Regions Financial Corporation (RF) Q1 2012 Earnings Report, Transcript and Summary

Good morning, and welcome to the Regions Financial Corporation's Quarterly Earnings Call. My name is Nicole, 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 on the call this morning. Our presenters today are our President and Chief Executive Officer, Grayson Hall; our Chief Financial Officer, David Turner. And also with us and available to answer questions are 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 at 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 on our forward-looking statement that is located in the appendix of the presentation. Let me now turn it over to Grayson.

Good morning, and thank you all for participating in Regions' First Quarter 2012 Earnings Conference Call. Simply put, this has been a quarter of significant accomplishment. In fact, I would characterize it as a pivotal quarter, with Regions now fundamentally stronger, strategically focused and well positioned to grow our franchise profitably. We certainly still have plenty of work left to fully accomplish our goals, but the past quarter's results position Regions well. Let's look at the key milestones that have occurred over the past few months. We successfully completed an approximate $900 million public offering of common stock. The overnight offering was significantly oversubscribed and priced at a premium from the previous day's close. Our equity rates, following the results of the Federal Reserve's large bank capital analysis review, there were no objections to our plan, demonstrating what we believe is the strength of our capital planning process. Subsequently, a major credit rating agency upgraded Regions, restoring us to investment grade status and attributing the upgrade to improving profitability, rise of asset quality and capital trends. Also, we completed the sale of Morgan Keegan, which closed on April 2, reducing our overall risk profile and improving liquidity and capital. And finally, on April 4, we redeemed the entire $3.5 billion of Series A preferred stock issued in the U.S. Treasury. On an ongoing basis, the redemption eliminates the payment of preferred dividends, as well as the amortization of the discount, which cost us in total $214 million or $0.17 per share in 2011. In addition to these important milestones, we also achieved broad-based asset quality improvement, providing strong evidence that we are at a long-awaited inflection point in overall credit quality trends. Plus, we continue to demonstrate disciplined progress in improving customer service quality in all of our business locations. Further, Regions' first quarter earnings from continuing operations were a solid $0.14 per diluted share and despite seasonal factors and legislative headwinds, adjusted pretax, pre-provisioned income approximated $419 million, a level that we believe will mark 2012's quarterly low point. We're off to a very good start in 2012 and given our recent capital accomplishments, as well as the ongoing successful execution of our business plans, Regions' outlook for the full year is encouraging. There's no question that the first few months of the year has been busy and eventful for Regions. We have accomplished a great deal and all these actions served to enhance our overall risk profile and allows us to focus on core fundamentals. As a result, we're a fundamentally stronger company that has encouraging momentum. Let me turn the call over to David who will provide first quarter's financial details. After which, I'll return for some closing comments before opening the call up for questions. David?

Thank you, Grayson, and good morning, everyone. Let's begin on Slide 3 with a quick snapshot of our first quarter 2012 financial results. We reported net income available to common shareholders of $145 million or $0.11 per diluted share, and income from continuing operations totaled $185 million or $0.14 per diluted share. A net loss from discontinued operations of $40 million or $0.03 per diluted share is attributable to an increase in professional and legal fees. Pretax Pre-provision Income, or PPI, was $438 million as reported. Net interest income declined linked quarter. However, net interest margin increased 1 basis point to 3.09%. Non-Interest Revenues increased 3% on a linked quarter basis and Non-Interest Expenses, excluding fourth quarter's goodwill impairment, were up 5%. From a credit standpoint, Net Charge-Offs were down 23% and the Loan Loss Provision declined 60% from the previous quarter. As you could see, our first quarter results from continuing operations were solid, reflecting core business strengths and a marked reduction in credit costs. We do expect this quarter to be the low point for PPI. Unless I note otherwise, my comments will focus on results from continuing operations, excluding goodwill impairment in the fourth quarter of last year, as we believe this provides a clearer picture of fundamental trends. Let me start with asset quality on Slide 4. In the first quarter, we experienced broad-based asset quality improvement. Virtually all credit metrics improved during the period and most should continue to do so throughout the year. Notably, first quarter's Loan Loss Provision was the lowest in more than 4 years. Net Charge-Offs were down significantly, resulting in a decline of $98 million or 23% linked quarter and exceeded the Loan Loss Provision by $215 million. Inflows of Non-Performing Loans declined to $381 million, or 32%, from the fourth quarter's $561 million. Non-Performing Loans, excluding loans held for sale, decreased $221 million or 9% linked quarter and $936 million or 30% year-over-year. Total Non-Performing Assets declined $1.3 billion or 33% from prior year. Also, it's important to note that nearly half of all Business Services' gross nonperforming loans were current and paying as agreed at the end of the quarter. This is up 11 percentage points from a year ago. Notably, Business Services' criticized and classified loans continued to decline, with criticized loans down 6% or $391 million from the fourth quarter and down $3.2 billion or 35% from 1 year ago. As a reminder, criticized and classified loans are one of the best and earliest indicators of credit quality. Our allowance coverage ratios remain strong. At quarter end, our allowance for loan and lease losses to Non-Performing Loans stood at 118%, up 15 basis points from last year. Meanwhile, our loan loss allowance to loan ratio remains strong at 3.3% at the end of the first quarter. Bottom line, we continue to make significant progress on asset quality and from almost every metric observed, you will find improved credit quality at Regions. However, each quarter has its own unique characteristics and some volatility should be expected going forward due to the uneven nature of the economic recovery. Now let's look at our balance sheet trends starting with loans on Slide 5. Ending loans for the first quarter were down $874 million or 1% linked quarter and the loan yield decreased 6 basis points to 4.29%. But this decrease in yield primarily reflects the impact of previously terminated balance sheet hedges. Ending earning assets, however, increased 2% linked quarter attributable to growth in the investment portfolio, which I will discuss in a moment. Investor real estate balances reflect a favorable decline of 6%. At quarter end, balances stood at $10.1 billion, which is down $4.7 billion from 1 year ago. This portfolio now comprises 13% of our total loan portfolio, down from 18% a year ago. We expect this portfolio to continue to decline at a more moderate pace. Mortgage balances declined 1% linked quarter, reflecting our continued strategy to sell fixed-rate conforming mortgages. The company also experienced additional loan declines in the home equity portfolios as consumers continue to refinance and or deleverage. Regarding the credit card portfolio, balances were down slightly on a linked quarter basis. However, we do expect growth later this year once we assume servicing of the portfolio and control the customer experience. Commercial and industrial loan demand remained healthy in the first quarter, driven by our specialized lending groups. On an ending basis, loans grew $576 million or 2% for the first quarter. While growth was broad-based geographically, we experienced particularly strong growth in Southwest Texas in the energy industry, as well as Central and West Tennessee in the health care industry. Pipelines have also picked up as customers continue to make capital expenditures and to some extent, build working capital. Line utilization on commercial and industrial loans was up 45 basis points linked quarter. Indirect auto continues to be an area of growth, as loans increased 5% linked quarter and we now have almost 1,500 dealers in our network. Total consumer loan production totaled $2.3 billion in the first quarter. We have been disciplined and judicious with respect to capital deployment. As a result of our capital actions and credit ratings upgrade, we are in a better position for our balance sheet to work harder for us in the future. Loan balances should end the year relatively stable compared to the beginning of the year, as loan growth in C&I and non-real-estate consumers should offset more modest declines in investor real estate. On the liability side of the balance sheet, as shown on Slide 6, deposit mix and costs continued to improve in the first quarter. Average deposits were up 1% linked quarter, driven by a $1.6 billion increase in low-cost deposits, partially offset by a $721 million decline in CDs. Given our continued success in growing low-cost deposits, average time deposits fell to 20% of average outstanding deposits, down from 24% a year ago. This positive mix shift resulted in deposit cost declining to 37 basis points for the quarter, down 3 basis points from fourth quarter and 22 basis points from 1 year ago. On a related note, our total funding costs improved 3 basis points linked quarter to 65 basis points. However, we expect to be able to drive additional improvement in deposit cost. We have approximately $4 billion of CDs that are scheduled to mature in the second quarter that carry an average interest rate of 1.1%. There's an additional $5.2 billion at 1.9% that will mature in the second half of the year. This compares to our current average going-on rates for new CDs approximating 25 to 30 basis points. Now let's turn to net interest income on Slide 7. Seasonal factors, including day count, along with the residual effect from previously-terminated derivatives reduced net interest income on a linked quarter basis. For the quarter, taxable equivalent net interest income was down $22 million or 3%. However, the resulting net interest margin was up 1 basis point to 3.09%, which was impacted by declining deposit costs, gains on previously-terminated balance sheet hedges and a decline in the low-yielding cash reserves at the Federal Reserve. We are optimistic about the course of net interest income and net interest margin over the balance of the year. As always, the course will depend on the trajectory of interest rates and prepayment levels, particularly in the investment portfolio. In order to utilize a portion of our excess liquidity, we purchased approximately $3 billion of investment securities during the first quarter, almost $2 billion in agency-guaranteed securities and $1 billion of corporate bonds. We are focused on ensuring that we can retain flexibility to adjust the size of the investment portfolio in all rate environments if more attractive loan opportunities arise. We believe these investments will increase the aggregate earnings of the portfolio, and also protect the investment portfolio from the negative impact of higher interest rates. Consequently, in the first quarter, the remaining excess cash reserves negatively impacted the margin 13 basis points, an improvement from fourth quarter's 14 basis points. In addition, the impact of non-accruals on the margins declined 3 basis points to 10 basis points in the first quarter. Let's turn to Non-Interest Revenues on Slide 8. First quarter Non-Interest Revenues were up 3% linked quarter. As expected, service charges declined modestly by 3% or $9 million linked quarter despite the negative impact of Regulation E and debit interchange legislation. These results demonstrate our ability to quickly adapt our business model. We've been able to successfully mitigate these hurdles by generating new revenue streams and through the ongoing product restructuring of deposit accounts. As a result of these changes, we expect to completely mitigate this legislative impact over time. Mortgage banking revenue was particularly strong in the quarter, aided by the government's HARP 2 program, which is serving to increase refinanced volume. Revenues were up $20 million or 35% over fourth quarter. We estimate HARP 2 will add over $1 billion to our full year 2012 mortgage refinance volume. As we evaluate the mortgage refinancing opportunities, we believe our capacity to handle refinancing activity more expeditiously is enabling us to take market share. We anticipate that mortgage revenue will continue to benefit from HARP 2 in the near term, but will moderate over the latter part of the year. Moving onto expenses on Slide 9. Non-interest expenses were up 5% linked quarter. However, expenses were down 2% year-over-year. During the first quarter, we experienced a seasonal increase in expenses primarily related to an increase of payroll taxes, as well as an annual subsidiary dividend of $13 million. In addition, we experienced an increase in pension and 401-K related expenses. This increase was offset by a reduction in certain credit-related expenses, in particular, other real estate and held for sale expenses. Combined, these expenses improved $19 million or 56% linked quarter and this is an area where we are making clear progress. We also reduced headcount during the quarter. And over the past year, we've experienced a decline of 737 positions or 3%. As we have noted before, we will continue to seek expense savings without compromising prudent investment opportunities or sacrificing the high service levels our customers have come to expect and deserve at Regions. In fact, this quarter, we are rolling out new technology to our teller platform that will leverage image technology to support a streamlined process for associates and customers. This will also enhance our cross-sell abilities and allow tellers to interact with customers in a way they were not able to before. We continue to focus on process improvement, technology investments and improving operating efficiencies. Looking ahead, we expect overall 2012 expenses from continuing operations, and excluding goodwill impairment, to be slightly down from the 2011 level, as a result of our continued and disciplined focus on expenses. Turning now to our strong capital and solid liquidity on Slide 10. As a result of our capital actions and events this past quarter, our Tier 1 ratio at the end of the quarter stood at 14.3% and our Tier 1 common ratio increased by 110 basis points to 9.6%. Adjusted to exclude the government's preferred investment, the Tier 1 ratio was 10.6%. At quarter's end, our pro forma Basel III Tier 1 common and Tier 1 ratios were 8.9% and 12.5%, respectively, and are above the proposed policy minimums. As a quick reminder, as a result of the Series A Preferred Stock repayment earlier this month, Regions' second quarter net income available to common shareholders will be impacted by the acceleration of the accretion of the discount associated with the repurchased shares. The charge associated with the accretion is expected to be approximately $70 million. Liquidity at both the bank and the holding company remains solid with a loan-to-deposit ratio of 79% and cash held at the Federal Reserve totaled approximately $5.2 billion at quarter end. Lastly, based on our interpretation, our liquidity coverage ratio is above the 100% Basel III requirement. Overall, this quarter's results show the significant accomplishments that we've made on several important fronts. We have substantially enhanced our asset quality. We have proven that our core business performance is sound and we further strengthened our balance sheet from a liquidity and capital standpoint. And with that, I'll turn it back over to Grayson for his closing remarks.

Thank you, David. And let me close just by quickly recapping the notable accomplishments in the past few months. We are pleased that a number of significant events are now largely behind us. We have raised capital, selling $900 million of new common stock. We have completed the sale of Morgan Keegan. We have repaid the government's preferred investment. We have made significant strides in addressing our asset quality issues as confirmed by the notable improvement in asset quality metrics. And we continue to deliver excellent customer service while investing in new technology and process improvements. As a result of these actions, we can now focus more of our resources on fundamentals and on executing our business plans and growing our franchise. I am proud of the progress we've made and I believe the second quarter of 2012 marks the start of a new chapter for Regions. We look forward to a shift in focus where the emphasis will be on profitable and prudent growth. I am confident that we have the right business plans in place and the talent to execute successfully. I'm also increasingly optimistic about the opportunities ahead, even in what we assume to be a relatively slow growth 2012 economy. We are committed to taking advantage of these opportunities and deliver improved, high-quality results to our stakeholders. Operator, we're now ready to take questions. Thank you.

[Operator Instructions] Your first question is from the line of Jefferson Harralson of KBW. Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division: Okay. Can we talk about the ability possibly to be -- to have a 1% ROA? You guys have always had a 1% ROA in the past. But you have a balance sheet that's $19 billion smaller than peak, you got $21 billion less loans than peak. Can you get to a 1.0% ROA on this size balance sheet with this expense run rate?

Jefferson, what we've kind of guided to is that over time, we believe we can be in that 1% to 1.2% ROA. The question is timing. And clearly, as the economy improves, our ability to attain that level is more achievable. We are continuing to look at credit. We had substantial improvements in credit. But that's going to be uneven. And so, we need to continue to focus on credit, as well as having our balance sheet work harder for us now that we've received our ratings upgrade and we're outside of TARP. So we'll start working towards that range of ROA that I mentioned. It's just timing.

Because Jefferson, as you look at it, we've been in a very defensive posture over the last few quarters from a capital and liquidity perspective, and we do believe we are at the point that we can move a little more off of defense, onto offense in terms of prudently generating new business. We do see the opportunity starting to increase for us in our markets. Obviously, our strengthening position will help us from a competitive perspective. Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division: And my follow-up, David, you mentioned you're optimistic about spread income and margin. Does that mean that you think that most likely, they'll both move higher from here throughout the year?

Well, we do believe that because of our deposit repricing opportunities that I mentioned, that our margin will -- you'll see improvement in our margin throughout the year.

Your next question is from the line of Matt O'Connor of Deutsche Bank.

Just one follow-up on the non-interest income. It seems like the securities that you added were done towards the latter part of the quarter. So I'm just wondering what the full run rate benefit of that would be as you think about 2Q and beyond.

Matt, we really haven't given guidance quarter-to-quarter. What we said is we expect that, if you look at the year, that -- it goes back to Jefferson's question really, that we expect our NII and margin to be improved over where we were in 2011, so that's back-end loaded. And it's back-end loaded primarily because of the deposit cost, but also, to the point that you brought up -- getting the balance sheet working harder for us, really didn't begin in earnest until receiving the ratings upgrade and having the TARP repayments. So you saw a little bit of that movement in the repositioning of the investment portfolio. So it will take to the back half before you start seeing it.

And as we think out a little bit longer term, I realize the credit rating boost will help and if more come, that will help more. But if we look at the cost of your long-term debt, it's still pretty high especially versus your other funding. And given your low loan to deposit ratio. Like, how do you think about remixing the funding overtime and what that might mean for the NIM beyond this year?

Well, we have a couple of maturities that are coming up this year and next year. We'll have to -- we continue to watch our credit spreads. They are coming in. They're still wider than we expect, and hope for over the long term. We do have a pretty low level of long-term debt compared to our equity and especially compared to our peers. But we will look for opportunities to take advantage of our tightening of credit spreads. And to the extent we see opportunities to refinance. In particular, we have one series of the trust preferreds that are at 8.8%. We'll be looking at that in particular.

And the just separately if I may. Obviously, credit was better than expected, pretty much across-the-board. I mean, what stuck out to me is the reserve release was quite large and I guess, being sensitive that the credit metrics can be choppy, you talked about being uneven yet you're confident enough to bring down a lot of reserves. So I mean, do you feel like we're past the point where you kind of have 2 to 3 quarters of good credit and there's a little blip that ends up, maybe catching some folks off guard? So maybe we'll still be choppy uneven but fewer bumps or smaller bumps?

Matt, I'll make a few comments and I'll ask Barb Godin if she'll add to this. But what we've seen is we had a very good quarter from a credit quality metrics standpoint. Our allowance methodology has been a pretty rigorous process that clearly, over the last few quarters, has been enhanced and strengthened and we're very rigorous about sticking to that. The metrics all look very positive this quarter. We do anticipate some level of unevenness. But clearly, what we're seeing, absent any unexpected economic shocks, that the credit quality trends will continue to be favorable and -- but we're going to stick to our process. We're going to stay disciplined in the way we look at the credits and the way we look at the allowance methodology. Barb?

And Matt, as we think about the allowance as well, as we've been making progress and strides on putting on better quality credits and rolling off of those weaker credits that too has an impact, a positive impact against our allowance needs. And as it relates to what we expect for further quarters, the only guidance I would give you is just remember that for each of the last couple of years, in the third quarter, we see a seasonal bump. There's no reason I wouldn't anticipate that this year, albeit hoping it will be muted from prior years. But it will be clearly choppy as we have come out. And as Grayson said, we are going to follow what the economy does.

And, Matt, if you look at the most problematic segment of our portfolio, it's been the investor commercial real estate, down 32% over a year ago. We ended the quarter at roughly $10.1 billion but if you get a little more granular into that portfolio, you'll see that construction's down over 50% and that portfolio is now slightly under $1 billion, $955 million. You look at some of the more problematic groups, the land, the single-family and condominium, down 40% year-over-year and all of those components, land's down slightly under $800 million; single family is about $800 million; and condo's down to $130 million. So as you look at the makeup and composition of that $10.1 billion, it continues to be a stronger story.

Your next question is from the line of Ken Usdin of Jefferies & Company. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: I want to ask a quick couple of question on the expense side. David, can you breakout for us what part of the salaries increase was related to pension cost that will stick around for the year versus the FICA and stock option stuff that will tail off?

Yes. Let me answer in maybe a different way than you asked it. If you look at the expense run rate from the first quarter and you try to figure out what is kind of the seasonal component, there's $35 million to $40 million of that number that you would not expect to recur going forward. So you can put that in your model and that will get you an approximation on where -- the question you just asked. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Okay and my follow up on that is then also, your credit related expenses were really nicely lower and I just wanted to ask you to kind of walk us through some color on that. And also, have we now -- in that line, also now gotten back to a nicely lower run rate? Or could that still be lumpy and episodic?

Ken it's Barb Godin. I'll answer that question. As it relates to what we're seeing in our OREO expense, there's less write-downs that we're taking due to appraised values coming in. We're seeing some bottoming in some of our markets. In fact, in the handful of markets, we're actually starting to see some rates starting to move in the opposite direction. And beyond that, we've simply just not put as much into our OREO portfolio. So therefore, overall expenses have tailed down nicely. And again, we'd anticipate that they should, absent any large moves to OREO, should stay low.

I would add that we did have some gains in the transactions related to held for sale and that's a function of our aggressive write-downs we take. The market, as Barb mentioned, in some cases is recovering. And we're seeing quite a few buyers coming to the market looking for these assets. So that's helped bolster prices. Get a little concerned to try to give you too much guidance as to where that could go in the future. I think we need to be careful that we don't get ahead of ourselves trying to predict that. So that's one of the uneven things that we want to continue to watch. But our OREO and held for sale portfolios have now gotten down to a relatively small level. And so, the volatility with that shouldn't be that great. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Okay. And then one just quick final one. Just coming back to the NII story, I just want to understand that first to second with average earning assets, you got rid of the $3.5 billion of TARP and you've raised the $900 million, that's a net reduction of $2.5 billion or so. So do we still have a step down to come just from balance sheet side before we then see the second half growth?

Well, I think averaging can mislead you a little bit, that's why we put into the prepared comments that our ending earning assets are actually up 2%. So I think you ought to look at that as maybe a better indicator of where things could trend. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Right that TARP was after the quarter end.

That's right. And so, we have the money sitting in at Federal Reserve and that...

At quarter end.

At quarter end so we utilized our excess cash at the Fed to make that repayment.

Your next question is from the line of Betsy Graseck of Morgan Stanley.

Couple questions. One is on the liquidity pool and the opportunity to redeploy that into securities and loans. If you could put into effect all the excess liquidity that you hold today into the weighted average portfolio that you've got in securities and loans. What's your estimate as to how much that would improve the NIM?

Betsy, I think if you looked in kind of round terms, you're talking about a 13-basis point reduction due to that excess liquidity. Now getting back to Ken's point, we utilized some that excess cash post quarter end so our excess cash is now closer to the $2 billion, $2.5 billion range today. And we would look to continue to deploy our excess cash in the most meaningful way. We also would rather deploy our balance sheet into loans, more so than we have in the investment portfolio. That grew close to $2.5 billion and we'd much rather put it into loans but we want to put it into loans that have the right risk profile and are properly priced. So we are continuing to look for those opportunities and what you'll see over time is that we will have more aggressive plays on our balance sheet now that we have our ratings upgrade. In particular, looking at our investment portfolio, just an example is our deployment of $1 billion this past quarter into the corporate bond portfolio. It takes a little more credit risk. It helps us to meet the extension risk that we have in the investment portfolio from rising grades. And those things over time, will help us from an NII and end resulting NIM.

Got it. And then separately, I hear the improvements in credit and then I also hear your prepared remarks, comments about volatility and expect some lumpiness or bumpiness. Is that lumpiness or bumpiness that you're expecting really because you need to say that just for legal reasons? You're obviously -- it's unsure 100% is what's going to happen because the trajectory looks like things are obviously getting better on the credit side.

I think that clearly, when you look at the first quarter, we had some very strong improvement in our credit metrics. I think that we've been in this cycle so long. We're going to always be -- if we're going to err, it's going to be to the side of caution and we do -- we do spend a lot of time stress testing our portfolio and forecasting what we believe the future to be. But we tend to always sort of anticipate that it could be somewhat uneven or bumpy as you would call. And Barb, you may want to add to that?

Betsy, as well if you think about last year, a year ago, I would just point everyone to that where we all felt the economy was moving in the right direction or better direction. And of course then we have Europe that happened and then next [ph] global that followed that. So again, we're simply being very cautious as to how we think about the economy. We would still say it will be in a fragile state.

I'll add one thing to it. If you look at criticized and classified levels, those are clearly coming down. We think that's one of the best places, first places that you look in terms of assessing credit quality, and those are coming down. We'll be disclosing our potential problem loan number, which is the inflow of numbers that we've talked about before in the $350 million to $400 million range. So that is a -- we believe showing that -- an improvement. So I think that we want to be careful with regards to the provisioning. Did I say the range is $350 million to $450 million...

You said $350 million to $400 million.

I'm sorry. $350 million to $450 million would be our range of potential problem loans.

Right, which that's lower than what you had a couple of quarters or so ago?

That's right.

Your next question comes from the line of Paul Miller of FBR. Paul J. Miller - FBR Capital Markets & Co., Research Division: Going back to the credit quality again. What do you say in -- I know, we know you have a lot of exposure to Florida and other parts of the South and we've been hearing that the South is probably less competitive on loan growth and pricing than other regions of the country. Now, you might not see that, being in that region but how would you talk about the competitiveness? And then also on the follow-up, is where is most of the good asset quality improvement coming from? Is it coming from the state of Florida or other regions that you service?

Well, I'll try to answer that question in a couple different directions. I'd say one, from a competitive standpoint, obviously, we're operating in 16 states, predominantly in the Southeast. But I'd say, what we've seen is some pretty strong competition. And I would say most of that competition has been around pricing, not so much on covenants, but certainly, you've seen some pricing competition as there's been a strong effort from all of our competitors to try to grow loans prudently. So we are seeing that. I would tell you, when you look at the business side of our balance sheet, most of that growth has been in the commercial industrial lending, predominantly in the upper end of that --of the middle market. And I would say specifically, where we've seen our most success is in what we call specialized industries, which has been asset-based lending in health care and energy in particular. We've seen strong growth in those segments and -- but I would tell you, that's been sort of broad-based across the footprint. Florida has never particularly been a strong commercial industrial state but we are seeing some improving signs in the state of Florida. I would tell you most of the borrowings tend to be around CapEx. There's a lot of investment in technology and in equipment that we're financing at this point in time. I'll tell you on the consumer side, we're still seeing, as David mentioned earlier, we're seeing very strong growth on the residential mortgage segment. We had about $1.6 billion in production in the first quarter, $200 million of that was in a HARP 2 segment and about 60% was refinancing. Our refinance and new home purchase is running about 60-40. We are seeing even stronger pipelines in both consumer and business in the early part of the second quarter. Auto, indirect auto lending continues to be strong with us -- for us, I would tell you that obviously, pricing has gotten more competitive in that segment as well, but we're still pleased with the spreads that we're seeing. Paul J. Miller - FBR Capital Markets & Co., Research Division: And you say -- and you're also -- you talked a little bit about on the mortgage side, on the purchase side. You're seeing an increase in purchase throughout your footprint or just in specific states?

It varies by state. Obviously, purchase has been a more dominant -- more dominant in states like Florida. We've had a stronger purchase percentage out of Florida just because of the inability for many of those mortgage holders to execute or refinance. Obviously, HARP 2 has changed that to some degree and our application volume for the first quarter, applications for HARP 2 is about 20% of total volume. We think it will be stronger than that for the second quarter.

Your next question comes from the line of Craig Siegenthaler of Crédit Suisse. Craig Siegenthaler - Crédit Suisse AG, Research Division: First, just thinking about aggregate period end loan growth here relative to the negative 5%-ish range here there the first quarter. I'm just wondering, how do you think this will trend? How quickly will this recover? And do you think residential mortgage is going to play a larger role in your aggregate loan growth, just given unattractive returns really in a lot of other earning asset classes and also, some weak demand in some of your core lending segments.

You got -- I would tell you that the sort of way we look at our loan growth is you'd look that first quarter obviously, as David mentioned a moment ago, you need to look a little beyond period-to-period averages and look at ending balances. We actually were a little stronger on ending balances than the averages would tend to -- indicate. We do anticipate that we'll continue to see growth in the segments I've previously mentioned. But that -- and we'll see a more moderate decline in commercial real estate over the year. Commercial real estate was down about $600 million period-to-period, which is a more moderate decline than we've seen previously. We think there's still some moderation in that. But it's still declining. We do think that from start to finish, that our loans outstanding will be fairly stable but you'll continue to see modest runoff in the first half of the year and modest growth in the second half of the year. Craig Siegenthaler - Crédit Suisse AG, Research Division: Got it. And how has your appetite changed for retaining conforming mortgages at this point?

We really haven't had much of an appetite for that. We've had -- we've retained very little of our production. Mostly what we're retaining is the adjustable rate mortgages as well as jumbo mortgages, which has been a relatively small percentage of our production. And at this point, we don't see that changing. We continue to evaluate it from quarter-to-quarter, and we're pretty rigorous about that evaluation and at this point in time, we still are holding on that strategy. David, do you want to speak there?

Yes, we continue to look at that because we know that's where we're different than our peers. We can't come up with a compelling argument for us to keep those mortgages, primarily, the 15-year product that we normally would retain. But the spreads we can make, in terms of selling it -- selling the production versus putting it on our books and having what we think would be long-dated, pretty long-dated loans that we can take a proxy [ph] risk in the investment portfolio for that and have a better liquidity profile for that to be prepared for the loan growth that we really want to put on the books. So we'll continue to look at it, but we don't see that we would change that in the near term.

Our next question is from the line of Erika Penala of Bank of America.

My first question is a follow-up to Ken's. I just wanted to make sure I understood it correctly. David, are we looking at about an $875 million quarterly starting point for the expense run rate and the main message in terms of PPI improvement if you could keep it stable at that level?

Well, what I said was if you take the existing expense number and back off $35 million to $40 million of that, that is -- $35 million or $40 million in that first quarter that should not repeat. We do believe for the year, which is consistent with our previous guidance that our expenses should be down from 2011. And of course, that's adjusting 2011 for the goodwill impairment and we're sticking to that.

Got it. And with regard to your comments on the margin, do you expect loan yield compression of about 6 basis points that you saw this quarter to moderate? Or is the margin expansion for the remaining of the year really a function of savings that you could extract from your funding base and also lower cash balances next quarter related to using some of that to pay back TARP?

Our guidance that we're giving you relative to NII and NIM takes all that into consideration including other hedges that we have on the books that will expire this year. So all in, we believe we're going to continue to have improvement in the margin. I think the -- we saw the change of 6 basis points. We don't see that necessarily repeating given the nature of how that unwinds in the first quarter, so you shouldn't extrapolate that.

Got it. And my last question is on the home equity portfolio. I'm sure you saw larger banks this quarter report an increase in MPLs due to a change in the accounting methodology with regards to classifying a performing first if they're behind -- performing second if they're behind a problem first. Barb, have you complied with this or reserved for this?

Erika, in fact, we've had a look not only at our own portfolio but what we service and in total, that number is roughly $3.7 million of our home equity that we would need to have been to non-accruals that would happen this quarter. We've also taken that as a proxy and used that to look at the rest of the portfolio. So our anticipation is that there would be an incremental monthly $10 million that could also happen coming from where others have the first, and we are holding the second mortgage. So all in, I would say a relatively immaterial number.

Our next question is from the line of Matt Burnell of Wells Fargo Securities.

We've spent a little time talking about expense side of things. I'd like to get a little additional color on the fee revenue outlook for Regions. You've made a couple comments about HARP helping out the mortgage side of the business for at least the next quarter or 2. I'm curious as to where else you might see benefits in terms of fee revenues in the second quarter and third quarter. And within that, can you provide any additional color on what -- on the ongoing relationship with Raymond James at this point following the sale of Morgan Keegan?

Okay. Let me try to answer your questions. First of all, I think from a fee revenue standpoint, in terms of Non-interest revenues, clearly, the first quarter benefited from a very strong level of production in our mortgage group. We do not see that abating. That continues early into the first quarter. Our pipelines and our applications that we're receiving to date would not indicate that that's abating anytime soon. So we would anticipate a continuous strong quarter in that regard. On the consumer side, as we've mentioned before, the consumer checking account, we've really been in a transition for several months of migrating our consumer checking account base from basically a free checking offering to more of a fee eligible offering with hurdles around balances and transaction types and we've successfully sort of bridged that transition and starting to see good results from that regard. We also introduced a number of products into our consumer offerings, prepaid cards and some money transfer types of activities and check cashing kind of activities that have augmented our service charges. We continue to introduce products into the consumer suite that will generate some level of revenue, but that are meeting very legitimate customer needs and trying to grow the consumer side of the portfolio. I'd also mention, since we acquired our credit card portfolio, we're generating a pretty strong interchange revenue off of that portfolio, as well as we continue to see growth in the debit card transactions. We've seen year-over-year growth in debit card in spite of all the changes that have been made to that product. So we have said that we think over time, we can mitigate the impact of the revenue challenges we have on NIR. And so far, our results are tracking on target to a little better than target.

And if I could, just a follow-up on that specific subject. Are you assuming that the Q1 number for your capital markets revenues are basically the peak for the year and that they would begin to come down, similar to the trend that you saw last year?

We are not -- we, at the capital markets group, I think, had a good first quarter. But we actually are encouraged about what we think might happen through the rest of the year. And I do think that you mentioned earlier, the continuing relationship with Raymond James, they continue to be a good customer of ours, as well as a partner on a number of fronts. And so, we are hopeful that, that turns into business for us later in the year.

Okay. And if I can, one final question on asset quality. You've mentioned several times, you expect asset or credit trends to continue to improve, perhaps not in a straight line. I guess I'm just curious about how you're thinking about where ultimately reserves would be, would fall out relative to the loan portfolio? You're looking somewhere in the 2% to 2.5% range or possibly even lower?

Well, this is David. We continue to monitor closely, credit. We have to all acknowledge that we're still in an unusual environment in the world economy. And we try to assess where reserves really end up. I think we would all agree that reserves are going to be higher than before we entered the crisis. And so, if entering in the crisis, you were in the 1.25 to 1.50 range, you're probably in that 1.50 to 2 range, and that's the best guess we have right now. We need to wait and see how this thing pans out. But I would think -- I know that's a wide margin, 1.50 to 2, but that's probably the best guidance that we would give you. And the question is in what time period -- we're at 3.3% today and what time period would that shift down? And that's a harder thing to answer because of the unevenness with regard to the economic recovery. So in time, I think we can get down to those levels.

Your next question comes from the line of Brian Foran of Nomura.

I guess just one definitional one. I mean, so when we think about PPNR having bottomed here, is it as simple as just kind of making the expense adjustments you talked about, $35 million to $40 million and the $13 million subsidiary dividend, and looking out to 2Q, there is a PPNR base that is $50 million higher or so or is there anything else that we should adjust for in the same kind of seasonal element that would either bring it back down or push it back up in terms of looking for a run rate as opposed to guidance?

Yes. I think if you look at the first quarter, that certainly is your starting point with the expenses we talked about. But you need to be thinking about our deployment of our balance sheet in a more meaningful manner, including our excess cash to work, getting our investment portfolio to work, being able to participate in loan syndications now that we have our ratings back that we hadn't had before. All those help drive earning asset growth. And so, I think there's something in -- there should be more than just taking out those expenses that help drive improvements and overall PPNR.

Having the investment credit rating back and having what I said [ph], a better position of strength from a capital perspective will allow our commercial bankers to compete more effectively in this market.

And then as I think about that maybe as part of the loan outlook, I know you don't break out run off versus core [ph] loans that way than some of your peers do. But if the assumption that loans will inflect this year, I guess is a prerequisite of that just that the run off headwinds will slow or does the core loan origination run rate actually need to accelerate from the current levels in order to get to growth in the back half of the year?

Well, I think as we talked earlier, we are experiencing pretty good growth in our C&I book and our pipelines remain strong. We're very encouraged there. We do have headwinds, which are continuing a moderation of a decline in Investor real estate. So that will slow some, but still decline and we still have the consumer that's deleveraging. In particular, our home equity line of credit book that continues to attrite [ph] because of this refinanced and or deleveraging that's occurring. It also is -- what impacts us versus our peers, is our decision not to retain the resident mortgages originations on our books versus selling them into the markets. So as we mentioned earlier, we think, if you look at the beginning of the year loan portfolio and you look at the end of the year, you're going to be about flat year-over-year. We're down about 1% end-to-end this first quarter and we'll see a little bit of attrition. But the back half, we expect the growth will take over that and get on the run rate in the second half leading into 2013.

And I guess just a last one, I know TruPS isn't a huge number for you but can you remind us what you're thinking in terms of timing and also, would those be expected to be something that would be just, cash on hand would take those out or should we build in some kind of replacement debt cost?

Well, we continue to look at that. We have 2 issues, a roughly $500 million issue at 6.6% and then we have a $350 million issue at 8.8%. We have put ourselves in position to be able to deal with either one of those. 8.8% is the more likely candidate given where our credit spreads are and I think that if -- a caller earlier had mentioned about our credit spreads. If our credit spreads tighten like we think they will over time, or hope that they will over time, then that gives us even better opportunity to either take them out from a cash standpoint and or replace them with cheaper debt. We still have to maintain our policy of cash at the holding company, which is 2 years worth of cash to take care of all debt service and dividends and so forth. And we're over that policy today, we will continue to maintain that, which if we took out that piece, would put us, depending on how things trend this year, could put us in the market. But for $350 million, we might be able to take it out for cash. We'll have to wait and see.

Our next question is from the line of Kevin Fitzsimmons of Sandler O'Neill. Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division: Just a quick question on the service charges. You mentioned how there's been a big impact over time from the regulatory hurdles, and you've made changes to offset that. Is there any additional hit to expect from, for instance, sequencing change for overdrafts or is that already complete? If you could just comment on that.

Kevin, we -- if you have to, when you look at the service charge revenue streams that we have, the revenue stream for overdrafts and insufficient funds, I think is the revenue stream that continues to be some level of debate over in the industry and part of that debate is around posting sequence and part of it is about funds availability and also parts of it is about sort of different institutions stances on waivers and refunds regarding the NSS. That revenue stream continues to decline for us and we anticipate that it will still continue to decline for some time to come. And we're repricing our products and readjusting our business model on existing products and addition of new products to offset that. We do still have -- we do anticipate that there will be rule changes -- further rule changes regarding this process that we'll adapt to and adjust to. But I think it's premature to speculate as to what those might be. Kevin Fitzsimmons - Sandler O'Neill + Partners, L.P., Research Division: Okay. And Grayson, and one -- just a follow up. You mentioned a few minutes ago about some of the additional products on the consumer side like money transfer and check-cashing activities and that there's a real need for that. You made that point and are those kind of opportunities that you run by the Consumer Finance Bureau just to make sure there's no trouble with that down the line or are we just way early on that front to be thinking about that?

I think that we're way early. Obviously, we've had a lot of conversations with our supervisors, the Consumer Financial Protection Bureau. But those conversations are confidential and I would tell you that we try to go through a risk assessment on all the products that we introduce. We try to make sure that they're fair and responsible, that they're treating customers fairly. I think those are all objectives that all of our supervisors agree with. But I do anticipate changes in this space and it's just too early. From my vantage point, it's just too early to call.

Your final question is from the line of John Pancari of Evercore Partners.

Barb, you had indicated that you expect OREO expenses to stay low through the year here. I just want to clarify that. Do you still expect further decline and you're just being conservative there? And I guess I have a similar question on the related credit cost throughout the expense base beyond the OREO expenses. Do you also expect continued declines through the year and into '13?

Yes. And John, as long as we're looking at what's happening with real estate values and prices, that's where I'm basing my remarks. That is that we have seen, as I've mentioned earlier, some of our markets stabilize. Some of the markets start to improve a little and of course, that directly impacts our OREO expense and cost. So as we see those things getting better throughout the year, hopefully, we won't be taking as many marks and our expense will be lower throughout the year. But again, depending on the economy.

Okay. So what is your -- would you say is your total environmental cost in your expense base that could come out as of today? I believe it was north of $800 million a few quarters back. So I wanted to see what -- how do you quantify that total amount as of today?

John, that number had been in the $300 million range. I'm not -- we might be talking about something different on your $800 million. That's $300 million. We said over time, 3 quarters of that would come out as just -- when it comes out is based on improvements in the economy. Clearly, we have seen that in the first quarter. And we think that, that continue -- those costs will continue to abate. It's not just OREO and held for sale cost but it's all the people that we have that manage problem assets for us as well in terms of where we deploy them. And today, it's in dealing with problem assets to market to be elsewhere in the organization to help serve customers.

Okay. I might have included some of the legal expenses in my number then. Then separately, in terms of securities, can you just give us what the durations were of the securities you put on during the quarter and what the yields were approximating?

Well, we had been -- our duration had been 2.5 years. Today, it's probably closer to 3. We put some corporate debt on the books, not a lot, about $1 billion this past quarter. And that duration's in the 4- to 5-year range, which is what drove that duration. But we like that asset class relative to the mortgage-backed securities given the volume that we had there.

And the average yields that are put on that?

John, somewhere in the 3.25 range versus 2.50 range that we put on mortgage-backed.

I will turn the call back to Mr. Hall for any closing remarks.

Just again, let me thank everyone for your time and attention today. We certainly appreciate your interest in Regions and we look forward to next quarter's call. Thank you.

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