Regions Financial Corp (RF) 2011 Q2 法說會逐字稿

Good morning and welcome to the Regions Financial Corp.

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 on 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.

Thank you, operator, and 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 here and available to answer questions is Matt Lusco, 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 and 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 and that these beliefs and projections expressed in such statements.

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

With that said, let me now turn it over to our President and CEO Grayson Hall.

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

We appreciate your time and interest and welcome everyone to Region's second-quarter earnings conference call.

I will begin today's call by covering highlights of business results, then David Turner will provide additional details on the financials a little later.

Region's second-quarter 2011 results further demonstrate we are executing our business plans and making substantial progress.

Regions earned $55 million or $0.04 per diluted share, marking the third consecutive quarter of profitability.

Core business performance continued to improve as core pre-tax, pre-provision net revenue rose to $500 million, the highest level since the third quarter of 2008.

We continue to see improvement in quality loan demand as we originated $16.7 billion in new or renewed loans and commitments, a 26% increase from first quarter's 2011 $13.3 billion.

Credit related costs which include our loan loss provision, OREO expense and held-for-sale losses declined to a two-year low or an estimated $0.22 per share after tax.

Additionally Morgan Keegan reached a settlement with the SEC, FINRA and state regulators.

The financial impact on second-order earnings related to the $210 million settlement was a $44 million tax benefit on a portion of settlement which had previously accrued to nondeductible.

Furthermore, with respect to Morgan Keegan, we also announced our intention to explore strategic alternatives.

As a result of this decision, we announced the formation of a new wealth management organization that will integrate trust, private banking and insurance business into a single business within the bank.

Establishing this new organization enables us to focus on key profitable customer segment with a goal of increasing non-interest revenue, deepening customer relationships and enhancing value.

During the quarter, we repositioned our investment securities portfolio, shortening the duration, resulting in approximately $24 million in security gains or $0.01 per share after tax.

On the expense front is a continued focus on productivity and efficiency initiatives.

We made the decision this quarter to consolidate approximately 40 branches and to dispose of property and equipment resulting in charges $77 million or $0.04 per share.

Sequentially, net interest income was steady and fee revenues reflected lower brokerage income offset by robust service charge income.

Non-interest expenses adjusted for the $77 million in charges declined 4% first to second quarter, demonstrating disciplined execution in our efforts to improve productivity and efficiency.

Recent macroeconomic indicators revealed further weakness and uncertainty in the economy, and we continue to experience an uneven recovery particularly in the Southeast.

However, these economic and global risk concerns do not lead to material changes in our economic outlook of below trend growth.

We continue to focus on what we can control in this environment -- delivering continued improvement in our operating results and long-term franchise value.

Our plan focuses on servicing our customers, enhancing enterprisewide risk management and building sustainable profitability.

Building sustainable profitability starts with continued improvements in asset quality.

Key credit metrics continue to improve as formation of non-performing loans are down for the third consecutive quarter and non-performing loans excluding loans held for sale have declined five quarters in a row.

The loan loss provision was down 17% linked quarter and business services criticized loans decreased another 14%.

Notably, our investor real estate portfolio has now been reduced to $13.4 billion, nearly 50% below [the 2006] level.

In addition to credit quality, core business performance continues to improve.

We are targeting a more diversified, balanced and profitable business mix.

As of June 30, business services accounted for approximately 61% of our loan portfolio and consumer services comprises 39%.

Over time, we are targeting a better balance with a focus on building the generally higher-margin consumer portfolio and appropriate pricing on our business services portfolio.

Although consumers continue to deleverage, our consumer services loan production was 14% higher year-to-date 2011 compared to 2010 and 8% higher on a linked quarter basis led by an increase in mortgage, indirect auto and direct lending.

Indirect auto was particularly strong as production rose to $291 million in the second quarter or 14% higher than the prior quarter.

We continue to expand this business and now have signed over 1000 auto dealerships and expect to reach 1200 by year-end.

An example of how we are keeping our business focused on the customer is our reentry into the credit card business.

Late in the quarter, we acquired a portfolio of approximately $1.2 billion.

The portfolio consists of Regions branded consumer and business check card accounts, credit card accounts, of which two-thirds have two to five other banking services with Regions today.

Our plan is to gradually grow this portfolio over time by controlling a positive customer experience that, strong cross-sell throughout our customer base and disciplined pricing and underwriting.

We believe that keeping focused on our customers requires strong knowledge of customer needs and expectations.

As such, we are committed to adding new products and services to further expand our business and add value.

We continue to look for opportunities to expand our consumer banking product line to address the ever-changing needs of our customers.

We are committed to serving the needs of our consumer customers with various credit products, payment and cash services, convenience of branches, ATMs, Internet and mobile, and providing financial protection products that give customers confidence and trust.

New products and services not only allow Regions to meet evolving customer needs, but also to diversify and grow dependable revenue streams.

Although we're focused on profitably growing our consumer business, we remain committed to adding and deepening relationships with our commercial portfolio as well.

Our business services and loan production for the second quarter totaled $14.6 billion, a 14% increase over the same period a year ago and a 32% higher first to second quarter.

We're continuing to see strength in middle market commercial industrial driven by both existing and new customers.

Specialized industries such as energy, healthcare and franchise restaurant are particularly strong with new relationships accounting for much of the activity.

Commercial and industrial commitments have increased 7% year-to-date and line utilization has remained relatively stable even with the growth in commitments.

Another area also performing well is small business.

With year-to-date production up more than 8% over 2010, this business remains a priority at Regions, providing not only loans, but also contributing fee income streams and deposits as well.

Our strength in gathering low-cost deposits continued this quarter.

Average low-cost deposits rose 4% compared to the same quarter last year and as a result, total deposit cost declined 26 basis points year over year to 53 basis points.

Total funding costs have also declined 31 basis points over the same period, ending the quarter at just 80 basis points.

Fee income is and will remain a significant component of our plan to diversify and expand our revenue streams.

Here again, our focus and emphasis on service quality is paying off along with our ability to quickly adapt to changing environments.

Despite legislative and regulatory rule changes, we grew service charge fee income 2% year over year and 7% linked quarter.

Along with the industry we face challenges required by the Durbin Amendment which are to be implemented in October this year.

Based on the final ruling, the Company estimates that the impact on annual debit interchange revenue will be approximately $170 million unmitigated.

However, we plan to promptly adjust our business model to deal with new rules and over time we will be able to offset this impact through revenue enhancements and disciplined expense management.

Improving productivity and efficiency is a foundational part of our business strategy.

We have and will continue to aggressively identify opportunities to reduce cost without adversely impacting service quality and business development and our opportunity to grow..

And with this concluding review, I will turn it over to David for an update on the financial details.

David?

Thank you, Grayson, and good morning, everyone.

Let's begin with a summary of our second-quarter results beginning on slide three.

Results demonstrated solid linked quarter progress including strong service charge fee revenue, lower core expenses and broad-based credit quality improvement.

Earnings per share totaled $0.04 and net income available to common shareholders amounted to $55 million.

Pre-tax pre-provision net revenue or PPNR totaled $447 million.

However, excluding security gains and branch consolidation cost and property and equipment charges, adjusted PPNR increase to $500 million, the highest level in 11 quarters.

Within PPNR, net interest income was essentially steady linked quarter and the resulting net interest margin was 3.05%.

Excluding securities gains, adjusted non-interest revenue declined $7 million or 1% linked quarter but was relatively flat on a year-over-year basis.

Non-interest expenses adjusted for $77 million of branch consolidation and property and equipment costs were lower than the prior quarter by $46 million or 4%, reflecting reduced professional and legal fees as well as a decline in salaries and benefits expense.

Included within income taxes for the quarter is a benefit of $44 million related to the announced Morgan Keegan settlement.

Last year at the time of the accrual, we believed the entire amount would be nondeductible.

Upon final settlement, a portion was determined to be deductible resulting in this quarter's $44 million tax benefit.

Let's now take a look at our improved credit quality trends beginning with non-performing loan inflows.

As shown on slide four, inflows of nonperforming loans declined $175 million or 24% linked quarter to $555 million, the third consecutive quarterly decline and the lowest level of inflows since the first quarter of 2008.

On an absolute basis, almost all loan categories experienced declining gross inflows.

Notably income producing commercial real estate and the land, condo and single-family portfolios demonstrated some of the largest improvements.

On the right side of the slide, note that 42% of June 30 total business services nonperforming loans were current and paying as agreed, four percentage points higher linked quarter.

Turning to slide five, nonperforming loans excluding loans held for sale declined $303 million or 10%.

This quarter we sold or transferred to held for sale $620 million of criticized loans consisting of $75 million of loans that were sold and $545 million of loans moved to held for sale.

I would like to point out that these loans that were in held for sale at June 30 have now been subsequently sold at the marked amount and are now off of our balance sheet.

Early-stage credit indicators demonstrated improvement with total delinquencies decreasing for the fifth straight quarter.

Additionally business services criticized loans were down approximately $1.2 billion or 14% from first quarter's level and have now declined each quarter since fourth quarter 2009.

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

Accruing troubled debt restructurings or TDRs increased modestly this quarter to $1.66 billion.

We expect to see an increase in TDRs as a result of recent accounting literature that will be effective in the third quarter.

However, importantly, we do not anticipate there will be a material impact to our loan-loss allowance resulting from this rule change.

Moving on to slide six, second quarter's net charge-offs were impacted by the $620 million of loans that were sold or moved to held for sale.

This disposition activity resulted in $207 million of charge-offs.

Net charge-offs totaled $548 million and exceeded the loan loss provision by $150 million, primarily associated with allowances allocated to these loans.

Excluding net charge-offs related to this quarter's disposition activity, net charge-offs declined 9% and reflected broad-based improvement in almost all categories.

Looking forward, net charge-offs are forecasted to remain elevated for the balance of the year.

Due to this quarter's disposition efforts, our loan-loss allowance to nonperforming loan coverage ratios increased from 103% to 112% at June 30.

Additionally, we also sold $289 million of OREO and nonperforming loans that were previously held for sale at approximately breakeven.

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

Average loans declined 1.6% with declines in investor real estate offsetting strong middle-market C&I growth.

However, ending loans were relatively flat linked quarter reflecting our late quarter credit card purchase.

The aggregate loan yield declined 4 basis points compared with the prior quarter to 4.27% as the average 30-day LIBOR rate declined 6 basis points this quarter.

We continue to see strength in our commercial loan portfolio with average and ending loans up 6.1% and 6.6% from one year ago respectively.

Growth in our middle-market C&I is particularly strong Driven by specialized industries which includes energy, healthcare, franchise restaurant, transportation, technology, defense, and asset-based lending.

Customers refinancing, mergers and acquisitions and capital expenditures are major contributors to this growth.

Again this quarter, we experienced increases in 65% of our markets and total commercial industrial commitments have risen $1.8 billion year to date, ending the quarter at $28 billion.

On an ending basis, investor real estate declined another $1.4 billion and now totals $13.4 billion.

As noted earlier, second quarter's credit card portfolio purchase demonstrates that we are focused on being a full-service provider and is yet another way for us to rebalance our portfolio between commercial and consumer lending.

And moving onto deposits, as noted on slide eight, we continue to benefit from our strength in gathering low-cost deposits which on average grew $1.3 billion linked quarter while our average time deposits declined another $465 million.

As a result, average total deposits rose $865 million or 1% over the first quarter.

Average low-cost deposits as a percentage of total deposits has risen from 72.5% in the second quarter of 2010 to 76.6% this quarter.

This positive mix shift led to another 6 basis points decline in second-quarter total deposit cost to 53 basis points.

Second-half deposit costs should continue to benefit from an improving mix through additional repricing of maturing CDs at lower market rates.

For the second half of this year, $6.1 billion of CDs will mature and carry an average of 1.48%.

Turning to slide nine, taxable equivalent net interest income was flat, totaling $872 million with the resulting net interest margin declining 2 basis points to 3.05%.

Our margin continues to reflect our excess liquidity held at the Federal Reserve.

During the second quarter we took advantage of long-term rates declining and repositioned our securities portfolio, shortening the duration to just over three years.

Specifically we sold $4 billion of 3.5-year agency mortgage-backed securities and reinvested the proceeds primarily in two-year agency mortgage-backed securities resulting in $24 million of security gains.

Barring unexpected movement in interest rates, net interest margin should be relatively stable with an upward bias for the balance of this year.

Let's now shift gears and look at non-interest revenue on slide 10.

Excluding security gains, second-quarter non-interest revenue amounted to $757 million, down 1% sequentially.

Second quarter's non-interest revenue reflected lower brokerage revenues offset by solid service charges and mortgage income growth.

Lower private client and capital markets revenues were the primary factors contributing to the sequential quarter decline in brokerage revenues.

The linked quarter increase in service charges reflects the ongoing restructuring of our accounts to fee eligible.

Also, interchange income was higher, benefiting from increasing active debit card usage as total transactions year to date are 12% higher compared to a year ago.

New product innovation such as the launch of short-term small dollar cash advances for relationship customers and identity theft protection will serve to further diversify and build our revenue streams.

Just to reiterate what Grayson said regarding the Durbin Amendment, we believe based on the final ruling, we will be able to mitigate lost revenue over time.

Lastly, mortgage income was up 11% from the first quarter due to improved mortgage servicing right and related hedging performance.

Turning to expenses on slide 11, second-quarter non-interest expenses totaled $1.2 billion.

However excluding $77 million in charges primarily related to branch consolidation and property and equipment charges, adjusted non-interest expense totaled $1.1 billion for the quarter, a solid 4% below first quarter's level.

Key drivers of this quarter's decline were a 6% reduction in salaries and benefits expense and a $20 million reduction in professional and legal fees.

Credit related expenses which include other real estate expense, gains and losses from held for sale and credit related personnel costs declined modestly, accounting for 8% of second quarter's adjusted non-interest expenses.

FDIC premiums increased $20 million linked quarter reflecting new rules which went into effect on April 1.

As Grayson noted, we will consolidate approximately 40 branches as part of our ongoing and routine efforts to strengthen the franchise through productivity and efficiency initiatives.

These branches will be closed later this year and will have minimal customer impact.

We recorded asset associated property evaluation charges and equipment expenses of $77 million this quarter and expect to realize pre-tax future net cost saves of approximately $19 million annually.

Including these announced branch closings, we will have reduced our branch count 19% and disposed of or exited 5.7 million square feet of Company space since 2006.

In addition, since 2006, we have reduced our headcount over 25% and 568 positions year to date.

We will continue to rigorously and diligently review our expenses to ensure they're tightly managed without sacrificing investment opportunities or our high standards for customer service.

Slide 12 provides a snapshot of our healthy capital ratios and favorable liquidity position.

Tier 1 common is estimated at 7.9% and our Tier 1 ratio stands at 12.6%.

Liquidity at both the bank and the holding company is solid with a loan to deposit ratio of 84.3%.

Overall this quarter's results demonstrate that our strategy is working as our core business performance continues to improve.

And with that, I'll turn it back over to Grayson for his closing remarks.

Thank you, David.

Before taking questions, I want to spend just a moment summarizing the actions we're taking to both improve Regions performance and to build a stronger organization for the future.

Focusing on the customer, enhancing enterprisewide risk management and building sustainable performance are the three priorities that we're executing.

As second quarter's results show, we are making continued progress in taking deliberate and appropriate steps to deliver on this business plan.

To recap, this quarter, we continued to de-risk our loan portfolio.

We purchased our Regions branded credit card portfolio.

We grew our commercial industrial business.

We organized a new wealth management line of business within the bank.

We introduced a new suite of products and services for our consumer base and we announced continued efforts to rationalize our expense base in a disciplined and continuous manner.

Another critical component of this strategy is to ensure that Regions has the appropriate level of capital to support its long-term plans.

To that end as we previously mentioned, as part of our capital planning process, we announced our intention to explore potential strategic alternatives for Morgan Keegan which we believe is in the best long-term interest of both Morgan Keegan and Regions Financial.

All in all, I'm encouraged with our second quarter progress.

We still have work ahead of us but we are committed to the ongoing successful execution of our business plans and we are delivering improved results.

Before we open the lines for questions, I want to address an issue that has received some attention recently.

In June, a federal judge denied our motion to dismiss a civil lawsuit and suggested in her opinion the audit committee of our Board of Directors and government authorities [are investing accrual status] of certain loans in 2009.

That prompted media coverage and questions from investors.

So in the 10-Q we will file in the next week or so, we are going to include a disclosure which will say that the Company has received inquiries and subpoenas from government authorities related to 2009 and earlier periods regarding accounting matters that have also been the subject of pending civil litigation against the Company.

The Company is cooperating fully in providing responses and the audit committee of our Board of Directors is conducting an investigation with the assistance of outside counsel and consultants.

I think it's important to note these inquiries relate to 2009 and earlier periods and do not have any bearing on our present financial statements including our level of non-performing assets or our loan loss reserves.

Please recognize that we are limited in what we can say beyond this disclosure.

With that, operator, I'll open the line up for questions.

(Operator Instructions) Matt O'Connor, Deutsche Bank.

I think in general the expense management has been very strong which is good to see given the revenue environment is tough for all banks, including yourself.

You highlighted the additional $19 million of run rate savings.

Just how do we think about the expense base going forward once we adjust for that, once we back out some of the restructuring charges?

What would you think about the trend of expenses incorporating that -- once we incorporate that?

Matt, this is David.

You know we still have a lot of environmental expenses embedded in our income statement, roughly call it $300 million a year that we're continuing to work on.

You also saw our increase in FDIC premiums during the quarter which is based on an estimate of what we think premiums will be.

There are still ongoing discussions on the new definitions that are embedded in the new rules there.

So we will continue to focus on expenses.

Part of our -- we look at headcount, we look at branches.

We will continue in this type of environment where revenue is harder to come by, you have to be diligent with regard to expenses.

So, we are going to continue to work on getting those down.

As I mentioned before, we expect that over time that we ultimately settle into an efficiency ratio which is in the lower 60s or higher 50% and we are not there yet.

So we still have some work to go.

Matt, this is Grayson.

Given our projection for a slow and somewhat uneven economic recovery, our focus on expense disciplines to drive efficiency and productivity will continue.

As David mentioned earlier, we're down over 500 positions since the first of the year.

I'm encouraged to say we did that with improving service quality.

Our service quality metrics continue to improve.

I think as David mentioned, you really can divide our expenses into two categories; really discretionary expenses and also environmental expenses.

The environmental expenses are starting to improve which is in their elevated nature has been a great turn of events for us this quarter.

But our discretionary expenses will continue to trend downward as well because all across the franchise, every business manager we have is focused on this issue and we believe we will have to for some time to come.

Okay, thanks.

Just separately, you did mention about the TDRs increasing in the third quarter with the accounting change.

Do you have an early estimate of what that might be?

And then similarly, the reserve impact you said is not going to be meaningful, but any estimate on what that might be in dollar terms would be helpful.

Yes, Matt, we haven't.

We're working through that right now to be able to quantify the increase.

We don't have that yet.

We do think that maybe a more important component is the expectation of the driver of any additional reserves, and we do not believe that that change in accounting of TDR definition will impact our reserves meaningfully.

So soon as we get the number, we will be posting that up.

We don't have that today.

Okay, thank you very much.

Marty Mosby, Guggenheim.

I wanted to ask two questions.

One was as we have moved the securities portfolio shorter, are we just increasing our asset sensitivity and kind of giving up some of our future earnings if rates stay at this level?

We do, Marty, but we also enter into some fixed received -- fixed swaps with that that protects us with a lower rate environment.

So again our expectation is rates will be down here for a while but we've protected ourselves on the downside.

Okay, so the combination of the swaps with the shorter securities weren't going to impact the NII going forward.

That's right.

Okay, and then the other question was in your release kind of in the back, this was more of a detailed -- you had about a 2% impact from Basel 1 to Basel 3 risk weighted assets.

And the kind of in the footnote, we say we're developing systems and the calculation.

The 2% number seems a little slight to me.

I was curious what you were including, if you're including any shift in the asset quality calculation or any of the net interest margin volatility or things like that in the new calculation for Basel 3.

Marty, it wasn't credit related.

Obviously these are all estimates, right now trying to come up with what the risk weighted assets are.

It's a little early for that.

The purpose of us putting Basel 3 in there to begin with is there was a lot of noise about what that might mean to some of the money center banks.

And we wanted to answer the question that our transition to Basel 3 is not going to be that difficult for us.

We just don't have the same construct that the larger money center banks do.

So we're continuing to look at definitions and implementation, but I wouldn't get too caught up on the specific numbers.

We do believe we will be in compliance.

Obviously we think we will have higher ratios than what you see when it comes time for implementation of Basel.

Ken Usdin, Jeffries.

Just a couple questions on credit quality.

I'm wondering, can you help us understand of the reserve release this quarter how much of it was related to the actual loan sales versus how much of it was just related to other parts of the portfolio improving?

This is Barb.

I will go ahead and respond to that question.

The majority of it was related to the actual loan sale that we did, although there was a small portion that was related otherwise.

Okay, and then as far as your comments, David, your comments earlier on charge-offs remaining elevated, understanding that a portion of this quarter's was again related to the loan sales, are we expecting -- are you generally expecting charge-offs to still remain at the level that it was this quarter going forward?

Well, clearly our charge-offs were up because of our de-risking and we provided if we had not had that, charge-offs would have been a couple hundred million dollars lower.

I think the point we need to make is we think that from a charge-off standpoint, a core charge-off, they will be elevated compared to what our expectation is on a normal run rate.

We have the reserves established for that.

We're holding a pretty large reserve at 3.84% today.

So you would expect charge-offs to continue to remain elevated.

The bigger issue is what will the provision look like over time.

And you saw us provide less than charge-offs for the first time in a while this past quarter.

So you know we don't have any planned transactions if you will at this time that would cause that charge-off level to be where you saw this past quarter.

And that's my last follow-up is just on your last point there.

So if the majority of the release this quarter was specifically against loans that were sold and there's not much release in the rest of the book, then is it fair to assume that you won't necessarily be planning on releasing reserves outside of incremental sales that you might conduct in the future?

Ken, I don't think you can look at it that way.

The charge-offs are charge-offs and the provision is a separate calculation that relates to any new issues that you may have coming up or any degradation in loans that you already had reserved for.

I think we let our allowance model work for us and we book whatever reserve -- the model tells us we need to have.

So I don't think just because we had charge-offs -- specific reserves attributable to those that you can imply we would not provide less than charge-offs going forward.

We're not committing that we're going to do that either.

We're just saying don't look at it that way.

(multiple speakers) I do think you have to look at the leading indicators in terms of criticized classified assets, in terms of early and late-stage delinquencies.

When you look at our credit metrics, they continue to show a favorable trend albeit slower than we would like, but a favorable trend nonetheless.

Of course, thanks a lot, guys.

Erika Penala, Bank of America Merrill Lynch.

My first question relates to the $620 million in loans that were reclassified in the quarter.

Could you give us a sense of how much of those loans came out of the NPL bucket versus criticized but accruing and what the associated mark was on that $620 million before you took the additional charge-offs?

Erika, I think I have your question.

Out of that $620 million, 255 of those were accruing and the remainder were in non-accruing status.

Those were the book value numbers and you saw our charge-offs of $207 million on that 620.

Right, I guess and what was the previous mark on that $620 million?

I assume that when you reclassified it to non-accrual, there was a reserve associated of the --

The 620 is the net book value that does not have reserves ascribed to it.

We ended up having charge-offs of $207 million and we released our reserve, $150 million.

That ought to give you some idea about the additional charges that we would've taken on that pool of loans.

Okay.

And, Barb, I was wondering if you could give us an update in terms of the re-default trends that you are seeing, how that's tracking on the resi TDR book and also if you could give us a refreshed LTV on that $1.2 billion?

Yes, I'll start with the trends that we're seeing.

The redefault rate continues to hold in around 20%.

So that really has not moved over the years.

As you can see from the numbers this quarter, we did add a little bit both in home equity and resi to our TDRs as we continued to apply our customer assistance program in helping customers.

Relative to the second part of the question which I need you to refresh me on --?

The refreshed LTV just specific to the resi TDR book please?

I don't have that broken out that way, Erika, but I can get that back to you.

Okay, and then just one last question.

In terms of your comments on really retooling your deposit product offerings to adjust to a new regulatory reality, I was wondering if it's too early to give us a sense of how much of the Durbin income you can end up mitigating and how long [does] over time mean?

Well, Erika, let me answer it this way.

One is we've put together a plan mitigating the impact of Durbin that includes both revenues and expenses and we will -- as you've seen us over the past year really moving from a free checking environment to a fee eligible environment, I think from a strategy standpoint, our strategy is not going to be that different than many of our competitors.

But most of those strategies are speculative at this juncture.

But we intend to increase the hurdles if you will for our checking accounts.

We certainly have under consideration specific charges around debit cards themselves and our implementation of that will occur between now and year-end, and we will be disclosing the impacts of those as we start seeing how customer behavior starts to modify in the new environment.

Thank you for taking my questions.

Scott Valentin, FBR.

Good morning and thanks for taking my question.

Just in regard to the margin, you mentioned stable margin with maybe an upward bias.

I'm just curious, it looks like CD rates, there's still room to reduce CD rates.

Maybe cost of funds can come down somewhat.

And I guess the other question would be liquidity, is there room to reduce liquidity and therefore maybe see some asset yield improvement?

I just thought that maybe there would be a brighter outlook for margin given some of it looks like low-hanging fruit to improve margin.

Yes, Scott, you're right.

That's why we put upward bias to it.

We also had non-performers and as those continue to yield, there's a pickup there.

You know one of our issues that we've been facing is from a liquidity standpoint, we've had tremendous liquidity over this past quarter.

We had an average of right at $5 billion at the Federal Reserve and we'd like to put that to work on a more efficient basis.

So we've been working unit to return to sustainable profitability, improve credit metrics and get our credit ratings improved such that we can take -- become more a little more efficient with regards to how our balance sheet is positioned.

And when we can do that, you can see that we can do a lot better earning than 25 basis points with that $5 billion over time.

So the question is when can we do that, and we're working hard on that.

You're right to point out we do have some more benefit to pick up from deposit costs.

We're at about 53 basis points today.

And I think that we will continue to improve there.

And then we layered on roughly a little over $1 billion credit card purchase that should enhance our loan yields going forward.

So if you're trying to imply we're being a little conservative in terms of the call, I'm with you.

But I don't think until we can get our balance sheet positioned as efficient as we want that we're going to have a runaway margin.

And, Scott, this is Grayson.

If you look at it from a deposit cost standpoint, we do continue to believe we have got more opportunity there to reduce our cost on the margin.

From a loan yield perspective is we're seeing new production across all asset classes, product types.

We are seeing improved yields and rates on new production.

Obviously there's more competition that we're seeing out in the marketplace but the rates that we're able to put new production on the books is still at levels higher than pre-crisis levels.

And as we add new production to the book, we are seeing improvement in our overall yield outlook on the loan portfolio.

That being said, most of our commercial loans are tied to 30-day LIBOR.

We did have a pretty challenging operating environment in relation to LIBOR in the second quarter.

Okay, thanks, that was immensely helpful, all the color.

Thank you.

Just a follow-up question, you mentioned that Morgan Keegan -- long term you think it's the right thing to do.

I was just curious how you weigh the trade-off between losing some earnings power on the sale of Morgan Keegan versus maybe the capital it frees up.

Well, we had to go through and have over the past several months a fairly extensive review of our businesses.

We continue to do that across our portfolio of businesses within the Company.

I think that the settlement that we were able to achieve with the SEC, FINRA and the state regulators in regard to Morgan Keegan really provided an opportunity for us to look at that business more strategically and decide where we go.

It's a very valuable franchise that's been part of this organization since 2001 and we do -- our preference is to sort of maintain some type of strategic alliance as we move forward.

But we continue to believe that as we look at our capital planning process that taking a strategic review at this point in time is the right answer.

We will be giving more clarity on our financial pro formas as this process matures.

We're not in a position to give that clarity today but it will be forthcoming.

Jefferson Harralson, KBW.

I was going to follow up on Erika's question.

I think that the -- I don't know if I would call it a concern -- but the biggest issue I think people have is -- with all banks right now is what they could sell the problem loans for versus what [that they are marked now].

And if you are taking a $207 million loss in addition to a $150 million reserve on $120 million of loans moved, it seems like that the loans aren't -- for all banks, not just you guys -- but close -- able to sell for close to where their margin -- it's going to take a long time to get through this whole cycle.

Is there -- I guess could you comment on that and is there -- I guess can you give us some comfort about the marks in the future losses and how long it's going to take to work through the problem loans?

Jefferson, it's Barb.

The $150 million that we released was not in addition to, it was part of the $207 million that it cost us.

So we already had these loans pretty well marked at the time that we sold them.

So if you look at that rough delta between what we sold, $620 million, and the difference between the 207 and the 150 is roughly $60 million, roughly 10%.

Okay.

So we chose those assets as we -- part of our continuous credit servicing.

We looked at each of the accounts.

We looked at how long it would take us to accomplish our workout strategies and in several instances -- and knowing at that time that the market was pretty enthusiastic for some of these individual assets, we felt it was in our best interest to go ahead and pull that workout strategy forward and go ahead and sell it.

And again the 10% therefore I would reflect as being more of a liquidity premium in the market than it was a credit mark.

Thank you very much.

Could you just comment on the -- you mentioned the pull-ahead of problem loans.

Should we expect more of that type of thing or is it going to -- as the inflows are slowing down, are we going to slow down the disbursement?

Jefferson, this is David.

You know we don't have any current plans for a disposition similar to what we just had.

We do have loans in held for sale and OREO which we would continue to market and sell.

But we are continuing to evaluate our portfolio and if it makes sense to have a further transaction, then we will mark loans to held for sale, take our mark, put them in there and sell them.

But right now we do not have that currently planned.

Chris Mustascio, Stifel Nicolaus.

Barb, my first question when it comes to the investor real estate TDRs, they were up about 30% this quarter and that's before I guess the accounting change next quarter.

Can you refresh my memory as to what type of collateral you have on those investor real estate TDRs and what the average LTVs would be?

Yes, I don't have the average LTVs in front of me, but let me just give a general comment on the TDRs if I could; remembering we have decided as a strategy on our workout side to keep all of our durations short.

So all of our renewals are short.

We typically don't go beyond a year.

And so because of that as we look at these loans that are coming up that we actually are going to renew this year, a lot of those are going to fall into TDR status because what will happen is one argues that would you ever make a loan to a classified credit and could you ever get the appropriate rate around it?

And so again we've taken the position conservative perhaps, but we've certainly taken the position that the answer is no and so therefore they would become TDRs.

Collateral behind it is all manner of things, income producing in general, but that would take up the majority of it.

David, what is the book value of Morgan Keegan?

We haven't shared that book value number.

If you sell it for less than book value, that loss goes to the income statement, would it be a similar hit to Tier 1 common?

It would be if we ended up having a loss, yes.

And if we had a gain, it would increase the Tier 1 common.

Right, my last question is -- and, David, the long-term debt yields were up about 22 basis points sequentially.

Any reason -- was that swap related why the yields would go up in your long-term debt?

It was just the maturing piece that was -- because we had it swapped out, it was -- on a weighted basis it was a lower rate.

So when it came out, it just forced everything else up.

Kevin Fitzsimmons, Sandler O'Neill.

You all have been fairly active over the last few quarters just pulling out structural changes; the branch sale, entering indirect auto, reentering credit card.

Now you're evaluating Morgan Keegan.

Can you give us a sense for are there other levers, other options that you have kind of on your planning board that are possible?

Or are you kind of at a point where that's really it?

And it kind of plays into the earlier question about how do you evaluate or how do you weigh that loss or shortfall of revenues if you part with Morgan Keegan?

Just wondering what other kind of levers are out there that you are evaluating.

Thanks.

Let me start -- and I'll let David sort of respond also.

We have been continuously reevaluating our businesses, our products and our markets and we have got a fairly full agenda at the moment with all activities going on.

We certainly continue to run through that process on a quarterly basis as we go through a fairly extensive capital planning process and making sure that we're looking at these businesses the right way.

I think the announcement we made around indirect around credit cards and now around reviewing strategic alternatives for Morgan Keegan have been part of that planning process for several quarters.

I think you'll continue to see us do those types of evaluations.

We're not in a position to share what our thoughts are today on future events, but I think you can have a certain amount of confidence that we are in a continuous review of all the businesses we're in to try to strengthen this organization for the future and put us in a better position to be successful in delivering the results that our shareholders desire.

This is David.

We have had a strategic plan in place that our Board's approved and we've been executing in accordance with that plan.

Certainly if you look at an example of Morgan Keegan, we needed to be in a position to settle the regulatory issues that we've talked about before we could move forward with evaluating strategic alternatives for Morgan Keegan.

So, we will continue to look at all options to continue to enhance the value to our shareholders.

Specific to Morgan Keegan, you asked at the end of your question kind of how do you replace the [revenue hold] to the extent that we execute on -- if something comes out and we actually dispose of Morgan Keegan, you need to look at page 10 of the supplement which carves out -- and this is not apples to apples, but it does give you -- most of that is Morgan Keegan that's included in the evaluation.

It does include on page 10 trust and asset management which is not part of that strategic evaluation, but you can look at the numbers that come out of that.

And as you think about how you replace revenue, you need to also consider about the expenses that won't be there to the extent we pull that trigger.

And also note that whatever proceeds raised in the transaction if one happens serves to offset the amount of debt perhaps that we have to raise as we position ourselves -- at the parent company as we position ourselves for repayment of TARP.

So that's interest carried that you save by not having to go out in the marketplace and raise that debt.

So you need to keep that [hold type] transaction not just focused on revenue.

Okay, great.

Just one quick follow-up.

You've talked a lot about the movement of customer accounts to fee eligible status.

I would assume not all banks are moving at the same speed in that process.

I know it's early, but are you seeing any early signs on what the customer reaction is to that?

(multiple speakers) this is Grayson.

It's going to be an uneven approach by the industry.

I think that it's too early to call at this juncture.

We are yet to see in the marketplace what all the participants -- what strategies all the participants will deploy.

We believe we put together a good strategy.

We stand ready to modify that strategy though if the market necessitates that.

But I think at this juncture it's just too early to call what the customer reaction will be.

We've certainly done a lot of research, we've tested a number of theories and we've had customer groups in that we've listened to and spoke to.

But we really have got to wait and see what the behavioral changes of our customers turn out to be.

Christopher Marinac, FIG Partners.

Thanks, good morning.

I wanted to extend the conversation -- the question that Jefferson and Erika both had.

It relates to if you look at the change in classifieds of the past year.

It looks like from the slide that it's roughly about 3.4 billion criticized adjustment in the last 12 months.

If I look at the charge-off you've taken plus the $200 million for the held-for-sale move today, it works out to about a 40% loss.

Is the loss content going forward similar to what you've just experienced the last year in business services?

Or should we we be thinking of a number that might be a little bit less than that given just what's remaining in the classified and criticized bucket?

Christopher, this David.

I'll start and, Barb, you can add on.

I would say the marketplace is changing dramatically each and every quarter.

You are looking at a lot of history.

In some cases, asset values are stabilizing and in some case, there are still some challenges there.

So when you try to forecasts losses that are built in based on the history, it gets difficult to do.

I would tell you as you think of our losses and look at the reductions in our most problematic loan portfolios, investor real estate is down 50% from where we were at the beginning of the cycle, down to [$13.4 million].

So we expect charge-offs to be there.

That's why we have a reserve of 3.84%.

We believe we are adequately reserved for the credit risk that's embedded in the portfolio.

When you have dispositions outside of the normal course if you will, and we've had some of those over time, you introduce a liquidity discount that you have to take.

In some cases, that liquidity discount is worth taking and sometimes it's not.

We clearly have disclosed the fair value of our loans and that's assuming we would have a -- sell every one of our loans and that's not the case.

So predicting that those losses will be at that same level is difficult, but we continue to evaluate the best strategy of our portfolio and like I said, today we don't have any plans to market and sell.

And if that changes, then we will take our charges and move on.

I would add to that -- this is Barb -- I would add to that that our [land] single-family and condos being our most distressed part of the portfolio, those balances did fall this quarter as you see, $2.5 billion down from $4.4 billion just a year ago.

[They followed] substantially.

The other comment I would add to that is that as we look at the number of customers or the percentage of our customers in nonperforming loans that are paying as contractually agreed, that continues to go up each quarter.

Compared to a year ago as well, 24% we were paying as contractually agreed and now we're at 42%.

So that too suggests that the quality of what is in the nonperforming loans is a different quality over the last several quarters.

And I would expect the same going forward.

Okay, great, and then just a quick follow-up.

Is there a rough percentage of the allowance that would be assigned towards the consumer as a broad number?

I don't have that handy (multiple speakers)

We will get back to you on that (multiple speakers)

That would be great.

Thanks for your color very much.

Operator, this is List Underwood.

We've got unfortunately time for only one more question.

Chris Gamaitoni, Compass Point.

On a broader level when you were speaking about credit card cross-selling, were you -- I was unclear.

Was the strategy to bring customers in with credit cards and then cross-sell them or cross-sell existing customers with credit cards?

Understand this portfolio we acquired has been Regions branded for years and so it's on a Regions card.

It's predominantly sold to Regions customers and our strategy is to cross-sell Regions customers with a credit card, not the other way round.

As I said in my comments today, when you look at this portfolio, the vast majority of these customers already have banking relationships with Regions Bank.

We've got about two to five products already sold to these customers on average today.

So this is really just our ability to control the customer experience around the credit card for our customers who already have a relationship with Regions and for us to deepen and strengthen that relationship.

And you won't see us being the most aggressive on a credit card.

It's a relationship product from our perspective.

Thanks, and then just on the short-term cash loans, what's the average APR on those?

Average APR on the short terms?

Yes.

It's a fee business, it's not an APR product.

Right, but when you convert it to an APR (multiple speakers) I think we'll have a conversation off-line would be better suited there.

Yes.

Let me also respond.

I think about a third of our reserve is consumer, two-thirds of it is commercial.

Chris, for you.

All right, well thank you very much for your time and we will stand adjourned.

This concludes today's conference call.

You may now disconnect.