Regions Financial Corp (RF) 2013 Q1 法說會逐字稿

Good morning, and welcome to the Regions Financial Corporation's Quarterly Earnings Call.

My name is Paula, and I'll be your operator for today's call.

I would like to remind everyone that all participants online have been place on listen-only.

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

(Operator Instructions)

I will now turn the call over to Mr. List Underwood to begin.

Thank you operator, and good morning everyone.

We appreciate your participation in our first quarter earnings call.

Our presenters today are Chief Executive Officer, Grayson Hall, and our Chief Financial Officer, David Turner, along with other senior members of our management team.

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

Also, let me remind you that in this call and potentially in the Q&A that follows, 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.

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

Thank you, and good morning and welcome to Regions first quarter 2013 earnings conference call.

We certainly appreciate your participation, and respect your time.

We'll keep our comments concise, and move promptly to your questions.

Regions continues to make substantial progress moving forward, with first quarter 2013 earnings reaching the highest quarterly level in more than four years.

Our results reflect continued execution of our business plans, and our focus on capitalizing on our franchise's opportunities.

First quarter 2013 net income available to common shareholders was $327 million, or $0.23 per diluted share, more than double a year ago, and up 25% from the prior period.

In addition, the year is off to a good start by many other important measures.

Loans on our balance sheet hold steady.

Our net interest margin remained stable.

We're growing our customer base.

Our mortgage business, while facing headwinds, is performing well.

Our operating expenses are being managed with discipline and rigor, and our asset quality continues to incrementally improve.

Let's begin with a closer look at the balance sheet.

We remain on track, absent any unknown economic shocks to achieve a low single-digit loan growth this year.

As loans outstanding steady from fourth to first quarter period end, and overall new loan production increased 8% over last year.

This new loan production helped to offset first quarter declines in portfolio outstandings, such as investor real estate and home equity.

The pace of decline in investor real estate portfolio has moderated to the lowest level in three years.

As our pace of de-risking slows, especially in the second half of 2013, we expect total loans outstanding to grow incrementally, marking a very important shift for our Company.

Turning to deposits, we grew checking accounts in the first quarter.

This is the first time in over two years that we've experienced a net increase in core checking accounts since shifting our strategy from free checking to fee-eligible pricing.

We believe this turnaround demonstrates Regions' commitment to customer service, our emphasis on providing products and services that meet customer needs, and preferences, and at a fair price.

Additionally, we continued to improve our deposit mix and further lowered average funding costs fourth to first quarter.

Over the past three years, we have reduced our overall deposit costs by 82 basis points.

So let's discuss revenue for just a moment.

Mortgage banking remained a significant contributor to fee-based income.

And not surprisingly, dipped below fourth quarter's levels.

The quarter over quarter decline reflects seasonality, less robust market activity, and our decision to retain 15-year fixed rate mortgages on our balance sheet.

The HART 2 program continues to be a significant contributor to overall mortgage production at about 20% of our volume.

It is important to note that approximately 80% of Regions' mortgage customers eligible for HART 2 have yet to refinance.

We are pleased with the recent announcement regarding the two year extension of this program.

We have a comprehensive outreach program under way to capture these opportunities, and to assist our customers and their needs.

We did experience a noticeable, but favorable shift in mortgage applications this quarter.

New home purchases now account for almost 50% of the applications, as compared to 35% just last quarter.

According to the National Association of Realtors, the supply of homes on the market has returned to pre-housing pricing levels and is at a four-month supply.

Further positive evidence that the housing market is recovering.

So let's turn our focus to expenses.

In the first quarter operating expenses, excluding special items in the fourth quarter, declined slightly and are on track to meet our expectations for a lower full-year operating cost versus 2012.

The decline in the first quarter is particularly encouraging, given the seasonal increase in payroll related tax expense.

And additionally in the first quarter, we continued to invest in technology that benefits our productivity and efficiency.

The investment is consistent with our commitment to provide new innovative services, and delivery options that our customers want and need.

In 2012, we invested in updating branch systems and platforms.

This year, we're concentrating on upgrading our alternate delivery channels.

For example, there in the first quarter, we enhanced our transaction capabilities at most of our ATMs.

As a result of these advances in technology, over 90% of the transactions traditionally conducted through a branch teller can now be completed at a Regions ATM.

Mobile banking continues to be a rapid growth channel, and a critical area of focus.

Earlier this month, we launched a number of product enhancements that enable our customers to more fully bank with us by using their mobile phone.

Moving on to asset quality.

Trends were broadly positive in the first quarter.

As expected, non-performing assets continued to improve, reflecting ongoing declines in both non-performing loans and non-performing loan migration.

We remain confident the pace of asset quality improvement will continue in 2013.

Finally, we are pleased with our 2013 CCAR results.

And you'll soon see us actions to execute the plan, including implementation of our announced stock repurchase program.

I'll now turn the call over to David for a more in-depth discussion of first quarter financial trends.

Afterwards, I'll return for a few closing comments before taking questions.

David?

Thank you, and good morning everyone.

Since Grayson has already provided a high level overview, I'm going to jump right into the detail.

So let's start with slide 3 on the balance sheet.

At the end of the first quarter, total loan balances remained steady from the prior quarter.

Our commercial and industrial and indirect auto loan portfolios continued to produce solid results.

In addition, we experienced a slower pace of decline in the investor real estate portfolio.

The investor real estate portfolio declined 5% link quarter compared to the previous quarter's decline of 11%.

At quarter end, investor real estate ending balances stood at $7.3 billion, down $2.8 billion from one year ago.

Overall balances in the investor real estate portfolio may fluctuate, depending on productivity levels, de-risking, and payoff activity.

We estimate that we have approximately $800 million of de-risking remaining in the portfolio, a portion of which will be offset by new production.

And then just to remind you, that compares to about $1 billion dollars that we mentioned to you before.

In fact, new production in the investor real estate portfolio has begun to pick up as we see more opportunities to make loans to qualified borrowers consistent with our risk appetite.

We experienced another quarter of solid growth in our commercial and industrial loan portfolio.

Average loans in this portfolio grew 2% versus the prior quarter, and total new and renewed production increased 3% over the prior year.

During the first quarter, we saw a broadening of our commercial loan activity across a well diversified base of industries and geographies.

Consequently, overall business loans increased $268 million link quarter.

Notably, line utilization increased 140 basis points to 44.8% from the end of the prior quarter, and commitments are up 12% from the prior year.

Looking at consumer lending, this portfolio decreased just over 1% link quarter as consumer deleveraging continued.

As a reminder, during the fourth quarter, we began the process of retaining our 15-year fixed rate conforming residential mortgages.

This strategy supports our overall efforts to grow the balance sheet, and effectively manage our exposure to interest rate risk.

This resulted in approximately $180 million of additional loans held on the balance sheet in the first quarter.

Declines in our total home equity portfolio, which includes lines and loans, continue as customers take advantage of opportunities to refinance.

However, we are encouraged by the results in our home equity loan portfolio, as loan production increased 60% over the prior year, primarily due to the introduction of a fixed rate loan product during the third quarter of 2012.

Growth in this product is expected to continue to reduce the pace of decline in our home equity portfolio.

Indirect auto loans increased 6% quarter over quarter, and total production is up 16%, as we continued to expand our dealer network.

At quarter end, we had approximately 2,000 dealers, and plan to add an additional 300 dealers by the end of the year.

Although credit card balances were down this quarter, our production of new accounts was 10% higher than the prior year first quarter.

Currently, our penetration rate is approximately 12% of our households, and we expect this to increase to more than 20% over time.

We have planned a comprehensive marketing campaign for credit cards throughout 2013 to help facilitate this growth.

We were pleased with the progress we made in the first quarter and holding our loans steady, and we expect to see growth in loan production and anticipate that production will outpace attrition by the second half of 2013.

And based on what we know now, we continued to project loan growth in the low single digits for 2013.

And now let's move on to the liability side of the balance sheet.

Deposit and mix and costs continued to improve in the first quarter.

Total average low cost deposits increased $375 million link quarter, and time deposits fell to just 14% of total average deposits.

This positive repricing and mix shift resulted in deposit costs declining 4 basis points, down to 18 basis points for the quarter.

And we have an additional $5.6 billion of CDs maturing in 2013 at an average rate of 93 basis points.

And this compares to our current average going-on rates for new CDs of approximately 25 basis points.

Further, our overall total funding costs improved to 45 basis points, a decrease of 86 basis points over the last three years.

So let's take a look at how all of this has impacted our net interest income.

Net interest income on a fully taxable equivalent basis was $811 million, down 2% link quarter.

And this decline was driven in part by fewer number of days in the quarter, as well as a decline in earning assets.

Total loan yields were down 7 basis points link quarter to 4.14%.

This was primarily related to the impact of a continued low rate environment on the reinvestment rates of higher fixed rate loans that are paying off.

The resulting net interest margin was 3.13%, up 3 basis points link quarter.

Again, this was driven by a reduced day count, which really resulted in 2 basis points of the benefit, and our debt management activities last quarter.

These activities and the decline in deposit costs served to offset the reduction on earning asset yields, which is largely attributable to the low rate environment.

And we continue to expect our margin to remain relatively stable throughout 2013, with potential upside if rates rise.

Let's take a look at non-interest revenue.

First quarter non-interest revenue declined 7% link quarter, primarily related to a decline in mortgage and service charges income.

As expected, mortgage banking revenue was down in the first quarter, but well above historical levels.

And while 2012 was a record year, we still anticipate 2013 to yield solid results.

As mentioned earlier, we started retaining 15-year mortgages on our balance sheet, which will impact mortgage income.

Now you can find a breakout of mortgage revenue on page 9 in the supplement to our press release.

Mortgage loan production was $1.8 billion, an increase of 13% over the prior year.

And mortgage revenue continues to be driven by HARP 2, as approximately 40% of all HARP mortgage applications submitted were from non-Regions customers.

In addition, at the end of the quarter, we purchased servicing rights on approximately $3 billion of mortgage loans, which will help offset some of the mortgage income decline going forward.

Service charges during the quarter were impacted by lower NSF fees, primarily related to seasonality.

As Grayson mentioned, we experienced an increase in net checking accounts, as well as our number of households, which will serve to drive future service charges.

Also, our now banking suite of products continued to grow.

The number of households using these products has more than tripled over the last year.

Almost 60% of these customers are new Regions customers, providing us with additional cross-sell opportunities.

Let's take a look at expenses on the next slide.

Non-interest expenses totaled $842 million, and excluding adjustments in the prior quarter, this resulted in a decline of 1% link quarter.

And during the quarter, we experienced seasonal increases in salaries and benefits, primarily related to an increase in payroll taxes.

Professional and legal expenses returned to a more normalized level, due to the prior quarter benefit of $20 million in reduced legal reserves that we've previously mentioned to you.

We continue to expect that 2013 expenses will be lower than those in 2012, illustrating our commitment to prudent expense management and the generation of positive operating leverage.

Our tax rate for the quarter was 26%, which included a $9 million reduction in tax reserves, as well as a $4 million benefit to the valuation allowance.

Excluding these items, our tax rate would have been closer to 29%, which is in line with our more normalized rate.

Let's move on to asset quality.

We continue to make progress with respect to asset quality.

The provision for loan losses was $10 million, or $170 million less than net charge-offs.

Total net charge-offs were flat link quarter, and net charge-offs as a percentage of average loans was again below 1%.

Both non-performing loans and non-performing assets declined link quarter, 6% and 7% respectively.

In addition, delinquencies also declined 10% fourth to first quarter.

Notably, credit size and classified loans, which is one of the best and the earliest indicators of asset quality, continued to decline, with commercial and investor real estate criticized loans down 9% from the fourth quarter.

Our coverage ratios remained solid.

At quarter end, our loan loss allowance to non-performing loans stood at 110%.

Meanwhile, our loan loss allowance to loans remained solid at 2.37% at the end of the first quarter.

And based on what we know today, we expect continued improvement in asset quality going forward.

Let's take a look at capital and liquidity.

As Grayson mentioned, we were pleased with our overall CCAR results, and The Federal Reserve having no objection to our Capital Management plan, which we expect to implement soon.

Our capital position remained strong, as our estimated Tier 1 ratio at the end of the quarter stood at 12.3%, and our estimated Tier 1 common ratio was 11.2%.

Now based on our interpretation of Basel III, we expect our pro forma Basel III Tier 1 common ratio will be approximately 9.1%.

Liquidity at both the bank and the holding company remains solid with a loan to deposit ratio of 79%.

And lastly, based on our understanding of the new amendments, Regions remains well positioned to be fully compliant with respect to the liquidity coverage ratio.

So overall, this quarter's results are solid, and demonstrate the substantial progress we are making.

And we look forward to continuing to build our momentum.

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

Thank you David.

Well in conclusion, Regions is moving forward and gaining momentum.

We are executing our business plans.

We're capitalizing on our franchise's opportunities.

We're actively managing our strong capital base, and incrementally improving probability quarter to quarter.

Our first quarter results demonstrate some progress we're making on several important products.

And these include prudently and profitably expanding our loan application pipelines, expanding and deepening our customer relationships, lowering our overall funding costs, continuing to stabilize our net interest margin, while at the same time continuing to reduce our overall risk profile, while adhering to disciplined expense management.

We are committed to further progress in 2013, as we continue to prudently work towards maximizing Regions' franchise value.

I'll turn the meeting back over to Liz for instructions for the Q&A portion of our call.

Thank you for your time.

Thank you Grayson.

We are ready to begin the Q&A session of our call.

In order to accommodate as many participants as possible this morning at the top of the hour, I would like to ask each caller to please limit yourself to one primary question and one related follow-up question.

Now, let's open up the line.

(Operator Instructions)

Matt O'Connor of Deutsche Bank.

Good morning Matt.

Good morning.

Obviously you've had some real nice C&I loan growth, and we've just heard from some other banks of pricing pressure and some terms being given.

Maybe you could just comment a little bit on the rates that you're seeing and the underlying asset quality to what you're adding?

Yes Matt, clearly it's a pretty competitive marketplace today.

And, we are seeing pricing pressure within the marketplace.

I would tell you that looking at the data, it would seem to indicate that while the pressure is there we're still holding spread margins slightly above historical rates.

But it does appear that spreads continued to very slowly move downward.

But I would say our numbers seem to indicate holding fairly steady with a bias to the downside.

But we continue to feel like that in our marketplaces and in the segments we're choosing to compete, that we're still able to hold pricing at a pretty favorable point.

In addition, our overall underwriting and structure, which includes pricing, we continue to believe that we are prudently adding to our balance sheet.

And I'll ask Barb Godin.

Barb's with us to sort of give you a little bit of color on what we're seeing coming onto the balance sheet.

Thank you Grayson.

Yes, what we're seeing right now, very happy with the asset quality that's going on the books.

Yes there is some pressure on structure, some pressure on price.

But all in, it's clearly is within our risk appetite.

In fact, below our risk appetite levels right now.

So we anticipate that that book will perform well, both now and in the future.

And then credit quality overall is obviously very good again this quarter.

But anything within the C&I book that caused the jump linked to quarter end charge-offs?

I don't know if it's seasonal or just some lumpiness there.

But just looking at the charge-off dollars in C&I, went up from $17 million to $58 million, down a little bit year-over-year.

But anything that you'd highlight there?

Yes Matt, it's Barb Godin again.

We had three C&I credits, large credits, a total of $39 million.

We had a reserve against them of $32 million.

And again, that caused a little bit of the bump in the release that we saw.

But again, no trend.

It's at the point right now that we're going to see some bumpiness as we move out of the back end of this cycle.

Yes.

I think the C&I charge and also mother nature are always going to be somewhat uneven.

And we saw some unevenness this quarter.

But still, overall, asset quality trends continue to be in the right direction.

Okay.

Thank you very much.

John Pancari of Evercore Partners.

Morning John.

Morning.

On that competition question, do you actually have the average new money yields that you're seeing by product perhaps in C&I and in CRE in terms of what you're bringing on the balance sheet right now?

John, let me ask John Asbury very quickly to speak to that issue.

John runs our Business Services Group, and he can speak more specifically to those spreads and yields.

Yes, thanks Grayson.

Good morning.

Obviously, it depends upon the exact nature of the client with the larger clients who are among the most credit worthy commanding the best pricing.

So you get into mix issues.

I would say typically what you'll see in terms of going on spread to LIBOR in the middle market is going to be something in the neighborhood of, say, LIBOR plus 225 to maybe 250.

It kind of varies.

If you look at the real estate world, it's a little higher.

It's probably within commercial real estate average pricing 260, 275 over LIBOR on those lines.

And you'll see variation up and down, again, depending upon credit worthiness of the client and size.

Okay, that's helpful.

Thanks.

And then in terms of your -- the longer-term loan loss reserve level, you're continuing to see some opportunity there to pull back on the reserve.

And I just wanted to get your thoughts on where the reserve level could end up leveling out.

I know it's at around 240 basis points of loans right now.

So I want to see where that could go to.

Yes John, this is David.

We've talked historically that we thought the reserve, pending -- there's some changes in accounting that are coming.

So ignoring those for the time being, that our reserves would be in that 1.50% to 2% range.

And I know that's a fairly wide margin, and as we get clarity on how things are shaking out, we will refine that.

The question is the time period on when that will get to that reserve level.

And it's really based off, obviously, charge-offs and what's going on in the books.

And we're seeing continued improvement in all of our credit metrics.

You heard about the three credits in C&I.

So our charge would have been lower.

But I think going forward, that we would be -- we expect it to be in the sub-2% range.

But the timing of that, we just can't be as clear.

Okay.

Thank you.

Josh Levin of Citi.

Good morning Josh.

Morning.

If the Basel III rules are adopted as proposed and you have to mark to market the securities portfolio for changes in rates, how much of a capital buffer do you think you'll need for the impact of OCI volatility on regulatory capital?

Yes Josh, we continued to look at that in terms of our modeling.

in just rough numbers, we would be in the 25 to 50 basis points of probably additional capital that we would have to keep to soften any change in market changes, because of the rapid change that could occur there.

Obviously, we're hopeful that certain things get carved out of the final rules.

But right now, as is, that's what the capital impact would be.

Okay.

And have you heard of anything from the CFPB regarding payday lending that might impact any of your businesses?

We obviously, we have a short-term lending product that we offer today, and we've been in close communication with the CFPB to at this juncture there has not been any clarification or guidance come out on those types of products.

We're working with them daily to understand sort of what the direction will be, and we'll adjust accordingly.

We've continued to adjust the products that we offer to be more customer-friendly and continue to continue to try to meet customer needs in that particular part of the segment.

Thank you very much.

Gaston Theron of Morningstar Equity Research.

Good morning Gaston.

Hello, good morning.

Thanks for taking my question.

I just wanted to dig into the expense line a little bit more.

I know you talked about this during your prepared remarks.

But wondering if you can give a little more color the other -- especially the other expense line and how much room do you have to bring that down permanently lower from these levels?

I know you said you expect 2013 expenses to be, to come under 2012, but I'm just trying to, as you continue to move, to improve operations there, I'm just trying to get a handle on what the normalized level is going to look like.

Yes Gaston, we've obviously given guidance on total expenses.

As you get down into a more granular level, it gets a little more difficult.

If you look at those other expense categories, in particular, what you saw in there were OREO and held for sale expenses.

We're seeing some gains on disposition of assets that are in those numbers, and have kept those pretty low.

Of course our held for sale and OREO balances together are less than about $200 million today.

And I'll tell you from an OREO standpoint, that's below historically where we've been.

So we see controlling that going forward as being real important to that other expense line item.

We kind of like to think about our expenses in terms of the top three.

Salaries and benefits, number one.

Occupancy, number two.

And furniture and equipment expense, number three.

And so making sure we focus on and ensuring we have the right number of talented people working for us is something we look at.

We continue to make investments in talent.

We will do that going forward.

We've looked at our infrastructure in terms of branching.

We've reduced branches more since 2007 than any other bank, about 16%.

But nonetheless, we continued to look at branch locations, and we had some consolidation last year of branches, as we did the year before.

And I'm sure we'll have some this year.

And we'll have investments in new branches and new formats.

So, there's really no one big rock that you can look at in terms of expense reduction.

That's why we don't come up -- we haven't developed a branded expense initiative.

It is cultural.

It is built into every expense line item that we have to make sure that we're prudent with regards to expenses.

So I would look at those four, what four or five things that I pointed to in terms of understanding the direction of where our expenses may go.

Okay.

And I'm sorry, and just a very quick follow-up on what you just said.

Regarding branches, is there any sort of target for kind of a year-end level or anything like that, or no?

And just kind of see how it develops?

No Gaston, we continue to be very disciplined and rigorous around looking at our branches in terms of branch activity, in terms of transaction counts, in terms of new accounts opened, as well as looking at the overall staffing in those branches.

We, as David said, we reduced our number of branch outlets over the past three years, the last few years, approximately 16%.

We continue to have fairly -- we still continue to make adjustments to those number of branches, and that develops over the course of the year as our process unfolds.

But, you should not anticipate any large swings in our number of branches, but we're making course corrections as we see the opportunities, and we'll do that every year.

And we'll continue to do it.

Great.

Thank you very much.

Keith Murray of Nomura.

Good morning.

Good morning.

Could you mind touching on duration extension risk and just kind of framing where you guys think you are now versus, let's say, 12 months ago?

I know you've reshaped the portfolio mix a little bit here.

Yes, I -- if you look at our investment portfolio, we have extended duration slightly.

It's just over three years.

We've done a couple things there, though.

We have some new asset classes in the investment portfolio, some new issue CMBS, some corporate's that we didn't have, that we think protects us a little bit on the extension risk.

But you really have to look at our balance sheet in total, and isolating it in any one spot is going to be detrimental.

We are still asset-sensitive, as you see, as you will see in our disclosures.

You saw it in our 10-K.

You'll see it in our 10-Q.

And we continue to be that way, which is why we're to the extent we do have an increase in rates, you should see a fairly sizable improvement in our net interest income and resulting margin.

I think when you look at the loan portfolio, you see we've put the 15-year mortgages on our balance sheet.

But, when you look at the absolute level of that in relationship to the size of our portfolio, it's fairly modest.

The other issue is, if you look at our commercial lending, if you look at small business lending and lower into more middle market, a lot of that is term-based lending with an amortizing loan.

But when you -- the further up you go in that market, the less of that you see.

And today on a dollars basis, still three-fourths of our business and commercial portfolio is variable rate priced.

And so from a duration standpoint, we still think on a loan portfolio, we're holding ourselves in a pretty good position.

Okay.

And then you mentioned that you'd purchased some mortgage servicing assets in the quarter.

Just talk about your appetite there, and do you view that as a little bit of a rate hedge as well?

We do view it somewhat as a rate hedge, but also as an NIR opportunity to generate some additional revenues for the Company.

When you look at it, our servicing portfolio, a little over $40 billion, and, adding $3 billion to that, we think we have the capacity to do that.

Our appetite, I would call our appetite limited, but still have an appetite for that asset and think it's incrementally favorable to our overall operation.

We think we've got a team that's pretty good at that.

We want to make sure that we don't create any capacity issues with that team, but we feel pretty good about where our appetite setting is for that business today.

We're still a relatively small, a very small player in that space.

We're about the 23rd largest servicer roughly, which is about 0.44% market share.

So we're really not that large, but we are good at it.

And we have our team dedicated to this, obviously went through all the issues and have done a great job.

And we like the return profile.

You mentioned the rate hedge.

That's part of it.

The capacity is part of it, too.

And we have the ability to add some even from where we are today.

And so we'll look opportunistically for those chances to improve that portfolio, increase that portfolio.

Thanks for taking my questions.

Betsy Graseck of Morgan Stanley.

Hello, good morning.

Good morning.

I had a question with what's going on with housing in your region and the impact on the NPAs and just delinquencies in general.

I'm hearing that housing has been improving, and wanted to get your take on what's going on, as well as opportunities to further accelerate the reduction in exposure to legacy assets there.

Yes Betsy, I would tell you that we've been fairly aggressive in shedding the stressed assets related to home builders through the cycle, and really have a pretty low exposure to that segment today from a distress standpoint.

I would say what's changed this quarter from last quarter is if you look across our 16-state footprint, a quarter ago we saw signs of housing recovery in a number of markets, but not all of them.

I would tell you it's more widespread today.

We're seeing more signs of recovery more broadly across our franchise footprint than we did.

We're seeing inventory levels that are getting back to very low levels, and we're seeing home builders starting to construct homes again.

So I would say it's more broad.

It's more consistent, and we believe that we're in a position to take a very prudent position of opportunity on that, in the home building space.

I'll ask Barb to sort of talk about the disposition of what distressed assets we still have related to that segment.

Barb?

Thank you Grayson.

We don't have as many assets in that asset class as we previously did, particularly in the distressed environment.

In total Betsy, I look at our OREO balance as an example.

We only have $133 million of those, [briefly] gets to move those relatively quickly and for some decent pricing.

What we moved into held for sale as well, right now, we only have $66 million left in our held for sale portfolio.

The majority of that being turned within a 12-month period.

So we don't see as much coming in the front end either into held for sale or OREO from the investor real estate classes.

We're seeing more on the C&I right now coming in.

And in terms of overall pricing, however, going back to that comment, we are seeing a number of markets across our footprint that have increased in pricing.

South Florida is one example.

We're even seeing the Atlanta market, the Birmingham market, some of our major markets have clearly moved in a positive direction.

Your NIM is relatively strong compared to peers, and there's more resiliency there as we look out over the next several quarters.

Would you consider using that to be a little bit more aggressive on pricing and loan growth generation?

Betsy, we -- our NIM obviously is supported in large part due to our -- the liability side of the balance sheet, first and foremost, our deposits.

So I had mentioned that we have $5.6 billion worth of CDs maturing at a 93-basis point rate going into a 25-basis point rate.

As we think about disposition of those assets, we've had a program for a long time to evaluate every one of those to get our best execution on disposition.

And it's not just about getting rid of non-performing loans and non-performing assets, but it is what is the best long-term play, best play for our shareholders.

And, where we see opportunities to sell, we sell.

When we see opportunities to work out, we keep that.

So we do understand that we could get our NPLs down a whole lot quicker if we just pooled them up and sold them.

But we're not confident that that's the best execution for our shareholders, which is why we hadn't done it.

And Barb, do you have--

No, I think you've hit the nail on the head.

We do evaluate bottoms-up every quarter.

We look at every single loan and look at what the best does come in for our shareholders.

And that might mean holding those loans a little bit longer.

But having said that, if you look at some of our numbers, our actual numbers that we keep more than a year in NPLs has dropped dramatically.

Again, in general, we try to turn our non-performing loan book over in a 12-month period.

Great.

Thank you.

Ken Usdin of Jefferies.

Hello, good morning.

Morning Ken.

My first question, I wanted to ask you about kind of the other side of the net interest income story.

So the NIM stability is certainly helped by a bunch of the mechanisms you've mentioned on the deposit side and on the long-term debt footprint.

But the earning asset balance has continued to shrink, even though it looks like loans have finally in a good way started to stabilize.

So can you help us understand what your outlook is for when you expect earning assets to bottom?

And within that, again, against a stable NIM backdrop, do you expect NII to grow from here?

Yes Ken, we -- what you're looking at on the earning assets included putting changes in cash and some of the liability management that we've had and we'll continue to see some liability management.

We hadn't been specific with those, but we still have opportunities on that front.

So, earning assets, the biggest driver of earning asset stability will be loan growth.

And as we mentioned in our prepared comments, we expect that growth to occur in the low single digits during this year.

The specific timing of that's a little harder, because we still are disposing of some of the assets, and in particular on our investor real estate portfolio.

But we're encouraged with our increase in production and our loan categories, and I think that you could see a slowing of the attrition going forward on earning assets.

And as we put more loans on the books, that's also going to support a higher overall net interest income.

Obviously, we're still a little bit at the mercy of the interest rate environment.

You've seen the 10-year jump around quite a bit in the first quarter.

And so where we are from reinvesting our cash flows off of our investment portfolio is important to us, and it's $500 million a month we have to put to work.

And so, but being able to give you confidence on NII dollars is a little more difficult.

But with the loan growth, we expect the ability to be able to do that is enhanced.

I think if you look, again, trying to say what's different this quarter from last quarter, we still see a modest demand for credit.

That being said, we've seen better diversity of demand.

We're seeing more demand from smaller middle market businesses than we've seen previously.

Again, modest, but better diversity of demand.

Still strong demand in the upper end of C&I.

But, I would tell you that the mix of demand we're getting today, we consider to be an encouraging sign.

Okay, great.

And my second question just relates to operating leverage.

We all hear your comments loud and clear about continuing to move expenses lower, and they certainly are on a great path on a year-over-year basis so far.

But from an efficiency ratio perspective, there's always a little bit of seasonality to think about.

But how do we understand how the inner play between that cost control you mentioned and then the revenue growth that you expect, translate into potential to improve the efficiency ratio?

I'll speak, and I'll let David add to that, his comments.

But, when we think about efficiency, clearly in a low rate, slow growth environment, expense management is just has to be foundational in the way we operate the business.

And we're going to continue to focus on expenses very rigorously.

But if you look at the efficiency ratio, the two sides of that coin, one's expense, the other is revenue.

And quite frankly, when you break our numbers down more granularly, the revenue side of that equation is probably one we need work on more.

The expense side though, we continue to focus on, and we still believe that that will come down.

The first quarter is always a challenging quarter for a number of seasonal issues and a number of day count issues, but we still see the opportunity to improve that ratio going forward with a balanced approach on both sides of that calculation.

Yes I will tell you Ken, that the efficiency ratio, call it 64% and change from a seasonality standpoint has a couple of points in there that work against us in this first quarter.

Even with that, we would like to get our efficiency ratio down into the high 50%s.

And we think in time, we can get there, but perhaps needing a little bit of a rate pickup to get there.

But while we wait for that, our focus is on improving both NII and NIR.

To Grayson's point, revenue is the biggest driver of improvement.

So if you -- as you think through NII, growing loans and having more of our balance sheet, more of our earning assets in loans versus securities.

So today, we have 25% of our earning assets are in investment securities.

And that number should be in the 18% range, just round numbers.

So getting loan growth and repositioning there is really important to us.

We continued to look on the right side of the balance sheet in terms of liability management too, to help us on interest expense.

And then we're also looking at growing our households.

In that we mentioned that in our prepared comments, because it's important to us to continue to add and in particular checking account households to us because it brings us a source of non-interest revenue.

And so we think we can continue to grow NIR through the development of new products and services.

I mentioned the now banking product where we've tripled our customers over the past year.

It's been a great source of non-interest revenue for us.

So continuing to understand what our customers need and want, and developing products and services that meet those needs, and therefore growing our total revenue will be the key to us improving that efficiency ratio and our commitment to generating positive operating leverage.

So it's not just an expense play for us.

It's all about making sure that we can generate positive operating leverage in the long run.

All right.

Great color guys.

Thank you.

Ryan Nash of Goldman Sachs.

Morning Ryan.

Hello Grayson.

How are you?

Just one clarification on the question that Ken had asked.

So, given the outlook for efficiency and some of the expense headwinds that you faced in the first quarter, could we expect to actually see expenses continue to fall from the current level?

We end up -- our commitment has been really kind of year-over-year.

The first quarter had some benefits in it relative to held for sale and OREO expenses.

I think we had some gains in that quarter.

We're continuing to work on those expenses to get them down even further from the first quarter.

But right now, our guidance to you is really a year-over-year basis is as far as we've committed thus far.

Got it.

And then just, just on the investor real estate, I know you noted that production has improved and there's something like $800 million of de-risking left versus $1 billion last quarter.

So implying that there's still some core runoff in the portfolio.

I know you made some positive comments about demand potentially picking up.

So is there -- are you starting to see enough demand on the other side that you could actually foresee this portfolio starting to grow at some point this year?

We have -- it is very close.

I can't -- I don't know that we can claim victory just yet on it.

We were down slightly in the first quarter, about $400 million.

Production is up, pipelines we're encouraged with.

But we still have that $800 million.

The timing of how that gets dealt with is what's harder to tell.

Again, we've looked at giving guidance on what the year will look like, but we are very close to where that attrition stops in investor real estate.

And we believe you will see that in the second half of 2013.

Okay.

And just a very quick follow-up on the back of that, given where we are in the cycle right now, are you expanding your geographic reach in any of your businesses, whether it's in middle market or large corporate C&I or in the commercial real estate business?

No.

We're staying -- we are trying to continue to grow our business within our footprint, and within the businesses that we compete today.

But we have not expanded beyond our footprint, and we've not expanded beyond the products that we offer today.

We don't see doing that at the moment.

Great.

Thank you for taking my questions.

You're welcome.

Thank you.

Erica Penala of Bank of America Merrill Lynch.

Morning Erika.

Morning.

My first question is a follow-up on your margin outlook, David.

In terms of the debt management actions that you did this quarter, could you tell us what specifically they are?

How much is left in terms of debt management actions?

And whether or not what's left is embedded in your guidance for NIM stability?

Let me answer it in a little different order Erika.

First off, I want to be careful about making any implication of any particular debt instrument that we might deal with.

So I have multiple lawyers around me to make sure we don't commit to that.

But I think as you look at our balance sheet and you think about where we are from a liquidity standpoint that doing some liability management makes sense for us.

We have had some of that liability management that you've seen that has been baked into our analysis of NIM since the beginning of the year.

There are additional pieces that we have not disclosed, that I don't want to get in again to the specifics, that have not been baked in to our overall margin guidance.

So, there are potential opportunities to pick up some incremental lift.

I would tell you, it's not a tremendous amount of lift, but there is some positive upside that could be there if in fact we execute.

Got it.

And to follow up, again, this is probably re-asking Ken Usdin's question, but given that outlook, is it fair to expect that earning asset growth will lag loan growth in the back half of the year?

Earning asset growth also gets driven by how we use some of our cash and liability management.

So it's harder to compare earning asset changes to loan growth.

I think the better way to look at it is to think of what the composition of those earning assets will be in the back half of the year versus where they have been, which is obviously more deployment in the loan book than in the securities book as being a big driver.

As we think about overall NIM, we're sitting here at a 3.13%, I mentioned in my prepared comments, that two of those points are related to day count.

So you need to level set there, and we're telling you right now that our margin is relatively stable looking out.

If in fact we can execute on, and it's right to do, to execute on some additional liability management initiatives, then we might have some incremental lift from there.

But again, caution you on, that wouldn't be a tremendous lift.

But it would be incremental.

Got it.

Thank you for taking my questions.

Thank you.

Marty Mosby of Guggenheim.

Morning Marty.

Good morning.

I wanted to just dive in a little bit more to the statement of the C&I broad across geographies and businesses, just to make sure we get a feel for what traction you're seeing in the southeast region.

And where is that real strength coming from?

Well, Marty, as you have -- as you are well aware, the southeast has probably been one of the tougher markets to operate in over the last three or four years.

And I would -- my comment was that what's changed over the last quarter for us is that we're seeing A broader demand from a physical geography standpoint.

We divide up our franchise into a number of different markets, and more of those markets are growing loans this quarter than were last quarter.

In addition, we also divide our customer base up into segments.

And I would tell you for the last several quarters, for example, in commercial industrial lending, we've seen most of that demand for credit in the upper end of that market segment, just purely from a segmentation standpoint.

This quarter, we're seeing more demand in the lower and middle part of that segment, which is an encouraging sign for recovery.

I do think that we're seeing that broadness both on a segmentation basis and on a geography basis.

Clearly, some of the strongest geographies in our business and our footprint have clearly been in the Texas, Louisiana markets.

And for a while, we're to a large degree limited to some of those markets, but now it's much more broad.

Then David, I want to talk a little bit more, we kind of had this conversation last year at this time, about the seasonal impacts.

There's probably $0.02 to $0.03 of givebacks as we look at taxes and security gains and some of the OREO gains that you wouldn't think of as sustainable.

But then there's also the FICA and option expenses, the fees on the service charges or deposits, and the day count and NII.

Could you look at those two things as being kind of generally even-handed in the sense of the givebacks versus the benefit you get from the seasonality?

Marty, I'd tell you, and again staying fairly broad, that we had obviously mentioned our income tax numbers, the $9 million and the $4 million.

So you need to think about that in terms of -- and that's tax, right, so that's $0.01 there.

Right.

And you can look at the traction of our quarter to quarter in terms of payroll taxes that we would have some pickup there.

But we had some favorable held for sale and OREO costs, too.

So it's harder to give you, without giving you specific guidance for the next quarter, which I'm not going to do, but we're trying to -- if you take your $0.23 and start carving out your, those one-offs that we mentioned, we were trying to give you some guidance as to what would not repeat in the subsequent quarters.

But I think you hit the specific ones that you should look at.

It just seemed to me that there's about as much opportunity in the seasonality as in some of the givebacks, and that's all I was trying to kind of think of.

Generally, not trying to forecast the next quarter, but just look at the balance between those two items.

Good comment.

Good comment.

Craig Siegenthaler of Credit Suisse.

Thanks guys.

Good morning.

Can us remind the size of the interest rate swap portfolio the current impact of the net interest margin?

Craig, I don't have that specifically.

Obviously, all that's baked into the overall guidance that I gave you.

But I don't have the pieces of that impact and the maturities.

But we can get that to you.

And when you think about that impact, how is the mix of it towards the debt side, in terms of kind of protecting interest rate expense on debt, and also towards kind of variable rate commercial loans?

Yes, a lot of this -- we have both.

Obviously, we have some pieces in debt that are swapped and some that are not.

And if you look at our overall long-term debt costs, we're right at $6 billion, slightly underneath that.

That after-swap impact is just under 5%.

That's the liability management initiative.

If you just take that globally and think about where spreads are for us today, that provide us an opportunity to execute some liability management to get that cost down.

We do have some swaps on our loan book.

I don't recall anything large rolling off any time in the near term that's going to negatively impact our net interest income and the resulting margin, though.

Got it.

And then just real quick on income crates, I believe the portfolio is about $6.3 billion now.

Can you help us when we think about a trough, expected trough level for this portfolio, as we think of runoff decelerating over the next few quarters here?

Yes, that was a little bit of what the question -- one of the questions we're trying to get at as to when that starts to grow.

And it's a little harder.

The kind of guidance that we were trying to give you is if you take our number today at 7.3% and you think of $800 million of that needing, $800 million needing -- being in a, quote, troubled category of rolling out, our production is increasing.

We're encouraged by our pipelines.

And when that actually shifts and bottoms out Craig is a little hard.

It will be in the second half of '13.

I don't know that you'll see this by the end of the second quarter.

I think you're into the second half before it occurs.

And so that's about as good a guidance as we can give you right now.

And David, the only reason I dissected the two numbers, I just gave you the income CRE non-construction portion.

Is that it looks like the construction portion has already started to grow.

Yes, it's about 7.3% in total.

You were given just the real estate mortgage number.

There's another I'll call it $1 billion dollars in construction.

And you're right, to your point we like the growth.

It's not a lot of growth, but you can kind of see quarter over quarter starting in the middle of last year there was slight growth throughout '13.

We are seeing opportunities there, but that book is still fairly small.

Got it.

Thanks for taking my questions.

Okay.

Jennifer Demba of SunTrust.

Good morning Jennifer.

Good morning.

Just curious, on the C&I growth, could you talk about maybe where you're seeing better demand in terms of industry versus weaker demand?

And I'm curious about your multi-family exposure and how you're feeling about that right now, given how strong it's been recently into the industry.

Well, I'll ask John Asbury to speak to that very quickly.

Hello Jennifer.

Good morning.

So as Grayson and David indicated, I would definitely describe the demand by industry as being pretty broad based.

Energy is probably still among the best, but it's not dominating it.

And there's really no clear kind of one, two, three that are driving most of the growth at this point.

So it is pretty broad-based, materials, commercial services, supplies, some retailing, a very encouraging sign to see that sort of diversification by industry type.

And as Grayson said, we're also seeing a pretty good spread geographically.

In terms of multi-family, we continue to watch.

A lot of new construction activity within multi-family.

We do believe that the fundamentals for multi-family remain strong, and we think that there is room for what is going in and is what is on the books.

Having said that, we watch very carefully the markets for evidence of over-building, including the sub-markets.

One thing I will add that's also an encouraging sign, as we look at new IRE commitments for Q1, multi-family was just about 30% of total new IRE commitments, and that's good.

It used to be that most of the IRE construction, we were financing or providing, was being dominated by multi-family.

So we're now seeing much more diversification by product type, which is also a healthy sign.

Jennifer, it's Barb Godin.

Our actual multi-family outstandings are down on a year-over-year basis from $2.3 billion down to $1.6 billion.

So again, we're being very careful at to what we're putting into that asset class.

Yes.

Lots of equity in those projects, well underwritten.

Thank you so much.

Matt Burnell of Wells Fargo Securities.

Morning Matt.

Good morning.

Thanks for taking my questions.

I guess we've just reached afternoon.

But one question for you Grayson.

In terms of capital return, obviously you exited the CCAR process this year with a positive result I think in most people's minds.

How should we think about two issues, one, moving to a dividend payout ratio that's much closer to the 30% line in the sand the regulators have provided, and the pace of your buybacks, your $300 million buyback program over the next four quarters?

Should we just assume that it's going to be even, or is there some other way you all are thinking about it?

Well, I'll tell you that we were -- first of all, we were very pleased to get a favorable response to our capital plan recommendations and our positioning ourselves to be able to execute those plans over the next several months.

If we sort of look at the progress we've made as a Company over the last couple of years and trying to put ourselves in position to be able to return more capital to our shareholders, we think we've made good progress.

We have been incrementally increasing.

Our action plan is to do that.

I think you should anticipate it, as our Company continues to incrementally improve our financial results, then we will seek opportunities to incrementally improve our return to shareholders.

It is, as you know, it's a much more disciplined process today.

And it's a much more regulated process, and know, we're working through that process and trying to demonstrate that we can effectively manage our capital position.

I think that what you saw this year was a very conservative first step on our part.

And, hopefully over time we can deliver even better news.

I do think that there's opportunities to do that, but we've got to continue to perform.

And that's what we're working hard to do.

Okay.

Thank you.

And David, a question for you.

You've mentioned several times on the call your thoughts around debt management.

And I certainly appreciate the power that that can have for your net interest margin.

I'd like to take that question in another direction.

What thoughts do you have right now in terms of the OLA and any potential debt issuance you might need to do under that?

Yes, we're continuing to evaluate what that OLA impact will be to the regional space.

That's largely, if you look at some of the letters that have been sent in from Congress in particular, are really leaning towards the bigger money center banks.

But that being said, we understand that we have to consider everything that's out there in the industry, including how much debt we might need to carry.

We are looking for better, clearer guidance as to what that ultimately would be.

As we have indeed leveraged ourselves given where our spreads had traded earlier, we thought was the prudent thing to do for our shareholders.

Our spreads have tightened up nicely.

They're obviously never good enough for us, but we'd like them to be -- we are encouraged by where they have moved.

And, as we think about how we capitalized the bank, and I'm talking about long-term debt and equity capital, and our goal is to make that as efficient as possible over the long haul, such that our capital structure is sustainable for any environment that we may have.

Whether we're in a low rate environment or a growth environment.

So we obviously think about that efficiency first, and then we think about whatever regulatory implications there might be from changes.

So to the extent the rules come out and say we need to go in a particular direction, we will adapt and overcome and deal with it.

But right now, we don't have that clear guidance as to what that means for the absolute debt levels for the regional bank space.

Okay.

Thanks for taking my questions gentlemen.

Thank you.

We have gone a bit over time today.

However, we have time for one more question.

Your final question comes from the line of Gerard Cassidy of RBC.

Hello Gerard.

Thank you.

The question I have is regarding the loan loss reserves.

You guys mentioned that you think that the reserves to total loans could fall into that 1.5% to 2% range at some point in the future.

Can you share with us, it seems to me that over the years the regulators have focused on the reserve methodology based on classified and criticized loans rather than a GAAP accounting measure that we all look at, which is reserves to total loans.

Are they still focused on driving or determining your reserve adequacy by the classified and criticized loans, or are they moving to this GAAP measure?

Gerard, I'll start and then Matt or Barb can jump in.

I would tell you that those are elements of the same conversation.

Obviously criticizing classifieds, you heard in our prepared comments, we think now that that's disclosed and available to the public is an important view of what credit quality is at any financial institution.

We use that, which is determined by our internal ratings as they are at every other bank, as an indicator of what embedded loss would be based on how those loans migrate through our process.

I don't believe the regulators have any stipulated percentage of criticizing classifieds.

That may have been a way they looked at it globally in the past, but I don't think that's what they're getting at it today.

I think they're looking for all of us to have a robust process that's documented and repeatable that provides both our shareholders and to them as our regulators what an appropriate allowance should be.

What happens is the coverage ratios, we compare those among peers just to give us an indication as to how we shake out.

But one should be very careful about comparing peer ratios, because we all have different loan books.

We all are in different geographies, different loan types, and I think that what you ought to look at is how is our loan credit quality migrating from quarter to quarter, which will give you a better indication of what our ultimate reserving needs to be.

Well said.

Great.

And then the second question has to do with the return on equity.

I know you guys provided us with a return on tangible common equity for the period, but whether you use that ratio or a stated return on equity, which we calculated to be in the 8% range this quarter, what if you had to choose one or two metrics that will drive that ratio, the return on equity numbers higher, which would then I think suggest your stock price could exceed stated book value at some point in the future, is it your loan to deposit ratio?

Is it interest rates going up 200 basis points?

Is it a lower efficiency ratio?

Better credit quality?

I know all of the above will help, but if you had to pick one or two items that really will drive that ROE higher to get the stock valuation higher, what two would you guys choose?

Would you -- I'd like to start with net income, be kind of a good one.

Okay.

I think that underneath that is probably what your question is.

And what really will drive your income higher, and I'm talking absolute dollars.

And so as Grayson mentioned and I tried to support, that for us, growing our revenue base is important.

And when you are essentially a spread bank, 63% of our revenue being in NII, you think about what changes there.

So you think of liability management.

You think about optimizing the left side of the balance sheet, more loans versus securities, growing earning assets, in particular in loans which is what we're all about.

So getting our NII up and getting our resulting margin close to what it had been in the past, which was in that $335 million to 350 million range.

Okay you think of NII and what can grow that revenue, and you think of adding new customers and new products and services.

So you've seen that come out of Regions quarter after quarter, and we will continue to stay focused on that.

So really, Gerard for us, to get the kind of returns that we would all be happy with is really about growing our revenue base, and of course we all recognize we're challenged in the low growth environment.

So while we're here, we're going to do the things I just talked about, while prudently managing our expenses.

Such that we generate positive operating leverage.

Such that we can have a reasonable return to our shareholders, until one day the rate environment changes.

Thank you.

Thank you.

Well listen, thank everyone for your time this morning.

We certainly appreciate it, and we will talk to you next quarter.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.