Regions Financial Corporation (RF) Q2 2008 Earnings Report, Transcript and Summary

Good morning and welcome to the Regions Financial Corporation’s Quarterly Earnings Call. My name is Stephanie 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 – Investor Relations: Thank you, operator. Good morning everyone and we appreciate your participation today, a very busy day overall. Our presentation 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, our Form 10-K for the year ended December 31, 2007 or our Form 10-Q for the period ending March 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. 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. Now I will turn it over to our Chairman and Chief Executive Officer, Dowd Ritter. Dowd? Dowd Ritter – Chairman and Chief Executive Officer: Thank you, List. We appreciate all of you joining us for Regions' second quarter earnings conference call. With me this afternoon are Irene Esteves, our Chief Financial Officer; Bill Wells, our Chief Risk Officer; Mike Willoughby, our Chief Credit Officer and Bob Watts, our Head of Consumer Credit. As all of you are well aware, credit quality deterioration and capital adequacy are today’s overriding issues for the financial services companies, Regions is among them. Earnings are being pressured by rising credit costs particularly related to residential homebuilder, condominium and home equity portfolios. As a result, second quarter earnings from continuing operations were below expectations at $0.39 per diluted share excluding merger charges. We believe that we’re prudently managing our credit risk and establishing the necessary reserves as I’ll discussion in a few minutes. Given the current operating environment and its potential pressure on earnings, we have decided to build our capital by reducing our quarterly common cash dividend to $0.10 per share. At current share prices that dividend rate represents a yield of 4%. The dividend reduction will provide additional capital of approximately $1.2 billion by year end 2009, and will significantly strengthen our regulatory capital ratios. We remain committed to a strong capital position. Turning to credit. In the second quarter, we continue to increase the allowance for credit losses while aggressively charging off problem loans. A $309 million provision for loan losses exceeded net charge-offs by $100 million. This lifted our period end allowance for credit losses to 1.56%. Given the continuing deterioration in residential property values, especially in Florida and the generally uncertain economic backdrop, we expect credit costs to remain elevated. While we are not predicting the duration of this economic downturn, we think it is prudent to plan for no real improvements until 2010. Credit management is clearly a top priority. While it’s difficult to have a great deal of confidence in projections as to the depth and duration of this credit down cycle, we do know that a successful navigation requires a proactive approach. We have been and will continue to aggressively deal with problem credits. As I previously mentioned, loans to residential homebuilders, condominiums and home equity lending are the main sources of our portfolio weakness. During the second quarter, we experienced unprecedented deterioration in home equity lending mostly in Florida where property valuations in certain markets have experienced significant and rapid deterioration. We have and will continue to implement measures to mitigate portfolio risk, particularly in our more problematic portfolios. Specific to our residential homebuilder portfolio, we have transferred some of our most experienced bankers to our special assets department so that they focus on risk mitigation of problem credits. We have established a loan disposition program one that evaluates opportunities on multiple levels through three different independent working groups. We have intensified our credit servicing function through more in-depth and frequent builder contacts and reporting. We stated our credit policies and processes across our franchise and adopted a more rigorous and disciplined underwriting and review process. We placed a moratorium on certain types of loans including land and condominium loans. Those two categories have declined $1.6 billion and $1 billion respectively since the end of 2006. We have also taken significant action in the management of our home equity portfolio including the completion of a portfolio evaluation analysis, the results of which provide us with valuable information in portfolio work-outs. In addition, we have continued to develop our customer assistance program, which age our customers on several fronts and Irene will provide some additional information on those initiatives in just a few minutes. There is no quick fix to today’s housing related issues and their negative impact on segments of our own portfolio. But, the actions that we have taken, we feel are important steps in the right direction, steps that will help minimize earnings impact and strengthen Regions as we move through the current cycle. Even with our real estate exposure with a couple of exceptions, we feel good about the diversity provided from our 16 state footprint and the overall diversity of the loan portfolio. Also, keep in mind that we have no structured investment vehicles, no collateralized debt obligations, no credit card loans and less than $90 million of subprime mortgage exposure. Although capital and credit or funds that we continue to work hard to take full advantage of quality revenue growth opportunities. For example, we grew loans at a healthy 6% annualized pace in the second quarter, up from first quarter’s 4%. Commercial and Industrial loans were the primary driver, where new initiatives to selectively leverage financial lease of our commercial class by emphasizing usage of additional services, is starting to pay off. On the expense side, we are taking actions that will further reduce expenses and improve our operating efficiencies. For instance, at the end of June, we eliminated another 600 positions, most related to the ongoing centralization of back office and operational facilities as well as corporate overhead following our late 2007 merger related branch conversions. This and other cost reductions efforts, such as our previously disclosed efficiency and effectiveness initiative enhance our confidence in achieving an all-in cost save run rate of greater than $700 million by year end 2008. In fact, in this second quarter, we are nearly there. Our second quarter merger cost saves totaled $165 million, which equates to an annual run rate of $660 million. As a reminder, this is well above of our originally targeted merger cost saves of $400 million. There is no doubt that the environment is challenging but, we are confident in our ability to successfully manage through these tough times. We are realistic about the environment and we are aggressively dealing with the credit issues. We have taken actions to bolster capital and fortify Regions’ balance sheet. We are developing and implementing revenue initiatives that will enable us to capture market share and enhance our longer term growth prospects. Finally, we are diligently managing expenses. Let me now turn it over to Irene. Irene Esteves – Chief Financial Officer: Thank you, Dowd. As you’ve seen, higher credit cost pressured second quarter operating earnings, driving our earnings per share to $0.39 excluding merger charges. Credit quality deterioration primarily caused by declining residential property values necessitate a $309 million loan loss provision, $128 million above the first quarter level and $100 million higher than our current quarter’s net charge off. As a result, the allowance for credit losses increased to 1.56% of June 30th loan balances. This is up 7 basis points linked quarter. Non-performing assets were up 35% and net charge offs increased 66% linked quarter, largely driven by deterioration in our residential homebuilder and home equity portfolios. Non-performing assets climbed $416 million linked quarter to 1.65% of loans and for closed assets, driven by migration of residential homebuilder credits and condominium project. The majority of the condo increase came from a handful of larger projects in South Florida. For our newly established loan disposition program, we disposed off approximately $147 million of properties in the first quarter, one example of our proactive approach to our credit quality issue. The majority of these assets has been classified as non-performing prior to their disposition. We’ll continue these transactions in the future on opportunistic basis. At the same time, net loan charge offs increased $83% million linked quarter, equating to an annualized 0.86% of average loan. Home equity credits caused over half the increase, rising to an annualized 1.94% of outstanding lines and loans, up from 57 basis points last quarter. We are clearly experiencing greater deterioration in this portfolio than originally expected, mostly due to Florida based credits which account for approximately $5.4 billion or one-third of our total home equity portfolio. Of that balance, approximately 1.9 billion represents first lien. Second lien, which totaled 3.5 billion or 22% of our home equity portfolio, are the main sources of the loss. In fact, the second quarter annualized loss rate on Florida second lien was 3.5 times the rate of first lien home equity loans and line, 4.74% for second lien versus 1.37% for first lien in Florida. So to emphasize this point, 22% of our total home equity portfolio or $3.5 billion had a 4.7% net charge off rate. The remaining 78% had about 1.1% net charge off rate. The problems in this portfolio are very concentrated. Within Florida, we are seeing particularly high losses in the Bradenton Sarasota, Fort Myers, Cape Coral, Maples, Marco Island, and Fort Walton areas. Customers who did not live in the properties but purchased them to be used as an investment home or second home were more prevalent in Florida than our other markets and have been especially problematic. As property values have dropped, so has the equity supporting these loans, exacerbating home equity write-offs. Significant income losses are also negatively affecting a growing number of borrower’s ability to repay home equity loans. Now we’ve been taking steps to proactively address the impact of the real estate market on our overall home equity portfolio. First of all, you should know we are recognizing losses when they become apparent. In many cases, this means we are charging home equity loans and lines down to market value before they become a 180 days past due. We review the strength of our equity position based on current appraisal and take appropriate charges regardless of the payment status with Regions. Second, we have a customer assistance program in place to mitigate losses. For example, we are educating customers about what work out options and contacting customers in short order as quickly as five days in some cases after a home equity loan or line is delinquent to discuss options. Finally, late in the second quarter, we completed the valuation assessment of our home equity portfolio, providing granular up-to-date property level information that will help us in making timely informed work out decisions. The assessment results are also being used in a pilot program to reach out to customers who are not delinquent to see if they are in need of assistance. If they are, we immediately make use of the tools within our customer assistance program. In part, due to these and other actions being taken, Regions 90 days past due home equity loans and lines dropped 20 basis points linked quarter to 1.08%. 30 days past dues improved to 2.36% from 2.67%. Let me now turn to our residential homebuilder portfolio. Second quarter losses in this portfolio were also higher but generally inline with our expectation. During the quarter, we charged-off $34.2 million of these credits. In total, our residential homebuilder portfolio now stands at $5.8 billion, a $473 million decrease versus first quarter. For loans within the portfolios that have been identified as exit credit increased from $1.2 billion from the first quarter to $1.8 billion at the end of the second quarter. Looking at commercial 90day past dues, total business services declined 6% versus first quarter. Drivers of the net decline include both migration to non-accrual credits and credits that were brought current during the quarter. Shifting to revenue, non-interest income was relatively steady linked quarter excluding securities transactions and the first quarter's leased income. Higher brokerage and service charge fee income largely offset lower levels of mortgage and commercial credit fees. Commercial credit fees were lower by $28 million versus the first quarter primarily due to drop in swap fees. However, this was offset by decline in the related market position adjustment before any brokerage income, which increased to $28 million. Service charges rose $23 million in the quarter driven by both seasonal factors and pricing adjustments. Mortgage income was affected by an approximate $15 million second quarter loss until of our mortgage servicing rights related to $3.4 billion of (inaudible) loans. Also, factoring the linked quarter change with the absence of first quarter’s FAS159 one-time adoption benefit of $9 million. Morgan Keegan posted a $7.3 million increase in net income linked quarter excluding merger charges, which was driven by lower expenses. With respect to revenues, fixed income capital markets activity was especially strong, up $8 million linked quarter. As customer swap to relative safety offered by these products. However, somewhat weaker equity capital markets revenue offset causing Morgan Kegan's total revenues to remain relative unchanged linked quarter. Notably, second quarter write-downs on investments to mutual funds totaled $13.4 million compared to first quarter's $24.5 million charge. The mutual fund investments market value was approximately $22 million at quarter end for these two funds. Consistent with our expectations, net interest income totaled just under $1 billion in the second quarter, $38 million below prior period. A 17 basis point drop in the net interest margin to 3.36% was the primary reason. The margin continues to be pressured by negative shift in our deposit mix, the flow through of recent yield curve movement and Federal Reserve interest rate cuts as well as higher non-performing asset level. Also, our proactive approach to capital and liquidity positioning including second quarter’s issuance of $750 million of sub debt and $345 million of hybrid capital further pressured the margin in the quarter. Average low cost deposits declined $489 million or an annualized 3% linked quarter, primarily from declines in low profitability, public funds and money markets. Non-interest bearing and savings balances partially offset the money market decline increasing $323 million combined. We have a major initiative underway to build our low cost deposits. We have better aligned branch incentive plans to drive checking accounts production and deposit growth. We are offering new product enhancements such as the relationship focus checking and savings that offer inducements to build relationships through additional products and services. We are creating a new unit which has end to end responsibility for growing deposits including product management, product delivery and deposit acquisitions. Turning to loans, growth picked up in the second quarter to an annualized 6%, driving solid gains and average earnings assets and helping net interest income. Importantly, commercial and industrial loans drove this growth, primarily in central Alabama, Southern Mississippi, North Carolina, and Virginia. With respect to operating expenses, we made very good progress in realizing targeted cost save. Nonetheless, operating expenses adjusted for unusual items were relatively flat linked quarter. While the second quarter reflects solid personnel related efficiencies, these were offset by increasing credit related costs such as higher other real estate expenses and professional fees. Second quarter’s effective tax rate excluding mortgage charges declined to 28% due to income mix as well as a recovery related to tax information reporting. With the adoption of FIN 48, the volatility of the effective tax rate has increased significantly with fluctuations of 200 to 400 basis points a quarter becoming more common. Regarding capital, our Tier I and total risk based ratios increased to an estimated 7.47% and 11.77% respectively as of quarter end. Both of these capital ratios will benefit from the reduced dividend rates. In fact, the estimated $780 million annual dividend relating saving will add approximately 65 basis points a year on a pro forma basis to our regulatory ratios. The Board’s decision to reduce the dividend was based on a very full assessment of our capital needs over the next couple of years. Of course, one of the key variables considered was asset quality trends, which we looked at under different portfolio stress scenario. Our conclusion after reviewing these scenarios was to prudently build capital in a measured way over the cycle. From a regulatory standpoint, we view Tier 1 capital as a priority and are fortunate to have approximately $1.2 billion of additional hybrid capital capacity. If this market opens up with reasonable terms, we will be opportunistic and tapping into it. In summary, we believe the credit environment will continue to pressure the industry and we are taking the actions necessary to successfully navigate through this unprecedented environment. We are directing substantial resources towards working through our credit related issues. At the same time, we remain focused on our customers, increasing branch efficiency, gathering low cost deposits, and enhancing our market share, and driving down overall cost. Finally, the dividend action we took strengthened our capital base and helps position us for future growth. All of these initiatives will help drive results both during the current cycle and as we transition to a more favorable operating environment. At this time, operator, we are ready to take questions.

(Operator Instructions). Your first question comes from Matthew O’Connor, UBS. Sir, go ahead. Matthew O’Connor: If I can just follow up on your comment that you will be opportunistic with respect to capital if the market opens up. Can you just give into more detail on that with respect to would it be common, non-common?

Thanks Matt. Yes, as I mentioned we have quite a bit of capacity for Hybrid Capital which would be our target for additional Tier 1 capital. We see no reason at this point to be raising dilutive capital. Matthew O’Connor: Okay. And just separately net interest margins under a bit of pressure last couple of quarter here. And with the market rates, just the Fed rates relatively stable, should we expect more stability going forward to the NIM?

Performance of the NIM is as expected given our asset sensitivity. It also has to do with -- that’s being conservative on our funding and liquidity position, I would expect a continued compression on that, what will have a big swing factor is what happens on deposits and what happens on competitive pricing. Matthew O’Connor: Okay. Any thoughts in the magnitudes, should we expect it to be as being what it was this quarter, next quarter in terms the decline?

I think you can get a good idea from looking at our disclosures in our 10-K of what interest rate reductions will do to our margin. Matthew O’Connor: Okay. All right, thank you.

Your next question comes from Steven Alexopoulos from JP Morgan. Sir, go ahead.

Maybe I could start first with the dividend cut. Can you maybe walk us through how you determined $0.10 to be the right number?

We looked at the number of factors. As I mentioned, we’re looking out at various scenarios of what could happen on the credit front and what that would do to our payout ratios and our capital conservation under those different methodologies, looking at our dividend payout ratio along with our dividend yield or some of the issues that we were looking at.

Was there a long term targeted payout ratio in mind?

We don’t have a formal policy on that.

What were the charge offs associated with the sale of the 147 million in properties?

This is Bill Wells, Steven. We paid up that bit of properties to take a look at, we sold about a 147 million, we had about a 30% discount on that, taking around 20 something, $25 million that about right so, that’s what we had.

Okay. And maybe just a final question, when you look at the home equity book, how high do your model home equity net charge offs to get in over the next year, just some color on the quality of the book and what are your thoughts on how high losses could go there near term?

Well, what we did is we look at an ongoing basis and we go back and try to look at what we see the rolled rates are going to be. We don’t really give any guidance on what we think the projections might be, I’m sorry Steven but, we take a hard look at it, do it under various scenarios, we look at our underwriting standards, we look at how we -- are customer selection we are going back to the values. Irene mentioned a little bit earlier, I think it was a good point is when you look at the portfolio and you take the home equity book, you bow it down to Florida and then you look at about that $3.5 billion that is second lien, and net charge offs was about 4.74%. You compare that to first lien in Florida is 1.37. So, we have identified what that book of business is under the most pressure. Then I go back to say the rest of the book is performing pretty well, the rest and the outside of Florida, the home equity book.

If you look at that secondly Florida piece though, could it get materially worse from there over the next couple of quarters just that one segment at the home equity book.

Well, I think for us it really looks about where we think the economy and properties value will go. I’ll let Morgan speak a little bit more to that point.

And, we do look at the home price depreciation and we do look at the normalize trend and we do again look out overtime as to when we see that normalized trend both for Florida properties as well as properties for the rest of our footprint. We feel pretty good about it. What our thoughts on and where these numbers might go.

Are you seeing that you are -- if you are okay with the under 5% charge-off you near term in the Florida in second lien book that you are seeing?

Right now, what we are seeing in Florida is that the numbers that are coming in on a daily basis we look at them everyday, they stabilize, and that’s the short-term outlook and there is -- they are well possessed, again there could be impact from economic factors that could happen in the future.

Steven, what I will get back, we look at on an ongoing basis and a lot of its going to be what we see what properties values are going to continue to do and from the credit side we’ve always said what employment will do and how that will factor in. So you are asking for a lot of predications that we might not, we just don’t have the answers for right now. But, I will say that we are looking at it on going basis where as Irene had mentioned earlier taking or identifying our problems, identifying our losses as they come through the portfolio.

Okay. I appreciate the color. Thanks.

Your next question comes from Mr. Jefferson Harralson from KBW. Go ahead sir.

Thank you, guys. The question about your first lien home equity business, what kind of severities are you seeing in your NPAs for both Florida and the overall book?

Well, when I look at it, we go to our rules based and how we look at our past dues and what you are seeing is as we approach from past due 90 days that go into NPA that’s what you are seeing the charge-offs comes through. You might see a little bit of it, you got the value there that might be from Florida for the foreclosure side. But, on first liens in Florida it's about 1.37% and the rest of the book is about 0.60.

And, for each house that you (inaudible) on a first lien portfolio, is it right second, or you are getting pretty close to 100% severities or because your first liens are somewhat lower loan to values, are you getting some value out of a foreclose first lien?

It sort of a foreclosure were have gotten -- on a foreclose, first lien we are typically getting and again its 10.3 in Florida but $0.60, $0.70 on the dollar.

Okay

Questions. First one, can you give us any inside as to how much reserve build, do you feel you have to go. I mean we’ve seen a lot of companies with more aggressive reserve building actions this quarter. I am just sort of wondering that to what extent you think you might have to continue to build the reserve over the next several quarters; that would be the first question. Second question would be, with the 7.5% Tier-1 capital ratio you are clearly below most of the other large peer banks, large regional banks; obviously, cutting the dividends and try to preserve capital. Could you outline any capital rising initiative that you would consider assuming that the convertible preferred or trust preferred markets remain locked up or out of equation at least in the near term. So, any kind of balance sheet initiatives or other things you might consider to, try to preserve or enhance capital ratio. And then third question, $67 million MSR recapture, is there anything that we should consider as one time other than the merger related costs that might have offset back? Thank you.

Hey, Ed this is Bill Wells, I will take the first one then I will let Irene handle the next two. On the reserve bill, what we do is we have a reserve methodology that we go through on an ongoing basis. We’ve had this methodology in place for a number of years and what I can define it is consistent. We take a look at different stress factors that you see within the different portfolio. We look at the moderation of problem loans over a period of time and that’s what we do on an ongoing basis. So, we are not projecting out what we think the reserve bill would, but what I can tell you is, the methodology has been applied consistently over time. It takes in historical factors, what we think will happen within the market by different product lines, geography as well as problem migration. That’s how we look at our reserve methodology. Now, let Irene handle the capital and MSR?

If I could just jump in, would it be fair or do you not even want to go this or would it be fair to say we should expect at least as much reserve bill than 3Q and 4Q as we saw in 2Q or that not even?

Ed, I think what you have to do is look at -- we have to do internal assessment of what our problem loan migration would be and what our movement in non-performing assets I mean that’s I what I would be looking at really went up. We are looking at our reserve methodology. So, I can’t say what that number would be for any particular quarter, we got to look what’s happening within the market place and within our loan portfolio.

Okay.

And, this is Irene. On the Tier-1 capital, as we mentioned we are at 7.47% now with the dividend change will get another 65 basis points a year. So, we have another 97 basis points by year end 2009. And of course, we would -- our next preferred on capital raise would come from convertible preferreds, and if we felt we really needed capital and that market was still closed we go straight preferred, but as I said earlier, we do not see any need to go to comment at this point.

Okay, but you would consider a convertible preferred offering if you were able to do that?

It all -- I don’t want to predict on what we were or wouldn’t do it all depend on what we’re looking on the credit front, as well as the terms available at the point in time.

And, then lastly would it not be reasonable to exclude this $65 million MSR write up typically when we are seeing you rate of MSR in the past, we have seen an equally offsetting amount of security losses or something of that all, we didn’t see that this quarter?

You have seen in times, when we have an MSR write-down that we had other security gains, and I think there’s only one other time when we saw the reverse. But we did have the $14 million lost on the sale of the Ginnie Mae business and we did have a $13 million write-down on the Morgan Keegan fund, which I would also exclude. But as you alluded to there’s a number of things going through our statement each quarter. So, I’ll call it unusual this quarter, but doesn’t mean, may not happen next quarter.

Okay, all right. Thank you.

Sure.

Your next question comes from Mr. Ken Usdin from BOA Securities. Go ahead sir.

The first question, just back on the overall credit picture, Dowd’s your comments in your preferred remarks about expecting ever be it credit cards through, you know, potentially you are thinking through at least into 2007. And I’m just wondering when we think about the fact that charge-offs really accelerated this quarter, but you did still provide, how should we be thinking about just the basis of overall provisioning expense from here, I mean, we are going continue to see not just over provision but just the absolute dollars of provisioning continue to grow as well charge off and reserved bill continues, any additional color would be helpful?

Sure, Ken. Let me first, in my opening remarks well, I was talking about was real estate values have declined, real estate values and although we are beginning to predict and we will have a flattening of the declines, when we will have an improvement in residential property values, what I was saying for conservatives and we are assuming no improvement in property values until 2010. Didn’t mean to infer that we saw no improvement in credit quality we just see no improvement in property values, near-term horizon and I will let Bill Wells, Bill you might want answer to.

Yes sir. What I would say you are there to go back and with their charge-offs, I mean they went from 53 basis points up to 86, when operate that down the story for us continues to be residential home building condo and also home equity. If you work within the numbers, really commercial and industrial commercial prices have actually down. We had a little blip up with the last quarter due to national home builder credit and then one large unsecured business line, but commercial charge-offs are down. So for us when I look at the $80 million increase, it comes down for continued pressure on residential, which we talked about earlier and then the increasing the home equity book which is about 50 million of that $80 million.

Right so, but it seems like trends on both of those two books, thanks for that clarification on the prices. We will continue to increase or decline incrementally as what it seems like through the delinquency trends et cetera. So I’m just not quite sure, I understand that the direction from here, are we going to continue to see a meaningful increase in charge-offs from here just based on the frequency and severity continues to go the wrong way?

Again I don’t know, if I could characterize as your words say meaningful. I mean what we would say is, we saw an increase over quarter-over-quarter, again what we’ve been telling you over a period of time is that continued pressure on the residential home builder book as well as now the home equity what we try to do this time is clarify as best we can where we think that problem is within the home equity book. Where I think the story is, is just where a property values are, in general and we are going to be reflection of that. So, I can’t -- we are not making any predication of what we will see for the next quarter, there is going to be continued pressure. We talked about that you see arising in nonperforming asset that you think they are going to be the more pressure conferred. I’ll step back and look at our portfolio and see residential home builder, condo and also home equity is kind of where we see the pressure within our portfolio.

Okay, and my last question is just on the first more real estate book and the largest book of the portfolio is charge off there a still relatively low there but, they did your also double 21 basis point the 43 basis point, can you just talk through what you are seeing in the first mortgage the regular residential mortgage book and if that some showing any incremental signs on it’s own?

But, one thing I think, on the construction book you saw the acreage is go up as the reflection of some of our sales coming through, and I have [indiscernible] who will talk about residential just in general.

Yeah, the residential mortgage book we saw that delinquencies has sold around we have also seen net loss has hit the loss at the when at marginally on that book of business, average cycle scores winning strong and it could have any pressure dollar on that book so little bit in Florida but again because we are in a first position we are not certainly not being finishes the we are in [indiscernible].

Okay. Thanks, very much.

Your next question comes from Jennifer Demba from Suntrust. Go ahead ma’am.

Thank you. In the residential builder book it looks like about 30% of your loans are considered problem loans but your charge offs in that category particularly low in the quarter, can you comment give us some color around that, and what kind of loss varies are you seeing in these types of loans?

Yes, it might well be, we are seeing depending on the property type for lost in lands I will say – we are seeing not a lot of loss severity like I think you are meaning it one who are selling we might say – we might get $0.60 on the dollar in that category, mostly the charge offs result from having to reappraise these properties and write them down to value so, you have got a combination of sales where we would be testing the market and their write downs based on appraisals. And I think, as you look back at the beginning of the year we had identified $850 million in problem loans that went to $1.2 billion at the last quarter and now is to a $1.8 billion this quarter.

Are you expecting no charge offs to get higher in those categories as the next few quarters, over the next few quarters given, I’m sure there would give me a lot more problem once on the market?

Hi, Jennifer, this is Bill Wells. Now, we’ll continue to look at the residential books. The one thing that I’ve seen is the overall balances are coming down, we reduced the home builder overall portfolio about $470 million, some of positive things we have done, we think we’ve got arms around the whole portfolio, we shifted a lot of the residential lenders, they have a lot of experience. We’ve moved in into special access, we developed work-out plan. So, we are working very hard to move these portfolios either to work-out situation or resolve them, assure them up in some way. I think you are going to continue to see pressure overall in the residential portfolio. But, I think that goes back to where a lot of other financial institutions are saying about their portfolios too, kind of a reflection of what it’s happening within the market.

Thank you.

Your next question comes from Scott Valentine from FBR Capital Markets. Go ahead sir.

Thanks for taking my question. Sir, I had a question on criticality outside of construction and here are consumer firmly, namely commercial real-estate and C&I. Just wondering if you are seeing any weakness in maybe the Florida market?

Scott, what we did as you would expect. We don’t do our commercial portfolio and that, we did a review recently and we did with the residential we’ve increased the amount of credit servicing we’ve done. And right as of now we have not seen any significant change or deterioration in the commercial real-estate portfolio. On the C&I side, some of our numbers, past due numbers show that actually that dues are coming down a little bit, a lot of due to our hard work of managing that portfolio. But we have not seen any pressure on those types of products. Yes, those portfolios.

Okay. And just a followup on the home equity and credit portfolio. Are you seeing any changes in usage by customers or are you aggressive reducing lines?

We are and I’ll let Irene (ph) talk about that.

Our Home Equity portfolio sits on a credit card platform and because of that we have the ability to do line management over limit management et cetera. So all of those types of tools we’ve been aggressively doing that since 2003, we were also doing the revaluation of the portfolio, we are also looking for opportunities, we are as appropriate for us to please align or cancel align on customers beginning of that program are ongoing.

And, that activity increase, I guess it is environment?

I think increase in this environment, yes.

Thank You.

Your next question comes from Chris Marinac with Fig Partners. Go ahead sir.

Thanks good afternoon I just wanted to give a little more color on CNI trends and particularly you know the fact that charge-offs is not going down this quarter is that anomaly compared to last few quarters or what you would expect?

Well what we saw last quarter was we had a couple of large charge-offs going it to trends and it still look at a National Home Builder and a large unsecured credits, a light popped up a little bit also in our small business area you probably saw rights trend up a little bit and overall what I saw on this quarter is charge-offs came in on the commercial book pretty much where as we suspected as in the small business area I think the moderate a little bit over all the Florida for us so what I would say is we got more back in lien where we were as a Fourth quarter.

Okay. And then a separate question just about opportunities to win market share whether its in Florida or elsewhere on your foot print? Are there any markets in particular that are better than others that we see opportunities the next few quarters?

We absolutely think there are opportunities to increase market share both on relationships on the commercial side and deposits in relationships on our consumer loans management sides. And really of putting a lot of emphasis on that as we all actually known is called which had been in our time talking about the real estate values and credit issues in the industry. And I am trying to spend a lot of my time as I did this morning talking to our employees about focusing on taking business away from other people that might be having more trouble than we are in this environment and we’ve got a overall going on across all lines of business and particularly in some of our South Eastern geographies doing there.

Okay. Good, thank you.

Our next question comes from Todd Hagerman from Credit Suisse. Go ahead sir.

Good afternoon everyone. Couple of questions are you just circling back first half in terms of the home builder portfolio, Bill and Mike if you could just a little bit more clarification terms if I think about the land only in the lot of portfolios again the given the commentary in terms of the real estate prices decline I would have sought that we would have seen a little bit more improvement with in those buckets and again Mike as you talked about kind of the appraisal process can you give us a better sense of kind of what you reserve allocation there or what kind of in term you have seen decrease I think about the raw land component?

Okay. I will -- starting with Home Builders you know, we are at between 9 and 10%.non-performing loans in that portfolio and the portfolio has come down a good bit, since we first started talking about this at the beginning of the year. I like to say that, when I look at this, I see a fairly quick increase on non-performing loans. I think the loss pieces, is right where it should be. So, I will note that I have a lot to add to where we are in home builders, we are happy that we were able to get our planned exposure down this quarter. We are also happy we were able to get our condo exposures down, and frankly part of way to look at it is to isolate what the issues are, which should be condos, homebuilders work those as aggressively as we can, and that’s way we think for us.

And okay, I would add to that, we identified overall land exposures back for the merger, as a key issue we’ve been bringing that down significantly over a period of time and we work extremely hard and we dedicate a lot of resources to doing that. You talked little bit and talked about the appraisal process, what we are seeing, we’ve been committed at independent appraisal process, is about that the line of business, we look at values on an ongoing basis. We identified, I guess if there is take a credit, whatever we look out at on ongoing basis forwardly, we’ve identified whatever reserved or discount, we think it might be. And as I mentioned earlier that goes into our overall methodology that we build for the loans.

Okay, I just see $3.2 billion of land related exposure and given the level of non-accrual loans, you showed that you would have expected to see little bit more impairment in the quarter, given the decline of real estate values?

Well, this is Mike. Well you have got to remember that, as this process takes place and think about it from, how quickly things have changed going back perhaps for the fourth quarter of last year, and what we’ve done is, we’ve identified markets of concerned. We get more frequent appraisals done in markets of concern just to make sure that our recurring value is appropriate and I think one of the issues there is in market of concerned the historical comps and what that might be telling us right now. So, I guess in summary, we’re following our process, we’re doing it revalidating values in those markets every six months and we haven’t got into the point that you are thinking we should be at this point.

Okay. Thanks, Michael. And just separately for Irene, again can you talk about or speak to any balance sheet strategies that you maybe thinking about in terms of your capital planning?

Beyond, the Tier 1 capital that we have discussed.

Beyond the Tier 1capital and the organic growth in the prospects for hybrid capital raise, but specifically any de-leveraging that you are considering?

We are open for business and we are bringing in additional clients and we have no plans to reduce our activity in that regard.

So, the balance sheet will continue to grow?

Yeah, that is our objective.

Terrific. Thank you.

And the final question will come from Al Savastano from Fox-Pitt Kelton. Sir go ahead.

Good afternoon. Could you give us a sense of the loan losses in our ability that happened over the past couple of quarters, is it just for the home builder, home equity and condo portfolios?

Yeah, what we have done I think we put in about $55 million in the first quarter and then $100 million this quarter. We go back to that reserve methodology that we put in place several years ago, and we look at it from a different perspective. Home builder would be one, but we look at different portfolios within our loan book, also we look at migration of problem asset. So I would say that there is any one particular product that we look at it’s a combination of looking at the overall loan portfolio.

To get some of the higher reserves that in the consumer portfolios what has happened is a just delinquency endurance?

Say it one more time.

Yeah, higher consumer loan most reserves, is it just delinquency driven or what else is happening to get that reserve to go up?

Well I mean, we look at it on an ongoing basis and it may be a combination of what we are seeing happening within the different geographies. We look at our past due, which you mentioned delinquency. We will also would look at our charge-off from that perspective also too. So it would be a combination of factors that we would look from a consumer both.

Okay, thank you.

Operator, if there are no more questions, let me thank everyone for joining us today. We appreciate it and we will stand adjourned.

Thank you for joining the Regions Financial Corporation’s quarterly earnings calls. This concludes today’s conference. You may now disconnect.