Regions Financial Corp (RF) 2009 Q2 法說會逐字稿

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

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

I would like to remind everyone that all participant 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 appreciate very much your participation.

Our presenters today are our Chairman, 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 touch on our presentation format.

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

It is 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 live phone player 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 this morning will discuss Region's business outlook, and includes forward-looking statements.

These statements may include descriptions of management's plans, objectives, 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 Region's 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 10-Q for the quarter ended March 31, 2009, and in our form 10-K for the year ended December 31, 2008.

As a reminder, forward-looking statements are effective only as of the date they're 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 press release and related supplemental financial schedules.

Now, let me turn it over to Dowd.

Thank you, List.

Excuse me, and thank all of you for joining us this morning for our second quarter earnings conference call.

Earlier this morning, we reported a second quarter loss of $0.28 per fully diluted share, reflecting our actions to realize and provide for losses in Region's loan portfolio.

Although I certainly don't want to downplay the second quarter's sizable credit costs and their bottom line effect, I do want to talk for a minute about the fact that those costs are masking favorable progress on several fronts.

Our net interest income increased, our deposit growth remains strong, our new account openings were at a record level for the second consecutive quarter, and our brokerage income rebounded.

At the same time, we significantly strengthened our balance sheet, meeting the requirement to increase our capital buffer by $2.5 billion, including adding approximately $2.1 billion of tier one common equity, and successfully fulfilling the regulatory stress test requirements.

In fact, with our total risk-based capital ratio at an estimated 16.2%, our tier one capital ratio at 12.2%, and our tier one common ratio at 8.1% as of June 30th, we would compare very favorably with our peers.

And further strengthening our balance sheet, our allowance for credit losses was increased as of June 30 to 2.43% of loans.

Irene will provide more detail on second quarter results, but first, I did want to spend a few minutes talking about some of the initiatives that are enhancing Region's earnings power as we continue to proactively de-risk the balance sheet.

Providing excellent customer service and a broad range of quality products is at the core of our focus on building profitable client relationships, and we're experiencing very positive results.

In the second quarter, our average customer deposits were up 3% from the preceding quarter.

Year-to-date, June 30th, new retail and business checking account openings are higher by 29% and were a record 491,000 new accounts, putting us well on track to achieve a goal that was set at the start of the year of over one million new checking accounts, further confirmation of our efforts in this recent national recognition that we've received, the most important of which relates to our relationships with important of which relates to our relationships with customers.

A recent J.D.

Power and Associates survey, measuring customer satisfaction with their primary bank, Region's rated as the most improved retail bank, passing 29 other banks in the ranking process.

Also, in a recent Gallup poll, Regions ranked second highest among banks that were tested when it comes to customer confidence and trust in your primary Bank.

And then finally, just last month, we were ranked as the number three small business lender in the United States by the small business administration.

From a customer profitability standpoint, we're also making headway.

For instance, you take our enhanced risk adjusted loan and deposit pricing discipline, it is notably improving spreads.

Our average interest bearing cost declined 24 basis points first to second quarter, bringing the year-over-year drop to 54 basis points.

And our loan yields are improving, reflective of the work we've been doing to appropriately price risk into all transactions.

As a result, we've been able to stabilize our net interest margin.

At the same time, we're working to diversify our revenue streams and enhance the fee-based component.

As an example, our mortgage business continues strong, originating a record $3.1 billion in new mortgages this quarter.

We're also more effectively leveraging our brokerage and insurance businesses, with progress here exemplified by Morgan Keegan, adding $1.4 billion in net new assets under management during the quarter, bringing that year-to-date total to $3.1 billion in net new assets under management.

Further, the growth in our customer base mentioned previously is helping drive service charge income, which increased 7% on a [late] quarter basis.

Expense control and productivity improvements are also key components for earnings power enhancement.

In the second quarter, costs directly tied to revenue generation, along with sharply higher FDIC premiums and securities-related impairment charges, obscure the productivity successes that we're achieving through streamlining systems and processes and continuing to strengthen our performance management.

All in all, we believe that we're implementing some solid strategies to enhance Region's earnings power, and ensure that the Company not only successfully manages through today's difficult environment but is well prepared to capitalize on the opportunities that an eventual economic recovery will offer.

And as I said earlier, attracting and retaining profitable customers are critical.

One measure of our success to date is the significant improvement that we've been able to achieve in our branch performance, with customer loyalty being a critical component there.

Since June 2008 this past year, the number of Region's lower performing branches is measured by customer service and satisfaction scores which are developed and tracked on a monthly basis by Gallup, have declined by 65%, while our high performing branches have increased 132%.

Turning, for a moment, to credit quality.

There's no doubt that the challenges are clearly not behind us, but we remain confident in our ability to deal with them, and continue to take the actions to identify and address problem credits.

Our stressed assets are well-defined, and primarily relate to our $3.8 billion homebuilder portfolio, our Florida home equity second liens, and the condominium portfolio which in aggregate, will reduce another $554 million during this prior quarter.

We will continue to manage these assets down.

For instance, we expect that by year end, we will have substantially eliminated our condominium exposure, which today stands at $711 million, down from $2.2 billion, just two years ago.

Early problem asset identification, along with early loss recognition, has been around remains our focus.

The majority of our loan portfolio continues to perform relatively well, including commercial real estate.

Nonetheless, nonperforming assets continue to rise, as Irene will discuss, and credit costs are likely to remain elevated throughout this year and into 2010.

If history is any guide, a turnaround in credit quality will lag an economic turnaround.

And while there's some signs that we may be near the bottom of this recessionary economic cycle, we can't presume a near-term rebound.

Ultimately, there will be an economic recovery, followed by an improvement in banking industry credit quality and a decline in those related costs.

When that time comes, the earnings power and enhancement that Regions is achieving will no longer be obscured by the out-sized loan loss provisions and [REO] costs, which in the second quarter alone combined to total $0.66 per fully diluted share.

As a reminder, our Institutional Investor Day is next week in New York on July 29th, where we'll provide additional insight about our initiatives and talk in much greater depth about why we feel Regions is increasingly well-positioned for the future.

But with that, let me turn it over to Irene.

Thank you, Dowd.

Let's begin with a summary of results for the quarter, which, despite a loss of $0.28 per diluted share, included several underlying strong positives.

As shown in slide one, customer deposits continue to increase at a strong pace, adding $2.5 billion on average linked quarter, driven by a pickup in the non-interest bearing deposits growth rate to 8%.

Reflective of lower demand, average loans were down across most categories.

With respect to credit quality, net charge offs increased to an annualized 2.06% of average of loans from first quarter's 1.64%.

Reflecting ongoing weakness in the economy, housing valuations in particular, we also increased the allowance for loan losses by recording a $912 million provision, $421 million above net charge offs.

Nonperforming loans, excluding loans held for sale, increased $977 million, primarily due to homebuilder and condo loans.

Region's net interest margin steadied at 2.62%.

Net interest income rose $22 million on a slightly larger earnings base.

This is in line with our expectations, and is evidence that the unfavorable impact of falling interest rates has largely worked its way through our asset-sensitive balance sheet.

Non-interest revenues, excluding certain items that I'll cover shortly, increased 10% quarter over quarter, particularly benefitting from a rebound in service charges and brokerage revenues.

Higher non-interest expenses were attributable to the increase in brokerage-related incentives, as well as higher FDIC insurance costs.

Lastly, as Dowd said, we bolstered capital, fulfilling our $2.5 billion S-cap requirement.

Our tier one capital ratio is estimated at 12.2%, and our tier one common ratio now stands at 8.1%.

Let's take a closer look at our earnings.

This was a busy quarter, with a number of items relating to our capital raise running through our P&L, so let me take a moment to point these out.

First, we booked a $61 million pretax gain on the exchange of trust preferred securities for common stock.

The gain effectively represents the growth discount to par on tendered securities.

We also sold our remaining shares of Visa, recognizing the $80 million pretax gain.

In conjunction with our asset liability management strategies, other securities having book value of about $1.4 billion were sold at $108 million pretax gain.

Partially offsetting those gains was an FDIC special insurance premium assessment of $64 million pretax, and $69 million in pretax securities related impairment expenses.

Additionally, we booked approximately $189 million of leverage lease termination income in the quarter, which was more than offset by $196 million related tax.

These items, combined with the core earnings element, produced pretax, pre-provision net revenue of $799 million.

This core PPNR, before unusual items, was up 11% from the prior quarter.

These strong results were offset by our loan loss provision, the preferred dividend expense, and taxes related to leverage lease termination.

Before covering some of these topics in greater detail, I want to spend a few minutes focusing on credit.

Slide three shows our most stressed portfolios, residential homebuilders, home equity second liens in Florida, and condominiums, which dropped another $554 million in aggregate during the second quarter, and these have been reduced by over one third since year end 2007.

Stressed assets currently comprise about 8% of the total loan portfolio, down from 13% at the end of 2008.

This represents a $4 billion decline in the last six quarters.

We have, however, seen some signs of weakness in income producing commercial real estate lending, including loans secured by retail and multifamily properties.

However, weakness in retail multifamily is not at the same velocity or loss severity as experienced in homebuilder and condo portfolios.

Income producing property types will experience less loss severity due to the presence of some level of cash flow, unlike unsold homes, lots, or condos.

Slide four highlights the substantial progress we've made over the last several quarters in working down our homebuilder land and condo portfolios, especially in hard-hit geographies such as Florida and north Georgia, where residential property values have suffered significant decline,s and unemployment levels are very high.

For homebuilders, overall exposure has dropped by $3.4 billion, or 47%, since the beginning of 2008.

Our land portfolio, some of which is a subset of the homebuilder balance, has been reduced as well, dropping by $2.8 billion or 45% since the merger.

Condo exposure continues to decline as well, and is now $711 million in total, of which only $400 million is in Florida, where stress is most acute.

We expect our condo book to reduce substantially through the rest of 2009, leaving only a small portfolio by year end.

The take away here remains the same.

Despite continued economic weakness and the materialization of difficulties in certain loan types, the composition of our problem credit hasn't materially changed.

We're focused on resolving them, and we're maintaining a conservative credit discipline.

You may recall that in the fourth quarter, brokerage and bank failures, government rescues, and other market events all contributed to increased economic pressure.

We recorded a provision substantially in excess of net charge offs, due to our analysis of credit quality and the expectations that problem assets would migrate to nonperforming, and ultimately lead to charge offs.

Actions by the Fed and Treasury brought some stability to the credit markets during the first quarter.

As a result, we felt that a more moderate reserve build was appropriate at that time.

During second quarter of 2009, several factors contributed to the need to increase the loan loss reserves.

But mainly, we experience the highest level of migration of commercial real estate into problem loan status and additions to non-accruals since the beginning of the downturn.

The majority of these continue to be residential related CRE.

Of note this quarter, included $169 million of commercial real estate non-accruals, which are currently not behind on their payments.

In addition, we saw an increase in nonperforming loans secured by income producing properties.

Unlike many of our homebuilder and condo nonperforming assets, the loans that are current or are secured by income producing projects, which total approximately $356 million, are much easier to restructure and return to accrual status.

Loss content in these types of non-accruals is smaller than the levels we've experienced in homebuilder and condo credit.

We fully expect to return a substantial portion of these to accrual status.

Consistent with the lower loss content of some of our new nonperforming loans, the coverage ratio, or allowance for loan losses, divided by nonperforming loans, declined to 0.87 times at the end of the second quarter.

Our period end allowance for credit losses of 2.43% of loans reflects our reserving methodology, which includes constant consideration of stress and problem loan migration, and an appraisal process that ensures we have accurate values, even in a declining market.

This slide gives you some perspective on credit costs, which we have defined here as net charge offs, plus other real estate losses, and held for sale gains and losses, plus any provision over net charge offs.

In total, these costs were $939 million or $0.66 per diluted share in the second quarter, compared to first quarter's $0.40 per share or $446 million.

Stressed portfolios continue to explain the bulk of loan losses, accounting for $202 million or 41% of the second quarter charge off, while the assets account for only 8% of our portfolio.

Florida, where unemployment has reached double digit thresholds, remains the driver of losses.

A peak in loan losses will normally lag in economic recovery, so Region's net loan charge offs are likely to remain at elevated levels over the next several quarters, given overall economic weakness including unemployment, which is still on an upward trend nationally, as well as in our footprint.

Slide seven gives you details on nonperforming asset increases for the quarter.

As you can see, second quarter NPAs were much higher than the first quarter, and were to a large extent driven by further migration of homebuilder and condo credits.

However, the addition of currently paying loans, as well as a higher inflow of loans secured by income producing properties, as I mentioned earlier, were also drivers.

Moving away from credit, average loan balances were down slightly linked quarter, with all categories declining except commercial mortgages, which reflects the migration of completed projects from the construction category.

The drop in commercial industrial loans reflects runoff of dealer floor plan loans, as well as lighter demand.

Impacting both commercial and commercial real estate, we did fund approximately $2.2 billion of variable rate demand notes during the latter part of the quarter, but this had relatively little impact to the average balances shown here.

On the consumer side, while down from the first quarter, residential first mortgage production activity remained solid, as refinance activity continued with still attractive mortgage rates.

Much of this production is sold in the secondary market.

The other consumer category, which consists mainly of indirect auto lending, continues to shrink since this portfolio is being exited and has been in runoff mode for several quarters now.

Slide nine shows the positive change in our deposit funding base since last quarter, driven by continued strong customer deposit growth, especially checking and money market accounts.

Notably, some third quarter 2008 average customer deposits have risen $9.6 billion or 11%.

Clearly, introduction of new consumer and business checking products and money market rate offers are paying off.

Importantly, interest-free deposits grew for the third consecutive quarter, with growth accelerating to $1.5 billion this quarter.

Savings balances were up again as well, evidence of a cultural shift in consumer sentiment, with respect to spending and saving.

Not only does the addition of no cost or low cost funding help drive down interest expense over the longer term, it is also a stable source of funding.

As slide ten shows, the pickup in customer deposit growth, coupled with modestly declining loan balances, has led to a sharply improved deposit to loan ratio, 98.5% at quarter end.

As a result, we have no exposure to the overnight wholesale market and have minimized use of government funds.

As expected, the second quarter net interest margin steadied at 2.62%, benefitting from continued low cost deposit growth, especially in non-interest bearing products, and improving loan spreads, due to better pricing disciplines, offset somewhat by the impact of the excess liquidity position we assumed in anticipation of the announcement of the S-cap results in may.

Excluding the impact of the excess liquidity, the net interest margin would have improved six basis points versus last quarter.

All in, taxable equivalent net interest income increased 3%, linked quarter.

Notably, a primary headwind for net interest income over the past few quarters, posed by dramatically falling interest rates, has largely worked its way through our numbers.

Trends in deposit pricing and loan spreads should continue to support a stable net interest margin during this period of historic low interest rates.

Reported non-interest revenues were significantly higher than the first quarter.

Excluding the unusual items for both the first and second quarters, non-interest revenues were up about 10%, linked quarter.

Most of our fee-based revenue lines posted gains to first to second quarter, with service charges and brokerage revenues especially strong.

Service charges, up $19 million or 7%, benefited from a high level of customer transactions, new account growth, and seasonal factors.

Brokerage revenues were up significantly compared to the first quarter, up $46 million or 21%, driven by strong fixed income results and improved equity market environment.

Partially offsetting the strength in other fees, mortgage revenue, while still solid, dropped $9 million from the first quarter, but at $64 million, they were almost double our fourth quarter '08 levels.

Despite somewhat higher mortgage interest rates, origination volume climbed to a record $3.1 billion from first quarter's $2.8 billion, with refinance activity representing 76% of originations, down from the first quarter level of 84%.

The key driver of brokerage income is Morgan Keegan, so let's take a moment to review their results.

Reflecting improved deal flows, second quarter fixed income capital market revenues were robust this quarter, increasing 14%, as compared to an already strong first quarter.

Also contributing to fixed income division revenues, this group has played a major role in underwriting government-sponsored debt, ranking 15th in overall volume, and ranking third in the number of issues underwritten during the quarter.

Equity capital markets also showed strength, as revenues were more than double that of the first quarter.

Drivers here include a greater number of transactions, as well as a healthy contribution from our newly-acquired Revolution Partners.

Improved market conditions, including increased evaluation levels, led to a pickup in private client trust and asset management division revenues.

We've also sustained momentum with respect to new account openings, which were over 48,000 in the first six months of 2009, as compared to 38,000 the last six months of last year.

New asset inflows also continued their upward trend, increasing by $3.1 billion year-to-date.

Turning to our non-interest expenses, the increased 4% linked quarter, including second quarter's earlier mentioned $64 million special FDIC assessment and $69 million securities related impairment charges, Morgan Keegan related incentives, and a hire level of regular FDIC expense, largely explain the quarterly rise in overall core costs.

Also during the quarter, we incurred the $69 million of other than temporary impairment charges on investment securities that I described earlier.

We remain focused on reigning in discretionary costs and improving productivity.

For the full year, we're still targeting a 2% to 4% reduction in our core non-interest expenses.

Switching to capital, this slide details how we have successfully fulfilled the S-cap requirements, primarily through the issuances of new, common, and mandatory convertible equity.

Our tier one capital is now $6.9 billion in excess of well capitalized minimum.

Here, we show you how we have performed, versus the assumptions used in the stress test by the regulators.

To date, we're tracking better than S-cap by $1.1 billion, with the majority of the outperformance coming from the loan loss provision.

This slide shows our significantly strengthened capital ratios.

Our tier one capital ratio now stands at 12.2%, while tier one common ratio is 8.1%, up approximately 160 basis points linked quarter, and both of these ratios are more than twice the regulatory minimum.

In summary, Regions offers a strong investment thesis.

We have a formidable franchise, with strong share and attractive markets.

We benefit from the outstanding diversification and contribution provided by Morgan Keegan.

We're growing customer accounts and deposits, while improving service quality.

Our earnings power continues to improve from a more disciplined approach to loan and deposit pricing, enhanced performance management, diversified revenue streams, and an ongoing cost containment effort.

Credit quality remains a challenge for Regions and the industry, but we're pleased with the actions that we have taken thus far, not only in reducing problem exposures, but in terms of changes we have made in strengthening our credit processes.

Lastly, our capital levels are strong, providing us with a solid foundation to navigate the remainder of the recession, and to take advantage of opportunities as the industry emerges from the current cycle.

With that, operator, we're ready to take any questions.

(Operator Instructions) Your first question comes from Craig from Credit Suisse.

Your line is now open.

Thanks, and good morning.

First, I just want to discuss the sequential pickup in NPAs, and more importantly, the net inflows of NPAs.

Was this mostly driven by the natural [seizing] of the credit cycle, probably a lot in Florida, or did management take a more proactive stance in downgrading problem credits in light of the higher capital levels?

Greg, this is Bill Wells.

What I would say is that we continue to see stress coming out of our Florida and Georgia portfolios, primarily the story that we've been saying for a period of time, which was the residential homebuilder, the condo portfolio, as well as the second lien home equity, continued to see stress in that and just FYI, that's the old Legacy East region that was based out of Georgia that also went down in Florida.

So, we're continuing to see stress come in that portfolio.

Also, this time, we saw a little bit more increase in our income producing commercial real estate.

We had signaled a couple of quarters earlier about commercial real estate retail, as being an item we were watching.

And then also, we've been watching a little bit of the multifamily now.

That number was only about $160 million movement this quarter, so when I looked at the quarter for increase in our non-performing loans, it really comes in from those stressed portfolios that we're continuing to see deterioration in, which has been expected, and then we saw a little bit of movement in the income producing.

And also, as Irene had mentioned, there are some loans that, as we looked at those, they're currently current paying as agreed, but there is some question about the continuing of that statement.

We believe through a restructure or strengthening of the credit, we'll be able to bring those back on accrual.

I think we see it as just a continuing by this Company to recognize its problems and to deal with those on a consistent basis.

Mike, do you have anything you want to add?

I think that's right, Bill, is that if you take the income producing and the credits that are paying current that we have on non-accrual, it is about $330 million, and then we had over $400 million that were out of the homebuilder and condo portfolio.

So, that's the vast bulk of our net increase in non-performing loans.

Got it.

And then, you mention the deterioration in multifamily and retail.

When I look at your net charge off breakoff, I don't a deterioration outside of construction on the charge off side.

Maybe [NPLs] is telling a different picture.

Could you quantify the deterioration in those two groups?

Well we hadn't seen the charge offs come through on those portfolios.

We're just starting to see, as we would identify as problems, and our determination would be that it is more prudent to put them on a non-accrual status.

And also one thing Irene had mentioned earlier, as we see this movement of this portfolio, one, you don't have the loss severity that we saw in our land and condo book.

That's really the first thing that I think about, and two, when I go back and look at the income producing movement, I don't see it any particular shape or form in one geography, it's kind of spread out.

And I think it is just overall more the stress of the recession impacting these portfolios, as opposed to what we saw really coming out of our land and condo book, which is really a Florida and Georgia story.

Were those [series] loans, that you moved into non-accrual this quarter, were they part of the 90-day plus bucket last quarter, the 30 to 89 day, or were they not even delinquent at that point, a good part of them?

There could be some that were, in but the 90 day bucket from last quarter, we had some we knew we were going to, in fact, all of those, we thought were going to not go non-accrual, or we would have put them on non-accrual.

Some of them, perhaps one or two did, but the vast bulk of the over 90's last quarter got redone and are current today.

And Craig, one thing I would say, I'm glad you brought up the 90 days, we've worked extremely hard on focusing on that bucket of loans and getting that number down.

Great.

Thanks for taking my questions.

Thanks, Greg.

Your next question comes from Matthew O'Connor from Deutsche Bank.

Your line is now open.

Good morning.

Good morning.

If I could just follow up on the NPA inflow questions here.

Any guesses on where they go from here?

Obviously they have increased quite a bit.

Should we expect still meaningful increases, some stabilization?

Any guesses in the next couple quarters?

Well, thank you, Matthew.

One thing I would say, first that I always keep in mind when we're looking at the portfolio, our stress, and we talked about that most of the movement has been coming out of our residential homebuilder as well as our condo book, and Irene talked a little bit about our overall reduction and our exposures in those portfolios.

But I was going through the numbers.

When you take Atlanta, north Georgia, and Florida and the homebuilder and condo side, size of the portfolio, at the end of '07, it was about a $4.5 billion book.

As of the end of the second quarter, that's now under $2 billion.

So, you've seen a lot of hard work getting that exposure down.

While we're going to continue to see some stress on our portfolio, we're starting to see a little bit of it coming in the income producing.

We don't see it at the same rate as what we experienced over the past 15 to 18 months on the land and condo book, so it's a little bit hard to gauge about where we think the non-performing levels will go.

What I can always say is we're taking very solid identification resolution steps to work those problem credits down as quickly as we can.

Okay.

Maybe to ask a different way here.

I can appreciate the loss content will probably be less than what's being added now, versus earlier in the cycle.

Given your strong capital, I think decent loan loss reserves here, that you have more flexibility to sell some of the problem assets.

Is the market opening up at all?

Very much so.

When you've got some type of an income stream, you're going to get a better source or a better price on that.

When I was going back looking for the quarter, we probably moved or marked well over $150 million in assets.

One thing that we saw back in the fourth quarter, you have to kind of put this in perspective of the Company, we took a pretty big strategy of marking down a good bit of our non-performing assets, and that was at an average mark of about 50% discount.

Last quarter, I would say the mark was around 30% to 33%.

And as we see in the assets moved into what we call "held for sale" it is at about a 25% mark.

So, it goes back to, which I don't think a lot of people have understood, we've got a lot of our worst credits behind us.

That was our intent in the fourth quarter.

Yes, we are seeing our non-performing loans go up.

But we're trying to work through those, and again, I think I see it when we see it in our marks, and as we sell, Matthew, we're getting about what we made on those marks.

So, we're coming in pretty good at what we had initially valued at.

You know, I would just add there that the idea of selling notes versus foreclosing is more attractive in those states that have judicial foreclosure processes.

So, in Florida, it takes a very long time to get to foreclosure.

It is more attractive.

And I also would say we have been selling assets for about six to seven quarters now, and we've built our own centralized unit, and they are [extreme] consistency to the process.

We are a strategic seller.

We do see there is a little bit more liquidity coming back in.

I would say it moved out in the first quarter, starting to come in a little bit on the second quarter.

So, that is something that we think will help us in moving some of these problem assets in the latter part of the year.

Okay.

Then just separately, a capital question here, a bit of a clarification.

The mandatory convert that you did, is that included in the tier one common of 8.1%?

I guess I thought it would be, but there was a table in the back of your supplement backing it out.

So, just remind us how that's accounted for.

Sure, for S-cap purposes, it was included as tier one common, because it is a mandatorily converted on December 2010, but in our actuals, it doesn't count as tier one common yet.

Okay, so it's not at 8.1% now, but if we roll out a year and a half or so, we'd add that 25 basis point impact?

Correct.

All right, thank you.

Sure.

Your next question comes from Kevin Fitzsimmons from Sandler O'Neill.

Your line is now open.

Good morning everyone.

Good morning.

Was wondering if, I know you discussed commercial real estate and the stress you're starting to see in retail and multifamily.

Was wondering if you can give a little color on, it also looks like the non-accruals went up linked quarter, noticeably in CNI and owner occupied CRE, and wondered if you could address that by what's driving that, either by loan, by industry, or by geography.

Then just second, if you can address what you're seeing early stage delinquencies doing, the 30 to 89 day past due.

Thank you.

Well, let me try to answer that.

The CNI and the owner occupied book is very widely dispersed, and the results that you asked about, there is no particular concentration in that area.

One thing to bear in mind, I think, too, around the CRE portfolio in particular, but all of the credit portfolio, if you remember, the Federal Reserve issued its stress test results on regions and the other 19 banks that went through that, and their conclusion was that $9.2 billion in charge offs for 2009-2010, cumulatively, is the right number for Regions.

And Bill had eluded earlier to the fact that we have been aggressive sellers and disposers of problem assets in the third and fourth quarter of last year.

And because of the way the stress test was put together, it was 2009-2010, and whatever you brought in to the beginning of 2009, you just had.

It wasn't taken into consideration in that.

We did our own our own stress case and expected case for 2009-2010, cumulatively, and I want to be clear about what these numbers are.

This would be where you take the expected loss in each quarter and add them all up.

So, the Fed was $9.2 billion on a stress basis.

Our stress case was $5.9 billion, and our expected case was $3.4 billion.

If we were to go to the end of 2010 and look back, we would expect cumulative losses to be between the $3.4 billion expected case and the $5.9 billion stress case.

So, that's kind of our view on where we think we're going to be looking back at the end of 2010, and it is consistent with the comments around some of the new migration in the form of income producing properties that we think will have less loss content, and really aren't part of the loss story today.

And Kevin, what I would say is when we look at the CNI, and owner occupied, owner occupied really operates like a CNI loan.

I mean that's what you're looking at it for the cash flow of the individual.

We hadn't seen anything from a particular geography or product in those.

And a good story that we have is our overall past dues.

Our team works our past dues very, very hard, and you can see that in the 90 plus numbers, too.

So, there's no trends we've seen in our 30 plus or between the 30 to 89 day past due numbers.

Okay.

Thank you.

Your next question comes from Ken Usdin from Bank of America.

Your line is now open.

Thanks, good morning.

Just want to come back to reserve adequacy and provisioning expense, falling on to your last point there about expected loss.

So, just want to understand, how much you may have already written down as far as these additional NPAs that you're bringing in, if you can give us a sense of what you already have in your reserve as far as partial write-downs on the portfolio?

Yes, Ken.

What we do is, our reserve methodology has been placed over the past several fourth quarters and is very consistent, very disciplined, and what I would say is that we start with the basis of looking at credits that are right now $2.5 million that we think there's stress in, we look at it from a FAS 114 perspective.

Then we look at the migration of problem loans, and then we get into our FAS 5 (inaudible).

So as we go through that, we look at what our losses will be for that period of time, trying to see what the expected loss would be.

We don't go through there and look for or categorize how much loss we've taken in the previous.

What that does account for the balances that you have, as you go through your methodology, that's how we account for it, any charge downs that we may have had.

Can you give us color then on what loss content you've already captured in this book of NPAs, especially this additional billion that hit in, or the one, seven of additions that hit this quarter?

Ken, this is Mike Willoughby.

If you look at Irene's slide seven, actually it is slide six, there is a valuation loss line on that.

And you'll notice that we took $129 million in value charges this quarter, up from the $92 million we did last quarter.

And what that is we go out, and for non-accruals that are in markets of concern, which would be Florida, Georgia, North Carolina, South Carolina, we have that on an every six month cycle.

So, what's driving those value charges and kind of gets to the answer to your question, each quarter, we look at what new appraisals we brought in.

We review them.

We make sure that we think that the assumptions are appropriate.

And I have to tell you at this point in the cycle, where we've been through as much as we have, we're very careful and conservative about values.

And then we take that final approved number and we take the charges.

Now, in addition to that in our reserve methodology, and Bill talked about this, we also look at every non-accrual over $2.5 million under FAS 114, and we assign a specific reserve.

So, you think about it this way.

We reserve one quarter, the next quarter we get a new appraisal, and we actually take the charge.

And also, on the valuation charges, if you look quarter over quarter, I would say we were at $90 million last quarter and we bumped up a little bit.

But a high percentage of those are the first time movement of non-accruals, coming through, I would say 93% of those valuation charges.

So what it means is, as I look at it, as we're looking at the various loans, we're taking the appropriate charges at that time.

Okay.

And so, the question I guess then is losses then are still going to trail this provision expense build, so is it fair to say you that you guys expect just the net amount of charge offs to be going as we go ahead for several quarters at least?

As the charge offs lag the reserve build?

How much catch-up do we still have to see ahead of us before there is a stabilization of provision expense and charge offs?

Well, Mike had eluded earlier in a comment that we have as our best case, come out and looked under a stressed environment first as a base case, and we think we're going to continue to see charge offs coming through, but not to the level that what has been reported by the Federal Reserve or even some of the analysts.

So, there is going to be continued stress coming through the portfolio.

We recognize that.

As we go through that, we're going to be looking at the reserve methodology and make sure that the reserve is at an appropriate amount.

Okay.

And last quick thing, can you tell us just what factors you really changed in your methodology?

Was it severity, was it a change to more recent loss experience?

What are the factors, not just the overall economic change that you did elude to earlier, but were there specific factors that you've changed in your modeling?

Well, what I would tell you, there's two things to that.

There's the FAS 114 that we've talked about, which are the big specific reserves are non-accruals, and they're just what they are each quarter.

And then you have the FAS 5 piece, which I think is what you're asking about, where we break the portfolio down into a number of subsets.

We re-look at the factors each quarter.

We did change factors as you would expect in an environment like right now, and that will continue frankly until we're through this cycle, and we're back in a period of relative stability in terms of loss content.

Thanks a lot.

Yes.

Your next question comes from Brian Foran from Goldman Sachs.

Your line is now open.

I guess coming back to the NPL inflow, and I don't want to beat a dead horse because I realize everyone has asked this already, but the $1.75 billion number is just sticker shock to a lot of investors, and I think the question we all keep trying to understand is whether that number in the second quarter is meant to be a little bit of getting ahead of the problem, cleaning out some of the pipeline, and thus all else being equal NPL inflows would moderate from here, or whether that's just the new run rate, and the outlook really just depends on what the economy and the housing market does in your geography from here.

Well, Brian, and first, I think and Irene, what we had signaled is that some of the loans that came on this quarter, we believe that it may be a restructure, or it may be some other item.

We may be getting more collateral, whatever, is that we'll be able to bring those back on to accrual status, and it may be a period of performance.

If you're looking for bellwether, the way I would go about it is break it in that part of what we think is now current, but there's some question about repayment that we put it on non-accrual.

I would also consider a look at the portfolios that are the most stressed, the overall balances are coming down over a period of time.

One thing we like to say is we're moving out of raw material.

We just don't have as much coming through, and I mentioned earlier about the significant decline in the Florida, Georgia residential and condo book, and then I would say well, yes, you're seeing a little bit of movement in your income producing properties.

But when you're thinking about reserve methodology and charge offs, they're not going to be at the loss severity that you see or that we have experienced before.

So, I think you're starting to see a little bit of the change in the portfolio that you would expect during this economic cycle.

That we're in right now.

You know, I would just add to that, if you look at slide seven and you walk down through that and look at the payments line, $116 million, that's up from $56 last quarter, and it's suggestive of the fact that we've had more opportunities to do workouts than we did when we were almost exclusively broken condos and homebuilder.

I also point to the line right under that, which says "return to accruing status", $10 million was the amount returned to accruing status.

And if you were to add up all five quarters, you would see that we've returned a cumulative amount of $116 million from non-accrual to accrual.

It's a very small amount, and particularly in the context of what we put on non-accrual this quarter after charge offs and all of the numbers, we had $330 million of income producing or paying current, and a chunk of those will be candidates for re-accrual in part or in whole in the next quarter or two.

So I think you begin to see the differences in the makeup of our non-accrual book.

And Brian, I caught what you said on sticker shock.

As we're going through this, one of the things we're trying to do is identify the issues early on.

We believe that is kind of a cornerstone of our process, identify them early on, put dedicated resources to them, and then where possible, strategically sell these assets.

It has worked well for us in the past.

We'll continue to do that, and that is one thing that I think you see is the strength of the Company, and as we come through this economic cycle, our whole goal has been to bring a strong, disciplined credit focus.

You've seen that in our moratoriums that we've put in place; you've seen it in the reduction of balances.

And that's what we want to have to position this Company for when the turnaround does come, that we can take full advantage of that opportunity.

If I could ask one follow-up on the adjusted pre-provision schedule.

It is helpful and it kind of frames the issue of how variable it has been, and some of the recent improvement that we've seen back towards the $500 million per quarter level.

Any kind of guess or framework you can give us for thinking about what a normalized level of pre-provision income would be, and how long it might take to get there?

The purpose of that schedule was to get you to a normalized pre-provision net revenue, so it is from that base that we're looking at initiatives that we talked about as far as building our customer relationships and our customer service, that will build that core PPNR line.

So, $500 million run rate today, and hopefully some growth going forward from some of these initiatives you're talking about?

Correct.

Thank you.

Your next question comes from Chris Mutascio from Stifel Nicolas.

Your line is now open.

Thank you.

Good morning and thanks for taking my call.

A question, I know you were talking about the credit quality and I don't want to belabor the point.

Can you give the average write-down on the income producing CRE/NPAs in the quarter, and does the view that losses on the income producing portfolios being less than other CRE portfolios, will that continue to hold true if indeed we see unemployment rates rise, and therefore vacancy rates start to increase?

You know, right now, those are not part of the loss story as of this quarter.

They're part of the non-accrual story, but not part of the loss story.

And you know, I think the question - - I'm sure that eventually there will be losses out of there.

I can't tell you at what level.

Right now, we're looking at both of those portfolios, that would be multifamily and retail, and saying to ourselves the loss content is not the story.

The non-accrual increase is way under where we ever got with homebuilder or condo.

So, right now, they're both, I would say we're watching them very closely.

Haven't seen anything yet on the charge off piece.

And Irene, can I ask one question on the earning assets for the quarter, the "other" earning asset line item was up about $4 billion in the quarter.

What was that attributable to, and is that sustainable level?

Sorry, that was just our excess reserves.

Okay.

Will they be maintained at an [non rate-billing] dollar rate going forward do you think?

No.

We're actually out of tap as of now.

So, you'll see that excess reserve come down to about five.

All right.

Thank you very much.

Sure.

Your next question comes from Jason Goldberg from Barclays capital.

Your line is now open.

Thank you.

I want to make sure I understood something.

In terms of, I think you said earlier that under your base case, you saw $3.4 billion of net charge offs for 2009, 2010, and $5.9 billion in your stressed, and you're now running thinking towards the middle of that, which I guess would be $4.7 billion?

Well, Jason, what I would say is as you go through, and remember this was done in the first quarter in conjunction of looking at our portfolio, and we'll continue to update this as we go forward, 5.9 is at the very top end of where you see, based on continued deterioration in the economy, higher unemployment.

And what we're saying is, somewhere in there, you'll see it peak and start to roll down hopefully into the latter part of 2010.

And what Mike was just saying, on average, you'll think you'll be somewhere in between that.

So then I guess we've had $450 million or so in charge offs, I'm sorry, an average of $450 million in charge offs over the last couple of quarters, so look for the number to step up to the $625 million to $650 million area?

We had, Jason, we had $390 million in the first quarter, and $425 million in the second quarter, and you'll probably see it move up again as we talked about stress in the portfolio.

We'll update it as we go forward.

I think you've seen a number of people say it is very tough to determine where losses are going, but on our best rate, our best estimates that we are right now, you'll start to see losses continue to rise, I believe Irene had mentioned that in her presentation, too.

But we don't think that we're, at this point, unless something else dramatically happens within our portfolio or the economy, we'll operate within our band at the end of 2010 will be those numbers.

And then I guess secondly, I know this came up, I believe at a conference earlier this year, you guys made the comment that reserve to MPLs shouldn't really fall much below 100%.

I understand some of the nuances there, but now we're kind of operating close to 60%.

It sounds like MPL has contained a trend higher.

Jason, yes, we did.

But we also said that was kind of a rule of thumb that you look at.

You really go by how your methodology builds quarter after quarter.

Ad one thing I think you have to take into consideration as you go through that is that, one, we do have some loans right now that are current, that we have some question about their ability to continue paying, and then also on the income producing, you see that some of these will not have the loss severity.

So, while it is a rule of thumb, it is not necessarily how you drive your methodology and your provisioning.

And I think your number, you said 60%, I think it is really about 87%.

And then if you put back kind of the current in there, you're getting close to about 93%, 94%.

So again, it is something that you look at, but what we do in this Company is follow our consistent methodology that has proven true for us over a number of quarters during the good times as well as the bad times.

And then just lastly, it looks like your Florida second lien home equity book is up about 10%.

I guess that's 4Q, '07.

Can you just maybe talk about, expand on terms of what you're seeing with that in terms of severities, and I don't know if there's lines in there, and utilizations and the like?

Yes, this is Barb Godin.

The utilization rate has stayed about the same, in the 50% range overall.

And what we've seen in terms of Florida is Florida is continuing to drive our results.

If we look at Florida from the loss perspective, the second liens represent 64% of our net charge offs and only 23% of our balances.

If you look at the other states that we have, they've gone up a little, but they have stayed relatively well-behaved.

In terms of overall balances, you did note that we have gone up since the fourth quarter of '07.

We have come down in the last three quarters in terms of our balances, however, and we're going to continue to see that go down.

Again, we follow Reg Z very closely as to customers that we can shut lines down on, and again, customers who use their lines don't fall into a distressed type of customer, and therefore, we leave their lines open.

Thank you.

Operator, this is List Underwood.

I think we have time for one more question.

Your last question comes from Jennifer Demba from SunTrust Robinson.

Your line is now open.

Operator, we didn't hear anything, operator.

Is there one more question?

Ms.

Demba, your line is now open, ma'am.

Operator, why don't we go to whoever might have the next question.

Okay, sir.

Your last question comes from Casey Embreck from Millennium.

Your line is now open.

Maybe they all left.

Well, operator, I think we must have lost some of the last questioners.

Why don't we go ahead and with that, conclude the call.

Thank you, everyone for joining us.

We stand adjourned.

This concludes the question and answer portion of today's call.

I will now turn the call back to Mr.

Ritter for any closing remarks.

Alright everyone, as we said earlier, I don't know what happened to us right here at the end after 11:00.

Something must have happened, but thank everyone for joining us, and we'll stand adjourned.

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

You may now disconnect your lines.