Regions Financial Corporation (RF) Q2 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, Operator, and 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 here and available to answer questions is Matt Lusco, our Chief Risk Officer; and Barb Godin, our Chief Credit Officer. As part of our earnings call, we will be referencing a slide presentation that is available under the Investor Relations section of regions.com. With that said, let me remind you that in this call, we may make forward-looking statements which reflect our current views with respect to future events and financial performance. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results and other developments. Those statements are based on general assumptions and are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. Additional information regarding these factors can be found on our forward-looking statement that is located in the appendix of the presentation. With that said, let me now turn it over to our President, CEO, Grayson Hall.

Thank you, List, and good morning, to all participants. We appreciate your time and interest, and welcome everyone to Regions Second Quarter Earnings Conference Call. I'll begin today's call by covering highlights and business results, then David Turner will provide additional details on the financials a little later. Regions second quarter 2011 results further demonstrate that we are executing our business plans and making substantial progress. Regions earned $55 million or $0.04 per diluted share, marking the third consecutive quarter of profitability. Core business performance continued to improve as core pretax pre-provision net revenue rose to $500 million, the highest level since the third quarter of 2008. We continued to see improvement in quality loan demand as we originated $16.7 billion in new or renewed loans and commitments, a 26% increase from first quarter's 2011, $13.3 billion. Credit related costs, which include our loan loss provision, OREO expense and held-for-sale losses declined to a 2-year low or an estimated $0.22 per share after tax. Additionally, Morgan Keegan reached a settlement with the SEC, FINRA and state regulators that financial impact on second quarter earnings related to the $210 million settlement was a $44 million tax benefit on a portion of settlement, which had previously accrued to nondeductible. Furthermore, with respect to Morgan Keegan, we also announced our intention to explore strategic alternatives. As a result of this decision, we announced the formation of a new wealth management organization that will integrate trust, private banking and insurance business into a single business within the bank. Establishing this new organization enables us to focus on key profitable customer segment with the goal of increasing noninterest revenue, deepening customer relationships and enhancing values. During the quarter, we repositioned our investment securities portfolio, shortening the duration, resulting in approximately $24 million in security gains or $0.01 per share after tax. On the expense front, as a continued focus on productivity and efficiency initiatives, we made the decision this quarter to consolidate approximately 40 branches and to dispose off property and equipment resulting in charges of $77 million or $0.04 per share. Sequentially, net interest income was steady. And fee revenues reflected lower brokerage income, offset by robust service charge income. Noninterest expenses, adjusted for the $77 million in charges, declined 4% first to second quarter, demonstrating disciplined execution in our efforts to improve productivity and efficiency. Recent macroeconomic indicators reveals further weakness and uncertainty in the economy, and we continue to experience an uneven recovery, particularly in the Southeast. However, these economic and global risk concerns do not lead to material changes in our economic outlook of below trend growth. We continue to focus on what we can control in this environment, delivering continued improvement in our operating results and long-term franchise value. Our plan focuses on servicing our customers, enhancing enterprisewide risk management and building sustainable profitability. Building sustainable profitability starts with continued improvements in asset quality. Key credit metrics continue to improve as formation of nonperforming loans are down for the third consecutive quarter. And nonperforming loans, excluding loans held for sale, have declined 5 quarters in a row. The loan loss provision was down 17% linked quarter and business services criticized loans decreased another 14%. Notably, our Investor Real Estate portfolio has now been reduced to $13.4 billion, nearly 50% below 2011 -- 2006 level. In addition to credit quality, core business performance continues to improve. We are targeting a more diversified, balanced and profitable business mix. As of June 30, business services accounted for approximately 61% of our loan portfolio and consumer services comprises 39%. Over time, we are targeting a better balance with a focus on building the generally higher margin consumer portfolio and appropriate pricing on our business services portfolio. Although consumers continue to deleverage, our consumer services loan production was 14% higher year-to-date 2011 compared to 2010, and 8% higher on linked quarter basis, led by an increase in mortgage, indirect auto and direct lending. Indirect auto was particularly strong as production rose to $291 million in the second quarter or 14% higher than the prior quarter. We continue to expand this business and now have signed over 100 -- signed over 1,000 auto dealerships and expects to reach 1,200 by year-end. An example of how we're keeping our business focused on the customer is our reentry into the credit card business. Late in the quarter, we acquired a portfolio of approximately $1.2 billion, the portfolio consists of Regions branded consumer and business check card accounts, credit card accounts, of which 2/3 have 2 to 5 other banking services with Regions today. Our plan is to gradually grow this portfolio over time, by controlling a positive customer experience, strong cross sale throughout our customer base, and disciplined pricing and underwriting. We believe that keeping focused on our customers require strong knowledge of customer needs and expectations. As such, we are committed to adding new products and services to further expand our business and add value. We continue to look for opportunities to expand our consumer banking product line to address the ever-changing needs of our customers. We are committed to serving the needs of our consumer customers with various credit products, payment and cash services, convenience of branches, ATMs, Internet and mobile, and providing financial protection products to give customers confidence and trust. The new products and services not only allow Regions to meet evolving customer needs while also to diversifying growing dependable revenue streams. Although we're focused on properly growing our consumer business, we remain committed to adding and deepening relationships with our commercial portfolio as well. Our business services loan production for the second quarter totaled $14.6 billion, a 14% increase over the same period a year ago and a 32% higher first to second quarter. We're continuing to see strength at middle market, commercial and industrial, driven by both existing and new customers, specialized industries, such as energy, healthcare and franchised restaurant are particularly strong, with new relationships accounting for much of the activity. Commercial & Industrial commitments have increased 7% year-to-date and line utilization has remained relatively stable even with the growth in commitments. Another area also performing well is small business, with year-to-date production up more than 8% over 2010, this business remains a priority at Regions, providing not only loans, but also contributing fee income streams and deposits as well. Our strength in gathering low cost deposits continued this quarter. Average low cost deposits rose 4% compared to the second quarter last year. And as a result, total deposit costs declined 26 basis points year-over-year to 53 basis points. Total funding cost have also declined 31 basis points over the same period, ending the quarter at just 80 basis points. Fee income is and will remain a significant component of our plan to diversify and expand our revenue streams. Here, again, our focus and emphasis on service quality is paying off, along with our ability to quickly adapt to changing environment. Despite legislative and regulatory rule changes, we grew service charges fee income 2% year-over-year and 7% linked quarter. Along with the industry, we face challenges required by the Durbin amendment which are to be implemented in October this year. Based on the final ruling, the company estimates that the impact on annual debit interchange revenue will be approximately $170 million unmitigated. However, we plan to promptly adjust our business model to deal with new rules, and over time, we will be able to offset this impact through revenue enhancements and disciplined expense management. Improving productivity and efficiency is a foundational part of our business strategy. We have and will continue to aggressively identify opportunities to reduce cost without adversely impacting service quality, and business development and our opportunity to grow. And with this concluding review, I'll turn it over to David for an update on the financial details. David?

Thank you, Grayson, and good morning, everyone. Let's begin with the summary of our second quarter results, beginning on Slide 3. Results demonstrated solid linked quarter progress, including strong service charge fee revenue, lower core expenses and broad-based credit quality improvement. Earnings per share totaled $0.04 and net income available to common shareholders amounted to $55 million. Pretax pre-provision net revenue or PPNR totaled $447 million. However, excluding security gains and branch consolidation costs of property and equipment charges, adjusted PPNR increased to $500 million, the highest level in 11 quarters. Within PPNR, net interest income was essentially steady linked quarter and the resulting net interest margin was 3.05%. Excluding securities gains, adjusted noninterest revenue declined $7 million or 1% linked quarter, but was relatively flat on a year-over-year basis. Noninterest expenses, adjusted for $77 million of branch consolidation and property and equipment costs, were lower than the prior quarter by $46 million or 4%, reflecting reduced professional and legal fees, as well as the decline in salaries and benefits expense. Included within income taxes for the quarter is a benefit of $44 million related to the announced Morgan Keegan settlement. Last year, at the time of the accrual, we believe the entire amount would be nondeductible. Upon final settlement, a portion was determined to be deductible, resulting in this quarter's $44 million tax benefit. Let's now take a look at our improved credit quality trends, beginning with nonperforming loan inflows. As shown on Slide 4, inflows of nonperforming loans declined $175 million or 24% linked quarter to $555 million, the third consecutive quarterly decline and the lowest level of inflows since the first quarter of 2008. On an absolute basis, almost all loan categories experienced the decline in gross inflows. Notably, income producing commercial real estate and the Land/Condo/Single Family portfolios demonstrated some of the largest improvements. On the right side of the slide, note that 42% of June 30 total business services nonperforming loans were current and paying as agreed, 4 percentage points higher linked quarter. Turning to Slide 5. Nonperforming loans, excluding loans held for sale, declined $303 million or 10%. This quarter, we sold or transferred the held-for-sale $620 million of criticized loans consisting of $75 million of loans that were sold and $545 million of loans moved to held-for-sale. I would like to point out that these loans that were in held-for-sale at June 30 have now been subsequently sold at the marked amount and are now off of our balance sheet. Early stage credit indicators demonstrated improvement with total delinquencies decreasing for the fifth straight quarter. Additionally, business services criticized loans were down approximately $1.2 billion or 14% from first quarter's level, and have now declined each quarter since fourth quarter 2009. These 2 leading asset quality indicators serve as important measures in estimating future inflows of problem loans, and once again, support our expectations for continued improvement in nonperforming loan migration. Accruing Troubled Debt Restructuring's or TDRs, increased modestly this quarter to $1.66 billion. We expect to see an increase in TDR's as a result of recent accounting literature that will be effective in the third quarter. However, importantly, we do not anticipate there will be a material impact to our loan loss allowance resulting from this rule change. And moving on to Slide 6. Second quarter's net charge-offs were impacted by the $620 million of loans that were sold or moved to held-for-sale. This disposition activity resulted in $207 million of charge-offs. Net charge-offs totaled $548 million and exceeded the loan loss provision by $150 million, primarily associated with allowances allocated to these loans. Excluding net charge-offs related to this quarter's disposition activity, net charge-offs declined 9% and reflected broad based improvement in almost all categories. Looking forward, net charge-offs are forecasted to remain elevated for the balance of the year. Due to this quarter's disposition efforts, our loan loss allowance to nonperforming loan coverage ratio increased from 103% to 112% at June 30. Additionally, we also sold $289 million of OREO and nonperforming loans that were previously held-for-sale at approximately break even. Turning to the balance sheet. Slide 7 breaks this quarter's change in loans and loan yields. Average loans declined 1.6% with declines at Investor Real Estate offsetting strong middle market C&I growth. However, ending loans were relatively flat linked quarter, reflecting our late quarter credit card purchase. The aggregate loan yield declined 4 basis points compared with the prior quarter to 4.27% as average 30-day LIBOR rate declined 6 basis points this quarter. We continue to see strength in our commercial loan portfolio, with average and ending loans up 6.1% and 6.6% from 1 year ago, respectively. Growth in our middle market C&I is particularly strong, driven by specialized industries which include: energy, healthcare, franchise restaurant, transportation, technology, defense and asset-based lending. Customers' refinancing, mergers and acquisitions and capital expenditures are major contributors to this growth. Again, this quarter, we experienced increases in 65% of our markets and total commercial & industrial commitments have risen to $1.8 billion year-to-date, ending the quarter at $28 billion. On an ending basis, Investor Real Estate declined another $1.4 billion and now totals $13.4 billion. As noted earlier, second quarter's credit card portfolio purchase demonstrates that we are focused on being a full service provider and is yet another way for us to rebalance our portfolio between commercial and consumer lending. Now moving on to deposits. As noted on Slide 8, we continue to benefit from our strength in gathering low cost deposits, which, on average, grew $1.3 billion linked quarter, while our average time deposits declined another $465 million. As a result, average total deposits rose $865 million or 1% over the first quarter. Average low cost deposits as a percentage of total deposits has risen from 72.5% in the second quarter of 2010 to 76.6% this quarter. This positive mix shift led to another 8 -- 6 basis points decline in second quarter, total deposit costs to 53 basis points. Second half deposit costs should continue to benefit from an improving mix through additional repricing of maturing CDs at lower market rates. For the second half of this year, $6.1 billion of CDs will mature and carry an average of 1.48%. Turning to Slide 9. Taxable equivalent net interest income was flat, totaling $872 million with the resulting net interest margin declining 2 basis points to 3.05%. Our margin continues to reflect our excess liquidity held at the Federal Reserve. During the second quarter, we took advantage of long-term rates declining and repositioned our securities portfolio, shortening the duration to just over 3 years. Specifically, we sold $4 billion of 3.5-year agency mortgage-backed securities and reinvested the proceeds primarily in 2-year agency mortgage-backed securities, resulting in $24 million of security gains. Barring unexpected movement in interest rates, net interest margin should be relatively stable with an upward bias for the balance of this year. Let's now shift gears and look at noninterest revenue on Slide 10. Excluding security gains, second quarter noninterest revenue amounted to $757 million, down 1% sequentially. Second quarter's noninterest revenue reflected lower brokerage revenues, offset by solid service charges and mortgage income growth. Lower private client and capital markets revenues were the primary factors contributing to the sequential quarter decline in brokerage revenues. The linked quarter increase in service charges reflects the ongoing restructuring of our accounts to fee-eligible. Also, interchange income was higher, benefiting from increasing active debit card usage as total transactions year-to-date are 12% higher compared to a year ago. New product innovation such as the launch of short-term small dollar cash advances for relationship customers and identity theft protections will serve to further diversify and build our revenue streams. And just to reiterate what Grayson said regarding the Durbin Amendment, we believe, based on the final ruling, we will be able to mitigate the lost revenue over time. Lastly, mortgage income was up 11% from the first quarter due to improved mortgage servicing right and related hedging performance. Turning to expenses on Slide 11. Second quarter noninterest expenses totaled $1.2 billion. However, excluding $77 million in charges, primarily related to branch consolidation and property and equipment charges, adjusted noninterest expense totaled $1.1 billion for the quarter, a solid 4% below first quarter's level. The key drivers of this quarter's decline were a 6% reduction in salaries and benefits expense and a $20 million reduction in professional and legal fees. Credit related expenses, which include other real estate expense, gains and losses from held-for-sale and credit-related personnel costs, declined modestly, accounting for 8% of second quarter's adjusted noninterest expenses. FDIC premiums increased $20 million linked quarter, reflecting new rules, which went into effect on April 1. As Grayson noted, we will consolidate approximately 40 branches as part of our ongoing and routine efforts to strengthen the franchise through productivity and efficiency initiatives. These branches will be closed later this year and will have minimal customer impact. We recorded asset -- associated property evaluation charges and equipment expenses of $77 million this quarter, and expect to realize pretax future net cost saves of approximately $19 million annually. Including these announced branch closings, we will have reduced our branch count 19% and disposed of or exited 5.7 million square feet of company space since 2006. In addition, since 2006, we have reduced our headcount over 25% and 568 positions year-to-date. We will continue to rigorously and diligently review our expenses to ensure they are tightly managed without sacrificing investment opportunities or our high standards for customer service. But we'll provide a snapshot of our healthy capital ratios and favorable liquidity position. Tier 1 Common is estimated at 7.9% and our Tier 1 ratio stands at 12.6%. Liquidity at both the bank and the holding company is solid, with a loan-to-deposit ratio of 84.3%. Overall, this quarter's results demonstrate that our strategy is working as our core business performance continues to improve. And with that, I'll turn it back over to Grayson for his closing remarks.

Thank you, David. Before taking questions, I want to spend just a moment summarizing the actions we are taking to both improve Regions performance and to build a stronger organization for the future. Focusing on the customer, enhancing enterprisewide risk management and building sustainable performance are the 3 priorities that we are executing. As second quarter's results show, we are making continued progress in taking deliberate and appropriate steps to deliver on this business plan. To recap, this quarter, we continued to de-risk our loan portfolio. We purchased our Regions branded credit card portfolio. We grew our commercial and industrial business. We organized a new wealth management line of business within the bank. We introduced some new suite of products and services for our consumer base and we announced continued efforts to rationalize our expense base in a disciplined and continuous manner. Another critical component of this strategy is to ensure that Regions has the appropriate level of capital to support its long-term plans. To that end, as we previously mentioned as part of our capital planning process, we announced our intention to explore potential strategic alternatives from Morgan Keegan, which we believe is in the best long-term interest of both Morgan Keegan and Regions Financial. All in all, I'm encouraged with our second quarter progress. We still have work ahead of us, but we are committed to the ongoing successful execution of our business plans and we are delivering improved results. Before we open the lines for questions, I want to address an issue that has received some attention recently. In June, a federal judge denied our motion to dismiss a civil lawsuit and suggested, in her opinion, the audit committee of our Board of Directors and government authorities are investing accrual status of certain loans in 2009. That prompted media coverage and questions from investors, so in the 10-Q, we will file in the next week or so, we are going to include a disclosure which will say that the company has received inquiries and subpoenas from government authorities related to 2009 and earlier periods regarding accounting matters that have also been the subject of pending civil litigation against the company. The company is cooperating fully and providing responses and the audit committee of our Board of Directors is conducting an investigation with the assistance of outside counsel and consultants. I think it's important to note these inquiries relate to 2009 and earlier periods and do not have any bearing on our present financial statements, including our level of nonperforming assets or our loan loss reserves. Please recognize that we're limited in what we can say beyond this disclosure. With that, operator, I'll open the line up for questions.

[Operator Instructions] Your first question comes from Matt O'Connor of Deutsche Bank.

I think in general, the expense management has been very strong, which is good to see given the revenue environment is tough for all banks including yourself, you highlighted the additional $19 million of run rate savings, and just how do we think about the expense base going forward once we adjust for that, once we back out some of the restructuring charges? What would you think about the trend of expenses incorporating that -- once we incorporate that?

Yes, Matt, this is David. We still have a lot of environmental expenses embedded in our income statement. Roughly, call it $300 million a year that we're continuing to work on. You also saw our increase in FDIC premiums during the quarter, which is based on an estimate of what we think the premiums will be. There are still ongoing discussions on the new definitions that are embedded in the new rules there, so we will continue to focus on expenses. Part of our -- we look at headcount, we look at branches, we will continue in this type of environment where revenue is harder to come by, you have to be diligent with regard to expenses. So we are going to continue to work on getting those down. As I mentioned before, we expect that over time, that we ultimately settle in to an efficiency ratio, which is in the lower 60s, or higher 50%, and we're not there yet, so we still have some work to go.

And Matt, this is Grayson, given our projection for a slow and somewhat uneven economic recovery, our focus on expense disciplines to drive efficiency and productivity will continue. As David mentioned earlier, we're down over 500 positions since the first of the year. I'm encouraged to say that we did that with improving service quality. Our service quality metrics continue to improve. I think as David mentioned, you really can divide our expenses into 2 categories, really, discretionary expenses and also environmental expenses. The environmental expenses are starting to improve, which is in their elevated nature has been a great turn of events for us this quarter. But our discretionary expenses will continue to trend downward as well because all across the franchise, every business manager we have is focused on this issue and we believe we will have to for some time to come.

And then just separately you did mention about the TDRs increasing in the third quarter with the accounting change. Do you have an early estimate of what that might be? And then similarly, the reserve impact, you said, is not going to be meaningful, but any estimate on what that might be in dollar terms would be helpful.

Yes. Matt, we haven't and we're working through that right now to be able to quantify the increase. We don't have that yet. We do think that maybe more important component is the expectation of the driver of any additional reserves. And we do not believe that, that change in accounting of TDR definition will impact our reserves meaningfully. So as soon as we get the number, we will be posting that up. We don't have that today.

Your next question comes from Marty Mosby of Guggenheim.

I wanted to ask 2 questions. One was, as we move the securities portfolio shorter, aren't we just increasing our asset sensitivity and kind of giving up some of our future earnings if rates stay at this level?

We do, Marty, but we also entered into some fix receipts, fixed swaps with that, that protects us with a lower rate environment. So again, our expectation is rates will be down here for a while, and -- but we've protected ourselves on the downside.

Okay. So the combination of the swaps with the shorter securities weren't going to impact NII going forward?

That's right.

Okay. And then my other question was, in the release, kind of in the back, this is more of a detailed -- you had about a 2% impact from Basel I to Basel III risk-weighted assets, and then kind of in the footnote, we say we're developing systems in the calculation. The 2% number seems a little slight to me. I was curious what you were including, if you're including any shift in the asset quality, calculation or any of the net interest margin volatility or things like that in the new calculation for Basel III?

Yes, Marty, one, credit-related, obviously, these are all estimates right now, trying to come up with what the risk-weighted assets are. It's a little early for that. The purpose of us putting Basel III in there to begin with is there was a lot of noise about what that might mean to some of the money center banks, and we wanted to answer the question that our transition to Basel III is not going to be that difficult for us. We just don't have the same construct that the larger money center banks do. So we are continuing to look at definitions and implementation, but I wouldn't get too caught up on the specific numbers. We do believe we'll be in compliance. Obviously, we think we'll have higher ratios than what you see when it comes time for implementation of Basel.

The next question comes from Ken Usdin of Jefferies. Kenneth Usdin - Jefferies & Company, Inc.: Just a couple of questions on credit quality. I'm wondering, can you help us understand, of the reserve release this quarter, how much of it was related to the actual loan sales versus how much of it was just related to the other parts of the portfolio improving?

This is Barb. I'll go ahead and respond to that question. The majority of it was related to the actual loan sale that we did, although there was a small portion that was related otherwise. Kenneth Usdin - Jefferies & Company, Inc.: Okay. And then as far as your comments -- David, your comments earlier on charge-offs remaining elevated, understanding that a portion of this quarter's was, again, related to the loan sales. Are we expecting -- are you generally expecting charge-offs to still remain at the level that it was this quarter going forward?

Well, clearly, our charge-offs were up because of our de-risking and we provided, if we had not had that charge-offs would've been a couple of hundred million dollars lower. I think the point we need to make is, we think that from a charge-off standpoint, core charge-off, they will be elevated compared to what our expectation is on a normal run rate. We have the reserves established for that. We're holding a pretty large reserve at 3.84% today. So you would expect charge-offs to continue to remain elevated. The bigger issue is, what will the provision look like over time? And you saw us provide less in charge-offs for the first time in a while this past quarter. So we don't have any planned transactions, if you will, at this time that would cause that charge-off to be -- level to be where you saw this past quarter. Kenneth Usdin - Jefferies & Company, Inc.: And -- but that's my last follow-up is just on your last point there. So if the majority of the release this quarter was specifically against loans that were sold and there is not much release in the rest of the book, then is it fair to assume that you won't necessarily be planning on releasing reserves outside of incremental sales that you might conduct in the future?

Ken, I don't think you can look at it that way. The charge-offs are charge-offs, and the provision is a separate calculation that relates to any new issues that you may have coming up or any degradation in issue -- in loans that you already had reserved for. And I think we let our allowance model work for us, and we book whatever reserve the model tells us we need to have. So I don't think just because we had charge-offs, specific reserves attributable to those that you can imply, we would not provide less in charge-offs going forward. We're not admitting that we're going to do that either, we're just saying don't look at it that way.

Well it's -- I do think you have to look at the leading indicators in terms of criticized classified assets, in terms of early and late stage delinquencies. When you look at our credit metrics, they continue to show some favorable trend, albeit slower than we would like, but a favorable trend nonetheless.

Your next question comes from Erika Penala Bank of America Merrill Lynch.

My first question relates to the $620 million in loans that were reclassified in the quarter. Could you give us a sense of how much of these loans came out of the NPL bucket versus criticized but accruing, and what the associated mark was on that $620 million before you took the additional charge-off?

Erika, I think I have your question. Out of that $620 million, $255 million of those were accruing and the remainder were in non-accruing status. Those were the book value numbers and you saw our charge-offs, the $207 million on that $620 million.

Right, I guess, and what was the previous mark on that -- I mean, on that $620 million? I assume that when you reclassified it to nonaccrual, there was a reserve associated of the...

Yes. The $620 million is the net book value that does not have reserves ascribed to it. We ended up having charge-offs of $207 million and we released our reserve $150 million. So that would give you some idea about the additional charges that we would have taken on that pool of loans.

Okay. And Barb, I was wondering if you could give us an update in terms of the redefault trends that you're seeing, how that's tracking on the resi TDR book? And also, if you can give us a refreshed LTV on that $1.2 billion.

I'll start with the trends that we're seeing, the redefault rate continues to hold in around 20%. So that really has not moved over the years. As you can see from the numbers this quarter, we did add a little bit both in home equity and resi to our TDR as we continued to apply our customer assistance program in helping customers. Relative to the second part of the question, which I need you to refresh me on?

I'm sorry, the refreshed LTV of the -- just specific to the resi TDR book, please.

I don't have that broken up that way, Erika, but I can get that back to you.

Okay. And just one last question, in terms of your comments on really retooling your deposit product offerings to adjust to a new regulatory reality, I was wondering if it's too early to give us a sense of how much of the Durbin income you can end up mitigating and how long does "over time" mean?

Well, Erika, let me answer it this way. One is, we put together a plan of mitigating the impact of Durbin that includes both revenues and expenses. And we will, as you've seen us over the past year, really moving from a free checking environment to a fee-eligible environment. I think from a strategy standpoint, our strategy is not going to be that different than many of our competitors. But most of those strategies are speculative at this juncture, but we intend to increase the hurdles, if you will for our checking accounts. We certainly have under consideration specific charges around debit cards themselves and our implementation of that will occur between now and year-end, and we will be disclosing the impacts of those as we start seeing how customer behavior starts to modify in the new environment.

Your next question comes from Scott Valentin of FBR. Scott Valentin - FBR Capital Markets & Co.: Just regard to the margin, you mentioned a stable margin with, maybe, an upward bias. I was just curious, looks like CD rates, there's still room to reduce CD rates, maybe cost of funds can come down somewhat. And I guess, the other question would be liquidity, is there room to reduce liquidity and therefore, maybe see some asset yield improvement. I just thought maybe there'd be a brighter outlook for margin given some outlooks like relying through to improve margin.

Yes, Scott, you're right. That's why we put upward bias to it. We also have nonperformers, and as those continue to yield, what -- there's a pickup there. One of our issues that we've been facing is, from a liquidity standpoint, we've had tremendous liquidity over this past quarter. We had an average of right at $5 billion at the Federal Reserve. And we'd like to put that to work on a more efficient basis. So we've been working to return to sustainable profitability, improve credit metrics and get our credit ratings improved such that we can take, become a little more efficient with regards to how our balance sheet is positioned. And when we can do that, you can see that we can do a lot better earning than 25 basis points with that $5 billion over time. So the question is, when can we do that? And we're working hard on that. You're right to point out, we do have some more benefit to pickup from deposit costs. We are at about 53 basis points today. And I think that we will continue to improve there. And then, we layered on roughly a little over $1 billion credit card purchase that should enhance our loan yields going forward. So if you're trying to imply we're being a little conservative in terms of the call, I'm with you, but I don't think until we can get our balance sheet positioned as efficient as we want that we're going to have a runaway margin.

And Scott, this is Grayson. From a -- if you look at it from a deposit cost standpoint, we do continue to believe that we got more opportunity there to reduce our cost on the margin. I mean, loan yield perspective is, we're seeing new production across all asset classes, product types. We are seeing improved yields and rates on new production. Obviously, there's more competition that we're seeing out in the marketplace, but the rates that we're able to put new production on the books is still at levels higher than precrisis levels. And as we add new production to the book, we are seeing improvement in our overall yield outlook on the loan portfolio. That being said, most of our commercial loans are tied to 30-day LIBOR. We did have a pretty challenging operating environment in relates to LIBOR in the second quarter. Scott Valentin - FBR Capital Markets & Co.: And just a follow-up question, you mentioned the Morgan Keegan long-term, you think it's the right thing to do. I'm just curious how you win a trade-off between losing some earnings power on the sale of Morgan Keegan versus maybe the capital that frees up?

Well, we had to go through and have over the past several months a fairly extensive review of our businesses. We continued to do that across our portfolio of businesses within the company. I think that the settlement that we were able to achieve with the SEC, FINRA and the state regulators in regard to Morgan Keegan really provided an opportunity for us to look at that business more strategically and decide where we go, it's a very valuable franchise. It's been part of this organization since 2001, and we do -- our preference is to sort of maintain some type of strategic alliance as we move forward, but we continue to believe that as we look at our capital planning process that taking a strategic review at this point in time is the right answer. We will be giving more clarity on our financial pro formas as this process matures. Now, we're not in a position to give that clarity today, but it will be forthcoming.

Your next question comes from Jefferson Harralson of Keefe, Bruyette, & Woods. Jefferson Harralson - Keefe, Bruyette, & Woods, Inc.: I was going to follow-up on Erika's question. I think that the -- I don't know if I call it a concern, but biggest issue I think people have is with all banks right now, what they could sell the problem loans for versus what their markdown. And if you've taken a $207 million loss in addition to $150 million reserve on $620 million of loans moved, it seems like that the loans aren't -- for all banks, not just you guys, but to close -- able to sell for close to where their margins is going to take a long time to get through this whole cycle. Is there -- I guess could you comment on that, and is there -- I guess can you give us some comfort about the marks in the future losses and how long it's going to take to work through those problem loans?

Jefferson, it's Barb. The $150 million that we released was not in addition to, it was part of the $207 million that it cost us. So we already had these loans pretty well marked at the time that we sold them. So if you look at that rough delta between what we sold, from the $620 million, and the difference between the $207 million and the $150 million, it's roughly $60 million, say, roughly a 10%. We chose those assets as we -- part of our continuous credit servicing, we've looked at each of the accounts, we looked at how long it would take us to accomplish our workout strategies, and in several instances, and knowing at the time that the market was pretty enthusiastic for some of these individual assets, we felt it was in our best interest to go ahead and pull that workout strategy forward and go ahead and sell it. And again, the 10% therefore, I would reflect as being more of a liquidity premium in the market than it was a credit mark. Jefferson Harralson - Keefe, Bruyette, & Woods, Inc.: All right. Can you just comment on the -- you mentioned the pull ahead of problem loans, should we expect more of that type of thing or is it going to, as the inflows are slowing down, are we going to slow down the disbursement?

Yes. Jefferson, this is David. We don't have any current plans for a disposition that we -- similar to what we just we had. We do have loans in held-for-sale and OREO, which we would continue to market and sell. But we are continuing to evaluate our portfolio. And if it makes sense to have a further transaction, then we will mark loans to held-for-sale, take our mark, put them in there and sell them. But right now, we do not have that currently planned.

Your next question comes from Chris Mutascio of Stifel, Nicolaus. Christopher Mutascio - Stifel, Nicolaus & Co., Inc.: Barb, my first question, when it comes to the Investor Real Estate TDRs, they were up about 30% this quarter, and that's before, I guess, the accounting change next quarter. Can you refresh my memory as to what type of collateral you have on those Investor Real Estate TDRs and what the average LTVs would be?

Yes, I don't have the average LTVs in front of me, but let me just give a general comment on the TDRs, if I could. Remembering that we have decided as a strategy on our work outside to keep all of our duration short, so all of our renewals are short, we typically don't go beyond a year. And so because of that, as we look at these loans that are coming up, that we actually are going to renew this year a lot of those are going to fall into TDR status because what will happen is, one argues that, "Would you ever make a loan to a classified credit and could you ever get the appropriate rate around it?" And so, again, we've taken the position, conservative perhaps, but we've certainly taken the position that the answer is no, and so therefore, they would become TDRs. The collateral behind it is, all manner of things, income producing in general, but that would make up the story of it. Christopher Mutascio - Stifel, Nicolaus & Co., Inc.: Great. David, what's the book value of Morgan Keegan?

We haven't shared that book value number. Christopher Mutascio - Stifel, Nicolaus & Co., Inc.: Well, let me -- if you sell it for less than book value, that loss goes to the income statement. Would it be a similar hit to Tier 1 Common?

It would be, if we end up having a loss, yes. And if we had a gain, it would increase to Tier 1 Common. Christopher Mutascio - Stifel, Nicolaus & Co., Inc.: Right. Okay. My last question is, and David, the long-term debt yields are up about 22 basis points sequentially. Any -- was that a swap-related, why the yields would go up on your long-term debt?

It was just the maturing piece that was -- because we had it swapped out, it was on a weighted basis, it was a lower rate. And so when it came out, it just forced everything else up.

Your next question comes from Kevin Fitzsimmons of Sandler O'Neill. Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P.: You all have been fairly active over the last few quarters just pulling out structural changes, the branch sale, entering indirect auto, reentering credit card, now you're evaluating Morgan Keegan. Can you give us a sense for are there other levers, other options that you have kind of on your planning board that are possible or are you kind of at a point where that's really it? And it kind of plays into the earlier question about how do you evaluate or how do you weigh that loss or shortfall of revenues if you part with Morgan Keegan? Just wondering what other kind of levers are out there that you're evaluating.

Well, let me start and I'll let David sort of respond also. We have been continuously reevaluating our businesses, our products and our markets. And we've got a fairly full agenda at the moment, with all the activities going on. We certainly continue to run through that process on a quarterly basis as we go through a fairly extensive capital planning process, and making sure that we're looking at these businesses the right way. I think the announcement we made around indirect, around credit cards, and now, around reviewing strategic alternatives for Morgan Keegan have been part of that planning process for several quarters. I think you will continue to see us do those types of evaluations. We're not in a position to share what our thoughts are today on future events, but I think you can have a certain amount of confidence that we are in a continuous review of all the businesses we're in to try to strengthen this organization for the future and put us in a better position to be successful in delivering the results that our shareholders desire.

Yes, Kevin, this is David. We've had a strategic plan in place that our board has approved, and we've been executing in accordance with that plan. Certainly, if you'd look at an example of Morgan Keegan, we needed to be in position to settle the regulatory issues that we've talked about before we could move forward with evaluating strategic alternatives for Morgan Keegan. So we will continue to look at all options to continue to enhance the value to our shareholders. Specific to Morgan Keegan, you asked at the end of your question kind of how do you replace the revenue hole to the extent that we execute on if something comes out and we actually dispose of Morgan Keegan, you need to look at Page 10 of the supplement, which carves out -- and this is not apples to apples, but it does give you most of that is Morgan Keegan, it's included in the evaluation. It does include, on Page 10, trust and asset management, which is not part of the strategic evaluation, but you can look at the numbers that come out of that. And as you think about how you replace revenue, you need to also consider about the expense that won't be there to the extent we pull that trigger. And also note that whatever proceeds raised in the transaction, if one happens, serves to offset the amount of debt perhaps that we have to raise as we position ourselves for -- at the Parent Company as we position ourselves for repayment of TARP. So that's interest carry that you save by not having to go out in the marketplace and raise that debt. So you need to keep that whole-type transaction, not just focus on revenue. Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P.: Just one quick follow-up. You've talked a lot about the movement of customer accounts to fee-eligible status. I'd assume not all banks are moving at the same speed of -- in that process. I know it's early, but are you seeing any early signs on what the customer reaction is to that?

Well, this is Grayson. It's going to be an uneven approach by the industry. I think that it's too early to call at this juncture where yet to see in the marketplace what all the participants, what strategies all the participants will deploy. We believe, we put together a good strategy. We stand ready to modify that strategy, though, if the market necessitates that. But I think at this juncture, it's just too early to call what the customer reaction will be. We've certainly done a lot of research. We tested a number of theories and we've had customer groups in and we've listened to and spoke to. But we really got to wait to see what the behavioral changes of our customers turn out to be.

Your next question comes from Christopher Marinac of FIG Partners.

I wanted to extend the conversation and questions that Jefferson and Erika both had, it relates to, if you look at the change in classified of the past year, it looks like from the slide that it's roughly about $3.4 billion criticized adjustment in the last 12 months. And if I look at the charge-offs you've taken plus the $200 million for the held-for-sale move today, works out to about a 40% loss. Is the loss content going forward similar to what you just experienced in the last year in business services or should we be thinking of a number that might be a little less than that given just what's remaining in the classified in criticized bucket?

Christopher, this is David. I'll start and Barb you can add on. Obviously, the marketplace is changing dramatically each and every quarter. You're looking at a lot of history. In some cases, asset values are stabilizing, in some case, there are still challenges there. So when you try to forecast losses that are built in based on that history, it gets difficult to do. I would tell you as you think of our losses, and look at the reductions in our most problematic loan portfolios, Investor Real Estate is down 50% from where we were at the beginning of the cycle, down to $13.4 million. So we expect charge-offs to be there, that's why we have a reserve of 3.84%, and we believe we're adequately reserved for the credit risks that's embedded in the portfolio. When you have dispositions outside of the normal course, if you will, and we've had some of those over time, you introduce a liquidity discount that you have to take. And in some cases, that liquidity discount is worth taking and sometimes it's not. We clearly have disclosed the fair value of our loans, that's assuming we would have a -- sell everyone of our loans, and that's not the case. So predicting those losses will be at that same level is difficult. But we continue to evaluate the best strategy of our portfolio. And like I said today, we don't have any plans to market and sell. And if that changes, then we will take our charges and move on.

I'd add to that -- this is Barb. I'd add to that, that our land, single family and condos, being our most distressed parts of the portfolio, both balances did fall this quarter, as you see $2.5 billion, down from $4.4 billion just a year ago. So they've fallen substantially. The other comment I would add to that is, of that, as we look at the number of customers or the percentage of our customers in nonperforming loans that are paying as contractually agreed, that continues to go up each quarter. Compared to a year ago, as well, it's 24%, were paying as contractually agreed, and now we're at 42%. But that, too, suggests that the quality of what's in the nonperforming loans is a different quality over the last several quarters, and I would expect the same going forward.

Okay. Great. And then just a quick follow-up. Is there a rough percentage of the allowance that would be assigned towards the consumer as a broad number?

I don't have that handy. [indiscernible]

We will have to look at the note. We'll get back to you, Chris.

Your final question comes from Chris Gamaitoni of Compass Point.

On a broader level, when you were speaking about credit card cross-selling, were you -- I was unclear, was the strategy to bring customers in with credit cards and then cross-sell them or cross-sell existing customers with credit cards?

Understand this portfolio we acquired has been Regions branded for years, and so it's on a Regions card, it's predominantly sold to Regions customers. And our strategy is to cross-sell Regions customers with a credit card, not the other way around. As I said in my comments today, when you look at this portfolio, the vast majority of these customers already have banking relationships with Regions Bank. We've got about 2 to 5 products already sold to these customers on average today. So this is really just our ability to control the customer experience around the credit card for our customers, who already have a relationship with Regions and for us to deepen and strengthen that relationship. And you won't see us being most aggressive on a credit card. It's a relationship product from our perspective.

And then just on the short term cash loans, what's the average APR on those?

The average APR on the short terms?

Yes.

It's a fee business. It's not an APR product.

Right. But when you convert it to an APR -- I think we'll have a conversation off-line, that will be better suited.

Yes. Let me also respond. I think about 1/3 of our reserve is consumer, 2/3 of it is commercial. Chris, that was for you.

All right, well, thank you very much for your time, and we'll stand adjourned. Thank you.

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