Regions Financial Corporation (RF) Q1 2011 Earnings Report, Transcript and Summary

Good morning, and welcome to the Regions Financial Corp. Quarterly Earnings Call. My name is Melissa, and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to Mr. List Underwood to begin.

Thank you, Melissa. Good morning, everyone. We appreciate your participation in our call this morning. Our presenters today are our President and Chief Executive Officer, Grayson Hall; our Chief Financial Officer, David Turner; and also, we have available to answer questions, Matt Lusco, our Chief Risk Officer and Barb Godin, our Chief Credit Officer. In the part of our earnings call, we will be referencing a slide presentation that is available under the Investor Relations section of www.regions.com. With that said, let me remind you that in this call, we may make forward-looking statements which reflect our current views with respect to future events and financial performance. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results or other developments. Those statements are based on general assumptions and are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. Additional information regarding these factors can be found in our forward-looking statement that is located in the appendix of the presentation. With that covered, I'll turn it over to Grayson

Thank you, List, and good morning to all participants. We appreciate your time and interest in today's discussion of Regions first quarter 2011 results and the progress we're making in a number of key areas, all of which are contributing towards restoring Regions to sustainable profitability. I'll begin by covering highlights and business results, and David will provide additional details on the financials a little later. Regions reported first quarter earnings of $0.01 from fully diluted share or $17 million, marking a second consecutive quarter of profitability, while still elevated, credit related costs, which include our provision, OREO expense and losses on halt or sell, declined to the lowest level in almost two years. On an after-tax basis, these combined costs were an estimated $0.26 per share. Additionally, we had $0.04 per share benefit from security gains. Core business performance continues to improve with adjusted pretax pre-provision net revenue up 16% year-over-year. Sequentially, expenses adjusted to exclude prior quarters’ debt extinguishment loss dropped 4%. The net interest margin rose 7 basis points. Average commercial and industrial loans outstanding grew 4%. Average low cost deposits increased 1% and our regulatory capital ratios improved incrementally. From an earnings perspective, we're clearly not performing at a level that we want or need to be, but we are making continuous progress. The pace of economic recovery is slow especially in our southeastern markets, but our focus on core business and customers is paying off. We're gaining share of market, adding new customers and expanding existing relationships. According to a recent report issued by Temkin Group, Regions ranked as the top bank of customer experience and is one of the top companies in America for customer service across all industries. We also received national awards from Greenwich Associates for overall client satisfaction in middle market and for relationship managed performance in the company's small business lending. We are clearly starting to distinguish Regions as one of the most customer-friendly banks in the industry. And at the same time, we're improving productivity and efficiency in taking steps to expediently and prudently deal with credit challenges still present in our more stressed portfolios. Turning to Slide 2. We're especially encouraged with first quarter's sharply lower net loan charge-offs and provision since improvement in credit quality and related costs is a primary key to restoring Regions to sustainable profitability. Net charge-offs and provision dropped $200 million or 29% linked quarter. Our provision, covered net charge-offs and although is likely to remain elevated, it is expected to trend down throughout 2011. As credit quality metrics continue to improve, we'll continue to evaluate reserve levels and be very disciplined in our reserve methodology process. Gross nonperforming loan inflows were down for a second consecutive quarter or over $200 million less than in the fourth quarter. Delinquencies fell for a fifth consecutive quarter, and criticized and classified loans declined. Nonperforming assets steady for the first quarter, reflecting less sales activity and fewer pay downs. Again, this quarter, the mix of profit loan inflows was increasingly income producing commercial real estate, which has a lower potential loss severity, and based on the cash flows, has the potential for restructure. Also, we continue to be very disciplined and cautious in our credit quality reviews; causing us to classify a number of credits as nonperforming when we see signs of weakness even though these customers may be current and paying as agreed. In the first quarter, we further enhanced our balance sheet position. We were able to grow commercial and industrial loans for the third consecutive quarter as average balances grew 4%. We remain diligent in improving our deposit costs and continued to positively shift our deposit mix with average time deposits declining to 24% of total deposits, down from 30% a year ago. We ended the quarter strong as well with low cost deposits, that which improved $1.9 billion or 3%, driving deposit cost down another 5 basis points to an overall 59 basis points on total customer deposits. And we have achieved a total company funding cost of 86 basis points, including all debt. Growing fee-based revenue in our business is critical, it's a component of our strategy to restore and grow normalized earnings. Given regulatory and legislative changes, it's not been an easy task, but we believe that our focus on customers, service, a broad array of product offerings, an increasing emphasis on appropriate cross sales gives us an opportunity. First quarter is typically challenging for fee-based revenues. Nonetheless, we were able to grow adjusted noninterest revenue approximately 4% year-over-year. Additionally, in spite of seasonal factors and regulatory rule changes, we were able to maintain reasonably steady service charge income for the first quarter. While these rules changes will continue to present a challenge to growing service charge fee income, we're proactively developing and implementing strategies to mitigate the negative impact. In fact, over the last three quarters, we have migrated all free checking accounts to fee eligible accounts. Specifically regarding the Durbin amendment, we are hopeful that the candid dialogue between regulators, legislators, merchants and banks result in a reasonable and prudent delay of the implementation of this amendment and allows proper debate and comprehensive analysis by delaying implementation, it will give all interested parties more time to analyze pricing and consequences of proposal. We are hopeful that the outcome will be more rational in the plan currently proposed. One that not only takes into account the bank industries actual cost of delivering debit cards including fraud, but also the potential unintended negative consequences to the individual consumer on debit card availability and participation in the banking system. In the unfortunate event that a reasonable and prudent delay does not occur, we have developed actions to respond to the July 21st implementation that helps us mitigate the financial impact of these require changes. Given the extremely short time frame for implementation, it will be challenging to effectively communicate the changes to our customers and our associates. But we know our customers and our markets very well and we remain confident that over time, we can make the necessary changes to protect our business. Our planned business adjustments not only include changes to fee schedules, but also include new product innovation and a very disciplined approach in improving productivity and efficiency. I'm pleased with the progress we've made in the first quarter given the seasonal hikes in payroll taxes, our goal is to keep full-year noninterest expenses, core expenses somewhat below 2010's level while continuing to make necessary investments in business and technology. Turning to Slide 3. We are seeing promising improvement in quality loan demand, as total loan production amounted to $13.3 billion for the quarter, up 15% year-over-year. Our Business Services loan production for the first quarter totaled $11.1 billion, which was a 17% increase over first quarter of 2010. We are seeing especially strong middle market, commercial and industrial loan production as loan outstandings have now grown for 9 consecutive months. Notably, of 65% of the markets we operate grew commercial loans in the first quarter. Both new client acquisition and line utilization are driving the growth. Commercial and industrial line utilization rose to 41.7% this quarter, up from year-end 2010's 40.3% which is the highest since September 2009. However, line utilization still remains well below our historical rates, which typically posted in the high 40% range. Our overall commercial sales pipelines remain strong, given expectations for a continued U.S. economic recovery, Commercial & Industrial outstanding should continue to grow throughout 2011, albeit, possibly at a slower pace than we're currently experiencing. Branch small business loan production, while still a relatively small component, is also strong, benefiting from our increased focus on this channel. On the consumer front, although pay downs continue to outweigh new production as consumers continue to deleverage, we are seeing signs of an improving loan production. Consumer loan production for the first quarter was higher year-over-year, with the largest components, mortgage and home equity, up 13% and 12%, respectively. Also, we are experiencing higher origination volume in our indirect auto portfolio as production rose to $255 million this quarter. We have now signed up over 800 auto dealerships and expect this number to reach 1,200 by the end of the year, but keep in mind that our focus is on profitable growth, not volume. We will remain disciplined both in risk taking and pricing. At the same time, we're working hard to grow profitable quality loans outstanding. We are still actively derisking our most stressful portfolio segments. For example, investor commercial estate loans were reduced another $1.1 billion in the first quarter. Our de-risking strategy and customer deleveraging suggested our overall outstanding loan portfolio balances will remain under pressure for the remainder of this year. Near-term, our lending revenues will be under pressure, but our efforts to improve pricing and production of new loans is working to offset the impact of derisking and deleveraging. We continue to positively shift loan and funding mix, as well as improve loan spreads and deposit costs in order to minimize the negative effect of a lower earning asset levels on this year's net interest income. On a final point regarding recent comprehensive capital analysis and review, I want to reiterate that Regions did not propose any immediate capital actions. The company's position of repaying the government's TARP investment in a prudent and patient manner on shareholder friendly terms remains unchanged. Our return to sustainable profitability in demonstrating improvement asset quality are key conditions that will enable reasonable repayment. As our core business continues to improve, we believe this will bode well for us and our eventual capital actions. Now David is going to provide you with financial details and I will return with some closing comments. David?

Thank you, Grayson, and good morning, everyone. Let's begin with a summary of our first quarter 2011 results on Slide 4. First quarter results generally matched our expectations as efforts to improve credit quality, reposition the balance sheet and curb operating expenses continued to pay off. EPS was $0.01 per share and net income available to common shareholders amounted to $17 million. Pretax pre-provision net revenue or PPNR, totaled $539 million. However, on an adjusted basis, PPNR was $460 million, which included some net adjustments such as security gains which is detailed in the appendix. Adjusted PPNR was up $63 million or 16% year-over-year and flat linked quarter despite seasonal factors such as day count. Within PPNR, net interest income declined 2% linked quarter primarily due to seasonality. However, year-over-year, net interest income rose 4% and the resulting net interest margin expanded to 3.07%. Noninterest revenue totaled $843 million, while adjusted noninterest revenues were $764 million. This was 4% below the fourth quarter which benefited from Morgan Keegan's strong revenues, particularly investment banking. However, as Grayson mentioned, first quarter adjusted noninterest revenues were higher than a year ago by 4% or $30 million. Noninterest expenses were 8% lower than the prior quarter and on an adjusted basis demonstrated significant improvement, dropping $44 million or 4% fourth to first quarter, favorably impacted by decline in the legal and professional fees, as well as credit-related expenses. Let's now take a more detailed look at our credit results beginning with nonperforming loans inflows. As shown on Slide 5, inflow of nonperforming loans continued to moderate, declining $217 million to $730 million or 23% less than fourth quarter. On the chart on the left, as indicated in blue, the biggest decline in inflows was in our Land/Condo and Single Family portfolio, which decreased $168 million or 64% linked quarter. This portfolio which now totals only $2.8 billion, down from $5 billion a year ago, had historically been the biggest driver of our inflows. Income producing commercial real estate continues to contribute to our nonperforming loan inflows, accounting for 31% of first quarter's migration compared to 29% in the fourth quarter. Keep in mind that income-producing commercial real estate credits generally provide greater cash flows, and therefore, may result in restructuring opportunities, and in our experience, have less ultimate loss potential. A substantial portion of our nonperforming loans continues to be current and paying as agreed. Notably, 38% of our March 31 total business service nonperforming loans were current and paying as agreed, up slightly from the fourth quarter, but 10 percentage points higher than a year ago. Turning to Slide 6. Nonperforming loans, excluding loans held for sale, declined $73 million. This quarter, we sold fewer nonperforming assets or $219 million compared to $405 million in the fourth quarter. At this point in the cycle and with stabilizing real estate values, we believe that loan restructurings will become more economical than loan sales. The graph to the right shows that delinquencies dropped for the fourth straight quarter. Additionally, criticized and classified problem loans declined for the fifth consecutive quarter and were down approximately $700 million from fourth quarter's levels. These two asset quality indicators serve as important measures in estimating future inflows of problem loans and support our expectations for continued improvement in nonperforming loan migrations going forward. Moving on to Slide 7. Net charge-offs declined to $481 million or an annualized 2.37% of average loans. The lowest level in over two years. As our loan loss provision essentially matched net charge-offs and with the decline in nonperforming loans, our loan loss allowance to nonperforming loan ratio increased from 101% to 103% at March 31st. Declines in nonperforming loans in gross inflows and nonperforming loan balances will be key determinants of our future quarterly provision needs. Turning to the balance sheet. Slide 8 breaks down this quarter's change in loans and loan yields. Average loans declined 2% with Investor Real Estate portfolio derisking efforts offsetting strong middle market commercial and industrial growth. Aggregate loan yield declined three basis points to 4.31%. This decline was driven by interest rate hedges that matured during the first quarter. Excluding these hedges, our loan yield would have been slightly higher as we remain very disciplined when pricing new loans, being sure that we are appropriately paid for the risk we are taking. We continue to see strength in our middle market Commercial and Industrial loan portfolio, with average and ending loans up 4% and 3% linked quarter, respectively. Demand is broad-based from both an industry and market standpoint. Our customers increasing investment in capital expenditures and M&A activities are driving much of our commercial growth. In addition, we are also beginning to see customers increase inventory investments, primarily due to rising commodity prices. Total Commercial and Industrial commitments rose $700 million linked quarter to $27 billion at March 31st. Our commercial and industrial line utilization rates are just over 41%, which is well below our historical norm. In fact, 25% of our Business Services customers with a commitment have zero outstanding balances. We continue to make progress in derisking our Investor Real Estate portfolio, with ending outstandings declining another $1.1 billion in the first quarter to $14.8 billion. Over the past 12 months, we have reduced this portfolio almost $6 billion, including a 60% decline in construction. Reducing our Investor Real Estate portfolio to no more than 100% of the bank's total regulatory capital or approximately $14 billion has been top priority. Additionally, going forward, we will continue to assess the appropriateness of this target. As noted on Slide 9, ending an average deposits were up 2% and 1%, respectively, driven by strong low cost deposit growth. Over the past 12 months, average low cost deposits have risen 6% compared to a 23% drop in time deposits. This positive mix shift continued in the first quarter, producing another 5 basis point decline in our overall deposit cost to 59 basis points. Our shift in funding mix to low cost deposits is also favorably impacting total funding costs which declined 5 basis points to 86 basis points. Turning to Slide 10. Taxable equivalent net interest income declined $14 million linked quarter or 2%, primarily due to fewer days in the first quarter compared to the fourth quarter. However, net interest income was up 4% over the same period in the prior year. Additionally, the first quarter net interest margin improved 7 basis points to 3.07%, and was attributable to slower prepayments resulting in lower premium amortization in our mortgage-backed securities portfolio, lower deposit cost and reduced average cash balances at the Federal Reserve. We continued to reprice our CDs at market rates, and in the second quarter, we have an additional $3.6 billion of CDs maturing that carry an average rate of 2.16%. While excess liquidity remains a drag on the margin, the effect is gradually diminishing. Excess liquidity negatively impacted the margin 10 basis points this quarter, down from fourth quarter's 11 basis points. In addition, nonaccrual interest reversals and nonperforming asset balances reduced first quarter's margin 16 basis points. During the first quarter, we executed sales of $2.4 billion of agency mortgage-backed securities, resulting in $82 million of security gains, the proceeds of which were reinvested in similar securities with slightly longer duration. Barring unexpected movement in interest rates, we expect our net interest margin to be relatively stable for the balance of this year. Let's now shift gears and look at noninterest revenue on Slide 11. Total noninterest revenue amounted to $843 million for the quarter, and on an adjusted basis totaled $764 million compared to an adjusted basis of $795 million in the fourth quarter. Adjustments in the first quarter primarily included $82 million of security gains. And in the fourth quarter included $333 million of security gains, $26 million of loan sale gains and $59 million of leverage lease termination gains, all of which is detailed in the appendix. Although adjusted noninterest revenues grew 4% year-over-year, they were down linked quarter primarily due to a 14% drop in brokerage and investment banking revenues, as well as seasonal adjustments for day count. As you may recall, Morgan Keegan's fourth quarter revenues benefited from several sizable investment banking transactions. In spite of seasonal challenges and regulatory changes, service charges were down only slightly linked quarter. Our customer focus and superior service quality are continuing to produce strong debit card volume and excellent fee-based account growth. Depending on ultimate regulatory changes related to interchange fees and implementation timing, we face fee income challenges in 2011. However, we have developed mitigation strategies to rationalize our business under the proposed rule changes. For instance, we began migrating accounts from free to fee eligible last May and now, all of our checking accounts are fee eligible. Also, our quality accounts which we defined as at least 10 customer transactions and over $500 in average balances per month, increased 2.2% this quarter when compared to the same period a year ago. And we continued to see a record level of penetration with our new checking account customers who are electing to have a debit card 90% of the time. Although mortgage originations were down on a linked quarter basis resulting in a $6 million decline in mortgage income, they remain strong compared to historical standards and were 13% higher compared to the same period a year ago. Turning to Slide 12. First quarter expenses were down despite the seasonal jump in payroll costs. Total noninterest expense was $1.167 billion for the quarter or 8% lower than the prior quarter. Excluding adjustments in the fourth quarter as detailed in our appendix, adjusted noninterest expenses dropped 4% linked quarter. This was driven by declines in credit related expenses such as other real estate expense, which declined 36% to $39 million. Also contributing to this decline were professional and legal fees which were down $11 million or 12%. Nonetheless, credit related expenses remained significant, accounting for 6% of first quarter adjusted noninterest expenses. Over time, we expect these expenses, which have been approximating $300 million to $400 million annually to subside. We remain focused on strengthening our core franchise through productivity and efficiency initiatives. As the chart on the bottom illustrates, we have reduced our headcount over 3,000 positions or 10% in the last 2 years. We will continue to rationalize our franchise, constraining expense growth without sacrificing investment opportunities. Slide 13 provides a snapshot of our healthy capital ratios and favorable liquidity position. Tier 1 Common is 7.9% and our Tier 1 ratio stands at 12.5%. Liquidity in both the bank and the holding company is solid as we have a bank loan to deposit ratio of 84.4% and cash at the parent company is above our policy minimum of maintaining a sufficient level of funding to meet projected cash needs which includes all of debt service, dividends and maturities for the next 2 years. Overall, this quarter's results provide solid evidence that our actions are moving us toward our goal of sustainable profitability. Now let me turn it back over to Grayson for his closing remarks.

Thanks, David. In summary, we are making progress and showing signs of improvement through solid core business performance, which included growth in commercial loans, continued improvement in loan cost deposits and margin expansion. We will be persistent in further improving productivity and efficiency, and even though credit costs remained elevated, we are committed to expediently and prudently dealing with our lagging credit challenges, I'll walk you in by emphasizing that our strategy for restoring Regions to sustainable profitability is working. Recovery and rebuilding take time, but with each quarter that passes, we are making progress. We believe that by keeping focused on the customer and our business fundamentals that Regions franchise has the markets, the customers, the associates, the talent and products to, over time, generate attractive, high-quality returns for our shareholders. We are making prompt and necessary adjustments to our business models to deliver innovation in terms of products, service quality and value. We appreciate your time this morning. We will open the lines up for questions after a brief administrative comment from List Underwood. List?

Thank you, Grayson. We'd like to ask that in the question-and-answer session, that you please limit your questions to one primary and one follow-up question per caller. This will help us accommodate all the callers given the total 1 hour timeframe allotted for the call. Thank you in advance for your cooperation. Operator, let's open it up for questions, please.

[Operator Instructions] Your first question comes from Erika Penala of Bank of America Merrill Lynch.

My first question is on the rising mortgage TDRs. Barb, I was wondering if you could give us an update on how the redefault rate is trending and whether or not you're getting more new requests or you're reaching out more to your customers to restructure some of the firsts?

I think you're -- yes, we are continuing to reach out to customers and our rescissions rate is actually running at 20% a little bit down from what it was last quarter, but still holding within that 20% to 22% that we reported through all prior quarters. But we still have a very active customer assistance program. Also making sure we're going out and also reappraising the book. Scott Valentin - FBR Capital Markets & Co.: And my follow-up question is, David, on your comment that loan restructuring is now more economically attractive than loan sales, should we expect your TDR bucket to continue to increase, but sort of the NPL decline and the associated charge-off would be the same? But I guess restructuring in A B fashion gets you to recover more or retain more than if you had sold it in the secondary market as a note or -- am I reading that correctly?

Yes, I think the -- what I'm saying is we expect that restructurings generally would result in better economics for us because you're not having to pay for the liquidity that you're providing, provided when you sell a loan. So as a result of restructurings, if we continue down that path, you should see increases in TDRs as a result. But the charge-offs, we would expect to be mitigated to some degree versus a straight up sale. We would do an A B note for restructure as you've mentioned and continue to have economics with the whole credit versus selling it, so that provides better opportunity for us to have a recovery and we realize we also continue to have credit risk associated with that note. So we're careful on the restructurings and that we'll do that when we think the overall economics are in our best interest.

Your next question comes from Brian Foran of Numora.

On the expense guidance, I guess first just to clarify, when you say full year '11 expenses, flat relative to 2010 excluding debt extinguishment, so that's $4.9 billion, is the expectation for this year's expenses?

But what was said is, as David says in time, on a core basis, when you cut out the one time, that we believe our overall noninterest expense would be flat to trend somewhat down from where we were in 2010, on a core basis.

And then I guess looking further out, I mean post the AmSouth Regions deal, it seems like at some point expenses would get down to like $1 billion a quarter and I realized a lot of time has passed since then and there's investments that are required and everything like that. But I mean, how should we think about the long-term expense basis? Is there an opportunity at some point that kind of realize the efficiencies that were pent-up in the merger?

Yes, I mean we, Brian to you full, we recognized a lot of the efficiencies, but given the cycle that we're in, we do believe there's more savings there. We've mentioned that we’re incurring, in a $300 million to $400 million per year, with just credit related expenses right now that we both believe will go away as credit continues to improve. We do have further efficiencies as we think about rationalizing our markets and rationalizing our business that we can continue to execute on when the time is right to do things like that. So you can see our number in the first quarter on an adjusted basis was $1.167 billion, and you could affect that for roughly $75 million to $100 million just with credit related expenses. So we do have efficiencies on top of that to come.

Well we are still driving efficiencies to our business. We were down over another 250 positions from a headcount perspective in the first quarter over our fourth quarter and we're continuing to achieve quite a bit of the system efficiencies across a number of discretionary spending categories and we'll continue to do that going forward.

Your next question comes from Matt O'Connor of Deutsche Bank. [Technical Difficulty]

Just the overall, the C&I loans have been growing nicely the past I think three quarters, but we are hearing about some price competition out there in that area. I'm just wondering what kind of spreads that you're seeing in the C&I bucket and how that compares to a few quarters ago?

Yes, I mean, there's no doubt that there are in the commercial and industrial space, there's certain segments in that, that have clearly become more competitive. I would tell you that when you look at it in terms of spreads and yields, we still are seeing an improved level of spreads and yields on our new production on commercial and industrial over and above what we were getting. It has gotten more competitive. You do hear of transactions that would indicate that there's a lot of spread and yield compression on some of these new transactions, but I would tell you that when you hear those anecdotally but when we dig in to the data and we really analyzed what we're putting on the books, we're still very pleased that we are getting compensated for the risk we're taking and are pleased with the spreads and yields that we're able to achieve.

I'd also add that when we think about the footprint that we operate in and really focus on service quality and the relationships that we're building with our customers, that relationship allows you to not just sell on price. We don't want to be a volume-price institution. We want to be providing proper service, fair price. We want the relationship because we want the total customer, not just the loan and that we're able to, we think, being we're able to maintain the spreads that we need even though there's stronger competition out there. The commercial middle market small business really provides an opportunity to really work through the relationship and get paid per link.

Okay, and we can obviously see some of that in the average loan yields overall which have been stable even though the loan mix has been derisking here so that makes sense. And then just my follow-up question, if we look at the NPA reconciliation table, the resolutions and return to accruals came down a bit versus the last couple of quarters and I'm just wondering if there is some seasonality there or is it just there are a couple of good quarters there in 3Q?

Yes, I'll ask Barb to answer that directly. But there is some timing issues that fall into that regard as we started working on restructurings with some of our business customers, that in this particular quarter, we had less of those that were seasoned to a point to return the accrual than in prior quarters. Barb?

Yes, in addition to that, third and fourth quarters are normally our seasonal highs and roughly I already pointed out for restructures, reaccruels, we wait up audited financial statements. We typically don't get most of our audited financial statements then until sometime late in the first quarter into the second quarter, again that's providing an opportunity for the restructures in the third and fourth quarter. And then some good news is that several accounts that we were planning to actually reaccrue actually paid us off in full. So again, I'll take that trade-off as well.

Your next question comes from Marty Mosby of Guggenheim.

It seems like that we're starting to put some numbers out there to help us gauge around what normalized earnings would look like with the credit costs and the provisioning, I was trying to kind of step wise from what you were saying to try to get to maybe where you're kind of guiding us in a range. If I take the earnings this quarter and back out the security gains, that puts us at about a $0.03 loss. You didn't go through the credit costs of $0.26 so that puts us at about a $0.23 profit or about $0.92 a year. And then in addition to that, we can add about $0.15 if we improved our margin bout 25 basis points from where we're at. So that would put us somewhere around $1.07 or at least north of $1. David, how are you thinking about that and what are your kind of giving us some clues, just wanted to try to cobble them together in the overall thought process.

The cobbled was right. We are trying to give you -- obviously, we're not going to give you earnings guidance, but we're going to give you bits and pieces. It's still obviously a very fragile economy. You can kind of look at our PPNR overtime and see where that, you ought to be -- if you stay at that level you can actually get pretty close to where you think our projected PPNR will be. And the story for us in terms of ultimate profitability is what credit looks like. We certainly are making progress on migration and early and late stage delinquencies and those trends and potential problems, all of those are trending better and we're feeling better about credit. We still have a robust reserve and see strong coverage in nonperformers, so we're adequately reserved there. And I think just as our charge-offs continue to improve, then you can start -- that's the key as to what will that look like in a "normalized world "and when will it be normal. So I think we've given you some tidbits. Your math you're going through is reasonable, but we have to -- we're going to stop short of giving specific guidance.

And then my 1 follow up will be, when you're talking about credit costs and the $0.26 per share and that includes loan loss provisioning, are you putting that to a normalized level or are you just backing out all provision?

Yes. We're backing out this -- what happened to this quarter, backing it all out.

So that would not be a normalized level, but would be all of the provisioning that you have this quarter.

That's right.

Your next question comes from John Pancari of Evercore Partners.

Can you talk as well about the potential problem loan number was for the quarter? I know you just indicated that it was trending better, but do you have that amount? And then also, how that may convey into your outlook for NPAs here, just given the decline in flows this quarter?

I'll start and let Barb finish up with the other part. Our potential problem loan number that was in our annual report was about $800 million and then you saw our migration of $730 million during the quarter. We are actually in the process of pulling that potential problem loan together. It will be in our first quarter 10-Q which we expect to file the first week in May. So we don't have that number yet, but in terms of trends and NPAs, Barb?

Yes, what we would look at is, for example our 90-day plus as you can see that 90-day plus number was down, our criticized number was down, our plus [indiscernible] number was down. I would anticipate that our potential problem loan number will likely follow that same trend, but again, we don't have both numbers pulled together yet. But all of the signs are saying that a little more positive than what we've seen previously.

Okay. And then my follow-up is, that being said, can you talk to us about your thought process around when you can start to see the ability to under provide here and release some reserves. I know you had mentioned before that you didn’t see some sustainability in terms of credit trends, it looks we're starting to see that here. So could we expect some under provisioning materializing next quarter?

Well, we haven't mentioned specific quarters in terms of when that would happen. What we tried to do is give you the things we look at that we think are the biggest drivers and that obviously is our nonperforming loan migration and then our resulting nonperforming loan balances, those are key influences on our methodology. We have been and we'll continue to be prudent with regards to how we establish the reserve and we will follow that methodology and what it indicates that we can provide less than our charge-offs, we'll do so. But we are going to be cautious and prudent with regards to what we ultimately do.

Your next question comes from Craig Siegenthaler of Credit Suisse. Craig Siegenthaler - Crédit Suisse AG: Just really a thought to my second question on the NPL resolutions, it looks like where really slow resolutions kind of drove the lack of improvement NPL balances this quarter and it sounds like from your kind of answers that the 1Q run rate was fairly clean. So what I'm wondering is how do you expect NPLs over the next quarter to decline? Is it really from lower inflows? Because if we don't get higher resolutions at this point, it will be tougher balances to decline?

No, we actually do anticipate resolutions to go up. What we think about there, they’re seasonal, number 1. And number 2, as Grayson had mentioned, there's a six-month seasoning period for any that we have gone ahead and restructuring before we can actually put them back to performing status. So we see all of that as we look on our pipelines we see some opportunities that are existing in there right now for us.

And I would add to that, if you look at the release, we actually sold this time roughly $219 million of problem assets and all from $405 million last quarter. We're being much more disciplined around the economics of those sales. First quarter appeared a little seasonally low from where we would have anticipated coming in. We are going to continue that disposition strategy, but we're going to balance it, as David said and Barb has said, with more focus on restructuring, but we're going to continue to dispose. And we do think that there are a number of seasonal factors that drove our nonperforming assets and nonperforming loans to not come down more than they did this quarter and we would anticipate an improvement in that going forward.

Just one follow-up from myself is that in some of our normal loan sales, we have some what we call retrading that happened at the end of the quarter where we had some of the buyers come back and want to talk about terms and structures and we decided to step away from some of those conversations and have those conversations again this quarter instead of just going in and executing it at potentially a lower price, or a poor loan structure than we otherwise would have done last quarter.

Well, the other thing you can't see is in the numbers, the number of notes that we sold, the number of properties that we sold this quarter was actually more than we sold in the fourth quarter because as we have been on this disposition strategy for some time, we're getting down to smaller and smaller dollar value assets. And they still take roughly the same amount of time regardless of the dollar value but we actually moved more properties this quarter than last. Craig Siegenthaler - Crédit Suisse AG: Got it. And then just a follow-up, given kind of two quarters here of profitability, given your expectations for NPA balances to decline then, I'm wondering, how does this change kind of your expectation for TARP repayment?

Well, it really doesn't change. We are clearly focused on making sure we sustain our profitability and that we show a clear turn in credit. We believe that, that's the appropriate thing for us to do and we're going to let results speak for themselves. But our strategy really has not changed at this juncture.

Your next question comes from Ken Usdin from Jefferies. Kenneth Usdin - Jefferies & Company, Inc.: I was hoping, I heard your comments about the fact that loans -- there'll continue to be net pressure on loans. But I'm just wondering with the -- there hasn't really been a change in the Delta on the loan shrinkage side. And I'm wondering if you could help us understand how low can low go? Meaning, do you have an understanding of where you think the bottom will be before that C&I growth and the stabilization of some of the runoff levels out?

Yes, I’ll tell you in kind of global terms what we've been saying is, we expect the total loan balances to drip down a little bit in the first half of the year, have a little bit of recovery in the second half such that we come close to finishing about where we started. So I think what we're going to do is, we're going to continue to derisk on the Investor Real Estate. That has slowed somewhat last year, I think our average was about $1.5 billion a quarter. This past quarter, we're at about $1.1 billion. So we see that decline slowing somewhat and we have had growth in C&I for 9 months. We'll see some seasonality and slowness in the first part of the year here and it'll finish stronger in the second half. So all that is predicated on where the economy goes. So that's our best guess on total loan balances right now.

Because in our internal forecast, we still got a fairly modest economic growth factor that we're looking at and so when we're making internal projections on loan growth. We're being prudent and conservative in that regard. We're trying to judge on total outstanding loans, we're trying to judge really 3 issues is 1, how much new production on both the business and consumer side will we be able to generate? Those numbers are encouraging, our production numbers are up substantially across every line of business. We're also trying to judge just exactly what the pace of decline on the investor commercial real estate portfolio will be. We've made several projections and, as David said, it has slowed, but we still are reducing the size of that portfolio substantially. It has exceeded our earlier expectations for where what we will be today. We are still seeing the 3rd issue is consumer deleveraging. When the consumers stops deleveraging or slows down that deleveraging process, then we'll start to see some decent growth on the consumer loan side of our business and we are introducing new products and we'll be over the next several months to try to grow that consumer side of our business and we said before, we really, would like to get to sort of a 50-50 mix between business and consumer loans on our balance sheet. Kenneth Usdin - Jefferies & Company, Inc.: Got you. And then, Grayson, you said on part of my follow-up, which is within the CRE business, understanding the 100% of equity limitation that you mentioned earlier, first of all, I guess are you seeing any gross loan opportunities start to percolate in the CRE side? And is that 100% limit any type of major limit on your ability to kind of reengage in the CRE market?

I think that several months ago, we came out with an internal goal of reducing that portfolio to no more than 100% of risk based capital. And we'll achieve that this year and feel pretty confident in where we'll be quite frankly, we have the other concern. Our concern is while we are seeing some opportunities in investor commercial real estate space, they are very limited and we are not seeing new production opportunities rebound with any materiality and if they don't, then we'll see that portfolio decline below that $14 billion mark, which is not a problem, and as David said in his comments, we continue to reassess just exactly what our targeted outstandings in that business should be going forward.

Your next question comes from Scott Valentin of FBR. Scott Valentin - FBR Capital Markets & Co.: Just with regard to potential com equity level [common equity], it slipped just a tad below 6%. And was curious and I guess your comfort level there and whether there’s any type of decision to consciously grow that level back up?

Yes, I mean, from a capital standpoint, obviously, we're impacted by the unrealized gain or loss changes as a result of the 10-year moving around. We really focus and run our business looking at Tier 1 common as the predominant capital measure. We're at 7.9% there. We dipped just below 6% on the tangible side, but we don't see anything that causes us concern that makes us want to believe we need to raise capital outside of the TARP repayment. That's been our consistent theme throughout the quarters but we’ll receive that question and it’s true today. Scott Valentin - FBR Capital Markets & Co.: Okay. And then just a follow-up question, if I may, on the Securities portfolio, I think it grew pretty substantially this quarter from the fourth quarter and I think you also referenced the fact that duration increased a little bit. I'm just curious if you can give some color around what's happening in the Securities portfolio?

Yes, we obviously, when you don't have a tremendous amount of growth in loan portfolio, you have to put cash somewhere, so we're in the securities book and it's higher than what we want it to be. We have it in a safe investment portfolio, take very little credit risk there. We primarily have used that for liquidity. But we will -- you can't just look at the duration of the investment portfolio, you really have to look at the construct of our entire balance sheet. So we're very cognizant of the duration and the risk that is embedded in that with the risk of a rising rate environment and when we see the opportune time we'll reposition and put those to work, securities to work differently. So I think right now we think it's the right answer, but we are looking very closely at it and as opportunities arise, we'll make different decisions.

Your next question comes from Greg Ketron of Citigroup.

A couple of questions. 1, on mortgage income, it looks like your mortgage income held up better than what we've been seeing across the industry which has been down anywhere from 30% to 40%, maybe just some color on why your mortgage income levels held up better.

Yes, I mean when you look at the mortgages, no doubt we're starting to see a drop in application volume, which is typical to see this time of year as a seasonal issue. But we actually saw mortgage bookings ahead of where we were last year. We are seeing a shift from refinancings to the new home purchase, refinancings dropped this particular quarter just over 50%, 51%, I believe, was the exact number and that's down substantially from where it was at last quarter. We are not, as rates have increased. We're not seeing the kind of application volume we were seeing, but in the first quarter, we had strong results really for work that we had established late in the fourth quarter and we are gaining share on a number of competitors in our market and I think this next quarter's really going to tell the story, because I mean typically in the second and third quarter, your biggest quarters for mortgage origination and we're really going to find out what that market's going to do in the next quarter or so. Encouraged by where we're at, the concern with the declining level of application volume.

Greg, it's David. I think that maybe some of the peers have purchases than the losses associated with repurchase in that mortgage income line item. We actually account for that in our NIE and that number is pretty small for us. We hadn't gotten caught up in the issue that others have had. So imagine repurchased losses for others have been more significant and probably netting down mortgage income.

And ours are up slightly, but still way below peer.

Okay great, appreciate the color. And then David, just a follow-up on the $300 million to $400 million of credit expenses, if you were to normalize that number, what level would that be longer-term?

Well, I think that if you look at a large percentage of that $300 million or $400 million ought to go away in time, and the question is when. So it won't be every dollar-per-dollar. But it will be substantial majority of that number we think in time will go away.

Okay. So it could approach close to 0 or something pretty insignificant?

Well, you would have you would have to use -- I'll give you the substantial majority of that ought to go away.

Your next question comes from Chris Gamaitoni of Compass.

On the OREO side, could you give us a little more color around how OREO expenses decreased quarter-over-quarter given the fall in home price HPIs, increased foreclosure timelines and general amount of disturbance and the foreclosure industry?

Yes, I think that I'll let Barb follow-up, but from an expense standpoint, there's really 2 components to drive that expense. 1, is just your normal operations taxes and property maintenance and those kinds of things which is a smaller piece of that total and the others are valuation declines and so we think when we take charges, because we foreclose something, that's running through our charge-off number so what you see there are any subsequent valuation changes and we've seen those valuation, depending on what markets you're in, we see some of the valuation starting to stabilize, others are not and that's why you see the number we have at $39 million. But Barb, anything you want to add?

Well my follow-up would be if you looked again to last quarter, it was $61 million and compared that to $39 million this quarter. And that in and of itself was primarily made up of the difference in the valuation charges. Property preservation expenses have stayed relatively flat on properties we have. And again, as you said, foreclosure timelines are extended. They're still running somewhere around that 20, 22 month mark in Florida and again, that leads into our numbers as you've seen.

And what's your policy to reevaluate those assets while they're in OREO again?

We do them on a 6-month basis.

And then there's kind of...

Well we do that on a 6-month basis, but if we evaluate property and there's one next door to it, then we'll use that particular appraisal as an indicator of valuation of the other properties. So it's a little misleading just to say 6 months because it's incumbent upon us to get the mark right every quarter.

Okay. And then kind of in the same breath as OREO, do you participate in any of the OREO exchange programs that were outlined by the OCC in their March 24th letter?

No, we don't.

Your next question comes from Betsy Graseck of Morgan Stanley.

Just a quick question on C&I, I wanted to understand where you're seeing the demand, the types of products that you're seeing and then obviously, your C&I is going up in a flattish market environment so I wanted to understand that.

If you look at it, really, as I mentioned a moment ago, it's a combination of increased line utilization which has been an encouraging sign as we saw little bit of our commercial industrial customer starting to access those lines. We had initially thought that they would access their liquidity that they're keeping with us and depository accounts before they started accessing the lines. It appears that’s not happening, that they're accessing the lines and holding the liquidity. When you look at the products that, when you look at the reasons why that, as we said earlier, you're seeing some capital expenditure activity that had been put off for quite some time and now they're at the juncture that they are spending again for capital projects. In addition, we're seeing quite a bit of M&A activity. They're using the opportunity to acquire assets and competitors in what has turned out to be a slow recovery environment. I'd also mention that we got a number of specialty industries that continue to show strength. We've mentioned them in the past. I would say the strongest of that group right now is in the Energy sector but we also are seeing strength in Transportation, and Healthcare has been sort of a solid performer for us all along. It continues to perform and those are the segments that predominantly we're seeing the opportunities in.

Okay. And then as -- on the credit side for C&I and CRE, alike obviously, a big function down in your NCOs this quarter, just wanted to understand on the CRE side, was that related to any specific lumpiness in the prior quarters? Are you now at a run rate to continue to improve from here or do you see that there's still some lumpy exposures in there that could drive that number to be volatile?

There's still going to be some lumpy exposures, certainly, a lot less volatility, a lot less product relative to the outstanding balances. What we did see is that the land single-family and condo, they contributed to the -- in migration fell pretty dramatically between quarters. It's going to bounce around a little bit as we come out of this. As one can expect, but we do again, see some volatility on those numbers.

Your final question comes from Jefferson Harralson of KBW. Jefferson Harralson - Keefe, Bruyette, & Woods, Inc.: I want to ask you about the regulatory detail; it looks like a small amount $40 million was disallowed this quarter. I wondered if that was just driven by a lower forecast earnings or it hit some sort of limitation?

It was primarily driven by the fact that if you look at the gross number, it was up $80 million, so $40 million of that was counted in capital and $40 million was disallowed just based on the math. So it really wasn't a dramatic change. We also went over a year or so. There's some impact to the tax credits that we have in terms of how the math works on the allowance calculation, but really look at the gross going up $80 million and half of that going into the calculations being the big driver. Jefferson Harralson - Keefe, Bruyette, & Woods, Inc.: Okay. Thank you that's helpful, I guess with that answer, I suppose there's no read through to the potential of GAAP DTA change there?

Right. There's no issue from our perspective in terms of realization from a GAAP basis.

Well, we thank everyone for your time and participation this morning and that this will conclude our meeting. Thank you.

This concludes today's conference call. You may now disconnect.