Regions Financial Corp (RF) 2011 Q1 法說會逐字稿

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

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

I would like to remind everyone that all participants online 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.

Thank you, Melissa.

Good morning, everyone.

We appreciate your participation in our call this morning.

Our presenters today are our President and Chief Executive Officer, Grayson Hall; our Chief Financial Officer, David Turner; and also, we have available to answer questions Matt Lesko, our Chief Risk Officer, and Barb Godin, our Chief Credit Officer.

As part of our earnings call, we will be referencing a slide presentation that is available under the Investor Relations section of regions.com.

With that said, let me remind you that in this call, we may make forward-looking statements, which reflect our current views with respect to future events and financial performance.

Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results or other developments.

Those statements are based on general assumptions and are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements.

Additional information regarding these factors can be found in our forward-looking statement that is located in the appendix of the presentation.

With that covered, I will turn it over to Grayson.

Thank you, List, and good morning to all participants.

We appreciate your time and interest in today's discussion of Regions' first-quarter 2011 results and the progress we're making in a number of key areas, all of which are contributing towards restoring Regions to sustainable profitability.

I will begin by covering highlights and business results, and David will provide additional details on the financials a little later.

Regions reported first-quarter earnings of $0.01 per fully diluted share, or $17 million, marking the second consecutive quarter of profitability.

While still elevated, credit-related costs, which include our provision, OREO expense and losses on held for sale, declined to the lowest level in almost two years.

On an after-tax basis, these combined costs were an estimated $0.26 per share.

Additionally, we had $0.04 per share benefit from security gains.

Core business performance continues to improve, with adjusted pretax, preprovision net revenue up 16% year over year.

Sequentially, expenses adjusted to exclude prior quarters' debt extinguishment loss dropped 4%.

The net interest margin rose 7 basis points.

Average commercial and industrial loans outstanding grew 4%.

Average low-cost deposits increased 1%.

And our regulatory capital ratios improved incrementally.

From an earnings perspective, we're clearly not performing at a level that we want or need to be, but we are making continuous progress.

The pace of economic recovery is slow, especially in our southeastern markets, but our focus on core business and customers is paying off.

We're gaining share of market, adding new customers and expanding existing relationships.

According to a recent report issued by [Timken] Group, Regions ranked as the top bank for customer experience and is one of the top companies in America for customer service across all industries.

We also received national awards from Greenwich and (sic) Associates for overall client satisfaction in middle market and for relationship management performance in the Company's small business lending.

We're clearly starting to distinguish Regions as one of the most customer-friendly banks in the industry.

At the same time, we are improving productivity and efficiency and taking steps to expediently and prudently deal with credit challenges still present in our more stressed portfolios.

Turning to slide 2, we're especially encouraged with first quarter's sharply lower net loan charge-offs and provision since improvement in credit quality and related costs is a primary key to restoring Regions to sustainable profitability.

Net charge-offs and provision dropped $200 million or 29% linked quarter.

Our provision covered net charge-offs, and although it is likely to remain elevated, it is expected to trend down throughout 2011.

As credit quality metrics continue to improve, we will continue to evaluate reserve levels and be very disciplined in our reserve methodology process.

Gross nonperforming loan inflows were down for a second consecutive quarter, or over $200 million less than in the fourth quarter.

Delinquencies fell for a fifth consecutive quarter, and criticized and classified loans declined.

Nonperforming assets steadied fourth to first quarter, reflecting less sales activity and fewer paydowns.

Again this quarter, the mix of problem loan inflows was increasingly income-producing commercial real estate, which has a lower potential loss severity and, based on the cash flows, has the potential for restructuring.

Also we continue to be very disciplined and cautious in our credit quality reviews, causing us to classify a number of credits as nonperforming when we see signs of weakness, even though these customers may be current and paying as agreed.

In the first quarter, we further enhanced our balance sheet position.

We were able to grow commercial and industrial loans for the third consecutive quarter as average balances grew 4%.

We remain diligent in improving our deposit costs and continue to positively shift our deposit mix, with average time deposits declining to 24% of total deposits, down from 30% a year ago.

We ended the quarter strong as well with low-cost deposits, which improved $1.9 billion or 3%, driving deposit costs down another 5 basis points to an overall 59 basis points on total customer deposits.

And we have achieved a total-Company funding cost of 86 basis points, including all debt.

Growing fee-based revenue in our business is critical.

It is a component of our strategy to restore and grow normalized earnings.

Given regulatory and legislative changes, it has not been an easy task, but we believe that our focus on customers, service, a broad array of product offerings, and increasing emphasis on appropriate cross-sales gives us an opportunity.

First quarter is typically challenging for fee-based revenues.

Nonetheless, we were able to grow adjusted noninterest revenue approximately 4% year over year.

Additionally, in spite of seasonal factors and regulatory rule changes, we were able to maintain reasonably steady service charge income for the first quarter.

While these rule changes will continue to present a challenge to growing service charge fee income, we are proactively developing and implementing strategies to mitigate the negative impact.

In fact, over the last three quarters, we have migrated all three checking accounts to fee-eligible accounts.

Specifically regarding the Durbin amendment, we are hopeful that the candid dialogue between regulators, legislators, merchants and banks results in a reasonable and prudent delay of the implementation of this amendment and allows proper debate and comprehensive analysis.

By delaying the implementation, it will give all interested parties more time to analyze pricing and consequences of the proposal.

We are hopeful that the outcome will be more rational than the plan currently proposed, one that not only takes into account bank [entities'] actual cost of delivering debit cards, including fraud, but also the potential unintended negative consequences to the individual consumer on debit card availability and participation in the banking system.

In the unfortunate event that a reasonable and prudent delay does not occur, we have developed actions to respond to a July 21 implementation that helps us mitigate the financial impact of these required changes.

Given the extremely short timeframe for implementation, it will be challenging to effectively communicate the changes to our customers and our associates, but we know our customers and our markets very well, and we remain confident that over time we can make the necessary changes to protect our business.

Our planned business adjustments not only include changes to fee schedules, but also include new product innovation and a very disciplined approach to improving productivity and efficiency.

I'm pleased with the progress we have made in the first quarter.

Given seasonal hikes in payroll taxes, our goal is to keep full-year noninterest expenses, core expenses, somewhat below 2010's level while continuing to make necessary investments in business and technology.

Turning to slide 3, we are seeing promising improvement in quality loan demand, as total loan production amounted to $13.3 billion for the quarter, up 15% year over year.

Our business services loan production for the first quarter totaled $11.1 billion, which was a 17% increase over first quarter 2010.

We are seeing especially strong middle-market, commercial and industrial loan production as loans outstandings have now growth for nine consecutive months.

Notably, 65% of the markets we operate grew commercial loans in the first quarter.

Both new client acquisition and line utilization are driving the growth.

Commercial industrial line utilization rose to 41.7% this quarter, up from year-end 2010's 40.3%, which is the highest since September 2009.

However, line utilization still remains well below our historical rates, which typically posted in the high 40% range.

Our overall commercial sales pipelines remain strong.

Given expectations for a continued US economic recovery, commercial and industrial outstandings should continue to grow throughout 2011, albeit possibly at a slower pace than we are currently experiencing.

Branch small business loan production, while still a relatively small component, is also strong, benefiting from our increased focus on this channel.

On the consumer front, although paydowns continue to outweigh new production as consumers continue to deleverage, we are seeing signs of an improving loan production.

Consumer loan production for the first quarter was higher year over year, with the largest components, mortgage and home equity, up 13% and 12%, respectively.

Also, we are experiencing higher origination volume in our indirect auto portfolio as production rose to $255 million this quarter.

We have now signed up over 800 auto dealerships and expect this number to reach 1200 by the end of the year.

But keep in mind that our focus is on profitable growth, not volume.

We will remain disciplined both in risk-taking and pricing.

At the same time, we're working hard to grow profitable quality loans outstanding, we're still actively derisking our most stressful portfolio segments.

For example, investor commercial real estate loans were reduced another $1.1 billion in the first quarter.

Our derisking strategy and customer deleveraging suggest that our overall outstanding loan portfolio balances will remain under pressure for the remainder of this year.

Near term, our lending revenues will be under pressure, but our efforts to improve pricing and production of new loans is working to offset the impact of derisking and deleveraging.

We continue to positively shift loan and funding mix, as well as improved loan spreads and deposit costs, in order to minimize the negative effect of lower earning asset levels on this year's net interest income.

On a final point, regarding the recent comprehensive capital analysis and review, I want to reiterate that Regions did not propose any immediate capital actions.

The Company's position of repaying the government's TARP investment in a prudent and patient manner on shareholder-friendly terms remains unchanged.

Our return to sustainable profitability and demonstrating improvement in asset quality are key conditions that will enable reasonable repayment.

As our core business continues to improve, we believe this will bode well for us and our eventual capital actions.

Now, David is going to provide you with the financial details, and I will return with some closing comments.

David?

Thank you, Grayson, and good morning, everyone.

Let's begin with a summary of our first-quarter 2011 results on slide 4.

First-quarter results generally matched our expectations as efforts to improve credit quality, reposition the balance sheet and curb operating expenses continue to pay off.

EPS was $0.01 per share, and net income available to common shareholders amounted to $17 million.

Pretax, preprovision net revenue, or PPNR, totaled $539 million.

However, on an adjusted basis, PPNR was $460 million, which included some net adjustments such as security gains, which is detailed in the appendix.

Adjusted PPNR was up $63 million or 16% year over year and flat linked quarter, despite seasonal factors such as day count.

Within PPNR, net interest income declined 2% linked quarter, primarily due to seasonality.

However, year over year, net interest income rose 4%, and the resulting net interest margin expanded to 3.07%.

Noninterest revenue totaled $843 million, while adjusted noninterest revenues were $764 million.

This was 4% below the fourth quarter, which benefited from Morgan Keegan's strong revenues, particularly in investment banking.

However, as Grayson mentioned, first-quarter adjusted noninterest revenues were higher than a year ago by 4% or $30 million.

Noninterest expenses were 8% lower than the prior quarter and on an adjusted basis demonstrated significant improvement, dropping $44 million or 4% fourth to first quarter, favorably impacted by a decline in legal and professional fees, as well as credit-related expenses.

Let's now take a more detailed look at our credit results, beginning with nonperforming loan inflows.

As shown on slide 5, inflow of nonperforming loans continued to moderate, declining [$270] million to $730 million, or 23% less than fourth quarter.

On the chart on the left, as indicated in blue, the biggest decline in inflows was in our land, condo and single-family portfolio, which decreased $168 million or 64% linked quarter.

This portfolio, which now totals only $2.8 billion, down from $5 billion a year ago, had historically been the biggest driver of our inflows.

Income-producing commercial real estate continues to contribute to our nonperforming loan inflows, accounting for 31% of first quarter's migration compared to 29% in the fourth quarter.

Keep in mind that income-producing commercial real estate credits generally provide greater cash flows and therefore may result in restructuring opportunities and, in our experience, have less ultimate loss potential.

A substantial portion of our nonperforming loans continues to be current and paying as agreed.

Notably, 38% of our March 31 total business service nonperforming loans were current and paying as agreed, up slightly from the fourth quarter, but 10 percentage points higher than a year ago.

Turning to slide 6, nonperforming loans excluding loans held for sale declined $73 million.

This quarter, we sold fewer nonperforming assets, or $219 million compared to $405 million in the fourth quarter.

At this point in the cycle and with stabilizing real estate values, we believe that loan restructurings will become more economical than loan sales.

The graph to the right shows that delinquencies dropped for the fourth straight quarter.

Additionally, criticized and classified problem loans declined for the fifth consecutive quarter and were down approximately $700 million from fourth quarter's levels.

These two asset quality indicators serve as important measures in estimating future inflows of problem loans and support our expectations for continued improvement in nonperforming loan migration going forward.

Moving on to slide 7, net charge-offs declined to $481 million or an annualized 2.37% of average loans, the lowest level in over two years.

As our loan loss provision essentially matched net charge-offs and with the decline in nonperforming loans, our loan loss allowance to nonperforming loan ratio increased from 101% to 103% at March 31.

Declines in nonperforming loans' gross inflows and nonperforming loan balances will be key determinants of our future quarterly provision needs.

Turning to the balance sheet, slide 8 breaks down this quarter's change in loans and loan yields.

Average loans declined 2%, with investor real estate portfolio derisking efforts offsetting strong middle-market commercial and industrial growth.

Aggregate loan yield declined 3 basis points to 4.31%.

This decline was driven by interest rate hedges that matured during the first quarter.

Excluding these hedges, our loan yield would have been slightly higher as we remain very disciplined when pricing new loans, being sure that we are appropriately paid for the risk we are taking.

We continue to see strength in our middle-market commercial and industrial loan portfolio, with average and ending loans up 4% and 3% linked quarter, respectively.

Demand is broad-based from both an industry and market standpoint.

Our customers' increasing investment in capital expenditures and M&A activities are driving much of our commercial growth.

In addition, we're also beginning to see customers increase inventory investments, primarily due to rising commodity prices.

Total commercial and industrial commitments rose $700 million linked quarter to $27 billion at March 31.

Our commercial and industrial line utilization rates are just over 41%, which is well below our historical norm.

In fact, 25% of our business service customers with a commitment had zero outstanding balances.

We continue to make progress in derisking our investor real estate portfolio, with ending outstandings declining another $1.1 billion in the first quarter to $14.8 billion.

Over the past 12 months, we have reduced this portfolio almost $6 billion, including a 60% decline in construction.

Reducing our investor real estate portfolio to no more than 100% of the bank's total regulatory capital, or approximately $14 billion, has been top priority.

Additionally, going forward, we will continue to assess the appropriateness of this target.

As noted on slide 9, ending and average deposits were up 2% and 1%, respectively, driven by strong low-cost deposit growth.

Over the past 12 months, average low-cost deposits have risen 6% compared to a 23% drop in time deposits.

This positive mix shift continued in the first quarter, producing another 5-basis-point decline in our overall deposit cost to 59 basis points.

Our shift in funding mix to low-cost deposits is also favorably impacting total funding costs, which declined 5 basis points to 86 basis points.

Turning to slide 10, taxable equivalent net interest income declined $14 million linked quarter or 2%, primarily due to fewer days in the first quarter compared to the fourth quarter.

However, net interest income was up 4% over the same period in the prior year.

Additionally, the first-quarter net interest margin improved 7 basis points to 3.07% and was attributable to slower prepayments, resulting in lower premium amortization in our mortgage-backed securities portfolio, lower deposit costs, and reduced average cash balances at the Federal Reserve.

We continue to reprice our CDs at market rates, and in the second quarter we have an additional $3.6 billion of CDs maturing that carry an average rate of 2.16%.

While excess liquidity remains a drag on the margin, the effect is gradually diminishing.

Excess liquidity negatively impacted the margin 10 basis points this quarter, down from fourth quarter's 11 basis points.

In addition, nonaccrual interest reversals and nonperforming asset balances reduced first quarter's margin 16 basis points.

During the first quarter, we executed sales of $2.4 billion of agency mortgage-backed securities, resulting in $82 million of security gains, the proceeds of which were reinvested in similar securities with slightly longer durations.

Barring unexpected movement in interest rates, we expect our net interest margin to be relatively stable for the balance of this year.

Let's now shift gears and look at noninterest revenue on slide 11.

Total noninterest revenue amounted to $843 million for the quarter, and on an adjusted basis totaled $764 million compared to an adjusted basis of $795 million in the fourth quarter.

Adjustments in the first quarter primarily included $82 million of security gains and in the fourth quarter included $333 million of security gains, $26 million of loan sale gains and $59 million of leveraged lease termination gains, all of which is detailed in the appendix.

Although adjusted noninterest revenues grew 4% year over year, they were down linked quarter, primarily due to a 14% drop in brokerage and investment banking revenue, as well as seasonable adjustments for day count.

As you may recall, Morgan Keegan's fourth-quarter revenues benefited from several sizable investment banking transactions.

In spite of seasonal challenges and regulatory changes, service charges were down only slightly linked quarter.

Our customer focus and superior service quality are continuing to produce strong debit card volume and excellent fee-based account growth.

Depending on ultimate regulatory changes related to interchange fees and implementation timing, we face fee income changes challenges in 2011.

However, we have developed mitigation strategies to rationalize our business under the proposed rule changes.

For instance, we began migrating accounts from free to fee-eligible last May, and now all of our checking accounts are fee-eligible.

Also, our quality accounts, which we define as a checking account that has at least 10 customer transactions and/or $500 in average balances per month, increased 2.2% this quarter when compared to the same period a year ago.

And we continue to see a record level of penetration with our new checking account customers, who are electing to have a debit card 90% of the time.

Although mortgage originations were down on a linked-quarter basis, resulting in a $6 million decline in mortgage income, they remain strong compared to historical standards and were 13% higher compared to the same period a year ago.

Turning to slide 12, first-quarter expenses were down despite the seasonal jump in payroll costs.

Total noninterest expense was $1.167 billion for the quarter, or 8% lower than the prior quarter.

Excluding adjustments in the fourth quarter, as detailed in our appendix, adjusted noninterest expenses dropped 4% linked quarter.

This was driven by declines in credit-related expenses such as other real estate expense, which declined 36% to $39 million.

Also contributing to this decline were professional and legal fees, which were down $11 million or 12%.

Nonetheless, credit-related expenses remained significant, accounting for 6% of first-quarter adjusted noninterest expenses.

Over time, we expect these expenses, which have been approximating $300 million to $400 million annually, to subside.

We remain focused on strengthening our core franchise through productivity and efficiency initiatives.

As the chart on the bottom illustrates, we have reduced our headcount by over 3000 positions or 10% in the last two years.

We will continue to rationalize our franchise, constraining expense growth without sacrificing investments opportunities.

Slide 13 provides a snapshot of our healthy capital ratios and favorable liquidity position.

Tier 1 common is 7.9%, and our Tier 1 ratio stands at 12.5%.

Liquidity at both the bank and the holding company is solid, as we have a bank loan-to-deposit ratio of 84.4% and cash at the parent company is above our policy minimums of maintaining a sufficient level of funding to meet projected cash needs, which includes all debt service, dividends and maturities for the next two years.

Overall, this quarter's results provide solid evidence that our actions are moving us toward our goal of sustainable profitability.

Now let me turn it back over to Grayson for his closing remarks.

Thank you, David.

In summary, we are making progress in showing signs of improvement through solid core business performance, which included growth in commercial loans, contingent improvement in low-cost deposits, and margin expansion.

We will be persistent in further improving productivity and efficiency.

And even though credit costs remain elevated, we are committed to expediently and presently dealing with our lagging credit challenges.

I want to end by emphasizing that our strategy for restoring Regions to sustainable profitability is working.

Recovery and rebuilding take time, but with each quarter that passes, we are making progress.

We believe that by keeping focused on the customer and our business fundamentals, Regions' franchise has the markets, the customers, the associates, the talent and products to, over time, generate attractive high-quality returns for shareholders.

We are making prompt and necessary adjustments to our business models to deliver innovation in terms of products, service quality and value.

We appreciate your time this morning.

We will open the lines up for questions after a brief administrative comment from List Underwood.

Thank you, Grayson.

We would like to ask that in the question-and-answer session that you please limit your questions to one primary and one follow-up question per caller.

This will help us accommodate all the callers, given the total one-hour timeframe allotted for the call.

Thank you in advance for your cooperation.

Operator, let's open it up for questions, please.

(Operator Instructions).

Erika Penala, Bank of America-Merrill Lynch.

My first question is on the resi mortgage TDRs.

Barb, I was wondering if you could give us an update on how the redefault rate is trending and whether or not you're getting more new requests or you're reaching out more to your customers to restructure some of the first.

Thanks, Erika.

Yes, we are continuing to reach out to customers.

And our recidivism rate is actually running at 20%, so a little bit down from what it was last quarter, but still holding within that 20% to 22% that we've reported for all prior quarters.

But we still have a very active customer assistance program; also making sure we're going out and also reappraising the book.

And my follow-up question is, David, on your comment that loan restructuring is now more economically attractive than loan sales, should we expect your TDR bucket to continue to increase the NPL decline, and the associated charge-off would be the same?

But I guess restructuring in A/B fashion gets you to recover more or retain more than if you had sold it in the secondary market as a note.

Or am I reading that correctly?

Yes, I think what I'm saying is we expect that restructurings generally will result in better economics for us because you're not having to pay for the liquidity that you're provided when you sell a loan.

So as a result of restructurings, if we continue down that path, you should see increases in TDRs as a result.

But the charge-offs we would expect to be mitigated to some degree versus a straight-up sale.

We would do an A/B note restructure, as you mentioned, and continue to have economics with the whole credit versus selling it.

So that provides better opportunity for us to have a recovery.

And we realize we also continue to have the credit risk associated with that note.

So we're careful on the restructurings, and we will do that when we think the overall economics are in our best interest.

Thank you.

Brian Foran, Nomura.

On the expense guidance, I guess first just to clarify, when you say full-year '11 expenses flat relative to 2010, excluding debt extinguishment, so that is $4.9 billion, is the expectation for this year's expenses?

What we said is -- this is David -- is that from a core basis, when you cut out the one-times, we believe our overall noninterest expense would be flat to trend somewhat down from where we were in 2010.

On a core basis.

On a core basis.

And then I guess looking further out, I mean, post- the AmSouth/Regions deal, it seemed like at some point expenses would get down to like $1 billion a quarter.

And I realize a lot of time has passed since then, and there are some investments that are required and everything like that, but, I mean, how should we think about the long-term expense base?

Is there an opportunity at some point to kind of realize the efficiencies that were pent-up in the merger?

Yes.

Brian, to your point, we've recognized a lot of those efficiencies.

But given the cycle that we're in, we do believe there's more savings there.

We've mentioned we are incurring in a $300 million to $400 million per year, with just credit-related expenses right now that we believe will go away as credit continues to improve.

We do have further efficiencies as we think about rationalizing our markets and rationalizing our business that we can continue to execute on when the time is right to do things like that.

So you can see our number in the first quarter on an adjusted basis was $1.167 billion, and you can affect that for roughly $75 million to $100 million just with credit-related expenses.

So we do have efficiencies on top of that to come.

Well, and we are still driving efficiencies through our business.

We're down over -- another 250 positions from a headcount perspective in the first quarter over fourth quarter.

And we're continuing to achieve quite a bit of efficiencies across a number of discretionary spending categories.

And we will continue to do that going forward.

Matt O'Connor, Deutsche Bank.

(technical difficulty) We are hearing, though, about some price competition out there --

Matt, start over (multiple speakers).

Grayson Hall We missed the first part of your question.

It was not coming through.

Just overall, the C&I loans have been growing nicely the past -- I think it's three quarters.

But we are hearing about some price competition out there in that area.

I'm just wondering what kind of spreads that you are seeing in the C&I bucket and how that compares to a few quarters ago.

Yes, there is no doubt that there are, in the commercial and industrial space, there are certain segments in that that have clearly become more competitive.

I would tell you that when you look at it in terms of spreads and yields, we still are seeing an improved level of spreads and yields on our new production on commercial and industrial over and above what we were getting.

It has gotten more competitive.

You do hear of transactions that would indicate that there's a lot of spread and yield compression on some of these new transactions.

But I would tell you that when you -- you hear those anecdotally, but when we dig into the data and we really analyze what we're putting on the books, we're still very pleased that we are getting compensated for the risks we're taking and are pleased with the spreads and yields that we're able to achieve.

And I would also add that when we think about the footprint that we operate in and really focus on service quality and the relationships that we're building with our customers, that relationship allows you to not just sell on price.

We don't want to be a volume/price institution.

We want to be providing proper service, fair price.

We want the relationship, because we want the total customer, not just the loan.

And we are able to, we think, be -- we're able to maintain the spreads that we need, even though there's stronger competition out there.

The commercial, middle-market and small business really provide an opportunity to really work through the relationship and get paid appropriately.

Okay.

And we can obviously see some of that in the average loan yields overall, which have been stable, even though the loan mix has been derisking here.

So that makes sense.

And then just my follow-up question, if we look at the NPA reconciliation table, the resolutions and return to accruals came down a bit versus the last couple quarters.

And I'm just wondering if there's some seasonality there, or is it just there were a couple of good quarters there in 3Q?

Yes.

I will ask Barb to answer that directly.

But there is some timing issues that fall into that regard.

As we've started working on restructurings with some of our business customers that in this particular quarter, we had less of those that were seasoned to a point to return to accrual than in prior quarters.

Barb?

Yes.

In addition to that, third and fourth quarters are normally our seasonal highs.

And you've already pointed out, for restructures, reaccruals, we wait on audited financial statements.

We typically don't get most of our audited financial statements in until sometime late in the first quarter into the second quarter, again, then providing an opportunity for the restructures in the third and fourth quarter.

And then some good news is that several accounts that we were planning to actually reaccrue actually paid us off in full.

So, again, I will take that tradeoff as well.

Okay.

Thank you.

Marty Mosby, Guggenheim.

It seems like that we're starting to put some numbers up there to help us gauge around what normalized earnings would look like with the credit costs and the provisioning.

I was trying to kind of step-wise from what you were saying to try to get to maybe where you're guiding us in a range.

If I take the earnings this quarter and back out the security gains, that puts us at about a $0.03 loss.

You then go through the credit cost of $0.26, so that puts us at about a $0.23 profit or about $0.92 a year.

And then in addition to that, we could add about $0.15 if we improve our margin by 25 basis points from where we're at.

So that would put us somewhere around $1.07, or at least north of $1.

David, how are you thinking about that, and what are -- you're kind of giving us some clues.

Just wanted to try to cobble them together in your overall thought process.

Cobbled was right.

No, we aren't trying to give you -- obviously, we're not going to give you earnings guidance, but we're going to give you bits and pieces.

It's still obviously a very fragile economy.

You can kind of look at our PPNR over time and see where that -- you ought to be able to -- if you stay at that level, can actually get pretty close to where you think our projected PPNR will be.

The story for us in terms of ultimate profitability is what credit looks like.

We certainly are making progress on migration and early- and late-stage delinquencies.

And those trends and potential problem loans, all of those are trending better, and we're feeling better about credit.

We still have a robust reserve and strong coverage of nonperformers.

So we're adequately reserved there.

And I think just as our charge-offs continue to improve, then you can start.

That is the key as to what will that look like in a, quote, normalized world, and when will it be normal.

So I think we've given you some tidbits.

Your math that you're going through is reasonable.

But we're going to stop short of giving specific guidance.

And then my one follow-up will be, when you are talking about credit costs and the $0.26 per share, and that includes loan loss provisioning, are you putting that to a normalized level, or are you just backing out all provision?

We're backing out just what happened to this quarter, backing it all out.

So that would not be a normalized level, but would be all of the provisioning that you had this quarter?

That's right.

Okay.

All right, thanks.

John Pancari, Evercore Partners.

Can you talk to us about what the potential problem loan number was for the quarter?

I know you just indicated that it was trending better, but do you have that amount, and then also how that may convey into your outlook for NPAs here, just given the decline in inflows this quarter?

Yes, I will start and let Barb finish up with the other part.

Our potential problem loan number that was in our Annual Report was about $800 million.

And then you saw our migration to $730 million during the quarter.

We are actually in the process of pulling that potential problem loan together.

It will be in our first-quarter 10-Q, which we expect to file the first week in May.

So we don't have that number yet.

But in terms of trends in NPAs, Barb?

Yes, what we would look at is, for example, our 90-day-plus.

As you can see, that 90-day-plus number was down.

Our criticized number was down.

Our classified number was down.

I would anticipate that our potential problem loan number will likely follow that same trend, but again, we don't have those numbers pulled together yet.

But all of the signs we're seeing are that's a little more positive than what we have seen previously.

Okay.

And then my follow-up is, that being said, can you talk to us about your thought process around when you can start to see the ability to underprovide here and release some reserves?

I know you had mentioned before that you would need to see some sustainability in terms of credit trends.

And it looks like we're starting to see that here.

So could we expect some underprovisioning materializing next quarter?

Well, we haven't mentioned specific quarters in terms of when that would happen.

What we've tried to do is give you the things we look at that we think are the biggest drivers.

And that, obviously, is our nonperforming loan migration and then our resulting nonperforming loan balances.

Those are key influences on our methodology.

We have been and will continue to be prudent with regards to how we establish the reserve, and we will follow that methodology.

And when it indicates that we can provide less than our charge-offs, we will do so.

But we are going to be cautious and prudent with regards to what we ultimately do.

Okay.

Thanks for taking my questions.

Craig Siegenthaler, Credit Suisse.

Just really a follow-up to Matt's second question on the NPL resolutions.

It looks like, well, really, slow resolutions kind of drove the lack of improvement in NPL balances this quarter.

And it sounds like from your kind of answer that the 1Q run rate was fairly clean.

So what I'm wondering is, how do you expect NPLs over the next quarter to decline?

Is it really from lower inflows?

Because if we don't get higher resolutions at this point, it will be tough for balances to decline.

No, we actually do anticipate resolutions to go up.

What we think is that they were seasonal, number one.

And number two, as Grayson had mentioned, there is a six-month seasoning period for any that we have gone ahead and restructured before we can actually put them back to performing status.

So we see all of that.

As we look at our pipelines, we see some opportunities that are existing in there right now for us.

And I will add to that, if you look at the release, we actually sold this time roughly $219 million in prop and assets, and off from $405 million last quarter.

We are being much more disciplined around the economics of those sales.

First quarter appeared a little seasonally low for where we would have anticipated coming in.

We're going to continue that disposition strategy, but we're going to balance it, as David said and Barb have said, with more focus on restructuring.

But we're going to continue to dispose.

And we do think that there were a number of seasonal factors that drove our nonperforming assets and nonperforming loans to not come down more than they did this quarter.

And we would anticipate an improvement in that going forward.

Just one follow-up from myself is that in some of our normal loan sales, we had some what we call retrading that happened at the end of the quarter, where we had some of the buyers come back and want to talk about terms and structures.

And we decided to step away from some of those conversations and have those conversations again this quarter instead of just going ahead and executing at potentially a lower price or a poorer loan structure than we otherwise would have done last quarter.

Well, and the other thing, you can't see this in the numbers, but the number of notes that we sold, number of properties that we sold this quarter was actually more than we sold in the fourth quarter, because as we have been on this disposition strategy for some time, we're getting down to smaller and smaller dollar value assets.

And they still take roughly the same amount of time regardless of the dollar value, but we actually moved more properties this quarter than last.

Got it.

And then just a follow-up.

Given kind of two quarters here of profitability, and given your expectation for NPA balances to decline, then, I'm wondering, how does this change kind of your expectation for TARP repayment?

Well, it really doesn't change.

We are clearly focused on making sure we sustain our profitability and that we show a clear turn in credit.

We believe that that is the appropriate thing for us to do.

And we're going to let the results speak for themselves.

But our strategy really has not changed at this juncture.

Great.

Thanks for taking my questions.

Ken Usdin, Jefferies.

I was wondering, I heard your comments just about the fact that loans -- there will continue to be net pressure on loans.

But I'm just wondering, with the -- there hasn't really been a change in the delta on the loan shrinkage side.

And I'm just wondering if you can help us understand, how low can low go, meaning, do you have an understanding of where do you think the bottom will be before that C&I growth and the stabilization of some of the runoff levels out?

Ken, this is David.

I will tell you in kind of global terms what we've been saying is we expect that total loan balances to drift down a little bit in the first half of the year, have a little bit of recovery in the second half, such that we come close to finishing about where we started.

So I think what we're going to do is we're going to continue to derisk on the investor real estate.

That has slowed somewhat.

Last year, I think our average was about $1.5 billion a quarter.

This past quarter, we were about $1.1 billion.

So we see that that decline slowing somewhat.

And we have had growth in C&I for nine months.

We will see some seasonality and slowness in the first part of the year here, and it will finish stronger in the second half.

So all that is predicated on where the economy goes.

So that is our best guess on total loan balances right now.

You know, because in our internal forecast, we've still got a fairly modest economic growth factor that we're looking at.

So when we're making internal projections on loan growth, we're being prudent and conservative in that regard.

Where we're trying to judge on total outstanding loans, we're trying to judge really three issues, is one, how much new production on both the business and consumer side will we be able to generate.

Those numbers are encouraging.

Our production numbers are up substantially across every line of business.

We're also trying to judge just exactly what the pace of decline on the investor commercial real estate portfolio will be.

We have made several projections, and as David said, it has slowed.

But we still are reducing the size of that portfolio substantially, and has exceeded our earlier expectations for where we would be today.

We are still seeing -- the third issue is consumer deleveraging.

When the consumer stops deleveraging or slows down that deleveraging process, then we will start to see some decent growth on the consumer loan side of our business.

And we are introducing new products and will be over the next several months to try to grow that consumer side of our business.

And we've said before we really would like to get to sort of a 50-50 mix between business and consumer loans on our balance sheet.

Got you.

And then, Grayson, you just hit on part of my follow-up, which is within the CRE business, understanding the 100% of equity limitation that you mentioned earlier, first of all, I guess, are you seeing any gross loan opportunities start to percolate on the CRE side?

And is that 100% limit any type of major limit on your ability to kind of reengage in the CRE market?

No.

I think several months ago, we came out with an internal goal of reducing that portfolio to no more than 100% of risk-based capital.

And we will achieve that this year and feel pretty confident in where we will be.

Quite frankly, we have the other concern.

Our concern is that while we are seeing some opportunities in the investor commercial real estate space, they are very limited.

And we're not seeing new production opportunities rebound with any materiality.

And if they don't, then we will see that portfolio decline below that $14 billion mark, which is not a problem.

And as David said in his comments, we continue to reassess just exactly what our targeted outstandings in that business should be going forward.

Okay.

Thanks very much.

Scott Valentin, FBR.

Thanks for taking my question.

Just with regard to the tangible common equity level, it slipped just a tab below 6%.

And I was curious on, I guess, your comfort level there and whether there was any type of decision to consciously grow that level back up?

Yes, I mean, from a capital standpoint, obviously, we were impacted by the realized gain or loss changes as a result of the 10-year moving around.

We really focus and run our business looking at Tier 1 common as the predominant capital measure.

We're at 7.9% there.

We dipped just below 6% on the tangible side.

But we don't see anything that causes us concern, that makes us want to believe we need to go raise capital outside of a TARP repayment.

That is been our consistent theme throughout the quarters when we received that question, and it is true today.

Okay.

And just a follow-up question, if I may.

On the securities portfolio, I think it grew pretty substantially this quarter from the fourth quarter.

And I think you also referenced the fact that duration increased a little bit.

Just curious if you can give some color around what is happening in the securities portfolio.

Yes.

Obviously, when you don't have a tremendous amount of growth in the loan portfolio, you have to put the cash somewhere.

So we're in the securities book.

It is higher than we want it to be.

We have a very safe investment portfolio.

We take very little credit risk there.

We primarily have used that for liquidity.

But we will -- you can't just look at duration of the investment portfolio.

You really have to look at the construct of our entire balance sheet.

So we are very cognizant of the duration and the risk that is embedded in that with the risk of a rising rate environment.

And when we see the opportunity time, we will reposition and put those to work, securities to work differently.

So I think right now, we think it is the right answer.

But we are looking very closely at it.

And as opportunities arise, we will make different decisions.

Thanks very much.

Greg Ketron, Citigroup.

A couple of questions, one on mortgage income.

It looks like your mortgage income held up better than what we have been seeing across the industry, which has been down anywhere from 30% to 40%.

Maybe just some color on why your mortgage income levels held up better?

Yes.

When you look at the mortgages, no doubt we're starting to see a drop in application volume, which is typical to see this time of year as a seasonal issue.

But we actually saw mortgage bookings ahead of where we were last year.

We are seeing a shift to where -- from refinancings to new home purchase.

Refinancings dropped this particular quarter just over 50%.

51% I believe was the exact number.

And that is down substantially from where it was at last quarter.

We are not, as rates have increased, we're not seeing the kind of application volume we were seeing.

But in the first quarter, we had strong results really for work that we had established late in the fourth quarter.

And we are gaining share on a number of competitors in our market.

And I think this next quarter is really going to tell the story, because, I mean, typically the second and third quarter are your biggest quarters for mortgage origination.

And we're really going to find out what that market is going to do in the next quarter or so.

Encouraged by where we are at, but concerned with the declining level of application volume.

Greg, this is David.

I think it may be that some of the peers have repurchases.

And the losses associated with repurchase in that mortgage income line item, we actually account for that in our NIE, and that number is pretty small for us.

We hadn't gotten caught up in the issue that others have had.

So I imagine repurchase losses for others have been more significant and probably netting down the mortgage income.

Ours are up slightly, but still way below peer.

Okay, great.

Appreciate the color.

And then, David, just a follow-up on the $300 million to $400 million of credit expenses.

If you were to normalize that number, what level would that be longer term?

Well, I think that if you look at -- a large percentage of that $300 million or $400 million ought to go away in time, and the question is when.

So it won't be every dollar for dollar, but it will be a substantial majority of that number we think in time will go away.

Okay.

So it could approach close to zero or something in pretty insignificant?

Well, it would -- you would have to use your own --

At some point.

I will give you the substantial majority of that ought to go away.

Okay.

Thank you.

Chris Gamaitoni, Compass.

Thanks for taking my call.

On the REO side, could you give us a little more color around how REO expenses decreased quarter over quarter, given the fall in home price HPIs, increased foreclosure timelines, and general amount of disturbance in the foreclosure industry?

Yes.

I think that I will let Barb follow up, but from an expense standpoint, there are really two components that drive that expense.

One is just your normal operations taxes and property maintenance and those kinds of things, which is a smaller piece of that total.

And the others are valuation declines.

And so we think when we take charges because we foreclose something, that growth is running through our charge-off number.

So what you see there are any subsequent valuation changes.

And we've seen those valuations, depending on what market you're in, we see some of the valuations starting to stabilize.

Others are not, and that is why you see the number we have at $39 million.

But, Barb, anything you want to add?

No.

My follow-up would be, if you looked again to last quarter, it was $51 million, and compare that to $39 million this quarter, that in and of itself was primarily made up of the difference in the valuation charges.

Property preservation expenses have stayed relatively flat on the properties we have.

And again, as you said, foreclosure timelines are extended.

They're still running somewhere around that 20-, 22-month mark in Florida.

And again, that bleeds into our numbers, as you've seen.

What's your policy to reevaluate those assets while they're in REO, again?

We do it on a six-month basis.

And they just kind of --

We do that on a six-month basis.

But if we evaluate property and there's one next door to it, then we will use that particular appraisal as an indicator of valuation of the other property.

So it is a little misleading just to say six months, because it is incumbent upon us to get the mark right every quarter.

Okay.

And then kind of in the same breath as REOs, do you participate in any of the REO exchange programs that were outlined by the OCC in their March 24 letter?

No, we don't.

Okay.

That's all I have.

Thank you.

Betsy Graseck, Morgan Stanley.

Just a quick question on C&I.

Wanted to understand where you are seeing the demand, the types of products that you're seeing it in.

Obviously, your C&I is going up in a flattish market environment, so I wanted to understand that.

Yes.

If you look at it, really, as I mentioned a moment ago, it is a combination of increased line utilization, which has been an encouraging sign, as we saw a little bit of our commercial and industrial customers starting to access those lines.

We had initially thought that they would access their liquidity that they're keeping with us in depository accounts before they started accessing the lines.

It appears that is not happening, that they are accessing the lines and holding the liquidity.

When you look at the product set, when you look at the reasons why that, as we said earlier, you're seeing some capital expenditure activity that had been put off for quite some time.

And now they're at the junction that they are spending again for capital projects.

In addition, we're seeing quite a bit of M&A activity.

We're using the opportunity to acquire assets and competitors in what has turned out to be a slow recovery environment.

I'd also mention that we've got a number of specialty industries that continue to show strength.

We've mentioned them in the past.

I would say the strongest of that group right now is in the energy sector.

But we also are seeing strength in transportation.

And healthcare has been sort of a solid performer for us all along, continues to perform.

And those are the segments that predominantly we're seeing the opportunities in.

Okay.

And then on the credit side for C&I and [CRE] alike, obviously a big step-function down in your NCOs this quarter.

Just wanted to understand on the CRE side, was that related to any specific lumpiness in the prior quarters?

Are you now at a run rate to continue to improve from here?

Or do you see that there's still some lumpy exposures in there that could drive that number to be volatile?

There's still going to be some lumpy exposures, certainly a lot less volatility, a lot less product relative to the outstanding balances.

What we did see is that the land, single-family and condo, they contributed to the in-migration of sell pretty dramatically between quarters.

It's going to bounce around a little bit as we come out of this, as one can expect.

But we do, again, see some volatility in those numbers.

Okay, thanks.

Jefferson Harralson, KBW.

I wanted to ask you about the regulatory DTA; looked like a small amount, $40 million, was disallowed this quarter.

I wondered if it was just driven by a lower forecast of earnings or hit some sort of limitation?

No, it was primarily driven by the fact that if you look at the gross number, it was up $80 million.

So $40 million of that we counted in capital, and $40 million of it was disallowed just based on the math.

So it really wasn't a dramatic change.

We also went over a year or so; there's some impact to the tax credits that we have in terms of how the math works on the allowance calculation.

But really look at the growth going up $80 million and half of that going into the calculation as being the big driver.

Thank you; that's helpful.

So I guess with that answer, I suppose there is no read-through to the potential of a GAAP DTA change there?

Right.

There is no issue from our perspective in terms of realization from a GAAP basis.

Okay.

Thanks, guys.

Well, we thank everyone for your time and participation this morning.

And this will conclude our meeting.

Thank you.

This concludes today's conference call.

You may now disconnect.