Regions Financial Corporation Q1 2009 Earnings Call Transcript

| About: Regions Financial (RF)

Regions Financial Corp. (NYSE:RF)

Q1 2009 Earnings Call

April 21, 2009; 11:00 am ET


Dowd Ritter - Chairman, President and Chief Executive Officer

Irene Esteves - Chief Financial Officer

Bill Wells - Chief Risk Officer

Mike Willoughby - Chief Credit Officer

Barb Guidon - Head of Consumer Credit

List Underwood - Investor Relation Officer


Chris Mutascio - Stifel Nicolaus

Kevin St Pierre - Bernstein

Brian Foran - Goldman Sachs

Scott Valentin - FBR Capital Markets

Christopher Marinac - FIG Partners

Greg Ketron - Citigroup

Jennifer Demba - SunTrust Robinson Humphrey

Ken Usdin - Banc of America-Merrill Lynch


Good morning and welcome to the Regions Financial Corporation’s quarterly earnings call. My name is Abigail and I will be your operator for today’s call. I would like to remind everyone that all participants’ 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 before Mr. Ritter begins the conference call.

List Underwood

Thank you, Abigail and good morning everyone. We appreciate your participation on a very busy earnings day.

Our presenters this morning are Dowd Ritter, Chairman, President and Chief Executive Officer; Irene Esteves, our Chief Financial Officer. Also joining us and available to answer questions are Bill Wells, our Chief Risk Officer; Mike Willoughby, our Chief Credit Officer; and Barb Guidon, our Head of Consumer Credit.

Let me quickly mention our presentation format. We have prepared a short slide presentation to accompany Irene’s comments. It’s available under the IR section of For those of you in the investment community, that dialed in by phone, once you are on the Investor Relations section of our website, just click on via phone player and the slides will automatically advance in sync with the audio of Irene’s presentation.

A copy of the slides will be available on our website shortly after the call. Our presentation this morning will discuss Regions’ business outlook and includes forward-looking statements. These statements may include descriptions of management’s plans, objectives, or goals for future operations, products, or services, forecasts of financial or other performance measures, statements about the expected quality, performance, or collectability of loans and statements about Regions’ general outlook for economic and business conditions.

We also may make other forward-looking statements in the question-and-answer period following the discussion. These forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially.

Information on the risk factors that could cause actual results to differ is available from today’s earnings press release, in today’s Form 8-K, and in our Form 10-K for the year-ended December 31, 2008. As a reminder, forward-looking statements are effective only as of the date they are made and we assume no obligation to update information concerning our expectations.

Finally, let me also mention that our discussions may include the use of non-GAAP financial measures. A reconciliation of these to the same measures on a GAAP basis can be found in our earnings release and related supplemental financial schedules.

I will now turn it over to Dowd.

Dowd Ritter

Thank you, List. We appreciate all of you joining us for Regions first quarter earnings conference call.

As we announced a little earlier this morning, Regions earned $0.04 per fully diluted share in the first quarter, a recovery from our fourth quarter 2008 loss. We’re extremely pleased with this quarter’s strong deposit growth in account production as well as our account retention and continued progress on the credit front.

During the quarter, we continued to de-risk the balance sheet aggressively dealing with problem credits, and at the same time improving our tangible common equity to assets ratio to 5.41%. Our Tier 1 capital ratio remains strong at an estimated 10.37%.

At the same time, we remained firmly focused on serving our customers needs, making approximately $15.7 billion in new and renewed loan commitments during the first quarter of 2009. We originated some $2.8 billion in residential mortgages, reaching the highest quarterly level in the company’s history, and resulted in a doubling of mortgage income to $73 million versus the prior quarter.

Additionally, we opened over 243,000 new retail and business checking accounts, a record quarterly amount, while the ratio of checking accounts opened to those closed improved 26% compared with the same period a year ago. These results drove a 4% increase in both low cost and customer deposits. Morgan Keegan continued to demonstrate growth, adding more than $1 billion in new assets under management during the quarter.

Furthermore, we are providing these and all customers with great service. In 2008, we focused our quality performance activities on improving the customer experience and the results thus far have been outstanding. Our recent customer satisfaction scores reached an all-time high, well into the top quartile for retail banks, reflecting continued success in meeting the needs of customers and delivering higher customer service levels.

There is no doubt that establishing new relationships, and at the same time, strengthening the existing ones will be a key advantage as this economy recovers. I am not about to suggest that the tough times are behind us because they are not. This economy remains weak, pressuring Regions overall revenues which were disappointing in the first quarter, and although our net loan losses and provisioning declined sharply from fourth to first quarter, they remain elevated and non-performing loans remain stubbornly highly, all of which Irene will discuss in just a few minutes.

It is clear however from the underlying business performance that we are taking the necessary actions to ensure that regions were not only successfully managed through these difficult days but be prepared to take full advantage of this economic recovery when it does occur. I am encouraged by recently announced government programs that are aid in stabilizing housing, unfreezing securitization markets, removing problem assets from bank’s balance sheets, and improving liquidity in the mortgage securities markets.

As more information about these plans become available, we will closely assess how, or even if we will participate in these programs, if they might benefit Regions and our customers. Meanwhile, our own customer assistant program has already produced benefits for Regions and our customers experiencing difficult tasks.

To-date, we have modified over 5,500 mortgages for customers, enabling those customers to remain in their homes, including more than 1,100 mortgages in the first quarter alone. From an economic environment standpoint, although it is too early to say we have bought them and we’ve recognized the credit quality, we will obviously lack the recovery as usual.

We are beginning to see some positive signs. For example, the Florida Association of Realtors most recent data shows that existing home sales have risen now for six consecutive months in year-over-year comparisons. Meanwhile, Regions is aggressively and successfully dealing with present problems, while preparing for economic recovery.

We are reducing our stressed portfolios of homebuilder, Florida second lien home equity and condominium credits, which declined nearly $340 million in aggregate during the first quarter.

Importantly, we’re focusing on what we can control in our businesses such as expenses which declined for the first quarter. We’re also building customer relationships as illustrated by the first quarter’s growth in customer deposits and accounts. We’re taking advantage of opportunities to strengthen our franchise in key markets by way of small FDIC-assisted bank acquisitions, such as the February assumption of approximately $285 million of FirstBank Financial Services just outside of Atlanta in Henry County, Georgia. We’re actively managing our balance sheet to ensure liquidity and capital strength.

Let me now turn it over to Irene for greater detail.

Irene Esteves

Thank you, Dowd. Let’s begin with the summary of results for the quarter. As shown on slide 1, first quarter earnings totaled $0.04 per diluted share, which I mentioned were not impacted by the recently announced fair market value accounting rule changes. In a continuation of a recent trend, customer deposit grew $3.8 billion, including a $1.1 billion or 6% rise in non-interest bearing deposits.

Ending loans were down slightly during the quarter. I’m glad to report the production of residential mortgages, most of which were sold hit a record $2.8 billion level this quarter. In fact, first quarter mortgage application volume was up 80% from fourth quarter of 2008, and was our biggest mortgage application quarter ever.

With respect to credit, net charge-offs were down to 1.64% from the fourth quarter spike of 3.19%. As we said at the time, the fourth quarter was largely driven by marks on loans moved to held for sale or sold.

This quarter we recorded a $425 million provision for loan losses, $35 million above net charge-offs, reflecting continued weakness in housing valuations and the overall economy. Non-performing loans increased $589 million in the quarter. Our average of allowance for loan losses to non-performing loans ended the quarter at a multiple of 1.13 times.

During the quarter we sold or had pay downs on our held for sale portfolio of $65 million. On the sales, we recorded a profit of $4 million, showing that our marks last quarter when we moved them to held for sale were adequate.

Regions’ net interest margin declined 32 basis points to 2.64%, reflecting the impact of falling rate on our assets under the balance sheet, the effects of the prime LIBOR rate normalization, as well as the full quarter impact of fourth quarter issuance under the TLGP, in essence an incremental cost of liquidity.

With the couple of exceptions, non-interest revenues were negatively affected by broad economic pressures. Importantly, we achieved targeted expense reductions, reducing total non-interest expenses by 10% from the previous quarter, excluding fourth quarter’s goodwill and MSR impairment charges. Lastly, capital remained strong as evidenced by our tangible common ratio of 5.41% and an estimated Tier 1 ratio of 10.37%.

We turn to credit. Slide two shows that our most stressed portfolio residential homebuilders, home equity second liens in Florida; and condominiums, dropped another $336 million in the first quarter. Stressed assets currently make up about 9% of their total loan portfolio, down from 13% at the beginning of 2008. This represents a $3.4 billion decline in the last five quarters.

Slide three highlights the substantial progress we have made over the last several quarters working down our homebuilder, land and condo portfolios, especially in hard-hit geographies such as Florida and North Georgia where unemployment levels are very high.

For homebuilders, overall exposure has dropped by $3.1 billion or 42% since the beginning of 2008. Our land portfolio, some of which is a subset of the homebuilder balances, has been reduced as well, dropping by $2.6 billion or 41% since the merger. Condo exposure continues to decline and is now $850 million of which approximately $460 million is in Florida where stress was most acute.

However, we’ve seen some signs of condo stabilization recently. For example, the Florida Association of Realtors most current data shows a 15% gain in statewide sales of existing condos, continuing a trend in recent months. The takeaway here is the nature of our problem credit hasn’t changed. We’re focused on resolving them and we’re maintaining a conservative credit discipline.

Let me give you a quick perspective on housing across our footprint. The government’s housing price index is a broad measure of average price changes in repeat sales or refinancing on the same properties. This slide illustrates an important point.

While prices have declined precipitously in Florida, as indicated by the red lines, prices over the remainder of our footprint are holding relatively steady. Contributing heavily is Florida’s high and rapidly rising unemployment rate, which recently stood at 9.4% as compared to 8.5% for the US as a whole.

Slide five is an important one for understanding our loan loss allowance levels over the last several quarters. Most of the large increase in the fourth quarter’s allowance level reflects the losses inherent in our loan portfolio at yearend, including the loans which have not yet migrated to non-performing status.

As expected, these loans increase. From fourth to first quarter they increased by $589 million, excluding loans held for sale. Also, note that the coverage ratio or allowance for loan losses divided by non-performing loans was 1.13 at the end of the first quarter.

Our current period allowance for credit losses of 2.82% of loans incorporates not only up-to-date asset valuations but our estimate of portfolio loss content using appropriately distressed economic assumptions.

Our next slide gives you some perspective on credit cost, which we have defined here as net charge-offs plus other real estate losses plus any provision over net charge-offs. In total, net charge-offs were an annualized 1.64% of average loan, down from fourth quarter’s 3.19% level, which was inflated by our decision to sell or move to held for sale over $1 billion of NPAs.

It’s noteworthy to remind everyone that our marks on transfers to held for sale have been validated to some extent since the first quarter sales from our held for sale portfolio were closed at a $4 million net gain to carrying value.

Stressed portfolios continue to explain the bulk of loan losses accounting for $143 million or 37% of first quarter charge-off, while the assets account is only 9% of our portfolio. Notably, there was an increase in home equity charge-offs to an annualized 2.38%.

The deterioration was largely centered in our Florida portfolio, which is being negatively effected by Florida’s near double-digit unemployment rate and significant housing price depreciation and if you exclude Florida from our results, all other net charge-offs for home equity were less than 1%.

Looking ahead, net loan charge-offs are likely to remain at elevated levels over the next several quarters given a weak economy, housing price pressures and rising employment.

Slide seven shows that while total NPAs rose, inflows of new NPAs remained relatively stable. Due to the aggressive moves in the fourth quarter to sell assets or move them to held for sale, there was a dip in non-performing assets. While NPAs rose in the first quarter, it’s important to note that the increase was not due to significantly higher inflows, but from a decrease in the linked-quarter levels of loan sold or moved to held for sale.

While the bulk of charge-offs and problem assets are still concentrated in our stress portfolios, we are closely monitoring our entire portfolio, especially commercial real estate. Thus far, we haven’t seen substantial deterioration even in segments such as retail and hospitality, and as detailed in our earnings supplement, Regions commercial real estate portfolio is well diversified by product type.

If I move now to our loan balances, they were down 3% linked-quarter or $2.5 billion. As Dowd pointed out, we are actively lending, nonetheless, we have experienced $1 billion drop in commercial industrial loans, largely reflecting remarketing of the RDM balances early in the first quarter.

We also realized $1.6 billion reduction in construction loan as projects were completed and converted to completed real estate loans. On the consumer side, residential first mortgage production activity was up significantly, spurred by the favorable rate environment. However, most of this production is sold in the secondary market.

Slide nine shows the change in our funding base since last quarter. Of note, total customer deposits grew a solid 4% on average in the first quarter, reflecting strong checking in money market growth. Positive results for these categories were driven by the introduction of new consumer and business checking products and money market rate offers.

Importantly, interest rate deposits grew this quarter by $1.1 billion or 6%. Savings balances were up as well as we expect this trend to continue since we’ve seen pickup in new checking customers who are also opening a savings account, allowing us to leverage a growing culture of saving.

Turning to revenues, our net interest income declined $116 million for the first quarter, primarily to the net interest margin dropping 32 basis points. To a large extent, the drop reflects the impact to our asset-sensitive balance sheet, our declines in short term interest rates, which caused us about 6 basis points, as well as normalization of the prime LIBOR spread, the equivalent of 15 basis points.

These two items explain 21 of the 32 basis point decline. Another 7 basis points is due o the full quarter impact of our TLGP issuance in December of 2008. The remaining 4 basis points variance is due to lower loan volumes and growth in lower spread deposit categories, partially offset by better loan spreads on new and renewed loans.

Our non-interest revenues were $364 million higher than in the fourth quarter, however, excluding the first quarter SILO transaction related income and securities gain, non-interest revenues were down slightly quarter-to-quarter.

In the securities sale, we sold $656 million of treasuries at a $53 million gain and we reinvested the sales proceeds in US government agency mortgage-backed security. There was minimal net duration change resulting from this transaction.

The unwinding of SILO leveraged lease transactions had little impact to net income. The accounting results in a large increase in non-interest revenue, about $323 million, and almost as large offsetting taxes of $315 million.

While partly seasonal, non-interest revenues certainly reflect the general economic downturn. Nonetheless, certain categories did reflect relative strengths, including mortgage income, which was up $39 million or 114% versus the fourth quarter level. Conversely, service charges dropped $19 million or 7%, largely reflecting lower customer transaction volumes, spending levels and seasonality.

Brokerage income declined about 10% linked quarter. As a driver of brokerage income, let’s look at Morgan Keegan in more depth. There is no doubt that the brokerage business is feeling pressure, but Morgan Keegan is weathering the conditions well. The fixed income capital markets division followed up last quarter’s strong showing with its second consecutive quarter of revenues in excess of $100 million. In a testament to its strength, this division moved up to the ace spot in a national ranking of Municipal Bond Underwriters this quarter.

Other areas such as private client, equity capital markets and trust reflect environmental conditions, including the effects of lower asset valuation. Offsetting the impact of market-driven value declines, we’re pleased with the influx of over $1 billion of net new customers assets, mainly associated with the recent addition of 60 new financial advisors. In addition, we’re keeping our eye on the ball with respect to efficiency. While we’ve added new financial advisors, we have reduced other staff.

Lastly, let me give you an update on recent arbitrations, results involving Morgan Keegan. Today, almost 90% of the arbitrations have been resolved or dismissed with no claims paid. Among all claims resolved or withdrawn to-date, resolutions of these arbitrations have averaged only $0.0135 for every dollar claimed.

Importantly, all judgments to-date have been based on individual brokerage sales practices and not against fund managements. As regards to class action suits, two have already been dismissed and none have been certified.

As I mentioned, mortgage activity has been especially strong of late. Here’s a monthly picture of what rates and mortgage application volumes have done since September. Driven largely by government purchases and mortgage-backed securities, rates have been very attractive since December, leading to record close volumes of $2.8 billion in the first quarter, driving a doubling of mortgage income to $73 million versus the previous quarter.

While market share data is difficult to come by in real-time, we know we picked up strong market share in 2008 and we believe that trend will continue for 2009. Non-interest expenses declined 10% linked-quarter, excluding fourth quarter’s goodwill impairment and mortgage servicing rights charges.

During the first quarter of 2009, we began accounting for MSRs at fair value and hedging volatility. Therefore, beginning this quarter, there are no MSR impairment recapture related amortization expenses. The impact of the fair value charge and the relative hedge now flow through the mortgage income and was less than $1 million for the quarter.

Notably, salary and benefit costs were down $23 million or 4% as lower commissions and incentives more than offset the annual seasonal rise and FICA and benefit expenses. Expenses also reflect lower professional fees and a $4 million net gain on the sale of non-performing loans held for sale.

Improving our operating efficiency remains a priority. All-in, we continue to target a 2% to 4% reduction in total non-interest expenses before any special assessments by the FDIC. I will also remind you that we recorded a full quarter’s worth of dividend expense on our CPP preferred stock this quarter equivalent to $0.07 per share compared to $0.04 for the seven weeks that was outstanding in the fourth quarter.

Switching to capital, our regulatory ratios remain comfortably well above the well capitalized minimum with our Tier 1 ratio of 10.37%. On a tangible basis, we picked up 18 basis points to 5.41%. Also, you may have seen last week, we just reduced our dividend to $0.01 per quarter, which will conserve an additional $250 million of capital annually.

We’re also in very good shape from the funding and liquidity standpoint as we tell on slide 16. For example, customer core deposits are growing and now fund 66% of total assets, up from fourth quarter’s 59% and. Although we are not reliant on overnight funding markets, this source is certainly available if there is a need for short term funds. Liquidity continues to be strong, totaling $42 billion, including $22 billion of secured line.

Wrapping up, these are clearly challenging times, however, we are confident in Regions’ ability to deal today’s challenges as well as take advantage of future opportunities. We continue to de-risk our balance sheet, maintain strong capital allowance levels, keep liquidity healthy, proactively manage operating expenses and focus on strengthening customer relationships through superior service and product enhancement.

With that, I’ll ask Abigail if we could open it up for question.

Question-and-Answer Session


(Operator Instructions). Your first question comes from Chris Mutascio - Stifel Nicolaus.

Chris Mutascio - Stifel Nicolaus

I was just looking your slide seven and I appreciate the input on the inflows of non-performing assets. I suppose you’re giving the sales you took down in the fourth quarter.

I want to try to get a little more flavor. When you look at the reserve, I guess, your argument would be that you’ve written down some of these things enough and that’s why the reserve build this quarter was only $35 million with NPAs up over $600 million.

When I look at that chart there for non-performing assets, and as it relates reserve build, do you also take into consideration increases and things like the loans that were 90 days past due and the restructured loans that occurred in the quarter, because if I think if I look at those two numbers they were up sequentially about $510 million or so in the quarter?

Should that go into the reserve calculation? In other words, should we have build the reserve a bit more than we did given the fact not just NPAs were up, but also maybe a pipeline of NPAs could be coming in the future with the restructured loans and 90 days past due?

Bill Wells

This is Bill Wells. There are several questions in there, and I’ll try to help answer them as best I can. First thing, I always think about some of the facts. As Irene had mentioned, there are really three portfolios that have given us trouble over the past 16 months. Remember, we are 16 months into this. That’s residential condo and home equity and two geographies, Florida and Georgia.

So we always keep that in mind, as we’re looking through our portfolio. When you do that, think about this, our Atlanta residential condo portfolio has gone decreased from about a 1.3 billion to little over 700 million, so you have to factor in how your exposures have come down over time.

Also remember that as Irene had mentioned during the fourth quarter, we did make a large provision anticipation of the non-performing loans coming through. When I look at the large non-performing, they are really coming out of those two product lines of residential and condo, the majority of them.

Also remember, there are reserve methodology that you spoke of is really a very conservative view and has been consistent over well really since about four years that I have been at the company.

The other thing is we look at it, we look at our ratios. We look at large problem credits. We look at our different pools on the restructured loans that you are talking about mainly those were coming out of our customer assistant program and the residential mortgage area.

So yes, we do factor that in, as we look at our methodology. We feel comfortable about where the reserve is. That’s when we went through the analysis and we thought that based on what we see out on exposures, on problem asset migration that we felt good about our coverage ratios with additional $35 million. I’d also add we always have third-party reviews coming after us, looking over us including our external accountant.

Mike Willoughby

Bill, if I could just mention, this is Mike Willoughby, on the TDRs, the recidivism there is about 12%, which is as compared to others restructured consumer loans is extremely good.

The other comment I would make is that on the over 90, the business services increased in particular which is about half of that, relates to a couple of large credits that are going to be current this quarter.

So when you look at business services increases, our policy is to put loans on non-accrual when they hit 90 days, unless they are well secured in the process of collection. So when you look at the business services piece, those are not what we would expect to migrate to non-performing.

The consumer part has a lot to do with the additional foreclosure in Florida and some other states. So I hope that helps.


Your next question comes from the line of Kevin St Pierre - Bernstein.

Kevin St Pierre - Bernstein

Just may be to get a little bit further, get a little more specific, it’s a follow-up on Chris’ questions. Could you tell us of the 1.6 billion or so of non-accrual loans, what the portion that is being treated with FAS 114 is an accumulative impairment charges on those loans and if we could get even more specific about the 959 in CRE loans?

Bill Wells

Well, let me first start on the FAS 114, what we do is we look at everything over $2.5 million and go to a very detailed process about looking in our portfolio and determining what is the valuation and what is appropriate reserve along those lines. Mike, if you might want to add a little bit more.

Mike Willoughby

As you would expect this quarter, our FAS 114 number is up and that has to do as you might expect last quarter that it was down just because of the asset sales or marks and moving to held for sale. So, we’re about 200 million approximately in FAS 114s.

I can’t give you the mark, but let me explain to you how that works. We get appraisals on non-accrual loans. You require it under regulations, and I think GAAP as well to get them at least annually. We get them every six months. So every six months we actually will mark our non-performing loans to market, which is relatively aggressive. Most of our peers do it annually.

The second thing would be that we take in addition to that a FAS 114 reserve. So when you look at the mark answer, you got to go back and look at the legal balance, you can’t look at book balance because we’re much more aggressive than some of our peers on taking losses relative to these.

So, in addition to that, we’re also looking at what we would expect the holding period to be. We’ll look at what we would expect other costs to be, and we will add those and then discount it and that’s how we come up with our FAS 114.

Bill Wells

I also think you have to, given consideration how we handle our held for sale also too, kind of tell you about where we are in some of the 114 valuations. Last quarter we had a very significant strategy of disposing a lot of problem assets, well over $1 billion and that mark was broke at about $0.50 on that portfolio.

We’re looking at loans coming through now. We have about 30% to 35% more. So that tells you a little bit about what we’re seeing, expectation of quality, I know they’re non- performing loans, but we don’t see the severe wall side that we had seen earlier. That shows what we’ve been able to sell a little bit of these problem assets for gain.

Kevin St Pierre - Bernstein

So that $200 million then is $200 million of the $1.6 billion in non-accruals has been impaired.

Bill Wells

Well, look at it, Kevin, is we’ve got about $1.6 billion in non-performing loans. We go part of that. We go through at its best 14 allowance overview that you have to look at. Then we have about another $280 million in OREO or repossessions, and then about another $400 million in held for sale. So that’s our total non-performing assets. Everything has a different way of looking at it. The reserve is really what the non-performing loan is.


Your next question comes from the line Brian Foran - Goldman Sachs.

Brian Foran - Goldman Sachs

I guess there is lot of questions about what the appropriate level for capital for a bank is and I guess we’ll find out with the stress test result to some extent, but if you are asked to strengthen your capital ratios, when you look across the different options for how you might do that from business sales to equity issuing to the Cap program to other options you might have deleveraging, what option in your mind is the most attractive or the most likely if you were required to strengthen capital ratios?

Irene Esteves

Well, as you might imagine, we’ll tell you that our capital levels are strong and the quality is very good with our high TCE. So we feel we have a strong capital starting point. If there is a need coming out of the regulatory reviews, we’ll work with our regulators on determining a course of action, but we’re not ready at this point to say what we would do under those scenarios.

Brian Foran - Goldman Sachs

I guess secondly, one of your competitors was pretty explicit about feeling like Florida and Atlanta were bottoming early stabilizing and potentially have hit a bottom already. You made some comments about Florida, but I guess more explicitly, do you feel like Florida and Atlanta are at a bottom right now or do you think there is still more deterioration that come in those markets from a housing kind of overall health of the real estate housing market?

Dowd Ritter

Brian, we are still seeing some stress come through Florida and Georgia. Some might say glimmers of hope, but we are talking about some of the credits that are coming in. We look at it that has potential to restructure or work through those. So that is a positive sign, but I will say that you are going to continue to see stress.

For us in Florida, I think of it this way, whether you are seeing some more stress or not in the next couple of quarters, we have gone from a homebuilder and condo portfolio of the first Florida 2008 at $3 billion down to a little lower $1.4 million. I mean we have worked that portfolio down significantly. As one thing, I really don’t think we have been given credit for, if you go back to one of our rein slides is really talking about how we worked the exposures down in a very difficult environment.

For us, Brian, what I would say is we’ve got some of our most troubled assets behind us. We kind of phrase it as the worst of the worst, and these are some condo projects that were half completed. We worked through our most troubled problem. I’m going to let Barb Guidon talk a little bit about what they are seeing in the housing.

Barb Guidon

In the housing portfolio we are seeing in Florida is that peak to trough, the peak being in the OFHEO data, the fourth quarter of 2006 to where we sit now, we’re already down almost 31% in value. So, one would suggest that the credit cycle potentially has 40% peak to trough to go. We think that will happen relatively soon. So we are seeing some activity in the markets in Florida. We are seeing some market, in fact, that are showing signs of recovery.

Mike Willoughby

This is Mike Willoughby. I just want to follow-up on Bill’s comments is when you look at homebuilder, we’ve been really talking about Florida and the Atlanta North Georgia area. In condos, we’ve been talking primarily about Florida, but we have some exposure in Atlanta, North Georgia as well.

If you were to take the condos and homebuilder in North Georgia, you would have a portfolio of a little over $700 million down from a $1.3 billion back at the beginning of 2008. You would also find that of that $700 million, $77 million are past credits. What that means is that we’re all over and have been all over the remaining portion of that portfolio.

In Florida, it’s a similar story where homebuilder is just under a $1 billion. Condos are under $500 million and we expect them to be under $300 million by the end of the third quarter. The total, if you add them together, Florida is about a $1.04 billion and about half of that is currently looked at as passed loans. So I think to Bill’s point, we’ve really worked these portfolio starting in condos; it was in 2007; in homebuilder, 2008. We’re making good progress. We’re going to end up where we don’t have anything to work on.


Your next question comes from the line of Scott Valentin - FBR Capital Markets.

Scott Valentin - FBR Capital Markets

There has been mumbling about shared national credits. I was just curious maybe if you could disclose the dollar amount of shared national credits you have in the portfolio. If you have it handy, maybe by industry or geography and potentially even by the seasoning maybe how old the loans are?

Dowd Ritter

We’ve got about 7 billion in shared national credits. You got to remember that shared national credit is defined as three banks total credit 20 million and above. So a lot of our shared national credits are, they can be real estate deals where there are three lenders; they can be public companies; and they can club deals that would be 20 million, 50 million maybe up to a 100 million would probably are sweet spot.

What I would tell you about that is, because I think your question is really about the larger portion of that, we have had as a policy going back to the merger. We’ve done some work around this to make sure that our shared national credit book is high quality. We did not do any of the covenant light deals. We haven’t done any of the highly leveraged transactions.

So to your question, we merged in November 2006 and we’ve taken a very conservative approach to our shared national credit portfolio since that time. We’re not experiencing any difficulties there other than commercial real estates as part of the numbers that you see.

Scott Valentin - FBR Capital Markets

Then in terms of you mentioned before about you make certain assumptions regarding the macro outlook for the economy. I guess what I’m getting at is, you’ve seen increasing trend in non-accruals and past dues, and with the economic forecast, unemployment forecast to go higher, I’m just curious to kind of figure out maybe what your assumption is on unemployment.

You mentioned Florida unemployment picking up or increasing to almost double digits, and maybe the knock-on effect that would have on C&I and commercial real estate. How that factors into your reserving?

Barb Guidon

This is Barb Guidon. Let me go ahead and start with the consumer portfolios. We do look at double-digit unemployment in Florida and several of our other markets perhaps, i.e., be Carolina. Having said that, that’s one of the reasons that we have very active customer assistance program.

As an example, last month alone we helped over 2,000 customers. Some of those customers simply needed a short-term deferment for Bears. All the customers needed modification of their loans, but again, we’re trying to get ahead of that. So working with customers daily, customers who want to stay in their homes, customers who want to keep their vehicles or other tangible assets, we’ve been very successful in that as Mike mentioned in terms of recidivism rates of only 12%.

So, while the unemployment rates, we do expect it will go up. We’re also very actively trying to get in front of that, including making outbound phone calls to customers who are not yet delinquent to ensure that we are able to weather any issues that they have and if they need assistance that we’re in front of that problem. I’ll turn it over to Mike.

Mike Willoughby

On the C&I and CRE side, we listened to a lot of what Barb is saying and seeing in the consumer portfolio and how that affects us in the C&I and commercial real estate portfolio and I would tell you on the C&I, we just have not seen the pressure or stress come through that portfolio. We’ve seen a few dealer align that had come through. I think that would be expected about what you are seeing in the economy, but all the lines are appropriately monitored and we think we can liquidate out of those.

When I look down the list of our large problem, classified credits, I don’t see any particular stress point in the C&I and commercial real estate, a very diversified portfolio. We may have seen a couple of apartment projects come through, but nothing really to speak of. So, even though we start to look at what unemployment may do, we had not seen it come through our portfolio yet.

Remember now, we’ve been talking about contagion for almost a year now and just have not seen it. That does mean that we are looking at those portfolios of commercial real estate retail and keeping a watch on as we just haven’t seen it spread and pass dues, or well as charge-offs or non-accruals come through at this time.

Scott Valentin - FBR Capital Markets

Just one final question, if I may. Your deposit growth is extremely strong. Just wondering is that, also marking campaign involved, but you’re seeing at any specific markets or is it being M&A driven, some of your competition being merged away?

Irene Esteves

It’s happening across our footprint. That was a part of our concerted strategic effort that we started last fall to focus on building deposits, particularly low cost deposits. So it’s not geographic specific, it’s across our footprints.


Your next question comes from the line of Christopher Marinac - FIG Partners.

Christopher Marinac - FIG Partners

I just want to get some more clarity on the non-performing assets held for sale. The $65 million that was sold in the quarter that was directly from this account, correct?

Bill Wells

It was. Yes it was.

Christopher Marinac - FIG Partners

Were there any other transfers or out of that to get us down to 395?

Bill Wells

Let me kind of walk through because it does, you kind have to think about how the inflows and how the outflows are. We started about 427 million in the held for sale account. We had either sales or payments come in of about $65 million, that’s the part that we talked about that we had a sale for a gain.

Then we had about $29 million that we transferred to OREO and that’s just the process that you went through to move it to other roles they don’t. Then, we had new additions that we moved from the loan portfolio into the held for sale of about $60 million and it was an average of a discount of 30% to 35% on that pool, that ends up to about $393 million in our held for sale.

Also, I’d let you know Christopher that this time, we sold about $10 million or $11 million for a little bit of a gain. What that shows is we have been in this. A lot of banks are talking about getting into this position of problem assets.

You go back and look, we started really in the second quarter of ‘08, started to ramp up pretty heavy in the third quarter, did a very big sale in fourth quarter. We are continuing that process and we look, as we will continue to sale, dispose off problem assets. We think we have a very good program in place.

Christopher Marinac - FIG Partners

So if you relate the $4 million gain that you had back to those related loans, what is the net mark at the end of the day on that experience?

Mike Willoughby

I think we probably took an average of 50% mark, I mean you will be a little bit shy of that. I don’t know the number, but it will probably be in the 48% range. What I would say is what was interesting though is you say that, but as we moved assets into held for sale, we were average in that 30% to 35% mark.

So you hate to say about non-performing loan of credit you are moving to held for sale is better, but the marks are a little better than what we’ve seen in the past, and we haven’t changed our process one bit. It’s the same process that we’ve had over the past almost a year now.

Dowd Ritter

What we put into held for sale this quarter, most of it, half of it was under purchase of sale as of the end of the quarter and all of it would be under purchase of sale within two weeks. So with that activity, we would expect to have out of the portfolio by the end of the quarter.


Your next question comes from the line of Greg Ketron - Citigroup.

Greg Ketron - Citigroup

I have a couple of brief ones. One, any color you can provide on the early delinquency trends 30 day, 90 day past dues in the first quarter compared to the fourth?

Then, the other would be any outlook or views you can provide on the net interest margin if you think the worse is behind you in terms of sensitivity or LIBOR prime basis, normalization and what your outlook may be for the rest of this year?

Bill Wells

Let me start on the past dues on the 30 days, I looked at our trend quarter-over-quarter and they are about stabilized, but you still see some movement up and down within particular quarters.

What I would tell you is we have a very active credit servicing program from the C&I and commercial and real estate, and our geographies were very, very hard to constantly work on our past dues.

On the 90 days, what I would tell you is, of the increase roughly in my mind about half of it comes from the C&I and commercial real estate side and it really deals with some large credits that we are in the process of working through some type of structure and we’ll bring those back up under 90 days. The other half has really deal with the judicial process, the slowdown dealing with Florida.

I’ll let Barb talk more about the consumers past dues.

Barb Guidon

The consumers past dues, the 90 plus for residential mortgage made up the bulk of $16 million quarter-over-quarter increase, and as Bill mentioned that was due to the backup in the Florida court system.

In addition to that, any repayment plans we enter with customers under our customers assistance program or any forbearance program, we do not reach that customer currently, allow to stay in the 90-day bucket or greater and as they make their payments, they will automatically move to a current status at that time.

Irene Esteves

Greg, on your question on the net interest margin, we think most of the impact of the asset sensitivity and the LIBOR gaping out has pretty much flown through our statements, so we’re expecting will be relatively stable in the second quarter.


Your next question comes from Jennifer Demba - SunTrust Robinson Humphrey.

Jennifer Demba - SunTrust Robinson Humphrey

You mentioned earlier in your commentary that you really haven’t seen evidence of contagion spreading to other commercial loan categories in any meaningful way. I am curious what particular loan buckets you may have, more concerned about as we go through 2009 and 2010. Would it be retail centers or hotel/motel or is there anything else you are particularly focused on?

Bill Wells

Jennifer, I will start, and let Mike or Barb comment on for us. I would say we continue to watch retail commercial real estate scrip center boxes. We’ve been doing that for a while and that’s been on a moratorium list for us, but we have been saying that for about two quarters now, watching it and just have to say, the level of problem assets come through. I mean, you will have one or two come through, but even in the good times you are going to have a problem credit come through.

We watch hospitality is one, but it’s relatively small portfolio for us, any C&I customer that’s tied to the housing will watch very closely the watch for trends in that, but really we just haven’t seen the pressure that we have been expecting. It does mean that we are not going to continue to watch the drift.

I think that goes back to me is a very solid program we put in about two years ago, where we are really focused on credit servicing. For us we start to look at principal reductions, trying to make sure our collateral values match up with our loan balance. We are always working with our customers too. Again I think that’s a significant piece of why we haven’t seen a lot of this contagion, or some of the problems spread to other parts of the portfolio.

I’ll let Barb talk about the consumer side.

Barb Guidon

On the consumer side, clearly we are watching the unemployment trends that are happening right across our footprint, but again, back to our customer assistance program and back to the fact that our geographies, our branches are reaching out to customers on a monthly basis, customers that are not delinquent and doing a financial checkup just to make sure if they need help that we are addressing that early.

On our mortgage portfolio, we are calling all of our adjustable rate mortgages six months in advance of their reset dates and making sure we have that conversation with the customer at the time that if they are not able to make the new payment or if they are going to have any difficulties, then again we are ahead of that problem.

So I would want to state that it won’t be any contagion or some increases in delinquency, but again we’re pretty aggressive about reaching out ahead of the problem making sure we are the best of it.

List Underwood

Just a follow-up comment on the commercial piece of this. One of the things we have noticed is that when we have seen a, let’s say, a commercial real estate retail project experienced difficulties, that unlike our experience in the homebuilder business wherein often there is not liquidity and staying power with these credits there is cash flow and that allows for workouts that are different from the homebuilder workout approach.

As you know, homebuilder, when they are no longer functioning you have lots, you have land, you have spec houses, and it’s a question of what can get for that. So the loss on those kinds of credits, once they revolve is materially higher than the loss you are going to find on the retail.

Bill Wells

Also, Jennifer, just to remind you how we started off. We’ve been in this for about 16 months now and it really has been a Florida-Georgia issue, it’s been a residential condo and a home equity and really a second lien home equity issue in Florida.

For us, we always have to keep in mind for our company, we sold our subprime operation early in 2007. We don’t have any credit card portfolios. We don’t do the broker mortgages. None of those have been in what we would do as products.

Mike had mentioned on this, we just don’t do highly leveraged transactions. We don’t have the sales. We don’t have the CDS. So it kind of goes back to the first question, when you really think about our company, you have to look at our allowance methodology and the problems that we have had addressed and that we’ve been working through these portfolio for almost 16 months now. So that’s what I would say is our focus. We continue to do that.

Jennifer Demba - SunTrust Robinson Humphrey

I do have a one follow-up question. You mentioned loss severities have been lower this quarter or in first quarter than they were in the fourth, where you did the big loan sale. Are you just seeing more betters or the pricing getting better or combination of the two? What’s going on there?

Bill Wells

Well, what I was really talking about is what we saw in the held for sale. I think it’s just the type of private property that’s coming through. Remember when we took the 50% mark you might have a couple of uncompleted condos in there and maybe a particularly large piece of land. I don’t know if I can say the pricing has really changed dramatically. I would say its more about the type of property that we are seeing moving to non-performing status.

Again, I go back to, Jennifer, what we had said is our fourth quarter strategy that we try to put in place was to get some of the worst problem credits behind us.


Your final question comes from the line of Ken Usdin - Bank of America-Merrill Lynch.

Ken Usdin - Banc of America-Merrill Lynch

Just a follow-up on the question about just reserving methodology and, in fact, you have been working through a lot of these books for a while. I know that the comments of that directionally credits should continue to go the wrong way or directionally deteriorate, but any color you can help us out on an understanding potential magnitude of over-provisioning that you still might have to do as these inflows are still building and the trend of NPAs is still moving higher? Thanks.

Bill Wells

Yes, Ken, its one thing kind of in all my years, you got to watch over-providing as well as under-providing. What we try to do, the best way for our methodology is be very consistent and have a very conservative methodology. That’s kind of our basis, our cornerstone.

We’re not saying that we are not going to continue to see stress. I mean I think for us, it’s going to be those three primary products of residential, condo and home equity. For us, as Barb will always say, home equity and first res has what seemed to stabilize a little bit, is always a trailer based on what you see in the consumer side.

So, again, what I go back to is we have this very conservative consistent methodology. You have to look at what we think is our expected run rate, which is pretty much come in line this quarter. We are looking at our exposure coming down. We go through the methodology, looking at our FAS 114 allowances. We look at our FAS 5 rule and we come out which we think is a proper and adequate reserve for what we think the risk is within the portfolio. That’s we’ve maintained over the last four years since I’ve been in the company.

Ken Usdin - Banc of America-Merrill Lynch

So the fact that additions are going up as far as incremental non-performing asset is somewhat being, am I right in saying that somewhat being helped by the deletions and that’s bringing down kind of some of the reserve that you might have had to build in prior quarters as far as what we saw this quarter.

Just wondering why the magnitude of reserve build was so small, even though we did see, an understanding that you did take partial. You’re moving down to realizable value on those 114s and the pools, but it would seem the incremental growth of the NPA would still speak to larger amount of over-provisioning.

Bill Wells

Also, Ken, remember that in the fourth quarter, we made a sizable provision with the expectations that we’d start to see some of these non-performing come through. So I think I Irene has a pretty good slide in her desk, slide 5 that talks about our reserving as well as matching up to our non-performing loans.

So, again, you have to take in, I would say, over a year’s period of time and look at our methodology and look at our reserving and keep that in mind, and not so much focus on the $35 million and the rise in the non-performing loans in this quarter. That’s what you have to do.


This concludes today’s Regions Financial Corporation quarterly earnings call. You may now disconnect your line.

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