Regions Financial Corp (RF) 2011 Q4 法說會逐字稿

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

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

I would like to remind everyone that all participant phone lines have been placed on listen only.

At the end of the call, there will be a question-and-answer session.

(Operator Instructions).

I will now turn the call over to Mr.

List Underwood to begin.

Good morning, everyone.

We appreciate your participation in our call this morning.

Our presenters today are Grayson Hall, our President and Chief Executive Officer; and David Turner, our Chief Financial Officer.

Also here with us this morning and available to answer questions are Matt Lusco, our Chief Risk Officer, and Barb Godin, our Chief Credit Officer.

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

Let me also 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 on our forward-looking statement that is located in the appendix of the presentation.

I will now turn it over to Grayson.

Thank you, List, and welcome to everyone to Regions' fourth-quarter and full-year 2011 earnings conference call.

We appreciate your interest in Regions and are pleased to have this opportunity to update you on the solid progress we made this past year in executing our business plans and building a stronger core franchise as well as our expectations for continued progress in 2012.

Although the environment has clearly remained challenged, our 2011 results demonstrated that our disciplined business plans and focus on the customer is working.

Total loan production for the year was a solid $60 billion.

Of that, Business Services accounted for $51 billion or 83%, including $15 billion of new loan production, a 14% increase over last year.

Consumer banking loan production accounted for $9 billion in 2011, driven by strength in mortgage, indirect auto, and credit card.

Loan growth was fueled by commercial and industrial loan balances, which on average increased 11% for the full year.

Offsetting this growth was the investor real estate loan portfolio, which favorably declined over $5 billion in 2011 or 33% of outstandings as we continue to consistently and aggressively derisk our balance sheet.

Average low-cost deposits for the full year grew more than $4 billion in 2011 or nearly 6%, which led to a 29 basis point decline in total deposit cost as a result of this favorable shift in deposit mix.

Credit quality metrics meaningfully improved in 2011 as demonstrated by a 29% decline in net charge-offs, a 24% decrease in nonperforming assets, a 40% decrease in inflows and nonperforming loans, and a 35% reduction in business services criticized loans, which are our earliest indicator of problem loans for the future.

We also sharply reduced our credit-related costs in 2011 with full-year provision down $1.3 billion or 47% from 2010 -- we -- while continuing to maintain a solid reserve level to net loans of 3.54%.

Although 2011 revenues were down due to lower security gains excluding the securities transactions, our revenues held relatively steady despite legislative regulatory and interest rate challenges.

Total expenses were higher due to fourth quarter's goodwill impairment charge associated with Morgan Keegan.

However, excluding the goodwill impairment charge and last year's regulatory charge and related tax benefit as a result of our continued focus on cost, full-year noninterest expenses from continuing operations were down 5% aided by a 4% reduction in headcount and the elimination of 700,000 square feet of excess facilities space.

Additionally, we further strengthened our capital base, increasing our Tier 1 common equity ratio by approximately 65 basis points to an estimated 8.5%.

As recently announced, we reached an agreement to sell our broker-dealer operation, Morgan Keegan, to Raymond James for $930 million.

As part of the transaction, Morgan Keegan is also expected to pay Regions a dividend of $250 million before closing, providing total consideration of $1.18 billion.

As disclosed, Morgan Asset Management and Regions Morgan Keegan Trust are not included in the sale and remain part of Region's wealth management organization.

To reiterate, the transaction reduces our overall risk profile, provides substantial liquidity at the holding company, and modestly improves key capital ratios.

It also establishes a strong long-term partnership with Raymond James, which we anticipate will provide incremental revenue opportunities and a source of low-cost deposits while also enhancing our ability to serve our existing customers.

Importantly, we also expect going forward that we will maintain important business relationships with Morgan Keegan associates that have developed over many years of working together to serve our customers' needs.

The divestiture will strengthen Regions' overall focus and discipline on our core banking franchise.

Although it has been less than two weeks since announced, we have been working productively and urgently to achieve a first-quarter close of this transaction.

Results for 2011 include a fourth-quarter net after-tax $731 million goodwill impairment charge related to the process of selling Morgan Keegan, which is reflected in both discontinued and continuing operations.

As a result, Regions reported fourth-quarter and full-year losses per share of $0.48 and $0.34 respectively and from continuing operations, Regions' fourth-quarter and full-year losses were $0.11 and $0.02 respectively.

Excluding the impairment charge, Regions' fourth-quarter earnings from continuing operations was $0.09 per fully diluted share, leading to full-year earnings per share of 17 on a same basis.

Importantly, adjusted pretax pre-provision income has now exceeded the loan loss provision for three quarters in a row, clearly demonstrating improved underlying fundamentals.

Fourth-quarter results from continuing operations also reflected lower credit-related costs driven by broad-based credit quality improvement.

This includes a 16% linked-quarter decline and net loan charge-offs and a 26% decline in gross inflows of nonperforming loans.

Fee-based revenues in the quarter were negatively impacted by the implementation of the Durbin Amendment on October 1.

However, new revenue initiatives and changes to our checking account fee structure helped offset some of the lost debit interchange fee income.

Also we continue to experience growth in debit card activity as total transactions have [risen] more than 2% from a year ago and total spending is up 3.6%.

Now we are also seeing healthy growth in credit card transaction volume, which was up 2.5% linked-quarter.

We were able to modestly increase our interest margin during the fourth quarter and continued improvement in both deposit mix and deposit cost offset long-term low interest rates on yields in our securities portfolio.

All in all, our underlying results and positive trends in certain key areas demonstrate that we are successfully executing our business plans by staying focused on our customer and that we are making considerable progress, positioning us well to take advantage of future opportunities.

I will now turn the call over to David, who will provide you with fourth-quarter and full-year 2011 financial details, after which I will return and make some additional comments prior to opening up the call for questions.

David?

Thank you, Grayson, and good morning, everyone.

I want to begin on slide 4 with a summary of our fourth-quarter 2011 and full-year results.

As Grayson pointed out, due to the after-tax goodwill impairment charge in the amount of $731 million associated with the process of selling Morgan Keegan, we reported a fourth-quarter loss of $602 million or $0.48 per diluted share.

$478 million of the impairment charge was recorded within discontinued operations and $253 million in continuing operations.

Therefore, we incurred a loss from continuing operations for the fourth quarter of $135 million or $0.11 per diluted share.

Excluding the goodwill impairment, income from continuing operations was $118 million or $0.09 per share.

Fourth quarter's results for continuing operations were silent and primarily reflected -- reflecting lower credit costs.

This morning's discussion unless otherwise noted will focus on fourth-quarter results from continuing operations excluding goodwill impairment as we believe this provides a clearer picture of fundamental trends.

Starting with a quick overview, pretax pre-provision income or PPI was $485 million or 5% below the third quarter.

As expected, service charges were negatively impacted by the implementation of debit interchange legislation which drove the decline in PPI.

Net interest income was steady linked-quarter while the net interest margin was up 4 basis points to 3.08%.

Noninterest revenues were down 1% on a linked-quarter basis while noninterest expenses were up 2%.

Let's take a look at some of the quarter's highlights, starting on slide 5 with credit quality trends that continue to improve.

Inflows of nonperforming loans declined to $561 million or 26% from the third quarter's $755 million.

The mix of inflows continues to be more income-producing commercial real estate loans, which have cash flows and tend to have lower loss severities.

It is important to note that land, condo, and single-family portfolio, which now totals $1.8 billion, makes up 10% or $58 million of the inflows.

Of this portfolio, 20% or $373 million have already been moved to non-accruing status.

It is important to note that 48% of all Business Services gross nonperforming loans were current and paying as agreed at the end of the quarter.

This is up 11 percentage points from a year ago and compares to 45% in the third quarter.

Let's move to nonperforming loans on slide 6.

Nonperforming loans excluding loans held for sale decreased $338 million or 12% linked-quarter and $788 million or 25% year-over-year.

During the fourth quarter, we executed $306 million in strategic sales of problem assets primarily out of held for sale.

We also moved $334 million of problem loans to held for sale.

Throughout 2011, we were able to reduce nonperforming assets by almost $1 billion or 24%.

Notably Business Services criticized and classified loans continued to decline, down 13% or $935 million from the third quarter and down $3.4 billion or 35% from one year ago.

Importantly, criticized and classified loan trends are one of the best and earliest indicators of credit quality.

As a result, we anticipate that 2011's marked improvement in overall credit quality trends will continue into 2012.

More specifically, we expect our migration into nonperforming status in the first quarter to approximate the level of this past quarter.

Moving onto the loan loss provision on slide 7, net charge-offs declined $81 million or 16% linked-quarter and for the full year declined 29%.

This quarter's disposition activity added $141 million to fourth quarter's charge-offs level; however, markdowns associated with these disposed assets had mostly been provided for in our loan-loss allowance.

Excluding net charge-offs related to disposition activity, net charge-offs were down 8% linked-quarter.

Net charge-offs exceeded the loan loss provision by $135 million, marking the third straight quarter we have provided less than net charge-offs.

Our coverage ratios remain strong.

At year-end, our allowance for loan loss -- loan and lease losses to nonperforming loans coverage stood at 116%, up 15 basis points from last year.

Meanwhile our loan-loss allowance to net loans declined from 3.84% at the end of 2010 to 3.54% at the end of 2011.

From any metric observed, you will find much improved credit quality at Regions.

Now let's move on to the balance sheet on slide 8.

Fourth quarter's average low yield increased 4 basis points to 4.35%.

This increase primarily reflects slightly higher LIBOR rates.

Ending loans for the year were down approximately 6%, which reflects a favorable 33% decline in investment real estate partially offset by a 9% increase in the commercial and industrial portfolio.

In addition, we added $1.2 billion of credit card loans and indirect auto loans to the balance sheet during 2011.

Average commercial and industrial loans grew $357 million or 1.5% third to fourth quarter.

However, other portfolio runoff, primarily investment real estate, more than offset this growth, causing the total loan portfolio to decline 2.2% linked-quarter.

Line utilization on commercial and industrial loans was modestly lower at 42.6%, but up from 40.3% in the fourth quarter of 2010.

We continue to see growth in our specialized industries, in particular, health care and franchise restaurants.

In addition, we are expanding other industry practices such as technology and defense.

Noteworthy, total commercial and industrial commitments rose $3.7 billion in 2011, ending the year at just under $30 billion.

This along with other factors lead us to expect continued growth in the commercial and industrial loan portfolio in 2012.

Investor real estate loans declined another $1.2 billion in the fourth quarter, resulting in year-end balances of $10.7 billion or $5.2 billion less than year-end 2010.

This portfolio now comprises only 14% of our total loan portfolio, down from 19% a year ago.

We do expect the investor real estate portfolio will continue to decline in 2012, albeit at a slower pace.

On the liability side of the balance sheet, as shown on slide 9, deposit mix and costs continued to improve in the fourth quarter.

Average deposits were down 1% in the fourth quarter, driven by a $1.6 billion decline in CDs partially offset by an increase in low-cost deposits.

Given our continued success in growing low-cost deposits, average time deposits fell to 21% of outstanding deposits, down from fourth-quarter 2010's level of 25%.

This positive mix shift resulted in deposit costs declining to 40 basis points for the quarter, down 6 basis point from third quarter and down 24 basis points from the end of 2010.

Related, our total funding costs improved 7 basis points linked-quarter to 68 basis points.

Additional opportunities remain to reduce our deposit costs as we have approximately $11.7 billion of CDs that carry an average of 1.46% interest rate that are scheduled to mature in 2012.

This compares to a current average going on rate for new CDs approximating 30 to 35 basis points.

Now let's turn to net interest income on slide 10.

Taxable equivalent net interest income for the fourth quarter was flat; however, the resulting net interest margin increased 4 basis points to 3.08%, benefiting from deposit pricing and an $843 million decline in average excess cash at the Federal Reserve.

Late in the quarter we repaid the final $2 billion of maturing TLGP debt which resulted in a lower ending balance of cash held at the Federal Reserve.

Consequently excess cash reserves negatively impacted the margin 14 basis points this quarter, an improvement from the third quarter's 16 basis points.

As expected, long-term interest rates led to higher prepayments in our mortgage backed securities portfolio, which negatively impacted our securities yield, resulting in a decline of 25 basis points linked-quarter.

The net interest margin was negatively impacted by 7 basis points related to these prepayments.

Looking into 2012, we expect this portfolio to grow modestly as we deploy excess cash reserves.

And as previously noted with the opportunities that remain on the liability side of our balance sheet and based on our expectation of a low rate environment, we expect our net interest margin to continue to incrementally improve this year.

Let's turn to noninterest revenue on slide 11.

Fourth-quarter noninterest revenues declined 1% from the third quarter to $507 million.

Fourth-quarter's implementation of debit interchange legislation reduced service charges $47 million linked-quarter, in line with our expectations.

One thing in particular I would like to highlight is that total 2011 service charges were relatively stable as compared with 2010 despite the negative impact of Regulation E and debit interchange legislation illustrating our ability to quickly adapt our business model.

We have been able to successfully mitigate these hurdles by generating new revenue streams and through the ongoing product restructuring of deposit accounts and we expect to completely mitigate this over time.

Mortgage revenue declined 16% linked-quarter, reflecting reduced benefit from MSR and related hedging activities.

Production in the fourth quarter totaled $1.8 billion, bringing our full-year production to $6.3 billion.

Further, the extended Home Affordable Refinance Program or HARP II is expected to foster mortgage production into 2012.

Moving onto slide 12, noninterest expenses excluding the goodwill impairment charge were up 2% linked-quarter.

During the fourth quarter, we incurred a $16 million expense related to Visa litigation.

Excluding this item and the goodwill impairment, expenses were relatively flat for the third quarter.

For the full year, noninterest expenses excluding goodwill impairment and the regulatory charge were down $175 million or 5%.

Regions has successfully been able to create and grow new revenue streams while also reducing expenses.

Credit-related expenses declined $23 million or 23% linked-quarter primarily related to lower other real estate expenses.

Fourth quarter 2011 credit-related expenses are 9% of total expenses, down from 14% in fourth quarter 2010.

Additionally and as previously announced, in the fourth quarter we consolidated 41 branches.

Furthermore, headcount declined over 1000 positions or nearly 4% during 2011 and is now -- and is down 6% over the last two years.

We will continue to seek expense savings without sacrificing investment opportunities or compromising high service levels our customers have come to expect and deserve at Regions.

As a result, we expect 2012 expenses to be slightly down from the 2011 level.

Moving on to capital and liquidity on slide 13, we have maintained solid capital and held a favorable liquidity position throughout the year.

The Tier 1 common ratio increased to 8.5% and the Tier 1 ratio at the end of the quarter stood at 13.2%.

In addition, our pro forma Basel III Tier 1 common and Tier 1 capital ratios are above their respective 7% and 8.5% minimums.

Liquidity at both the bank and the holding company remains solid with a loan to deposit ratio of 81% and cash held at the Federal Reserve totaled approximately $5 billion at year-end.

Lastly based on our interpretation, our Liquidity Coverage Ratio is above the 100% Basel III requirement.

Overall, this year's results show progress that we have made.

Our core business performance improved as we achieved sustainable profitability on a continuing operations basis.

We have substantial substantially improved our credit risk profile and further strengthened our balance sheet from a liquidity and capital standpoint.

With that, I will turn it back over to Grayson for his closing remarks.

Thank you, David.

I want to spend just a few moments talking about 2012.

Although we are encouraged by recent improvements in various economic indicators in particular the unemployment rate and GDP growth, we do believe that the economy remains challenged by housing and unemployment and the pace of economic recovery does appear to be incremental.

That being said, we are positioning our franchise to continue our recovery on asset quality and earnings performance.

With this backdrop, we expect to be very disciplined in our focus on fundamentals focusing on the basics of banking, focusing on our customers, and continue to take steps to position ourselves for growth when the economic recovery demonstrates sustainable momentum.

By providing customers with superior service and a broad array of well priced products, we are able to deepen existing relationships as well as profitably grow our business.

In fact, we believe our competitive advantage is driven by customer loyalty, service quality, and disciplined bankers, and that is what we ultimately differentiate us in the marketplace.

Regarding noninterest revenue in 2012, over time we expect recovery estimated $180 million lost due to the interchange pricing changes.

We are seeing early success in recent introduced suite of products and services that offer customers new choices on how to bank with Regions.

We are encouraged by the positive results of our changes in checking account fee structures.

As we transition from free to fee-eligible, we have to sell into legitimate customer needs and deliver value at a fair price.

We are building a stronger and more consistent banking model that customers appreciate and respect.

Given our assumption of a continued low interest rate, low growth environment, we expect growing net interest income will remain challenging.

Additional improvement in funding mix and pricing should offset pressure on earning asset yields where our margin will remain relatively stable with incremental improvement.

We believe that commercial and industrial loan growth was strong in 2011, and we are continuing to add resources into our specialized industries and will do so throughout 2012.

As a result, we expect continued commercial and industrial loan growth in 2012.

At the same time, we plan to continue derisking some segments of our loan portfolio, although the pace of runoff is expected to moderate to some degree.

Overall, we believe consumers and small businesses will remain cautious about spending and borrowing but we do anticipate incremental improvement.

Obviously we continue to focus on legislative and regulatory changes in our industry and adjust our business model, products, and services as necessary.

We are working every day to restore financial confidence and to provide financial products to stimulate economic growth across all markets.

In our business we maintain a disciplined focus on streamlining and driving expenses down; however, innovation and new product development are critical and do require some level of investment.

As such, we will be diligent about managing our resources to achieve the right balance of efficiency, effectiveness, and growth.

In fact, 2011 adjusted expenses are lower than those of the past three years despite increasing environmental costs.

We have become much more efficient reducing operating expenses even as we added new products and services.

And it has -- it is important I think to note that during this same time, customer service has actually improved at the Regions and this is supported externally by J.D.

Power, by Gallup, and by Greenwich.

Improving credit quality metrics combined with sharp reduction in investor's real estate portfolio are driving our expectation for reduction in loan charge-offs and provision in 2012.

We continue to derisk our portfolio through liquidation of property assets on foreclosed properties.

We expect overall credit trends to improve and nonperforming assets are anticipated to decrease as the year progresses.

To wrap up, in 2011, we reached three important milestones.

Our core franchise has strengthened and we do appear to have achieved sustainable profitability from continuing operations excluding the recent goodwill impairment.

All of our credit quality-related metrics experienced marked improvement throughout the year and shortly after year-end, we completed the strategic review of Morgan Keegan culminating in the announced sale to Raymond James.

While we are encouraged by all of these accomplishments, we recognize there is still much work to be done.

As outlined earlier, we expect 2012 to be another year of slow incremental economic recovery but we remain committed to the ongoing successful execution of our business plans and we are taking decisive steps to deliver improved results.

We are confident that we continue to make progress and importantly we believe this progress translates into improved returns for shareholders.

Before we turn to questions, as you know, we are among the banks required to participate in a comprehensive capital analysis and review, or CCAR as it is called, using stringent stress test scenarios outlined by the Federal Reserve.

Our capital plan has been submitted.

We expect to receive results by mid-March and we look forward to receiving that analysis which will give clarity on a number of issues we believe that are important to our organization.

That being said, it is premature for us to comment beyond this point at this time.

With that, I will open it up for questions.

(Operator Instructions).

John Pancari, Evercore Partners.

Good morning.

Can you remind us about the amount of total environmental-related credit costs in your operating expenses?

And then more specifically around how we should think about the decline in those costs through 2012 and then beyond?

Thanks.

John, this is David.

We have approximately $300 [million] that are still in the environmental costs.

As we continue to go through 2012 and our credit metrics improve, nonperforming inflows comes down, ultimate nonperformers come down, we expect those to trend down in 2012 as well.

Okay and then related to that, can you or at least on the credit front still, can you talk about your expectation for the balance of TDRs, whether we can still expect some increased -- increases there on a quarterly basis as you work through some of the CRE?

I will ask Barb Godin to comment on that.

We anticipate that our -- excuse me, our TDRs will remain relatively flat.

As you know, we have kept our tenor on those pretty short.

The reason for that is so that we keep our customer talking to us instead of waiting for an extended period of time.

So with that and as the markets improve, we will then start to see the TDRs roll off but until the economy improves, I would say you are going to see roughly the same level.

And then lastly, with your expectation for the margin to see some upside here through the year, it's a little bit better than we had thought and I guess if you could just talk about what changed with your expectation there because I believe you had thought it would be flattish at first.

Then are you seeing some stabilization in loan pricing at all?

Thanks.

I will just make a couple of comments and then I will ask David to comment as well.

When you look at the margin, we do anticipate continued incremental improvement in the margin.

When you look at our margin relative to peers, our margin is lower than the peer median and we have been working hard to bring that margin back in the line with where it should be.

Clearly we have made a lot of progress on the deposit side, still more work to do there.

We brought it much more in line with where it ought to be.

The loan pricing is really done one loan at a time and it is a competitive marketplace where every basis point is of value that is debated and we are making slow but steady progress on the loan side.

Obviously the reinvestment rates on our investment portfolio is challenged and we will continue to see that in this rate environment.

But we are seeing the opportunity to continue to incrementally improve our margin through 2012.

David, do you want to add to that?

Yes, I will add to that.

Grayson hit on a lot of them.

We do believe the impact lower NPLs will be positive, lower excess cash to the Federal Reserve as we put that to work and are less defensive with our liquidity than we have been.

From a deposit cost standpoint, while we improved 6 basis points over the quarter we still think -- we're at 40 basis points -- we think we can clearly get in lower than that into the 30s.

And I think if you look at our investment portfolio, we've started to make some changes there going into different asset classes and so you will see some movement there.

And then we've been pretty disciplined with our loan portfolio.

We are ensuring we are paid for the risk that we take and we feel like we're going to be able to book loans that are properly priced and all that together, there's 5 or 6 points, John, when you add them together, it shows an incremental improvement in the margin.

All right, thank you.

Marty Mosby, Guggenheim.

Good morning, I had two questions.

One is, David, as you look at the Morgan Keegan divestiture, now that we can see the discontinued kind of operations, it looks like on average it produced about $20 million per quarter in earnings.

If you take that earnings away, it would be about a 5% dilution probably to your earnings power.

In comparison, issuing $1 billion which is basically the cash you got out of the divestiture could have created close to 15% dilution.

So when you finally see the deal done, we only get about 10 basis points in capital ratio improvement but really this deal was about the cash and the substitution for having to issue that $1 billion and some common issuance down the road.

Well, I think as Grayson mentioned in his comments, we really were doing three things.

We are changing our risk profile so that we could focus on our core banking franchise.

Liquidity as you pointed out was -- is very important to us.

That generated a substantial amount of liquidity and the capital was important as well.

So if you look at all three of those and our continuing involvement with Raymond James, don't discount that totally either.

I think your number is a little high in terms of its overall contribution, core contribution.

We had about $0.01 relative to that.

So we think going forward that this was the right decision for our shareholders and we will see what this relationship brings to us on a go forward basis.

The other thing that I was looking at was if you look at the release of loan loss reserve, about $135 million and you talked about the disposition of your sales and said that the haircut that you took this quarter was basically already provided for, which matches up.

Your $141 million hit on disposition was basically what you got in release in loan-loss reductions this quarter.

Are you seeing enough improvement in the overall portfolio that we begin to see some release not just related to the impact from disposition but mainly from the broad portfolio as a whole?

I'll make a couple of comments, Marty, and then ask Barb Godin to speak as well.

Clearly what we saw this quarter was that generally across every credit metric improvement.

But one thing I would point out we saw, we saw the ability for resolution improve markedly this quarter.

And as we look at the marks we are taking on loans, we take our marks and then we also reserve as we moved it to held for sale, we felt very confident in the marks and the reserves we had taken.

Dispositions continue to be a big part of our strategy and we have been consistent in that and I don't see us deviating from that at this point.

Barb, comments?

The only other comment I would make is as you look at the makeup of what came in and also matched that up against the makeup of what we have in resolutions, we are pretty well at that inflection point organically.

We are at neutral and any loan sales that we do clearly are impacting positively our NPL balances.

I would also say as you look at our -- what we took in terms of a mark, we took 41% on our loan sales of $307 million.

We had a 41% mark against that and again, 10% of that with liquidity premium just given the way that we disposed of the (inaudible) small group of loans that had a bulk sale associated with it, etc.

So again, we are feeling pretty good about the way we have our reserve matched up against those portfolios.

I guess what I'm really trying to get at is can the release begin to broaden out so that you actually don't have offsetting increase in losses from disposition, you start to get just some release that starts to bring down the impact of the overall net charge offs?

Marty, it's Matt Lusco.

Good question.

I would say, though, that our allowance model, really we look at it more in terms of our portfolio and its balanced by I guess really the overall economic conditions we are seeing right now, which as Grayson said, still remain relatively soft.

That being said, to date we have only released about $430 million of allowance, so we continue to believe we are appropriately reserved and we will watch and see how economic conditions moderate over the remainder of the year.

Marty, the signs we've seen this quarter are encouraging and it's just a question of sustainability and we are encouraged but we are still being very disciplined about how we run our models and the projections we are making.

And as we continue to see early indicators, obviously the drop in criticized and classified, there was a clear drop in early-stage delinquencies.

Late stage delinquencies were relatively flat.

So we are seeing a lot of signs that would tell us that the asset quality is improving but we keep running very disciplined models to make sure we are making the appropriate changes in that allowance as the numbers justify.

Thanks.

Brian Foran, Nomura.

Good morning, just as I was trying to write down all your different points of guidance, I just want to sure I got it right.

So NIM will improve.

We've got C&I loan growth but we have continued reductions in investor real estate.

If that's right, when you put it all together, is there any range you can give us of where the overall loan book is likely a bottom?

Just -- or I guess at what level would the C&I growth start outpacing the CRE declines?

And then secondly, would you expect the dollars of net interest income to grow from the fourth-quarter base or is the NIM going up on a smaller balance sheet?

I'll just make a couple points, Brian, and if you look at the opportunities for loan growth over the 2012 time horizon, what we have seen is that we are seeing growth in C&Is are the predominant place we are seeing growth.

Our commitments have grown faster than our outstandings.

Most of that growth has been in the larger end of C&I.

You look at the marketplace, it has been predominantly in the -- up into the larger syndicated markets.

We have stayed pretty disciplined in what we're putting on our books.

We very much have a relationship banking model.

Our core competency is really in that middle market and lower end of the upper corporate market.

We have had very good results for 2011.

That moderated a little bit in the latter part of 2011 and then we saw it accelerate in the last two months of the year.

Our pipelines are still very solid, so we feel good about the growth there.

We feel good about the growth in our specialty industries, in particular asset-based lending, health care, energy.

So -- and we are still continuing to add resources into those segments.

So from a commercial standpoint, we feel good about it.

I think when you look at the consumer side, we still are seeing deleveraging on the part of the consumer but growth in auto to a strong degree.

Mortgage has been strong but we have not held much of that on our balance sheet.

We are holding very little of that and we are mostly passing that through.

And so when you net it all together, I think consumer is up slightly for 2012 and I think that when you look at the commercials, it's going to be a question of what's the pace of declines (technical difficulty) in that investor commercial real estate portfolio?

And I think that is a question we ask ourselves all the time.

That's going to have more to do with the economic strength in this country.

As the economy recovers, hopefully we see more demand in that segment.

Right now the strength that we are seeing in that segment is pretty much isolated to multifamily.

Brian, this is David.

I will add from an NII standpoint, we do see a modest increase in the dollars as well.

So it's not just a shrinkage of the earning assets that drives a NIM up and I think that rounds out your first question.

That does, thank you.

I guess a follow-up on TARP.

I know you are limited in kind of what you can say about thinking about the timing.

But just as you think about the economics of TARP, I guess one school of thought is the preferred dividend is a pretty significant drag to near-term earnings and even if you do a pretty sizable capital raise, the EPS in the near term improves because you don't have that dividend anymore.

It takes like $0.14 a share per year.

Then the other school of thought is the longer you wait the better because even though you've got this EPS drag in the near term, the preferred dividend is temporary while whatever shares you issue are essentially permanent or I guess you could always buy them back in the future.

But you are issuing those shares forever.

So as you think there is that economic trade-off between improvement in near-term earnings by canceling out the preferred dividend versus the long-term share count, how do you think about the balance and the trade-off between those two?

Well, you brought up what we've been looking at for a long period of time.

We have been very disciplined and patient with regards to TARP.

We will continue to be that way but those are the things we look at in terms of immediate dilution versus what the dilution would be by paying the dividend.

And so we think we needed to get some other things taken care of that would be reflected in the market for our Company now which includes retaining -- return to sustainable profitability, getting credit metrics turning.

And we do those things and as we have demonstrated, we think that all that actually gets taken care of in due course.

We don't have specific timing that we can talk about today relative to TARP.

As you know, we submitted our capital plan and we expect to hear back in the middle of March on that and perhaps that will provide clarity with regards to what we do from there.

I do think it's premature and it's inappropriate for us to give much guidance on that.

I do think the way you're thinking through the economics of the alternatives, we had been laboring through those same analysis for several months now and have, as David said, been very patient and prudent in that regard.

We will continue to be so but it is premature at this point in time for us to communicate anything in regard to that exercise.

Great, thank you for taking my question.

Kent Usdin, Jeffries.

One question on expenses.

You mentioned that they might be down 2012 over 2011.

I just wanted to check given the restatement post the Morgan Keegan sale, can you give us a comparison basis of what you are thinking about as far as the expense starting point and then kind of the go to decline off of that?

If you look at our core expenses, the adjusted expenses against goodwill charge, that didn't have Morgan Keegan in it, it's in our supplement.

I don't have the page number but it's off of that base for the year.

Was that about $3.6 billion ex the $250 million then?

That's right.

Right, I'm just looking at it in the supplement, it's like 3.8 something -- minus -- it is $3.862 billion and then you are saying minus the $250 million and that's the core?

That's right.

Okay, so little down off of $3.6 billion.

The second question I had is you talked about this a little bit on the call a couple of weeks ago but I wanted to just follow up and try to get a little bit more detail.

The litigation reserve, you had mentioned on the call that that was a fair value but that didn't seem to be the max value.

So can you walk us through how it works with potential -- what's the max exposure on top of the charge that you did -- that you are going to take for -- upon sale of Morgan Keegan and how that could work in the future?

I will just attempt to get you closer.

We do not have a maximum.

That question came up last call that we had.

Was that the maximum?

It is not.

It is the fair value of our indemnification, which is indemnifying the buyer for all the pre-closing legal contingencies that exist at Morgan Keegan and there are several things that are embedded in that.

That fair value number comes -- we get to that number by thinking through [possibly] with a third party, unrelated third party would ask for us to pay them to take that liability or that risk from us.

Those cases that are underneath that aren't necessarily probable and estimable under the current accounting guidance.

But they are fair value, so we may not have any payments that we have to make out of that.

It also includes a cost to defend relative to all the litigation matters that are pre-closing issues.

So we have not had a maximum.

I can give you as kind of a reference point if you look in our previous disclosures in the legal footnote, we talked about possible losses that we could have and we had a range on those possible losses in the zero to $300 million.

This -- these components of the litigation that you're reading about and indemnification is a part of that range of zero to $300 million.

Great, okay.

One last thing also related to the last call.

On the last call you mentioned that you want to keep two years of cash at the holding company even after a TARP repayment.

So can you just walk us through how you think about what two years of cash flows is in dollar terms so that we can try to understand how much cash you will eventually need to get to the parent company on presuming an eventual TARP payment of $3.5 billion?

Ken, I don't have those numbers.

I can have List follow up with you specifically on that but we have had a policy, a long-standing policy that we would have two years worth of debt service, dividends and so forth in the parent company.

All we are trying to say is we're going to continue to maintain that policy.

We think that's the right thing to do.

We think that has been an appropriate policy.

We've had it in place for a good long time and the only thing we communicated in the last call is we plan to continue to adhere to that policy.

Can you just tell us how much cash was at the parent company at March 31?

At March or December?

I'm sorry, at December.

My bad.

We can get that number.

About $2.6 billion.

Okay, understood.

Thanks a lot.

Matt O'Connor, Deutsche Bank.

Two unrelated questions.

First on the NPA inflows, they have been coming down but obviously it's been a little bit of a bumpy leg down.

But clearly downward trend, stable in 1Q.

I guess as we think from a timing point of view throughout 2012, are there any pluses and minuses that we should be focused on, whether it's a bunch of loans coming due or seasonality?

It feels like kind of one quarter in each of the last couple of years has had a blip up and any forecast of that would be helpful in advance of course.

Matt, this is Barb.

I would say the general projection is we are looking at that continuing to show improvement for 2012.

The last couple of years, we have shown that there is a slight increase in the third quarter.

I would attribute that to seasonality.

The rise last quarter was -- in the third quarter was not as big as the rise in 2010.

We would hope that too would modify in 2012 but if there's going to be any kind of a small bump, it would likely be in the third quarter but again even from where I sit right now, we just see continued improvement.

Okay.

And then separately as we think about capital build from here, you still have I think about 50 basis points of disallowed DTA and obviously making money brings that back but just give us a sense of the timing of what you think you might get some of that back.

Are there many nuances beyond just positive EPS that might allow some of that to come back?

No, Matt.

You really -- we got it.

It's based on projections.

We look at that every quarter.

We project out the next 12 months from the measurement date and we expect that to start coming in in 2012.

We won't have all of it but a decent portion of that comes into the capital calculation throughout 2012.

I guess just putting it all together, it seems like there's some DTAs coming back in.

You have some positive earnings and the RWAs sound like they are still going to trickle down a little bit.

Do you think the Tier 1 common gets to 9% range by the end of the year?

I think obviously we have a lot going on relative to our CCAR submission, which includes our forecast of where we think capital ratios will be at any point in time along the two years.

And I think it would be a little premature to talk about specifics in terms of our capital plan right now.

We are probably going to wait until we hear back from our supervisors and that would probably be a more appropriate time.

Okay, fair enough.

Thank you.

Erika Penala, Bank of America Merrill Lynch.

Good morning.

I just had two follow up questions.

The first is on Matt's question with regard to the DTA.

With this year you have three years of GAAP loss.

Should we -- should the accountants get more worried about the three years of GAAP loss with regards to your GAAP DTA or it's not as relevant because it's not the timing difference between the loan losses and the provision that caused the GAAP loss but it was the goodwill impairment?

Yes, from a GAAP standpoint, different from what Matt just mentioned, that was a regulatory issue and the past losses really aren't applicable to that conversation.

But from a GAAP standpoint, we have to evaluate the recoverability of our deferred tax asset every quarter and at year-end, obviously our auditors sign off on that relative to the financial statements.

When we have to support that, we do look at continuing losses.

We also look at the content of those continuing losses and when you have an unusual event or item like a goodwill impairment charge, you can take that into account in terms of providing support basis for whether or not you need to have a valuation allowance.

We did not add a valuation allowance.

We don't believe one is required other than a small one that we have for some state net operating loss carry forwards.

But we don't believe that there is any big valuation allowance required for deferred tax assets.

Our core operations are profitable and have been for the year and so I think -- and we expect that to continue.

So we don't see the need for valuation allowance.

That was helpful.

And my second follow-up question is on the guidance for NIM improvement, that does not include any potential financing plans or issuance of debt regarding potential TARP repayment, correct?

We get into specifics related to the capital plan.

I would just say that taken into account everything that we think we need to do, our NIM would increase.

Very helpful.

Thank you so much.

Craig Siegenthaler, Credit Suisse.

Thanks, guys.

Good morning.

Can you talk about the regulatory constraints on the Regions Bank subsidiary's ability to upstream capital to holding company to really kind of dividend capacity in 2012?

Greg, you know the regulators have rules in terms of the earnings that you have to have looking at the last two years worth of earnings that you have to have without receiving any approval from them.

So you will see that disclosed in our 10-K in terms of without prior approval what that number is.

I don't have that with me right at this moment but that's really the constraint without prior regulatory approval.

And do you by any chance have the common equity Tier 1 level of the Regions Bank offhand?

I can get that for you if give me just a minute.

I can tell you the leverage.

What is the Tier 1 leverage?

It is -- I said that too quick.

9.6.

It was 9.4 at the end of the third quarter, 9.6 at the end of the fourth quarter.

And maybe just a follow up while you're looking for that.

In the 4 basis point increase in loan yields, if we kind of oversimplified this trend that we look at, what was driven by the change in rates, mainly LIBOR, and what was driven by the change in spreads, repricing?

How can you kind of break up that 4 basis point in terms of the contribution?

I don't know that I have the specifics in terms of whether it was -- what amount we have for repricing.

Was it mostly repricing then?

Most of it would be through repricing.

There's a slight improvement in LIBOR but I think most of that came from repricing and new loans.

Got it.

Tier 1 at the bank, Tier 1 risk-based at the bank is 12.86; independent leverage was 9.7 instead of 9.6.

I guess the Tier 1 common ratio was in the mid-9s?

No, 12.7.

Oh, I thought that was the Tier 1 risk-based not the Tier 1 common.

Yes, that's right.

That would not be really applicable anyway to the bank, the common.

Okay.

Got it, guys.

Thanks for taking the question.

Jefferson Harralson, KBW.

You guys have talked about the ongoing relationship with Raymond James.

Can you just talk about the nature of what that venture is and what the revenue stream consists of there?

Jefferson, I think it is a little early to do that.

We have started a very productive relationship and have conversations going on in a number of fronts.

Since we've signed the definitive agreement with Raymond James two weeks ago, we've had a number of meetings and we will continue to be encouraged by where we think that relationship is going.

It's a little early for us to start assigning revenue streams to that today because clearly we're still trying to define some of that.

But I would bring you back to the fact that Morgan Keegan and the associates there and the leadership team there has been part of this Company since 2001.

There's some very strong relationships built there.

I would also remind you that Raymond James has been a long-time customer of the bank and so we know the leadership team there very well and we continue to believe that there are future opportunities that are undefined at this point in time.

But we fully intend to define those over the next several weeks.

Okay, thanks, guys.

Gerard Cassidy, RBC Capital Markets.

Good morning, thank you or good afternoon, I guess.

A quick question.

On the write-downs that you guys took, could you share with us what the dollar amount was for Morgan Keegan?

And then in the goodwill impairment charge for ongoing operations, what operations for those that was applied to?

Yes, David can explain that but the goodwill calculation is really based off the segment reporting we've been doing every quarter.

Yes, Gerard, I know it seems odd but the goodwill calculation, the first (technical difficulty) calculation is at the segment level.

The segment included primarily Morgan Keegan will be sold to Raymond James, but excluded trust and so when we evaluate the whole segment's goodwill, we ended up impairing virtually all of it.

Or we did impair all of it.

When you have that impairment, you have to allocate that impairment (technical difficulty)

Gerard, you can't shuffle your papers because it's coming through, we can't hear.

The allocation of the impairment then has to be made on a relative fair value basis between a discontinued operation and a continuing operation and that's why you end up having the impairment attributed to continuing and it looks like it was related to trust.

It is not.

It's related to the segment.

Okay, speaking of Morgan Keegan, are there any reps and warranties regarding the large producers at Morgan Keegan if they leave before the deal closes?

Would that impact the price?

There is.

If you look at the agreement that was signed that we filed, you can see that there is a post closing adjustment language in there that talks about production and retention of large producers.

We continue to be very confident that we've got a retention plan in place and enthusiasm in place with the team to hold those producers in place.

But that does -- that risk is there.

That risk, Gerard, lasts for 90 days post closing and when you read the agreement, you will see that there was a rep that the buyer put in in an appropriate retention plan on top of existing retention that existed with the company to reduce the risk of revenue producers leaving because they don't want revenue producers leaving, nor do we.

And we think that that has been taken care of.

Final question is when you guys get back to normalcy on earnings and profitability, what type of efficiency ratio do you think you're going to need to get to to reach that normalcy and profitability?

We've talked for a while now about wanting to get to that high 50s, low 60s rate.

We actually think that we can do -- be in the 50 range in that mid (technical difficulty)

-- in terms of lifting some drag.

Thanks.

This is David.

I'll take that, Kevin.

We've spent a lot of time with the rating agencies explaining kind of what our plan has been.

We think our continued -- our return to sustainable profitability and our return to credit metrics were critical to getting our ratings stabilized in some cases and working on upgrades in others.

We think that timing and to the extent we can continue to execute on our business plan, our credit continues to improve as we demonstrated through the fourth quarter that we would be in position to receive an appropriate adjustment to our ratings.

So we clearly can't -- we don't know what the rating agencies will do when they will do it but we know the things that we need to do, which is continued improvement and performance including improvement credit metrics.

Okay, thanks.

This is just more of a housekeeping thing but your line item within fee income, brokerage, investment banking, capital markets, it's a very small amount obviously now post-Morgan Keegan.

What's left in there?

Is that going to be something you continue to break out or is that going to be folded within something else going forward?

Yes, we looked at that.

We will probably change the title on a go forward basis, but it's got our capital markets grouped in there.

We do more exchange and derivative transactions and hedging and things of that nature.

Okay, great.

Thank you.

Matt Burnell, Wells Fargo Securities.

Good afternoon.

(technical difficulty)

-- not entirely, but the majority.

We think that so far our numbers appear to be tracking where we thought they would.

We have had some of the products that we have introduced that have been slightly more successful than we had anticipated.

The conversion from free checking to fee-eligible checking, our numbers there have been almost spot on of what we had forecasted.

So I would say no real surprises.

We continue to be slightly ahead of where we had projected from a service charge revenue standpoint but only slightly.

So we still feel confident that our plans are working and while it has been a challenge, I think that we have met that challenge very well.

Just switching gears in terms of the margin, you mentioned a little bit less than $12 billion of CDs are going to mature.

What is your expectation in terms of the percentage of that amount that you will retain?

You know, Matt, a lot of that depends on what our competitor is doing but we have obviously had -- in total deposits, we have stayed fairly stable.

We may be down slightly but as we have shifted, as we have shifted dollars from time deposits into low-cost deposits, we have had a fairly strong retention of the dollars in the bank.

But we also when you look at maturing CDs, what we have experienced is a retention rate of about 60% to 70% of them stay in a CD or time deposit product and we don't see that changing in 2012.

But obviously the competitive pressures could change and alter that, but we don't anticipate that at this juncture.

Sure, and then just one question in terms of the environmental costs.

You mentioned that you expect that the $300 million that you are currently experiencing in environmental costs should be down a little bit in 2012.

I guess I'm just curious as to how those of us on the outside might get a sense as to the trend.

And one way other banks have suggested we might look at that is just a trend in overall OREO amounts.

Is that a reasonable proxy for thinking about the pace of the decline in environmental costs for Regions this year?

I think the way I would look at it if I was trying to find a positive correlation, as I do think assets that are held in OREO are held for sale as well as overall asset quality trends would be where I think the correlation on those asset -- on those environmental costs would be at.

Okay, thanks for taking my questions.

Greg Ketron, UBS.

Good afternoon.

Just a question on the -- a follow-up question on the margin.

When you look at the CD rates if you go back to the first quarter of 2011, which I think is one of the higher maturity quarters, we saw the margin jump about 8 basis points and the yield on CDs drop about 20 basis points.

Is that -- looking at your maturities and the going rate for CDs in 2012, is it possible to see that kind of similar action and where do you think the CD rate for the portfolio could ultimately reach?

When you look at roughly 11.6 billion, 11.7 billion in maturities we have for 2012, you don't see that normally large group of maturities in the first quarter that you saw last year on high rates.

It's spread out more evenly this year than what you saw last year.

And the percent of deposit mix is now in time deposits.

We can see that -- we see that percentage continuing to fall throughout 2012.

Okay, and what is the new CD rate that you are seeing on average?

You know, it depends on term.

Obviously a customer selects a term but when you look at overall mix, we are probably coming on new CDs probably at a 30 to 35 basis point range, all in.

Okay and one final question on loan growth.

As we play out 2012, you have run off in areas like investor commercial real estate.

Could we expect to see any type of change?

We've seen some people commit more mortgage production to the balance sheet.

Is that something that you all would consider?

We continue to revisit that question every month and certainly could alter that decision if we thought circumstances warranted it.

I think the question on how much earning asset growth we have this year is really just going to depend on what is the pace of decline that we continue to see in industrial commercial real estate.

We do anticipate that pace of decline to moderate over the course of 2012.

In terms of balance sheet, we are seeing that the assets on the consumer side that we have for the consumer whether it's in equity line and first residential mortgages continue to decline roughly $100 million each per month.

But if we were to elect to keep more residential first mortgages on the balance sheet, we would obviously alter that pace of decline on that particular asset type.

But we also are encouraged by some of the growth we are seeing in some of our other products.

And so as we -- if we can get to the point we are outpacing decline in investor real estate, we will have net growth.

And that is -- we are looking for that inflection point.

Right, thank you for taking my questions.

Christopher Marinac, FIG Partners.

Thanks, good afternoon.

I just wanted to explore the disclosures you gave about the business services on the criticized information particularly in investor real estate, the improvements on special mention and substandard.

What's driving that?

Is there anything unusual happening in this quarter that may not be repeated in future quarters?

Things are getting better, quite frankly, in that space and I think part of it is perhaps the survivor bias.

Those that have lasted this long are able a little bit longer.

They are hanging on to better days.

I think we saw the early fallout and that's been a lot of what's we've seen in the last couple of years in terms of our charge offs.

There are things (inaudible) could criticize the last time, but again, we are seeing just an overall improvement in that sector right now.

Chris, I would also say looking at the most troubled part of our portfolio has been in land and single-family condo and if you look in our release, you'll see that's down to about $1.8 billion.

And so -- and that to Barb's point, that exposure is now reduced and those borrowers have made it this far.

I would tell you also in certain geographies we are seeing geographies that have been pretty stressed throughout this cycle starting to turn in much better numbers.

So it's just where we are in the cycle, quite frankly.

Okay, great.

Thank you for the color.

There are no further questions at this time.

I will now turn the call back over to Mr.

Hall for closing remarks.

Well, thank you for your time and your interest in Regions Financial.

We certainly appreciate it and respect it.

So thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.