that the restructured loans that went up again as a result of our customer assistance program, we are continuing all of those efforts with our customers, including when a customer is unemployed.

Unemployment may start to peak.

We may start to see some more restructured loans happening.

I wouldn't want to suggest what that level might be at this point in time, but as I said, we have had some very good experience working with our customers and keeping them in our homes and avoiding foreclosure.

Would any of those be construction related loans or CRE loans?

None of them are, they're all consumer.

In fact, to give you a little more color, there's 2,922 of them to be exact.

So you can see, if you take our totals, $453 million and divide is out, they're relatively small sized loans.

Great, thank you very much.

Your last question is from Jennifer Demba, Suntrust Robinson, your line is open.

Irene, I was wondering if you could repeat the expense guidance you gave during your monologue and give us some more detail about what type of rationalization and cost you guys might be looking at doing this year?

Sure, Jennifer.

We're forecasting a 2% to 4% expense reduction, and it's going to come from a number of areas.

We're looking at our expenses in all areas, our travel and entertainment expenses, our training.

All but the most critical frontline training.

We're looking at limiting the amount of conferences we attend.

It's throughout the organization.

Thank you.

Sure.

Operator, are there any additional questions?

Sir, you have a question from Rodney Pitts from Southern Elevator.

Your line is open.

All right.

We'll let this be our last, looking at the time, our last question.

Mr.

Ritter, Rodney Pitts.

As it relates to your preferred stock that you sold in the marketplace, how much do you have outstanding now?

Do you anticipate offering more preferred stock, and how safe is the dividend on the preferred stock?

That preferred stock is the $3.5 billion invested by the United States government at a 5% dividend, and that is a very safe payment to the United States government of the taxpayers.

I'm really talking about the preferred stock that you offered in the marketplace prior to the $3.5 billion to the government.

That was our convertible preferred -- our hybrid preferred that was earlier.

Right, the 8.875% preferred.

Obviously, that is a safe dividend that we are comfortable in making, and that market currently isn't open to issue additional, but we are watching it ,and if there is an opportunity, we will issue additional shares.

Very good.

Thank you.

Thank you.

Okay, with that, let me thank everyone for joining us and we'll stand adjourned.

This concludes today's Regions Financial Corporation's quarterly earnings call.