Regions Financial Corp (RF) 2012 Q1 法說會逐字稿

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

My name is Nicole 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.

Thank you, operator and good morning, everyone.

We appreciate your participation on the call this morning.

Our presenters today are our President and Chief Executive Officer, Grayson Hall; our Chief Financial Officer, David Turner; and also with us and available to answer questions are 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 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.

Let me now turn it over to Grayson.

Good morning and thank you all for participating in Regions' first quarter 2012 earnings conference call.

Simply put, this has been a quarter of significant accomplishment.

In fact, I would characterize it as a pivotal quarter with Regions now fundamentally stronger, strategically focused and well-positioned to grow our franchise profitably.

We certainly still have plenty of work left to fully accomplish our goals, but the past quarter's results position Regions well.

Let's look at the key milestones that have occurred over the past few months.

We successfully completed an approximate $900 million public offering of common stock.

The overnight offering was significantly oversubscribed and priced at a premium from the previous day's close.

Our equity raise followed the results of the Federal Reserve's large bank capital analysis and review.

There was no objections to our plan demonstrating what we believe is the strength of our capital planning process.

Subsequently, a major credit rating agency upgraded Regions restoring us to investment grade status and attributing the upgrade to improving profitability, positive asset quality and capital trends.

Also, we completed the sale of Morgan Keegan, which closed on April 2 reducing our overall risk profile and improving liquidity and capital.

And finally, on April 4, we redeemed the entire $3.5 billion of Series A preferred stock issued to the US Treasury.

On an ongoing basis, the redemption eliminates the payment of preferred dividends, as well as the amortization of the discount, which cost us in total $214 million, or $0.17 per share in 2011.

In addition to these reported milestones, we also achieved broad-based asset quality improvement, providing strong evidence that we are at a long-awaited inflection point in overall credit quality trends.

Plus, we continue to demonstrate disciplined progress in improving customer service quality in all of our business locations.

Further, Regions' first-quarter earnings from continuing operations were a solid $0.14 per diluted share and despite seasonal factors and legislative headwinds, adjusted pre-tax pre-prevision income approximated $419 million, a level that we believe will mark 2012's quarterly low point.

We are off to a very good start in 2012 and given our recent capital accomplishments, as well as the ongoing successful execution of our business plans, Regions' outlook for the full year is encouraging.

There is no question that the first few months of the year have been busy and eventful for Regions.

We have accomplished a great deal and all these actions serve to enhance our overall risk profile and allows us to focus on core fundamentals.

As a result, we are a fundamentally stronger company that has encouraging momentum.

Let me turn the call over to David, who will provide first quarter's financial details, after which I will return for some closing comments before opening the call up for questions.

David?

Thank you, Grayson and good morning, everyone.

Let's begin on slide 3 with a quick snapshot of our first-quarter 2012 financial results.

We reported net income available to common shareholders of $145 million, or $0.11 per diluted share, and income from continuing operations totaled $185 million, or $0.14 per diluted share.

A net loss from discontinued operations of $40 million, or $0.03 per diluted share is attributable to an increase in professional and legal fees.

Pre-tax pre-provision income or PPI was $438 million as reported.

Net interest income declined linked quarter; however, net interest margin increased 1 basis point to 3.09%.

Non-interest revenues increased 3% on a linked-quarter basis and non-interest expenses, excluding fourth quarter's goodwill impairment, were up 5%.

From a credit standpoint, net charge-offs were down 23% and the loan loss provision declined 60% from the previous quarter.

As you can see, our first-quarter results from continuing operations were solid, reflecting core business strengths and a marked reduction in credit costs.

We do expect this quarter to be the low point for PPI.

Unless I note otherwise, my comments are focused on results from continuing operations, excluding goodwill impairment in the fourth quarter of last year, as we believe this provides a clearer picture of fundamental trends.

Let us start with asset quality on slide 4.

In the first quarter, we experienced broad-based asset quality improvement.

Virtually all credit metrics improved during the period and most should continue to do so throughout the year.

Notably, first quarter's loan loss provision was the lowest in more than four years.

Net charge-offs were down significantly resulting in a decline of $98 million, or 23% linked quarter and exceeded the loan loss provision by $215 million.

Inflows of non-performing loans declined to $381 million, or 32% from the fourth quarter's $561 million.

Non-performing loans, excluding loans held for sale, decreased $221 million, or 9% linked quarter and $936 million, or 30% year-over-year.

Total non-performing assets declined $1.3 billion, or 33% from prior year.

Also, it is important to note that nearly half of all Business Services' gross non-performing loans were current and paying as agreed at the end of the quarter.

This is up 11 percentage points from a year ago.

Notably, Business Services' criticized and classified loans continued to decline with criticized loans down 6% or $391 million from the fourth quarter and down $3.2 billion, or 35%, from one year ago.

As a reminder, criticized and classified loans are one of the best and earliest indicators of credit quality.

Our allowance coverage ratios remained strong.

At quarter-end, our allowance for loan and lease losses to non-performing loans stood at 118%, up 15 basis points from last year.

Meanwhile, our loan loss allowance to loan ratio remained strong at 3.3% at the end of the first quarter.

Bottom line, we continue to make significant progress on asset quality and from almost every metric observed, you will find improved credit quality at Regions.

However, each quarter has its own unique characteristics and some volatility should be expected going forward due to the uneven nature of the economic recovery.

Now let's look at our balance sheet trends starting with loans on slide 5.

Ending loans for the first quarter were down $874 million or 1% linked quarter and the loan yield decreased 6 basis points to 4.29%.

This decrease in yield primarily reflects the impact of previously terminated balance sheet hedges.

Ending earning assets, however, increased 2% linked quarter attributable to growth in the investment portfolio, which I will discuss in a moment.

Investor real estate balances reflect a favorable decline of 6%.

At quarter-end, balances stood at $10.1 billion, which is down $4.7 billion from one year ago.

This portfolio now comprises 13% of our total loan portfolio, down from 18% a year ago.

We expect this portfolio to continue to decline at a more moderate pace.

Mortgage balances declined 1% linked quarter reflecting our continued strategy to sell fixed-rate conforming mortgages.

The Company also experienced additional loan declines in the home equity portfolios as consumers continued to refinance and/or deleverage.

Regarding the credit card portfolio, balances were down slightly on a linked-quarter basis.

However, we do expect growth later this year once we assume servicing of the portfolio and control the customer experience.

Commercial and industrial loan demand remained healthy in the first quarter driven by our specialized lending groups.

On an ending basis, loans grew $576 million, or 2% for the first quarter.

While growth was broad-based geographically, we experienced particularly strong growth in Southwest Texas in the energy industry, as well as Central and West Tennessee in the healthcare industry.

Pipelines have also picked up as customers continue to make capital expenditures and to some extent build working capital.

Line utilization on commercial and industrial loans was up 45 basis points linked quarter.

Indirect auto continues to be an area of growth as loans increased 5% linked quarter and we now have almost 1500 dealers in our network.

Total consumer loan production totaled $2.3 billion in the first quarter.

We have been disciplined and judicious with respect to capital deployment.

As a result of our capital actions and credit ratings upgrade, we are in a better position for our balance sheet to work harder for us in the future.

Loan balances should end the year relatively stable compared to the beginning of the year as loan growth in C&I and non-real estate consumer should offset more modest declines in investor real estate.

On the liability side of the balance sheet, as shown on slide 6, deposit mix and costs continued to improve in the first quarter.

Average deposits were up 1% linked quarter driven by a $1.6 billion increase in low-cost deposits, partially offset by a $721 million decline in CDs.

Given our continued success in growing low-cost deposits, average timed deposits fell to 20% of average outstanding deposits, down from 24% a year ago.

This positive mix shift resulted in deposit costs declining to 37 basis points for the quarter, down 3 basis points from fourth quarter and 22 basis points from one year ago.

On a related note, our total funding costs improved 3 basis points linked quarter to 65 basis points.

However, we expect to be able to drive additional improvement in deposit costs.

We have approximately $4 billion of CDs that are scheduled to mature in the second quarter that carry an average interest rate of 1.1%.

There is an additional $5.2 billion at 1.9% that will mature in the second half of the year.

This compares to our current average going-on rates for new CDs approximating 25 to 30 basis points.

Now let's turn to net interest income on slide 7.

Seasonal factors, including day count, along with the residual effect from previously terminated derivatives, reduced net interest income on a linked-quarter basis.

For the quarter, taxable equivalent net interest income was down $22 million, or 3%.

However, the resulting net interest margin was up 1 basis point to 3.09%, which was impacted by declining deposit costs, gains on previously terminated balance sheet hedges and a decline into low-yielding cash reserves at the Federal Reserve.

We are optimistic about the course of net interest income and net interest margin over the balance of the year.

As always, the course will depend on the trajectory of interest rates and prepayment levels, particularly in investment portfolios.

In order to utilize a portion of our excess liquidity, we purchased approximately $3 billion of investment securities during the first quarter, almost $2 billion in agency-guaranteed securities and $1 billion of corporate bonds.

We are focused on ensuring that we can retain flexibility to adjust the size of the investment portfolio in all rate environments if more attractive loan opportunities arise.

We believe these investments will increase the aggregate earnings of the portfolio and also protect the investment portfolio from the negative impacts of higher interest rates.

Consequently, in the first quarter, the remaining excess cash reserves negatively impacted the margin 13 basis points, an improvement from fourth quarter's 14 basis points.

In addition, the impact of non-accruals on the margin declined 3 basis points to 10 basis points in the first quarter.

Let's turn to non-interest revenues on slide 8.

First-quarter non-interest revenues were up 3% linked quarter.

As expected, service charges declined modestly by 3%, or $9 million linked quarter, despite the negative impact of Regulation E and debit interchange legislation.

These results demonstrate 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.

As a result of these changes, we expect to completely mitigate this legislative impact over time.

Mortgage banking revenue was particularly strong in the quarter aided by the government's HARP II program, which is serving to increase refinance volume.

Revenues were up $20 million, or 35% over fourth quarter.

We estimate HARP II will add over $1 billion to our full-year 2012 mortgage refinance volume.

As we evaluate the mortgage refinancing opportunities, we believe our capacity to handle refinancing activity more expeditiously is enabling us to take marketshare.

We anticipate that mortgage revenue will continue to benefit from HARP II in the near term, but will moderate over the latter part of the year.

Moving onto expenses on slide 9, non-interest expenses were up 5% linked quarter.

However, expenses were down 2% year-over-year.

During the first quarter, we experienced a seasonal increase in expenses primarily related to an increase in payroll taxes, as well as an annual subsidiary dividend of $13 million.

In addition, we experienced an increase in pension and 401(k)-related expenses.

This increase was offset by a reduction in certain credit-related expenses, in particular other real estate and held-for-sale expenses.

Combined, these expenses improved $19 million, or 56% linked quarter and this is an area where we are making clear progress.

We also reduced headcount during the quarter and over the past year, we have experienced a decline of 737 positions or 3%.

As we have noted before, we will continue to seek expense savings without compromising prudent investment opportunities or sacrificing the high service levels our customers have come to expect and deserve at Regions.

In fact, this quarter, we are rolling out new technology to our teller platform that will leverage image technology to support a streamlined process for associates and customers.

This will also enhance our cross-sell abilities and allow tellers to interact with customers in a way they were not able to before.

We continue to focus on process improvement, technology investments and improving operating efficiencies.

Looking ahead, we expect overall 2012 expenses from continuing operations, and excluding goodwill impairment, to be slightly down from the 2011 level as a result of our continued and disciplined focus on expenses.

Turning now to our strong capital and solid liquidity on slide 10, as a result of our capital actions and events this past quarter, our Tier 1 ratio at the end of the quarter stood at 14.3% and our Tier 1 common ratio increased by 110 basis points to 9.6%.

Adjusted to exclude the government's preferred investment, the Tier 1 ratio was 10.6%.

At quarter's end, our pro forma Basel III Tier 1 common and Tier 1 ratios were 8.9% and 12.5% respectively and are above the proposed policy minimums.

As a quick reminder, as a result of the Series A preferred stock repayment earlier this month, Regions' second-quarter net income available to common shareholders will be impacted by the acceleration of the accretion of the discount associated with the repurchased shares.

The charge associated with the accretion is expected to be approximately $70 million.

Liquidity at both the bank and the holding company remains solid with a loan to deposit ratio of 79% and cash held at the Federal Reserve totaled approximately $5.2 billion at quarter-end.

Lastly, based on our interpretation, our liquidity coverage ratio is above the 100% Basel III requirement.

Overall, this quarter's results show the significant accomplishments that we have made on several important fronts.

We have substantially enhanced our asset quality.

We have proven that our core business performance is sound and we further strengthened our balance sheet from a liquidity and capital standpoint.

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

Thank you, David and let me close just by quickly recapping the notable accomplishments over the past few months.

We are pleased that a number of significant events are now largely behind us.

We have raised capital selling $900 million of new common stock.

We have completed the sale of Morgan Keegan.

We have repaid the government's preferred investment.

We have made significant strides in addressing our asset quality issues as confirmed by the notable improvement in asset quality metrics.

And we continue to deliver excellent customer service while investing in new technology and process improvements.

As a result of these actions, we can now focus more of our resources on fundamentals and on executing our business plans and growing our franchise.

I am proud of the progress we have made and I believe the second quarter of 2012 marks the start of a new chapter for Regions.

We look forward to a shift in focus where the emphasis will be on profitable and prudent growth.

I am confident that we have the right business plans in place and the talent to execute successfully.

I am also increasingly optimistic about the opportunities ahead, even in what we assume to be a relatively slow growth 2012 economy.

We are committed to taking advantage of these opportunities and delivering improved high-quality results to our stakeholders.

Operator, we are now ready to take questions.

Thank you.

(Operator Instructions).

Jefferson Harralson, KBW.

Good morning.

How are you?

Great to talk to you guys today.

I am surprised to be first.

Okay, can we talk about the ability possibly to have a 1% ROA?

You guys have always had a 1% ROA in the past, but you have a balance sheet that is $19 billion smaller than peak; you have got $21 billion less loans at peak.

Can you get to a 1.0% ROA on this side of the balance sheet with this expense run rate?

Jefferson, what we have kind of guided to is that, over time, we believe we can be in that 1% to 1.2% ROA.

The question is timing and clearly, as the economy improves, our ability to attain that level is more achievable.

We are continuing to look at credit.

We had substantial improvements in credit, but that is going to be uneven and so we need to continue to focus on credit, as well as having our balance sheet work harder for us now that we have received our ratings upgrade and we are outside of TARP.

So we will start working towards that range of ROA that I mentioned.

It's just timing.

Because, Jefferson, as you look at it, we have been in a very defensive posture over the last few quarters from a capital and liquidity perspective and we do believe we are at the point that we can move a little more off of defense onto offense in terms of prudently generating new business.

We do see the opportunities starting to increase for us in our markets.

Obviously, our strengthening position will help us from a competitive perspective.

All right, thanks.

And my follow-up, David, you mentioned you are optimistic about spread income and margin.

Does that mean that you think that most likely they will both move higher from here throughout the year?

Well, we do believe that, because of our deposit repricing opportunities that I mentioned, that our margin will -- you will see improvement in our margin throughout the year.

Okay, thanks, guys.

Matt O'Connor, Deutsche Bank.

Just some follow-ups on the net interest income.

It seems like the securities that you added were done towards the latter part of the quarter.

So I am just wondering what the full run rate benefit of that would be as we think about 2Q and beyond.

Yes, we really haven't given guidance quarter-to-quarter.

What we have said is we expect that, if you look at the year, and it goes back to Jefferson's question really, that we expect our NII and margin to be improved over where we were in 2011.

So that is back-end loaded and it is back-end loaded primarily because of the deposit cost, but also to the point that you brought up, getting the balance sheet working harder for us really didn't begin in earnest until receiving the ratings upgrade and having the TARP repayment.

So you saw little bit of that movement in the repositioning of the investment portfolio.

So it'll take to the back half before you start seeing it.

And as we think out a little bit longer term, I realize the credit rating boost will help and if more come, that will help more.

But if we look at the cost of your long-term debt, it is still pretty high, especially versus your other funding.

And given your low loan to deposit ratio, like how do you just think about remixing the funding over time and what that might mean to the NIM beyond this year?

Well, we have a couple of maturities that are coming up this year and next year.

We will have to -- we continue to watch our credit spreads; they are coming in.

They are still wider than we expect and hope for over the long term.

We do have a pretty low level of long-term debt compared to our equity, especially compared to our peers.

But we will look for opportunities to take advantage of our tightening of credit spreads.

And to the extent we see opportunities to refinance -- in particular, we have one series of the trust preferreds that are 8.8%.

We will be looking at that in particular.

All right.

And then just separately if I may, obviously, credit was better than expected pretty much across the board.

I mean what stuck out to me is the reserve release was quite large and I guess being sensitive that the credit metrics can be choppy, you talked about being uneven and yet you were confident enough to bring down a lot of reserves.

Do you feel like we are past the point where you kind of have two or three good quarters of credit and then there's a little blip that ends up maybe catching some folks offguard?

So maybe we will still be choppy or uneven, but fewer bumps or smaller bumps.

So Matt, I will make a few comments and then I will ask Barb Godin if she'll just add to this.

What we have seen is we had a very good quarter from a credit quality metric standpoint.

Our allowance methodology has been a pretty rigorous process.

Clearly, over the last few quarters, it has been enhanced and strengthened and we are very vigorous about sticking to that.

The metrics all look very positive this quarter.

We do anticipate some level of unevenness, but clearly what we are seeing, absent any unexpected economic shocks, that the credit quality trends will continue to be favorable.

But we are going to stick to our process.

We are going to stay disciplined in the way we look at credits and the way we look at the allowance methodology.

Matt, as we think about the allowance as well, we have been making progress and strides on putting on better quality credits and rolling off those weaker credits.

That too has a positive impact against our allowance needs.

And as it relates to what we expect for further quarters, the only guidance I would give you is let's remember that, for each of the last couple of years in the third quarter, we see a seasonal bump.

There is no reason I wouldn't anticipate that this year, albeit hoping it would be muted from prior years.

But it will be clearly choppy as we come out and as Grayson said, we are going to follow what the economy does.

And Matt, if you look, the most problematic segment of our portfolio has been the investor commercial real estate, down 32% over a year ago.

We ended the quarter at roughly $10.1 billion.

But if you get a little more granular into that portfolio, you see that construction is down over 50% in that portfolio and is now slightly under $1 billion, $955 million.

You look at some of the more problematic groups, the land, single-family and condominium, down 40% year-over-year and all of those components -- land is down slightly under $800 million; single-family is about $800 million; and condos down to $130 million.

So as you look at the makeup and composition of that $10.1 billion, it continues to be a stronger story.

Okay, thank you very much.

Ken Usdin, Jefferies & Co.

Thanks, good morning.

I wanted to ask a quick couple questions on the expense side.

David, can you break out for us what part of the salaries increase was related to pension costs that will stick around for the year versus the FICA and stock options stuff that will tail off?

Yes, let me answer it maybe a different way than you asked it.

If you look at the expense run rate from the first quarter and you try to figure out what is kind of the seasonal component, there is $35 million to $40 million of that number that you would not expect to recur going forward.

So you can put that in your model and that will get you an approximation of the question you just asked.

Okay.

And my follow-up on that is then also credit-related expenses were really nicely lower and I just wanted to ask you to kind of walk us through some color on that and also have we now, in that line, also now gotten back to a nicely lower run rate or could that still be lumpy and episodic?

Hey, Ken, it's Barb Godin; I will answer that question.

As it relates to what we are seeing in our OREO expense, there is less writedowns that we are taking due to appraised values coming in.

We are seeing some bottoming in some of our markets.

In fact, in a handful of markets, we are actually starting to see some rates starting to move in the opposite direction.

Beyond that, we simply just not put as much into our ORE portfolio, so therefore, overall expenses have tailed down nicely and again would anticipate that they should, absent any large moves to ORE, should stay low.

Ken, I would add that we did have some gains in the transactions related to held-for-sale and that is a function of our aggressive writedowns we take.

The market, as Barb mentioned, in some cases, is recovering and we are seeing quite a few buyers come into the market looking for these assets.

So that has helped bolster prices.

I get a little concerned to try to give you too much guidance as to where that could go in the future.

I think we need to be careful that we don't get ahead of ourselves trying to predict that.

So that is one of the uneven things that we want to continue to watch, but our OREO and held-for-sale portfolios have now gotten down to a relatively small level and so the volatility with that shouldn't be that great.

Okay.

And then one just quick final one.

Just coming back to the NII story, I just want to understand that first to second with average earning assets, you have gotten rid of the $3.5 billion of TARP and you've raised the $900 million.

That's a net reduction of $2.5 billion or so.

So do we still have a stepdown to come just from balance sheet size before we then see the second-half growth?

Well, I think averaging can mislead you a little bit.

That is why we put into the prepared comments that our ending earning assets are actually up 2%.

So I think you ought to look at that as maybe a better indicator of where things could trend.

Right, but if TARP was after -- right, but TARP was after the quarter-end.

That is right and so we had the money sitting at the Federal Reserve at quarter-end.

So we utilized our excess cash at the Fed to make that repayment.

Understood.

Thank you.

Betsy Graseck, Morgan Stanley.

Hi, good morning.

A couple questions.

One is on the liquidity pool and the opportunity to redeploy that into securities and loans.

If you could put into effect all the excess liquidity that you hold today into the weighted average portfolio that you have got and securities and loans, what is your estimate as to how much that would improve the NIM?

Yes, Betsy, I think if you looked in kind of round terms, you are talking about a 13 basis point reduction due to that excess liquidity.

Now getting back to Ken's point, we utilize some of that excess cash post quarter-end, so our excess cash is down closer to the $2 million, $2.5 million range today.

And we would look to continue to deploy our excess cash in the most meaningful way.

We also would rather deploy our balance sheet and the loans more so than we have in the investment portfolio.

That grew close to $2.5 billion and we would much rather put it into loans, but we want to put it into loans that have the right risk profile and are properly priced.

So we are continuing to look for those opportunities and we will -- what you will see over time is that we will have more aggressive plays on our balance sheet now that we have our ratings upgrade, in particular looking at our investment portfolio.

Just an example is our deployment of $1 billion this past quarter into the corporate bond portfolio.

It takes a little more credit risk, helps us to meet the extension risk that we have in the investment portfolio from rising rates and those things over time will help us from an NII and resulting NIM.

Got it.

And then separately, I hear the improvements in credit and then I also hear your prepared remarks, comments about volatility and expect some lumpiness or bumpiness.

Is that lumpiness or bumpiness that you are expecting really because you need to say that just for legal reasons?

You're -- obviously, it's unsure, 100% is what's going to happen?

Because the trajectory looks like things are obviously getting better on the credit side.

Well, I think that clearly when you look at the first quarter, we had some very strong improvement in our credit metrics.

I think that we have been in this cycle so long, we will always be -- if we're going to err, it's going to be to the side of caution.

And we do spend a lot of time stress-testing our portfolio and forecasting what we believe the future to be.

But we tend to always sort of anticipate that it could be somewhat uneven or bumpy, as you recall.

And Barb, you may want to add to that.

Thank you.

Betsy, as well, if you think about last year a year ago, I would just point everyone to that where we all felt the economy was moving in the right direction or a better direction and of course, then we had Europe that happened.

(inaudible) that followed that.

So again, we are simply being very cautious as to how we think about the economy.

We would still say it would be in a fragile state.

Yes, I will add one thing to it.

If you look at criticized and classified levels, those are clearly coming down.

We think that is one of the best places, first places that you look in terms of assessing credit quality and those are coming down.

We will be disclosing our potential problem loan number, which is the inflow numbers that we talked about before in the $350 million to $400 million range.

So that is, we believe, showing an improvement.

So I think that we want to be careful with regards to the provisioning.

Did I say the range $350 million to $450 million?

You said $350 million to $400 million.

I'm sorry.

$350 million to $450 million would be our range of potential problem loans.

Right, which that's lower than what you had had a quarter or so ago.

That's right.

All right, thank you.

Paul Miller, FBR.

Going back to the credit quality again, what are you saying -- we know you have a lot of exposure to Florida and other parts in the South.

And we have been hearing that the South is probably less competitive on loan growth and pricing than other regions of the country.

Now you might not see that being in that region, but how would you talk about the competitiveness?

And then also on the follow-up is where is most of the good asset quality improvement coming from?

Is it coming from the state of Florida or other regions that you service?

Well, I'll try to answer that question in a couple of different directions.

I would say one, from a competitive standpoint, obviously, we are operating in 16 states, predominantly in the Southeast.

But I would say what we have seen is some pretty strong competition.

I would say most of that competition has been around pricing, not so much on covenants.

But certainly you have seen some pricing competition as there has been a strong effort by all of our competitors to try to grow loans prudently.

So we are seeing that.

I would tell you when you look at the business side of our balance sheet, most of that growth has been in commercial and industrial lending, predominantly in the upper end of the middle market.

And I would say specifically where we have seen our most success is in what we call specialized industries, which has been asset-based lending and healthcare and energy in particular.

We have seen strong growth in those segments, but I would tell you that has been sort of broad-based across the footprint.

Florida has never particularly been a strong commercial and industrial state, but we are seeing some improving signs in the state of Florida.

I would tell you most of the borrowings tend to be around CapEx.

There is a lot of investment in technology and in equipment that we are financing at this point in time.

I'd tell you, on the consumer side, we are still seeing, as David mentioned earlier, we are seeing very strong growth on the residential mortgage segment.

We had about $1.6 billion in production in the first quarter.

$200 million of that was in the HARP II segment and about 60% was refinancing.

Our refinance to new home purchase is running about 60/40.

We are seeing even stronger pipelines in both consumer and business in the early part of the second quarter.

Indirect auto lending continues to be strong with us -- for us.

I would tell you that obviously pricing has gotten more competitive in that segment as well, but we are still pleased with the spreads that we are seeing.

And you are saying -- you're also -- you talked a little bit about on the mortgage side, on the purchase side, you are seeing an increase in purchase throughout your footprint or just in specific states?

It varies by state.

Obviously, purchase has been more dominant in states like Florida.

We have had a stronger purchase percentage out of Florida just because of the inability for many of those mortgage holders to execute a refinance.

Obviously, HARP II has changed that to some degree and our application volume for the first-quarter applications for HARP II at about 20% of total volume we think it will be stronger in the second quarter.

Guys, thank you very much.

Craig Siegenthaler, Credit Suisse.

Good morning, everyone.

First just thinking about aggregate period-end loan growth here relative to the negative 5 percentage range there in the first quarter.

I am just wondering how do you think this will trend, how quickly will this recover and do you think residential mortgage is going to play a larger role in your aggregate loan growth just given unattractive returns really in a lot of other earning asset classes and also some weak demand in some of your core lending segments?

I would tell you that sort of the way we look at our loan growth if you had looked at first quarter, obviously, as David mentioned a moment ago, you need to look a little beyond the period-to-period averages and look at ending balances.

We actually were a little stronger on ending balances than the average would tend to indicate.

We do anticipate that we will continue to see growth in the segments that I've previously mentioned, but that -- and we will see a more moderate decline in commercial real estate over the year.

Commercial real estate was down about $600 million period-to-period, which is a more moderate decline than we had seen previously.

We think there is still some moderation in that, but still declining.

We do think that, from start to finish, that our loans outstanding will be fairly stable, but you will see and continue to see modest runoff in the first half of the year and modest growth in the second half of the year.

Got it.

And how has your appetite changed for retaining conforming mortgages at this point?

We really haven't had much of an appetite for that.

We have retained very little of our production.

Mostly what we are retaining is the adjustable rate mortgages, as well as jumbo mortgages, which have been a relatively small percentage of our production.

And at this point, we don't see that changing.

We continue to evaluate it from quarter-to-quarter and we were pretty rigorous about that evaluation and at this point in time, we are still holding on that strategy.

David, do you want to speak to that?

We continued to look at that because we know that's -- we are different than our peers.

We can't come up with a compelling argument for us to keep those mortgages -- primarily the 15-year product that we normally would retain, but the spreads we can make in terms of selling it, selling the production versus putting it on our books and having what we think would be long-dated -- pretty long-dated loans that we can take a proxy risk in the investment portfolio for that and have a better liquidity profile for that to be prepared for the loan growth that we really want to put on the books.

So we will continue to look at it, but we don't see that we would change that in the near term.

Great, thanks, guys.

Erika Penala, Bank of America.

Good morning.

My first question is a follow-up to Ken's.

I just wanted to make sure I understood it correctly.

David, are we looking at about an $875 million quarterly starting point for the expense run rate and the main message in terms of PPI improvement if you could keep it stable at that level?

Well, what I said was if you take the existing expense number and back off $35 million to $40 million of that, that is -- that's $35 million or $40 million in that first quarter that should not repeat.

We do believe for the year, which is consistent with our previous guidance, that our expenses should be down from 2011 and of course, that is adjusting 2011 for the goodwill impairment and we are sticking to that.

Got it.

And with regards to your comments on the margin, do you expect the loan yield compression of about 6 basis points that you saw this quarter to moderate or is the margin expansion for the remaining of the year really a function of savings that you could extract from your funding base and also lower cash balances next quarter related to using some of that to pay back TARP?

Our guidance that we are giving you relative to NII/NIM takes all of that into consideration, including other hedges that we have on the books that will expire this year.

So all in, we believe we are going to continue to have improvement in the margin.

I think we saw the change of 6 basis points.

We don't see that necessarily repeating given the nature of how that unwinds in the first quarter.

So you shouldn't extrapolate that.

Got it.

And my last question is on the home equity portfolio.

I am sure you saw larger banks this quarter report an increase in NPLs due to a change in the accounting methodology with regards to classifying or performing first if they are behind -- performing second if they are behind a problem first.

Barb, have you complied with this or reserved for this?

Erika, in fact, we have had to look not only at our own portfolio, but what we service and in total, that number is roughly $3.7 million for home equity that we would need to move into non-accruals.

That would happen this quarter.

We have also taken that as a proxy and used that to look at the rest of the portfolio.

So our anticipation is that there would be an incremental roughly $10 million that could also happen coming from where others have the first and we are holding the second mortgage.

So all in, I would say a relatively immaterial number.

Got it.

Thank you.

Matt Burnell, Wells Fargo Securities.

Good morning, everybody.

We've spent a little time talking about the expense side of things.

I would like to get a little additional color on the fee revenue outlook for Regions.

You've made a couple of comments about HARP helping out the mortgage side of the business for at least the next quarter or two.

I am curious as to where else you might see some benefits in terms of fee revenues in the second quarter and third quarter.

And within that, can you provide any additional color on the ongoing relationship with Raymond James at this point following the sale of Morgan Keegan?

Okay.

Let me try to answer your questions.

First of all, I think from a fee revenue standpoint in terms of non-interest revenues, clearly, the first quarter benefited from a very strong level of production in our mortgage group.

We do not see that abating.

That continues early into the first quarter.

Our pipelines and our applications that we are receiving to date would not indicate that that is abating anytime soon.

So we would anticipate a continued strong quarter in that regard.

On the consumer side, as we have mentioned before, the consumer checking account, we have really been in a transition for several months of migrating our consumer checking account base from basically a free checking offering to more of a fee-eligible offering with hurdles around balances and transaction types.

And we have successfully sort of bridged that transition and starting to see good results from that regard.

We also introduced a number of products into our consumer offerings, pre-paid cards and some money transfer types of activities and check-cashing type of activities that have augmented our service charges.

We continue to introduce products into the consumer suite that will generate some level of revenue, but that are meeting very legitimate customer needs and trying to grow the consumer side of the portfolio.

I would also mention, since we reacquired our credit card portfolio, we are generating pretty strong interchange revenue off of that portfolio, as well as we continue to see growth in the debit card transactions.

We have seen year-over-year growth in debit cards despite all the changes that have been made to that product.

So we have said that we think over time we can mitigate the impact of the revenue challenges we have on NIR and so far, our results are tracking on target or a little better than target.

And if I could, just a follow-up on that specific subject, are you assuming that the Q1 number for your capital markets revenues are basically the peak for the year and that they would begin to come down similar to the trend that you saw last year?

We are not and we think the capital markets group I think had a good first quarter, but we're actually encouraged about what we think might happen through the rest of the year.

And I do think that -- you mentioned earlier the continuing relationship with Raymond James.

They continue to be a good customer of ours, as well as a partner on a number of fronts.

And so we are hopeful that that turns into business for us later in the year.

Okay.

And if I can, one final question on asset quality.

You have mentioned several times you expect credit trends to continue to improve and perhaps not in a straight line.

I guess I am just curious about how you are thinking about where ultimately reserves would fall out relative to the loan portfolio.

Are you looking somewhere in the 2% to 2.5% range or possibly even lower?

This is David.

We continue to monitor closely credit.

We have to all acknowledge that we are still in an unusual environment and the world economy and we try to assess where reserves really end up.

I think we would all agree that reserves are going to be higher than before we entered the crisis.

And so if entering in the crisis you were in the 125 to 150 range, you are probably in that 150 to 200 range and that is the best guess we have right now.

We need to wait and see how this thing pans out, but I know that is a wide margin, 150 to 200, but that is probably the best guidance that we would give you.

And the question is in what time period?

We are at 3.3% today.

In what time period would that shift down?

And that is a harder thing to answer because of the unevenness with regard to the economic recovery.

So in time, I think we can get down to those levels.

Thank you, David.

Brian Foran, Nomura.

Hi, how are you?

I guess just one definitional one.

I mean so when we think about PPNR having bottomed here, is it as simple as just kind of making the expense adjustments you talked about, $35 million to $40 million and the $13 million subsidiary dividend?

And looking out to 2Q, there is a PPNR base that is $50 million higher or so or is there anything else that we should adjust for in the same kind of seasonal element that would either bring it back down or push it back up in terms of looking for a run rate as opposed to guidance?

Yes, I think if you look at the first quarter, that certainly is your starting point with the expenses we talked about.

But you need to be thinking about our deployment of our balance sheet in a more meaningful manner, in putting our excess cash to work, getting our investment portfolio to work, being able to participate in loan syndications now that we have our ratings back that we hadn't had before.

All those help drive earning asset growth and so I think there is something -- there should be more than just taking out those expenses that help drive improvements in overall PPNR.

(inaudible) the investment credit (inaudible) back and having put ourselves in a better position of strength from a capital perspective will allow our commercial bankers to compete more effectively in this market.

And then as I think about that maybe as part of the loan outlook, I know you don't break out run-off versus core loans the way some of your peers do, but is the assumption that loans will inflect this year?

I guess is a prerequisite of that just that the run-off headwinds will slow or does the core loan origination run rate actually need to accelerate from the current levels in order to get to growth in the back half of the year?

I think as we talked earlier, we are experiencing pretty good growth in our C&I book and our pipelines remain strong.

We are very encouraged there.

We do have headwinds, which are continuing a moderation of a decline in investor real estate.

So that will slow some, but still decline and we still have the consumer that is deleveraging, in particular our home equity line of credit book that continues to attrite because of this refinance and/or deleveraging that is occurring.

Also what impacts us versus our peers is our decision not to retain the resi mortgage originations on our books versus selling them into the market.

So as we mentioned earlier, we think if you look at the beginning of the year loan portfolio and you look at the end of the year, you are going to be about flat year-over-year.

We are down about 1% end-to-end this first quarter and we will see a little bit of attrition.

But the back half we expect the growth will take over that and get on a run rate in that second half leading into 2013.

I guess just a last one, I know TruPS isn't a huge number for you, but can you just remind us what you are thinking in terms of timing and also would those be expected to be something that would be -- just cash on hand would take those out or should we build in some kind of replacement debt cost?

Well, we continue to look at that.

We have two issues, a 500 -- roughly $500 million issue at 6.6% and then we have a $350 million issue at 8.8%.

We have put ourselves in position to be able to deal with either one of those.

8.8% is the more likely candidate given where our credit spreads are and I think that if -- a caller earlier had mentioned about our credit spreads.

If our credit spreads tighten like we think they will over time, or hope that they will over time, then that gives us even better opportunity to either take them out from a cash standpoint and/or replace them with cheaper debt.

We still have to maintain our policy of cash at the holding company, which is two years worth of cash to take care of all debt service and dividends and so forth and we are over that policy today.

We will continue to maintain that, which if we took out that piece would put us, depending on how things trend this year, could put us in the market.

But for $350 million, we might be able to take it out for cash.

We will have to wait and see.

Great, thank you.

Kevin Fitzsimmons, Sandler O'Neill.

Hi, good morning, everyone.

Just a quick question on the service charges.

You mentioned how there has been a big impact over time from the regulatory hurdles and you have made changes to offset that.

Is there any additional hit to expect from, for instance, a sequencing change for overdrafts or is that already complete, if you could just comment on that?

Thanks.

Kevin, if you have to -- when you look at the service charge revenue streams that we have, the revenue stream for overdrafts and insufficient funds I think is a revenue stream that continues to be some level of debate over in the industry.

And part of that debate is around posting sequence and part of it is about funds' availability and also parts of it is about sort of different institution stances on waivers and refunds regarding to NSFs.

That revenue stream continues to decline for us and we anticipate that it will still continue to decline for some time to come.

And we are repricing our products and readjusting our business model on existing products in addition to new products to offset that.

We do still have -- we do anticipate that there will be rule changes -- further rule changes regarding this process that we will adapt to and adjust to, but I think it is premature to speculate as to what those might be.

Okay.

Grayson, one just follow-up.

You mentioned a few minutes ago about some of the additional products on the consumer side like money transfer and check-cashing activities and that there is a real need for that.

You made that point.

Are those kind of activities that you run by the Consumer Finance Bureau just to make sure there is no trouble with that down the line or are we just way early on that front to be thinking about that?

I think we are way early.

Obviously, we have had a lot of conversations with our supervisors at the Consumer Financial Protection Bureau, but those conversations are confidential.

But I would tell you that we try to go through a risk assessment on all the products that we introduce.

We try to make sure that they are fair and responsible, that they are treating customers fairly.

I think those are all objectives that all of our supervisors agree with.

But I do anticipate changes in this space and it is just too early -- from my vantage point, it is just too early to call.

Okay.

Okay, great.

Thanks.

John Pancari, Evercore Partners.

Good morning.

Barb, you had indicated that you expect OREO expenses to stay low through the year here.

I just wanted to clarify that.

Do you still expect further decline and you are just being conservative there?

And I guess I have a similar question on the related credit costs throughout the expense base beyond the OREO expenses.

Do you also expect continued declines through the year and into '13?

Yes, John, as long as we are looking at what is happening with real estate values and prices, that is where I am basing my remarks.

That is that we have seen, as I mentioned earlier, some of our markets stabilize, some of the markets starting to improve a little and of course that directly impacts our OREO expense and costs.

So as we see those things getting better throughout the year, hopefully we won't be taking as many marks and our expense will be lower throughout the year.

But again dependent on the economy.

Okay, so what would you say is your total environmental cost in your expense base that could come out as of today?

I believe it was north of $800 million a few quarters back.

So I want to see -- how do you quantify that total amount as of today?

John, that number had been in the $300 million range.

We may be talking about something different on your $800 million, but $300 million, we said over time three-quarters of that would come out.

Just when it comes out is based on improvements in the economy.

Clearly, we have seen that in the first quarter and we think that that continues -- those costs will continue to abate.

It is not just OREO and held-for-sale cost, but it is all the people that we have that manage problem assets for us as well in terms of where we deploy them today and dealing with problem assets to mark would be elsewhere in the organization to help serve customers.

Okay, yes, I might have included some of the legal expenses in my number then.

And then separately, in terms of securities, can you just give us what the durations were of the securities you put on during the quarter and what the yields were approximating?

Well, we had been -- our duration had been about two and half years today.

It is probably closer to three.

We put some corporate debt on the books, not a lot, about $1 billion this past quarter and that duration is in the four to five-year range, which is what drove that duration up.

But we like that asset class relative to the mortgage-backed securities given the volume that we had there.

And the average yields out there put on it?

Somewhere, John, somewhere in the 3.25 range versus 2.50 range if we put on a mortgage-backed.

Great, thank you.

Thank you.

I will turn the call back to Mr.

Hall for any closing remarks.

Well, look, just again, let me thank everyone for your time and attention today.

We certainly appreciate your interest in Regions and we look forward to next quarter's call.

Thank you.

This concludes today's conference call.

You may now disconnect.