Regions Financial Corp (RF) 2010 Q1 法說會逐字稿

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

My name is Christine, 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 to begin the conference call.

Thank you, Operator, and good morning, everyone.

We very much appreciate your participation in our call today.

Our presenters this morning are, our President and Chief Executive Officer, Grayson Hall, our Chief Financial Officer, David Turner, and Bill Wells, our Chief Risk Officer.

Accompanying Bill is Tom Neely, our Director of Risk Analytics, and Barb Godin, our Head of Consumer Credit.

Also here with us this morning are our Heads of our lines of business.

Tim Laney, who heads our Business Services line of business, John Owen, who heads our Consumer Credit line of business, and John Carson, who heads Morgan Keegan.

Let me quickly touch on our presentation format.

We have prepared a short slide presentation to accompany David and Bill's comments.

It's 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 synch with the audio of the presentation.

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

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

These statements may include description 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 and in our Form 10-K for the year ended December 31, 2009.

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 nonGAAP 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'll turn it over to Grayson

Good morning, and thanks to everyone for your time and attention today.

Earlier Regions reported a first quarter loss of $0.21 per share.

This loss is in line with our internal expectations and is a notable improvement from the $0.51 per share loss we reported in the first-- fourth quarter of 2009.

We are encouraged by the continual-- continued financial progress, but clearly no one at Regions is satisfied with this performance, and we're focused on our efforts to return to a (inaudible) of sustainable profitability.

We did clearly see credit and recession-related expenses improve linked quarter, they do remain elevated and continue to more than offset our strong underlying core earnings.

I can assure you that my primary focus is returning the Company to a prompt level of sustained profitability.

Getting back to profitability may not happen as promptly as any of us would desire and we've got a lot of work yet to do, but I tell you today that I am convinced we have the right team, and we're taking the right actions to not only restore Regions' profitability, but more importantly to build a stronger business model and a stronger franchise that will produce competitive long-term financial performance.

We have strategic priorities that we are confident will return our Company to profitability.

We're keeping your business focused on the customer, we're building for our future, we're restoring our financial performance, and we are committed to executing with excellence.

We are absolutely keeping our team focused on the customer by strengthening and expanding our customer relationships with value products and excellent service, and retaining more customer relationships than ever before.

These priorities are our business guidelines for how we operate.

We're building for our future by de-risking the balance sheet, aggressively addressing credit issues and making sure our capital and liquidity levels remain strong.

And we will restore our financial performance by growing and diversifying our revenue base, as well as improving our operating efficiency, a key factor to returning to profitability of strong execution across the organization, and we have solid business plans, we're paying attention to the (inaudible) and driving for results with clear goals and accountability for prompt results.

Looking beyond first quarter's bottom line there is significant evidence that our priorities are being achieved.

But keep in mind it may take some time to fully realize the benefit for these initiatives in a slow-growth high unemployment operating environment.

But more importantly, during the first quarter we continued to derisk our balance sheet by appropriately charging off and providing for problemed (inaudible), proactively liquidating foreclosed assets and reducing exposure to higher risk loan portfolio segments.

As a result, loan loss provision and OREO cost, including a $70 million net addition to our loan loss reserved, totaled $812 million, impacting earnings on a per share basis of $0.42.

We continue to see credit-related costs elevated, but stabilizing and moderating.

Assuming modest economic growth, we estimate that these costs may have peeked.

In addition, we continue to forecast the absolute levels of non-performing assets will peak at mid-year.

As anticipated and forecasted, gross inflows in non-performing loans were down for the third consecutive quarter, an important factor in the continued trend of slowing net non-performing asset formation.

Of particular note is that internally risk-rated problem assets, a leading indicator of future non-performing assets, are showing much improvement.

In fact they have declined for the first time this quarter since 2006, an important milestone.

As Bill Wells will discuss in a new moments, non-performing asset levels are benefiting from our consistent charge-off policy as well as an active problem asset disposition program.

First quarter problem asset dispositions were $689 million, including non-performing assets, exceeding fourth quarter $643 million and discounts have continued to improvement, as it clearly appears that investor demand for problem assets is improving, another encouraging sign for our future non-performing asset formation.

Additionally we are disciplined in managing balance sheet risk with our proactive approach to reducing high-risk portfolios.

In the first quarter, we reduced investor real estate loans by $1.3 billion, or 6%, through sales, charge-offs and paydowns.

Our ultimate target is to lower this portfolio to 15% of total loan portfolio.

We fully acknowledge that our exposure to this lending segment has been elevated, but we are encouraged by the progress we have achieved in aggressively reducing these exposure by $3.1 billion over the last five quarters.

We fully expect our efforts to demonstrate strong improvement in the upcoming quarters.

Of course reducing investor real estate combined with a general lack of loan demand has pressured overall loan balances, which is frankly one of our Company's and our industry's most significant near-term challenges.

While we are disappointed in this quarter's contraction in our loans, let me assure you that we have an all-out effort to grow balance as where is prudent to do so.

As a foundation of that goal, we've made great progress in growing our customer base.

In fact we've increased market share in both small business and commercial lending.

Further, recent consumer application volume has risen substantially.

There is little doubt that once we get help from the economy, we are posed-- poised to grow our loans outstandings to customers.

This focus on growing or retaining customer relationships is critical to our long-term success.

The first quarter deposit metrics validate we remain on the right path.

In fact, during the quarter, we opened 248,000 new business and consumer checking accounts.

This puts us on track to exceed 2009's record-breaking pace.

Customer retention continues to perform well above industry norm, cross sale has improved up to 4% during the last year, and recent customer service surveys give us a high mark relative to our competitors with customer loyalty metrics now surpassing the 90th percentile of competitors.

Excellent service continues to drive strong costumer deposit growth, which result in average 2% for the first quarter.

But more importantly, average low-cost deposits increased over 6% in the first quarter, driving an ongoing positive shift in our funding mix away from higher-priced consumer CDs and giving us confidence in future improvements in the net interest margin.

As expected, core revenue is down slightly for the first quarter, primarily due to seasonal factors, but also continue to reflect the slowing-- a slowly improving economy with weak loan demand and reduced customer transaction activity.

But our net interest margin, as expected and as forecasted, rose five basis points linked quarter, and we still remain confident in our ability to execute and to achieve a 3% margin by year end 2010.

We have substantially improved our deposit mix, and that combined with better loan pricing has benefited our margin and will have stronger impact in future quarters.

Throughout the first quarter about $8 billion for higher-rate CDs matured, with the bulk of these funds migrating into to lower-cost instruments, such as money market, our CDs with an average ongoing rate of approximately 180 basis points lower than the CDs they're replacing.

I would point out that the full impact of the shift will not be realized until next quarter as the use instruments mature over the full duration of the first quarter.

Another $10 billion for higher cost CDs are scheduled to mature over the balance of this year.

We continue to have clear focus on executing our plans to achieve a better net interest margin for the future.

David Turner will provide more details on revenue and loan trends in a few moments, but I will note that line utilization levels appear to have stabilized, both for commercial and small business customers, which is a first step towards ultimate growth in outstandings.

And with the initiatives we have underway, I feel confident about our ability to take advantage of not only the increased lending opportunities, but opportunities to leverage customer relationships through incremental sales across our franchise and our business units including brokerage, mortgage, cash management, insurance and other lines of businesses.

I'm particularly encouraged in our progress in controlling operating expenses, which on a quarter basis declined about 3% linked quarter.

As expected, a seasonal jump in payroll and benefits cost was more than offset by lower professional fees and reduced OREO expense.

Credit and environmental expenses such as professional fees can be volatile quarter-to-quarter, but we're nonetheless encouraged by first quarter's reduced level.

Additionally, as we had earlier indicated, we successfully competed the consolidation of 120 branches in late first quarter.

Which should provide on a net basis $21 million in cost savings starting and fully anticipated in the second quarter.

We continued to aggressively control day-to-day operating expenses and seek opportunities to further improve our efficiency.

As an example, we have reduced headcount by 2,400 positions since this time last year.

Benefits of our cost-control efforts should become increasingly evident over time, recession-related costs return to more normal levels.

Before I close, I just wanted to briefly touch on Morgan Keegan, which has been receiving a tremendous amount of media attention as of late.

We have the right business plan in place at Morgan Keegan and are very pleased with our performance.

Despite pressure on fixed income revenues this quarter, net income at Morgan Keegan rose $7 million, or 39%, as compared to prior quarter.

These results were largely driven by solid product client, solid equity capital markets and consistent trust revenues, as well as overall reduced operating costs.

Net new brokerage account openings increased 5% on a linked quarter basis reflecting of outstanding interCompany referrals, which are at the highest levels in our history.

Total investment assets under administration now stand at $149 billion, having drawn 19.7% year-over-year and 2.4% linked quarter.

That said, we are fully aware of the regulatory and legal challenges related to certain regions Morgan Keegan select funds, which is a business we exited in 2008.

Recently as previously announced the SEC and other regulatory state authorities have brought administrative proceedings against Morgan Keegan related to these funds.

These actions, while disappointing, were no surprise to us.

We have been cooperating with the investigations for over two years now.

We will continue to work to resolve these charges, and any and all issues raised by our regulators has expeditiously and as prudently as possible.

Our commitment is to work cooperatively with our customers, with our regulators and with our states to achieve a prompt and fair resolution.

Most importantly, we're not letting this become a distraction or get in the way of our primary goal which is building and retaining long-term customer relationships.

In summary, the challenges aren't behind us, but I'm more convinced than ever that we've got the right team and right strategy to successfully execute Regions' return to profitability and build a stronger franchise for the future.

As we have merged from the economic recession and operating in a much different business model, Regions is working hard to be part of the solution in rebuilding customer's trust and confidence in the financial services industry and in Regions Financial.

As I said earlier, we understand that to grow the business it'd be critical to stay focused on the customer, and as such, we've made this our top priority.

I'll now hand the call over to David Turner, our recent promoted Chief Financial Officer, to provide additional details about first quarter results, but before I do let me make a quick introduction for those of you who aren't familiar with David and his background.

David has been with us since 2005.

Before coming to us, he was an audit partner with KPMG, working primarily on financial institutions.

We're very fortunate to have someone on board with such extensive industry experience combined with in depth knowledge of Regions for this important position in our Company.

David.

Thank you, Grayson, and good morning, everyone.

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

Although first quarter results reflect a loss per diluted share of $0.21, our core business showed further strengthening.

We continued to improve the risk profile of our balance sheet, and importantly, our credit metrics are at or are closing in on peak levels.

Net interest income, after adjusting for mortgage servicing rights hedge activity, was stable late quarter and was higher by $22 million, or 2.8%, compared to the same period in the prior year.

We continued to achieve strong deposit growth with average low-cost deposits of $4.2 billion, or 6.5%, helping drive total deposit costs down 15 basis points to 1%.

The net interest margin increased to 2.77% as a result of the increase in net interest income as well as a 2% decline in average earning assets.

A targeted reduction in higher-risk credits, such as investor real estate, along with soft loan demand, caused the reduction in earning assets.

First quarter non-interest income included a $59 million gain on sale of CMO securities, compared to a $96 million loss in the fourth quarter.

Additionally non-interest income included a $19 million gain related to leverage lease terminations compared to a $71 million gain in the fourth quarter.

The average lease gains -- leveraged lease gains, were essentially offset by income taxes in the respective quarters.

Absent securities transactions and leverage lease gains, non-interest income declined approximately 1% linked quarter largely due to a $21 million decline in brokerage revenue and a 4% decline in service charges reflecting lower transaction activity, as is typical during the first quarter of the year.

Non-interest expenses declined 3% linked quarter, after excluding a $53 million loss on early extinguishment of debt, as well as branch consolidation costs of $8 million in the first quarter and $12 million in the fourth quarter.

Lower professional and legal fees drove the improvement by declining approximately $42 million.

From a credit perspective, we reported $770 million loan loss provision, which exceeded the net charge-offs by $70 million.

As a result, our allowance for loan losses increased 18 basis points linked quarter to 3.61% of loans at March 31st.

Net charge-offs were essentially flat, rising only $8 million.

The net charge-off ratio rose to an annualized 3.16% of average loans compared to fourth quarter's 2.99%, primarily resulting from a decrease in average loans.

Our charge-offs continued to reflect our aggressive efforts to derisk our balance sheet and dispose of problem assets.

Our modest provision over charge-offs reflects the slowing of the increase in non-performing loans.

Non-performing assets, excluding loans held for sale, increased $221 million or 5% linked quarter.

This marks the third consecutive quarterly decline in the level of inflows to non-performing status.

Our loan loss allowance coverage of non-performing loans stood at 0.86 times at quarter end compared to the year end level of 0.89 times.

Lastly, our capital position remains strong, with a Tier 1 capital at an estimated 11.7% and a Tier 1 common at an estimated 7.1%.

Let's take a deeper look into the quarterly results.

In terms of first quarter balance sheet changes, slide two shows that loans declined $2.5 billion.

As you can see, the main driver of this decrease was the investor real estate category, which as previously mentioned is by design the result of our focused portfolio reduction efforts.

The $1.1 billion linked quarter decline in average outstandings reflects the fact that we haven't originated many new loans of this type for some time coupled with continued paydowns and charge-offs.

Looking closer at commercial lending, slide three illustrates that commitment levels remain solid.

And for the first time in several quarters, utilization rates have begun to level off, although at a substantially lower level than in a normal environment.

Despite the challenging environment, we continue to search for and extend loans to credit worthy customers.

In fact during the first quarter, we originated $11.6 billion of new and renewed loan commitments, including $2.2 billion to consumers, $1.5 billion to small businesses and $7.9 billion to other commercial customers.

There is no doubt that our customer base is strong and getting stronger.

We are positioned to grow balances as the economy improves and customers begin to rebuild inventories, make new capital investments and begin expanding their businesses.

On the liability side, we're especially pleased with the ongoing rampant growth in low cost deposits, as shown on slide four, which is having a significant positive effect on our funding mix and cost.

This growth allowed us to reduce higher costs certificates of deposit by $2.3 billion on average in the first quarter.

Of note, liquidity is very strong with a ratio of loans to deposits of 90% at March 31st, down significantly from 102% one year ago.

Moving to slide five, there is no doubt that the environment has played a role in driving deposit balances higher as both businesses and consumers are holding on to more cash these days.

But beyond that, we have grown our customer base with innovative products, and retained existing customers with service and satisfaction levels that are higher today than at any point in our history.

To reiterate Grayson's earlier comment, we opened over one million new checking accounts for consumers and small businesses in 2009 and have validated that effort with an additional 248,000 new accounts in the first quarter of this year.

These accounts are yielding substantial amounts of new low cost funding.

We are continuing to take advantage of disruptions in the marketplace to win new customers and expand relationships with existing customers.

As noted on slide six, core pre-tax, pre-provision net revenue, PPNR, was up this quarter and the outlook is improving.

The last few quarters, negative PPNR trend has been driven mainly by net interest income pressure, largely a result of our assets instead of interest rate position, and rising non-interest expenses, primarily the result of increasing recession-related expenses.

First quarter results indicate that these items impacting PPNR will improve going forward.

First quarter recession-related expenses, while still elevated, declined to 15% of core non-interest expense from fourth quarter 2009's 18%.

It is unlikely that we'll return to 2007's pre-recession level of 6% any time soon, since costs such as elevated FDIC expense are not likely to abate.

However, we believe that they will continue to decline this year as non-performing assets decline and the economy continues to recover.

Moreover net interest income, the largest driver of PPNR, is also on track to substantially improve.

Let's look at the details on that front.

As noted on slide seven, fully taxable equivalent net interest income of $839 million was essentially flat linked quarter after adjusting for the impact of MSR hedge activity.

As I previously noted, this was achieved despite a lower earning asset base and is a result of our continuing efforts to change the mix and cost of our deposit base.

Our resulting net interest margin expanded five basis points to 2.77%.

Solid low cost deposit growth and resulting improved deposit mix are positively impacting our net interest income and margin, and should continue to do so throughout 2010, particularly in the second half.

As Grayson mentioned, we repriced over $8 billion of CDs, having an average rate of 3.26% in the first quarter, whereas the average going on rates for new CDs was approximately 1.42%.

We have approximately $10 billion of CDs maturing over the remainder of this year, which will be subjected to market rates as they mature.

From a loan standpoint, we have been successful in our efforts to raise our going-on loan rates, although these efforts have yet to be fully realized, our loan yields increased three basis points from 4.27% in the fourth quarter to 4.3% in the first quarter of this year.

We expect that further deposit mix, costs and loan-spread improvements will lift our net interest margin to 3% by year end.

This forecast does not assume any meaningful help from rising interest rates.

In fact, as can be seen on slide eight, our current forecast doesn't call for rates to rise meaningfully until early next year.

As a result, we put short-term hedges in plays that have temporarily reduced our asset sensitivity.

However, as you can see in the slide, the substantial benefit of higher rates to net interest income in 2011 and beyond is not affected.

On slide nine, reported non-interest income was 13% higher than in the fourth quarter.

However, excluding leverage lease termination gains and securities transactions, non-interest income declined 1%.

The main driver was the $21 million decline in brokerage revenues, owing largely to the pressure of fixed income revenues mentioned earlier.

Non-interest income was also impacted by a 4% decrease in service charges, reflecting a seasonal drop off in transaction activity.

Note that announced NSF OD policy changes related to the dollar limit and daily occurrence caps began to take effect on April 1st.

In addition, policy changes associated with Regulation E, expected to take place in the third quarter, will also impact service charge revenues.

These changes, along with other customer fees, will reduce service charge revenue by approximately $70 million annually, based on preliminary estimates.

Mortgage income was essentially unchanged linked quarter, excluding the effects of MSR hedging activity.

Origination volume of $1.4 billion was still historically strong but was down versus the prior quarter's $2.0 billion with 45% representing new purchases in the first quarter compared to 17% a year ago.

As I mentioned, we sold securities during the quarter, recording a $59 million gain on sale of $1.4 billion of shorter duration collateralized mortgage obligations.

Proceeds were reinvested into newer issue CMOs with a slightly longer duration.

Turning to non-interest expenses, slide ten reflects that core non-interest expenses dropped approximately 3% linked quarter, due largely to lower legal and professional fees.

Although overall levels continued to be inflated by recession-related costs, we fully expect a substantial amount of these costs to subside as the economy recovers.

In the meantime, we continue to closely monitor and control discretionary spending.

Specifically, legal and professional fees declined $42 million linked quarter driven by lower Morgan Keegan and credit-related costs.

Additionally, other real estate expense declined $22 million linked quarter.

Other items of note include salaries and benefit expense, which increased only 2% fourth to first quarter, as we remained focused on fine tuning staffing models and improving personnel efficiency.

As Grayson touched on, we have reduced headcount by 2400, or 8%, in the last year alone.

In addition, we have reduced discretionary expenditures, such as marketing and travel, by approximately $29 million, or 46%, relative to the fourth quarter of 2008.

We also prepaid about $1.5 billion of FHLB advances, realizing a $53 million loss reflected in other non-interest expense with the expectation that this will be slightly accretive to the margin in 2010.

Slide 11 shows that capital ratios remain strong at quarter end, with the Tier 1 capital ratio that now stands at an estimated 11.7% and a Tier 1 common ratio estimated at a very solid 7.1%.

Touching on capital planning, we have strengthened our capital planning process, which includes various scenario analysis, including stress testing under adverse conditions.

This robust process includes the development of macro economic forecast, significantly improved credit modeling and financial and capital forecasting using various scenarios.

These scenarios consider all types of risks that could affect the Company over a given period of time.

We believe this improved process has allowed us to better determine our capital requirements in a timely manner.

Wrapping up, we're clearly not satisfied with first quarter's bottom line results but we are making substantially progress in our efforts to return Regions to profitability and we are firmly committed to successfully executing our strategy.

Now I'll turn it over to Bill for a run through of credit.

Thanks, David.

Starting with slide 12, let's begin by reviewing non-performing asset migrations.

We expect non-performing assets to peak in the second quarter and decline thereafter.

In fact, internally risk-rated problem loans have declined linked quarter, which is the first time that has happened since the end of 2006.

This decline comes after considerable effort over the past year to improve the discipline and consistency of our risk ratings across the franchise.

This foundational component is how we manage our portfolio strategy as well as the loan loss reserve.

Based on sharp and continued recent declines of internally risk rated problem asset migration, which is the source of future non-performing loan formation, we feel confident that absolute levels of non-performing assets will peak in the second quarter.

The land, condos, single-family grouping, which we have traditionally called home builder and condo, is still a driver of inflows but continues to decline.

The performance of income-producing property loans has remained relatively stable as compared to last quarter.

Results of our proactive disposition program detailed on slide 13, helped drive down the MPA migration.

During the first quarter, we reported problem asset dispositions totaling $689 million, which included $87 million of non-performing loans moved to held for sale.

Continuing the trend, discounts on problem loan sales and loans that were mark-to-market, improved this quarter to 23% on average as compared to 29% last quarter.

This reflects the combination of an improved market for loan sales as well as our focus on strategic buyers rather than bulk sales.

As illustrated in the chart, over the last six quarters we have disposed of $3.4 billion of problem assets.

Now turning to charge-offs.

Our risk management strategy has been to confront issues early and accelerate the disposition of problem assets, primarily those secured by investor real estate and take losses as soon as possible.

Partially as a result of this strategy, charge-offs have remained relatively stable as seen on slide 14 for the last three quarters and should begin to moderate in the second half of 2010.

Within total charge-offs, Business Services losses were driven by lower valuation charges of $198 million in the first quarter versus $215 million in the fourth.

Despite continued high unemployment, consumer losses remained relatively stable, increasing just $5 million linked quarter.

Finally, the cost of non-performing loan sales in March dropped $5 million from the last quarter.

We sold more for less.

Let me put net charge-offs in terms of progress against the stress test, which as you might remember assumed [$9.2 million] in combined losses for 2009 and 2010.

Through five quarters of the eight-quarter stress test term, our losses represent 51% of the [$5.75 billion] projected in the supervisory capital assessment program.

Said a different way, we're about two thirds through the stress test period and only experienced a third of the losses.

We continue to believe the guidance we gave quite awhile ago at our investor day in July 2009 still holds, that we will be somewhere near the midpoint of our $3.4 billion to $5.9 billion two year loss range.

The primary reason for the difference is that investor commercial real estate, while very stressed, has not defaulted as rapidly or with the loss severity originally projected in the stress test.

On slide 15 is an update on our troubled debt restructurings.

These balances declined $302 million from the fourth quarter.

As you may know, if TDRs performed as a new term for a six-month period, cross over at year end and yield to market rate, they can be removed from the TDR classification.

This was the driver of our linked quarter decline.

An important point to note is that 92% of Regions TDRs are consumer real estate loans.

In addition, 96% of all consumer TDRs are accruing interest.

Nearly all of our consumer TDRs are a function of our proactive customer assistance program, which has been beneficial to Regions and our customers alike.

Of note, Regions' recidivism rate is very low, and our foreclosure rate is less than half the national average.

Slide 16 points toward further improvement for 2010.

A de-risking of the portfolio has occurred as evidenced by the reduction of our land, home builder, condominium and overall investor real estate portfolios.

Additionally, the construction loan portfolio has been reduced from $9 billion at the beginning of 2009 to currently at $4.7 billion.

All of this de-risking has resulted in the decline of problem loans based on our internal risk rating.

Given what we know today, we reaffirm our investor day July 2009 guidance and expect NPAs and charge-offs to peak by the end of the second quarter and decline thereafter.

Based on all of the above, we expect no further reserve build in the second half of the year.

With that, I'll now turn the call back to Grayson for closing comments.

Thank you, Bill.

And to wrap up, let me say clearly that we're not satisfied with first quarter's bottom line, but we are encouraged and we do believe the Company's headed in the right direction and the right steps are being taken to restore profitability.

I have high expectations for Regions, and I'm committed to delivering for our customers, employees and shareholders.

We have a strong franchise with a good underlying business set of fundamentals as evidence by this quarters result.

To reiterate, we continue to see record account deposit growth, our net interest margin is expanding, operating costs are declining, all leading to higher pre-tax pre-provision net revenue.

My focus, along with the entire Management team, remains on realizing Regions long-term earnings potential.

I thank you for your time.

And with that, Operator, we will now open the floor for questions.

Thank you.

(Operator instructions).

Your first question comes from the line of Matthew O'Connor with Deutsche Bank.

Hi, guys.

Hi, Matthew.

Couple of credit-related questions.

The MPA sales of almost $400 million I think were the highest they've been this downturn.

Just wondering if you could give a little more color in terms of any additional marks you need to take on those to dispose of them, and what the outlook is for additional sales?

First, we had a record sale of disposing of problem assets, it was about $600 million compared to about $500 million last quarter.

One of the things that we have seen is that there's more liquidity coming back to the market.

In fact because of -- we have a very centralized discipline process, buyers are actually coming to us because they know that they can get a quick decision.

As far as additional marks, we think that when we go though the selling process, we identify what those marks would be, it was very positive this quarter where we've moved from last quarter of a 29% discount to a 23% discount.

And so you're starting to see the marks getting better because sales continue to be strong.

We had a good pipeline going over quarter end.

We continued to sell, and we think that it's going to be another good quarter for us.

Okay.

And then I guess this is a little bit of a follow on to that.

Considering additional sales and the fact that you expect the charge-offs and MPAs to peak in 2Q, just any thoughts on how quickly charge-offs and MPAs come down in the back half of the year?

I know there's a lot of moving pieces here, but what's your best guess on the pace of decline?

What we've gone from last year, talking about the rise and the problems, we're talking about pace and depth of decline, which to me is pretty positive.

And for us at risk, we want to kind of pause there and understand that we're talking about that.

I'll tell you what we've seen is, it's going to be continued part of our ability to dispose of problem assets.

But also where we think we'll have tremendous opportunity is our ability to restructure credits also too.

So with the combination of sales and restructuring and what we've seen coming through our pipeline, we think that we're going to continue to see positive results of where we see our problem assets are.

Yes I think Matthew we're spending a lot of time talking about the trajectory of that improvement.

I mean clearly we're starting to see the metrics turn and that improvement is forthcoming.

I think that your question is an excellent question, is what is the pace of that improvement.

I think a lot of that is going to depend on the amount of economic clarity we get in the economy over the next few months.

Okay.

Great.

Thank you.

Thank you.

Your next question comes from the line of Craig Siegenthaler with Credit Suisse.

Thanks and good morning, everyone.

Good morning, Craig.

First question just really on the overall kind of positive PPNR trends we saw this quarter.

When you factor in some of the items, which really are unusual but benefited PPNR, like the MSR hedge gain and declined legal fees and lower OREO expenses, do you continue to expect that PPNR can improve from here?

Because there's also some headwinds coming up like [NFFBs] in the third quarter and potentially low earning assets.

So maybe you could help us think about how really your underlying earnings power can trend here?

Yes I think the question that you asked is one that I think is a good question, because when you look at earning asset growth, we've made a -- we've made a very strategic decision to reduce our investor commercial real estate portfolio, which as you saw stands today at a little over $20 billion at quarter end.

The pace at which we've been able to reduce that portfolio has exceeded our internal expectations.

So we're very encouraged by how we've been able to execute on that strategy, and it's declining a little faster than we had anticipated.

All of that is good news.

The second part is that it was our full intention to grow other lending product types at a pace that would offset that contraction in investor commercial real estate.

I do think that what you see when you look at our lending activities, that we have been able to keep commitments to our customers very high, they have been very stable.

Our commitments continue to expand, and we're continuing to add customers each and every week.

Unfortunately, utilization rates have continued to fall through all of last year.

The good news is they have stabilized or appeared to have stabilized at this juncture, and we've got an opportunity to grow earning assets going forward.

I do think when you look at non-interest expense, the non-interest expense growth has been -- has been largely due to credit-related recession-related expenses.

Our core expenses in terms of expenses that are being spent in our business units with our producers on the front line, we've continued to manage those expenses down and feel very good about the level of operating efficiency that we'll be able to demonstrate once this credit cycle moderated.

But this quarter, we saw some moderation in those expenses.

The more of these problem assets we can move off the books, the less carrying costs we have with them.

And so we think once this trend line starts to improve, you're going to see our expenses really start to demonstrate what we've done to the Company.

Craig, this is David, I'll add a couple of things to that.

We continue to look at our deposit mix and cost.

As I mentioned, we have $10 billion worth of CDs that will be maturing this year.

For the remainder of the year where those are going to be subject to market rates at the time.

You can see the industry tightening up and reducing funding costs given the lack of loan demand.

On the loan side, we've had some very good early indicators of some potential growth on our consumer side, as we mentioned from loan growth there.

So those two things, and the continued focus on expense management, will be the keys to us continuing with our improvement in PPNR.

And David, just a follow up to your comment though, we see very good improvement in your deposit costs, but on terms of the loan yields, as you reprice some of those loans over the last year or two especially the [variable] ones, why haven't the higher spreads, and especially over the last two quarters when interest rates have been more flat, why haven't they help lifted your loan yields in some cases?

Because we've seen actually some of your competitors have higher loan yields.

Yes I mean if you look at the loan yield, a lot of our competitors, if you were to compare our loan portfolio to theirs, a lot of the competitors went into this cycle with more fixed-rate loans than we did.

We had a higher percentage of variable rate lending.

We did show this quarter I think three basis points improvement in our loan yields.

We're repricing the consumer book at about a fifth a year and the commercial book at about a third a year.

It's a slower process.

We had relatively few floors on our accounts.

And we do have a number of stress credits that limit our ability to up price that particular credit at renewal time.

But we are seeing progress, and we do believe that while the improvement in yield on loans will be slower than improvement in the reduction of cost of deposits, that you will continue to see steady but incremental progress there, but a number of head winds on loan yields.

Great.

Thanks for taking my questions.

Thank you.

Your next question comes from the line of Brian Foran with Goldman Sachs.

Good morning.

Hey, Brian.

How are you?

I guess from a credit perspective, historically charge-offs for both you and the industry are seasonal and come down in the first quarter relative to the fourth, so I know this cycle is kind of overwhelmed normal seasonality and you guys kind of went through all of the aggressive charge downs you were taking of loans to get them to net realizable value.

But how should we think about charge-offs being flat on a seasonally adjusted basis?

Is there any surprise in the construction book or anything like that that normally would get better seasonally that didn't?

Yes, I'll speak first and let Bill follow up.

I think a lot of the surprises are behind us.

When we look at seasonality, typically you see that in the first quarter.

I do believe that where we're at in our disposition program and where we're working on trying to reduce and derisk our portfolio, you will see that seasonality muted somewhat in our numbers.

And from an seasonal adjustment standpoint, I think that we're tracking to our internal forecast in a way that encourages us for the remainder of the year.

And Bill, if you want to add --

Yes, Brian when it comes to Business Services, you just don't really see the seasonality.

You mentioned the construction book.

We don't see anything projecting out that seasonality would affect that, which is still our largest part of the charge-off component.

When it comes to consumer, you always have a little bit of a seasonality in the first quarter.

But what I would say is our projections are pretty much as we outlined back in July of last year as holding very, very true, and each month, each quarter, we get more and more confident about where we are in that projection.

And so as Grayson mentioned, it is tracking just as we thought it would be.

We factored seasonality, if there were some, in those numbers.

And then as a follow up on the net interest margin discussion.

I mean historically in the decade prior to the crisis, you averaged the 3.75% NIM.

Most points in the you tend to be kind of an average or maybe even a little bit above average net interest margin bank.

So as we think about this recent disconnect between you and the industry, is there anything structurally that's changing?

Or would you on a normalized basis expect to be back in that high 3s range?

Well, Brian this is David.

It's yet to be seen what the new normal is going to be given all of the changes.

I -- we certainly can be higher than the 3% that we're projecting at the end of the year, and I think from what we see right now, we think we can be in that 3.35% to 3.50% range, but that's our best estimate based on what we know today.

And as we get more clarity in what the industry looks like after coming out of this past year, two years of issues we've faced, we'll have more clarity on what we think we might be able to achieve.

Great.

Thanks.

Thank you.

Your next next question comes from the line of Chris Mutascio with Stifel Nicolaus.

Thanks for taking my question.

I don't know if this is for Grayson or for Bill.

But I'm just going through the slide deck and I look at the gross NPA inflows this on a gross basis were $1.31 billion, last quarter they were $1.4 billion, so not a whole lot of improvement there.

And in fact, the rate of deceleration of the gross inflows is actually much slower than what we've seen in some other banks that have experienced some of the type of credit problems that Regions has.

What would you attribute the difference is?

Why is your rate of gross NPAs not fallen, not decelerating more so?

Yes, I'll speak to that.

What you have to do is also go back, as you mention that, we peaked in gross non-performing asset migration at $1.8 billion in the second quarter of 2009, and you seen it come down quarter-after-quarter.

Couple of things.

Again, as David has mentioned, it's moving in the right direction.

I think you have to always say look at when you combine two large banks located in the south, you had a large real estate exposure, so with that, it's taking us time to work through.

That's why we've been very aggressive in our disposition program.

But what I'd also say, Chris, is when you look at our-- we look at our internal pipeline of non-performing asset migration, we start to see that come down even more.

The other thing I would say is when you keep these two things in mind, when you look at it, look at our payments that we've had on non-accrual loans.

That went up quarter-over-quarter.

I think from about $88 million to about $128 million, so you're still having a good bit of payments come in.

So I think you're still wrestling around with a little bit of this performing, non-performing issue which we think will continue to resolve.

And then the upside, which we continue to say for our Company, is the ability to restructure credit.

And you'll start to see that formation, I believe, come down at a more rapid rate.

Thank you.

One follow-up question, if I could.

On slide 15, you look at the TDRs, it looks like there is a pretty substantial reduction in the residential first mortgage TDRs between fourth quarter and first quarter.

What contributes to the actual dollar reduction quarter-to-quarter in the TDRs?

Are stuff going back into accrual status?

Have you sold those TDRs?

How do you account for that fall?

This is Barb Godin, I'll answer that question.

That goes back to what Bill mentioned in his presentation.

That our TDR policy, you must make six consecutive monthly payments, you must yield the market rate before going back into the accruing status.

So those would be account-- and cross over at calendar year end, sorry.

Those accounts therefore crossed over at calander year end and therefore we were able to remove them from the TDR status.

So those--

Those accounts have not been sold, they've been moved back into an accruing status because they have been current for six months and they did cross a fiscal year end.

All right.

Thank you very much for the clarification.

Thank you.

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

Hi, thanks, Just one quick clarification on NIM.

Can you tell us the amount of the MPA drag that there is right now in the margin?

We have not-- I can calculate that real quick, Idon't have that particular number.

We'll work on that and get that back to you, Ken.

Okay because broadly, I'm just wondering how much that might be of the improvement that you'd expect in the margin overtime versus the improvement in rates.

(Inaudible) significant.

I'll have David validate this to make sure we get absolutely the right answer out there, but it's approximately four basis points this quarter -- at quarter -- this quarter, a quarter.

And I think that it absolutely is accretive to our margin improvement when credit -- when credit improves and obviously that's going to be a favorable movement on the part of our loan yields and our margin.

Okay.

Great.

And then the second question is just can you just give us an update with all things surrounding capital and TARP and your just thought process?

I know obviously there's still a lot to be settled as far as rate-- where we have to sit on ratios and such.

But can you give us an update on your thought process there, please?

Thanks.

Yes and I will reiterate that our position on TARP repayment really has not changed at all.

We continue to say that it is not a permanent form of capital and we'd like to repay.

That being said, we want to do it in a patient and prudent manner and repay in as shareholder-friendly manner as possible.

We continue to work cooperatively with our regulators, and continue to look at our internal loss projections, and we want to repay when it makes sense, and when both we and our regulators have confidence in that plan.

And so we haven't changed that.

That's sort of been our story for the past couple of quarters.

I'll let David speak more specifically to our capital ratios and our thought process there.

Yes we feel good about our capital ratios.

We think they're very strong.

Where the capital ratios need to ultimately end up from a TARP repayment continues to be a little bit of uncertainty there.

But I think that based on our projections, as Grayson mentioned, we have scenarios that we're planning for eventual TARP repayment when it becomes prudent to do so, and in concert with our regulators.

And every quarter that goes by, that clarity improves.

Great, thanks very much.

Thank you.

Your next question comes from the line of Betsy Graseck with Morgan Stanley.

Oh, thanks, good morning.

Good morning.

Hey, good morning.

Question on the new normal.

We talked a little bit about the NIM, potentially 3.35%, 3.50%.

Could you talk about what you would think your new normal would be for expense ratio, ROA, ROE type of numbers?

Yes, this is David.

Those two are subject to what that new normal looks like.

But in kind of round terms, we would expect to have an ROA at least in the 120 range or better, with a return in the 15% to 16% range.

At least that's what kind of what we're targeting right now.

But it's dependant on kind of how the industry continues to turn, just like I mentioned in terms of the margin discussion.

And does the ROE suppose the current level of capital ratio?

We think the ultimate return on -- should be on the capital base employed at the time.

Right.

Okay.

And then you were indicating earlier that you feel like you have the ability to grow the balance sheet at this stage, so would you -- does that indicate that you would bring down the common Tier 1 ratio at this stage?

Well I think in terms of our growth, what we talked about from the balance sheet is obviously we're de-risking from a loan portfolio and getting our investor real estate loans down to the 15% range of our total loan book, offsetting that with growth in other -- other loan areas like consumer that we mentioned.

Okay.

Got it.

So more of a mix shift than a total growth?

Absolutely.

I mean we're seeing strong loan growth in places like asset-based lending, in consumer auto.

We are trying to expand our growth and our verticals in healthcare and transportation technology, but we're going to have to work very diligently to grow other categories of loans at a fast enough pace to offset the reduction in investor commercial real estate.

Got it.

Okay.

That's appreciated.

Thanks.

Thank you.

Your next question comes from the line of Kevin St.

Pierre with Bernstein.

Good afternoon.

Just to follow up on the capital issues.

Could you tell me, in your conversations around eventual TARP repayment, what kind of consideration that the current levels of the reserves and potential reserve release as well as the disallowed DTA are coming in as potential sources of capital?

I'll take the DTA.

The DTA we have is a little over $900 million that's disallowed for capital.

In round terms that's about 90 basis points of Tier 1 common.

There are very specific regulatory rules that exist today as to when they can come back into the capital calculation and when we can start showing that return to profitability, it will start coming back to us.

It will not come back in all at once, but as profitability returns, we'll get the -- start getting that 90 basis points back.

Linking our reserve release directly to TARP repayment, we haven't had those kinds of direct discussions.

I think they're really mutually exclusive.

I mean our reserve that we establish for our allowance is subject to a very rigorous and a reoccurring methodology that we have in place.

And whatever our credit metrics indicate and that reserve indicates is what our reserve is.

And whether we can under provide for charge-offs, which is where I think you're going, is going to be dependent on what those credit metrics look like.

I mean-- this is Grayson, absolutely a few moments ago, someone asked the question about the pace of improvement in our credit metrics, and that's going to drive that question.

We've got a very disciplined, very robust process around loss projections and our allowance methodology that supports those loss projections, and we're going to stay disciplined around that.

As the credit metrics improve, clarity around when you stop matching charge-offs on a quarterly basis will be self-evident.

And we're working closely as a team to make sure we do that in a right way.

Obviously that's going to be driven entirely by the pace of improvement in the credit metrics.

Do you sense -- is there an underlying concession on the part of the regulators that charge-offs will eventually decline and the Company will eventually return to profitability so that what is perhaps latent capital in the reserves, in the disallowed DTA, will eventually flow back?

Absolutely.

The-- we built up a fairly substantial allowance today, 3.61% of total loans.

We continued to reserve over and above charge-offs this quarter, slightly.

We think that we have a very substantial and -- but appropriate reserve today.

And I'll ask Bill if he'll sort of speak to sort of how that's viewed by our risk team.

Yes, what I -- I think we've talked about that, as Grayson has said, when you look at a reserve of $3.2 billion that had 3.61%, I mean you go back and look historically back through other credit drop cycles, that's a very strong reserve.

The other thing you have to really keep in mind is what David and Grayson both have said, our best experience has been, you find (inaudible) very sound and methodical methodology through good times and tough times and that serves you well.

And you always get to an influxion point in a cycle.

Are we getting close?

We'll see as the credit metrics will do -- will point out.

But there's a couple of things that I -- we look at.

One is the continued de-risking with the investor real estate portfolio, especially the construction book.

As I mentioned earlier with-- you're seeing the construction book move from about $9 billion at the first of 2009 to a little under $5 billion.

That's starting to take risk of one part out of the portfolio.

Our valuation charges continue to moderate, which is another positive trend.

And as we've really talked about our potential problems that we see coming through the pipeline is really the driver of what we see our reserve methodologies should be.

It's an [ongoing] discussion that you have internally.

We're very focused on it, but we feel like we have a very solid reserve and continue to feel that way.

Thanks very much.

Thank you.

Your next question comes from the line of Scott Valentin with FBR Capital Markets.

Good morning, everyone.

Thanks for taking my question.

I just wanted to dive down if possible on decline internal risk ratings.

Just trying to get some more color on maybe the movement from category to category.

Is it better improvement in the front end?

Are you seeing less migration in the deeper stages of problemed assets?

And then also maybe what the categories you're seeing improvement in?

Is it construction improving or commercial real estate?

Yes, what we do is this is the first time we talked about our internal risk ratings, and what we wanted to do was really signal why we believe that not only what we saw in the fourth quarter but in the first quarter, but what we're seeing in the future quarters about we see these metrics changing for us.

We always have this view that one quarter is not a trend, but two quarters is a trend, and we're starting to see that now.

Internal risk ratings for us, we look at it at migration through all our categories, whether it's past potential problems or problem credit.

As we look through that, we don't give any more guidance on what those individual components are.

But when we step back and look, what I would say is, as we look for potential problems that are coming down the pike, we see positive movement, and it's been across the board.

CNI has held up relatively well throughout this whole cycle.

So principally as you've seen the risk in our portfolio has been in the land, the condo, the home builder and the parts of investor real estate portfolio.

With that we've scene positive movement.

And we think that is because of how we have worked this program, these portfolios for the past 18 to 24 months.

Okay.

And just if I could have a follow-up question.

One of the comments earlier about MPA's, reducing MPAs will require an increase in (inaudible) restructuring.

And I'm assume that's the commercial real estate and the income in investor owned.

What's been the experience then, I know it's still early stages, but do you guys have any sense of how successful those restructurings have been?

Well, I believe in there we had a chart in the supplement that goes through our restructuring.

We had a little bit about $55 million that we restructured the past quarter.

And I'll let Tom speak a little bit about restructuring and our success, and what we think our opportunities will be.

Well we haven't done a whole lot, Scott, in the last several quarters, but what we're seeing is as we have distressed income producing properties, you have a couple avenues.

You can sell the asset, you can work it out traditionally or you can restructure, so the opportunities we see are with those income producing properties, working with the clients, making sure we have confidence in the property type, and that the values won't decline or the NOI related to that property won't decline (inaudible).

But candidly, we did about $50 million in restructuring in the fourth quarter, did another $55 million this quarter as compared to $500 million many sales in the fourth, $600 million in sales in the first.

And so restructuring is still a relatively small percentage of our resolution process.

We do-- and what we're signaling today is we do see it becoming a larger part of our resolution process.

But we'll still be substantially smaller than our sales activities.

Okay.

Thanks very much.

Operator.

This is List Underwood.

We have time for one more question, please.

Certainly.

Your final question comes from the line of Christopher Marinac with FIG Partners.

Thanks.

Grayson, this is curious and I guess on the quest for long-term relationships, would you consider doing any external transactions in the next year?

Or would you prefer just to focus on the internal organic growth that you outlined before?

Well Chris, I think obviously we're trying to monitor the activities that are going on in the markets, the disruptions that have take place there.

From an internal sales standpoint, we think we've taken advantage of a lot of those disruptions to grow our business and to build a stronger franchise for the future.

We obviously look at those kinds of opportunities strategically, but quite frankly and candidly, our focus is on returning this institution to a position of profitability and sustainable profitability.

And so the normal metrics that we would look at entertaining some type of transaction are obviously higher today than they would have been historically, because we've got an action plan that we're executing and we're focused on it, and that may not include those types of activities in the short term.

Okay.

Very well.

Thank you for the clarification.

Appreciate it.

Thank you.

Well, I appreciate your time and attention today and thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.