Regions Financial Corporation (RF) Q1 2013 Earnings Report, Transcript and Summary

M. List Underwood - Director of Investor Relations O. B. Grayson Hall - Vice Chairman, Chief Executive Officer, President, Director, Chief Executive Officer of Regions Bank, President of Regions Bank and Director of Regions Bank David J. Turner - Chief Financial Officer, Senior Executive Vice President, Member of The Executive Council, President of Central Region, Chief Financial Officer of Regions Bank and Senior Executive Vice President of Regions Bank Barbara Godin - Chief Credit Officer, Executive Vice President and Head of Credit Operations - Regions Bank John C. Asbury - Senior Executive Vice President and Head of Business Services Group

Matthew D. O'Connor - Deutsche Bank AG, Research Division John G. Pancari - Evercore Partners Inc., Research Division Josh Levin - Citigroup Inc, Research Division Gaston F. Ceron - Morningstar Inc., Research Division Keith Murray - Nomura Securities Co. Ltd., Research Division Betsy Graseck - Morgan Stanley, Research Division Kenneth M. Usdin - Jefferies & Company, Inc., Research Division Ryan M. Nash - Goldman Sachs Group Inc., Research Division Erika Penala - BofA Merrill Lynch, Research Division Marty Mosby - Guggenheim Securities, LLC, Research Division Craig Siegenthaler - Crédit Suisse AG, Research Division Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division Matthew H. Burnell - Wells Fargo Securities, LLC, Research Division Gerard S. Cassidy - RBC Capital Markets, LLC, Research Division

Good morning, and welcome to the Regions Financial Corporation's Quarterly Earnings Call. My name is Paula, and I'll 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 our first quarter earnings call. Our presenters today are Chief Executive Officer, Grayson Hall; and our Chief Financial Officer, David Turner, along with other senior members of our management team. As part of our earnings call, we will be referencing a slide presentation that is available under the Investor Relations section of regions.com. Also, let me remind you that in this call and potentially in the Q&A that follows, 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 statements that is located in the Appendix of the presentation. With that said, I will turn it over to Grayson.

Thank you, and good morning, and welcome to Regions First Quarter 2013 Earnings Conference Call. We certainly appreciate your participation and respect your time. We'll keep our comments concise and move promptly to your questions. Regions continues to make substantial progress moving forward with first quarter 2013 earnings reaching the highest quarterly level in more than 4 years. Our results reflect continued execution of our business plans and our focus on capitalizing on our franchise's opportunities. First quarter 2013 net income available to common shareholders was $327 million or $0.23 per diluted share, more than double a year ago and up 25% from prior period. In addition, the year is off to a good start by many other important measures. Loans on our balance sheet hold steady. Our net interest margin remains stable. We're growing our customer base. Our mortgage business, while facing headwinds, is performing well. Our operating expenses are being managed with discipline and rigor, and our asset quality continues to incrementally improve. Let's begin with a closer look at the balance sheet. We remain on track, absent any unknown economic shocks, to achieve a low-single-digit loan growth this year. As loans outstanding steadied from first to fourth -- first quarter -- fourth to first quarter period in and overall new loan production increased 8% over last year. This new loan production helped offset first quarter declines in portfolio outstandings, such as Investor Real Estate and home equity. The pace of decline in Investor Real Estate portfolio has moderated to the lowest level in 3 years. As our pace of derisking slows, especially in the second half of 2013, we expect total loans outstanding to grow incrementally, marking a very important shift for our company. Turning to deposits, we grew checking accounts in the first quarter. This is the first time in over 2 years that we have experienced a net increase in core checking accounts since shifting our strategy from free checking to fee-eligible pricing. We believe this turnaround demonstrates Regions' commitment to customer service, our emphasis on providing products and services that meet customer needs and preferences, and at a fair price. Additionally, we continue to improve our deposit mix and further lowered average funding costs fourth to first quarter. Over the past 3 years, we have reduced our overall deposit cost by 82 basis points. So let's discuss revenue for just a moment. Mortgage banking remained a significant contributor to fee-based income and not surprisingly, dipped below fourth quarter's levels. The quarter-over-quarter decline reflects seasonality, less robust market activity and our decision to retain 15-year fixed-rate mortgages on our balance sheet. The HARP 2 program continues to be a significant contributor to overall mortgage production at about 20% of our volume. It is important to note that approximately 80% of Regions' mortgage customers, eligible for HARP 2, have yet to refinance. We are pleased with the recent announcement regarding the 2-year extension of this program, we have a comprehensive outreach program underway to capture these opportunities and to assist our customers and their needs. We did experience a noticeable but favorable shift in mortgage applications this quarter. New home purchases now account for almost 50% of the applications as compared to 35% just last quarter. According to the National Association of Realtors, the supply of homes on the market has returned to pre-housing pricing levels and is at a 4-month supply. Further positive evidence that the housing market is recovering. So let's turn our focus to expenses. In the first quarter, operating expenses, excluding special items in the fourth quarter, declined slightly and are on track to meet our expectations for a lower full year operating cost versus 2012. The decline in the first quarter is particularly encouraging given the seasonal increase in favorable related tax expense. And additionally, in the first quarter, we continued to invest in technology that benefits our productivity and efficiency. The investment is consistent with our commitment to provide new, innovative services and delivery options that our customers want and need. In 2012, we invested in updating branch systems and platforms. This year we're concentrating on upgrading our alternative delivery channels. For example, here in the first quarter, we enhanced our transaction capabilities at most of our ATMs. As a result of these advances in technology, over 90% of the transactions traditionally conducted through a branch teller, can now be completed at a Regions ATM. Mobile banking continues to be a rapid growth channel and a critical area of focus. Earlier this month, we launched a number of product enhancements that enable our customers to more fully bank with us by using their mobile phone. Moving on to asset quality. Trends were broadly positive in the first quarter. As expected, nonperforming assets continue to improve, reflecting ongoing declines in both nonperforming loans and nonperforming loan migration. We remain confident that the pace of asset quality improvement will continue in 2013. Finally, we are pleased with our 2013 CCAR results, and you will soon see us taking actions to execute the plan, including implementation of our announced stock repurchase program. I'll now turn the call over to David for a more in-depth discussion of first quarter financial trends. Afterwards, I'll return for a few closing comments before taking questions. David?

Thank you, and good morning, everyone. Since Grayson has already provided a high-level overview, I'm going to jump right into the details. So let's start with Slide 3 on the balance sheet. At the end of the first quarter, total loan balances remained steady from the prior quarter. Our commercial and industrial and indirect auto loan portfolios continue to produce solid results. In addition, we experienced a slower pace of decline in the Investor Real Estate portfolio. The Investor Real Estate portfolio declined 5% linked quarter compared to the previous quarter's decline of 11%. At quarter end, Investor Real Estate ending balances stood at $7.3 billion, down $2.8 billion from 1 year ago. Overall, balances in the Investor Real Estate portfolio may fluctuate, depending on productivity levels, derisking and payoff activity. We estimate that we have approximately $800 million of derisking remaining in the portfolio, a portion of which will be offset by new production. And just to remind you, that compares to about $1 billion that we've mentioned to you before. In fact, new production in the Investor Real Estate portfolio has begun to pick up as we see more opportunities to make loans to qualify borrowers consistent with our risk appetite. We experienced another quarter of solid growth in our commercial and industrial loan portfolio. Average loans in this portfolio grew 2% versus the prior quarter, and total new and renewed production increased 3% over the prior year. During the first quarter, we saw a broadening of our commercial loan activity across a well-diversified base of industries and geographies. Consequently, overall business loans increased $268 million linked quarter. Notably, line utilization increased 140 basis points to 44.8% from the end of the prior quarter and commitments are up 12% from the prior year. Looking at consumer lending, this portfolio decreased just over 1% linked quarter as consumer deleveraging continued. As a reminder, during the fourth quarter, we began the process of retaining our 15-year fixed-rate conforming residential mortgages. This strategy supports our overall efforts to grow the balance sheet and effectively manage our exposure to interest rate risk. This resulted in approximately $180 million of additional loans held on the balance sheet in the first quarter. Declines in our total home equity portfolio, which includes lines and loans, continue as customers take advantage of opportunities to refinance. However, we are encouraged by the results at our home equity loan portfolio, as loan production increased 60% over the prior year primarily due to the introduction of a fixed-rate loan product during the third quarter of 2012. Growth in this product is expected to continue to reduce the pace of decline in our home equity portfolio. Indirect auto loans increased 6% quarter-over-quarter and total production is up 16%, as we continued to expand our dealer's network. At quarter end, we had approximately 2,000 dealers and plan to add an additional 300 dealers by the end of the year. Although credit card balances were down this quarter, our production of new accounts was 10% higher than the prior year first quarter. Currently, our penetration rate is approximately 12% of our households, and we expect this to increase to more than 20% over time. We have planned a comprehensive marketing campaign for credit cards throughout 2013 to help facilitate this growth. We were pleased with the progress we made in the first quarter in holding our loan steady, and we expect to see growth in loan production and anticipate that production will outpace attrition by the second half of 2013. And based on what we know now, we continue to project loan growth in the low-single digits for 2013. And now let's move on to the liability side of the balance sheet. Deposit mix and cost continue to improve in the first quarter. Total average low-cost deposits increased $375 million linked quarter, and time deposits fell to just 14% of total average deposits. This positive repricing and mix shift resulted in deposit cost declining 4 basis points, down to 18 basis points for the quarter. Now we have an additional $5.6 billion of CDs maturing in 2013 at an average rate of 93 basis points. Now this compares to our current average going on rates for new CDs of approximately 25 basis points. Further, our overall total funding cost improved to 45 basis points, a decrease of 86 basis points over the last 3 years. So let's take a look at how all of this has impacted our net interest income. Net interest income on a fully taxable equivalent basis was $811 million, down 2% linked quarter. And this decline was driven in part by a fewer number of days in the quarter, as well as a decline in earning assets. Total loan yields were down 7 basis points linked quarter to 4.14%. This was primarily related to the impact of a continued low-rate environment on the reinvestment rates of higher fixed-rate loans that are paying off. The resulting net interest margin was 3.13%, up 3 basis points linked quarter. Again, this was driven by a reduced day count, which really resulted in 2 basis points of the benefit and our debt management activities last quarter. These activities and the decline in deposit cost served to offset the reduction on earning asset yields, which is largely attributable to the low-rate environment. Now we continue to expect our margins to remain relatively stable throughout 2013, with potential upside if rates rise. Let's take a look at non-interest revenue. First quarter non-interest revenue declined 7% linked quarter, primarily related to a decline in mortgage and service charges income. As expected, mortgage banking revenue was down in the first quarter, but well above historical levels. And while 2012 was a record year, we still anticipate 2013 to yield solid results. As mentioned earlier, we started retaining 15-year mortgages on our balance sheet, which will impact mortgage income. Now you can find a breakout of mortgage revenue on Page 9 in the supplement to our press release. Mortgage loan production was $1.8 billion, an increase of 13% over the prior year. And mortgage revenue continues to be driven by HARP 2, as approximately 40% of all HARP mortgage applications submitted were from non-Regions customers. In addition, at the end of the quarter, we purchased servicing rights on approximately $3 billion of mortgage loans, which will help offset some of the mortgage income decline going forward. Service charges during the quarter were impacted by lower NSF fees, primarily related to seasonality. As Grayson mentioned, we experienced an increase in net checking accounts, as well as our number of households, which will serve to drive future service charges. Also, our Now Banking suite of products continue to grow. The number of households using these products has more than tripled over the last year. Almost 60% of these customers are new Regions customers, providing us with additional cross-sell opportunities. Let's take a look at expenses on the next slide. Non-interest expenses totaled $842 million. And excluding adjustments in the prior quarter, this resulted in a decline of 1% linked quarter. And during the quarter, we experienced seasonal increases in salaries and benefits, primarily related to an increase in payroll taxes. Professional and legal expenses return to a more normalized level due to the prior quarter benefit of $20 million and reduced legal reserves that we previously mentioned to you. We continue to expect that 2013 expenses will be lower than those in 2012, illustrating our commitment to prudent expense management and the generation of positive operating leverage. Our tax rate for the quarter was 26%, which included a $9 million reduction in tax reserves, as well as a $4 million benefit to the valuation allowance. Excluding these items, our tax rate would have been closer to 29%, which is in line with our more normalized rate. Let's move on to asset quality. We continue to make progress with respect to asset quality. The provision for loan losses was $10 million or $170 million less than net charge-offs. Total net charge-offs were flat linked quarter and net charge offs as a percentage of average loans was again below 1%. Both nonperforming loans and nonperforming assets declined linked quarter, 6% and 7%, respectively. In addition, delinquencies also declined 10% fourth to first quarter. Notably, criticized and classified loans, which is one of the best and earliest indicators of asset quality, continue to decline with commercial and Investor Real Estate criticized loans down 9% from the fourth quarter. Our coverage ratios remain solid. At quarter end, our loan loss allowance to nonperforming loans stood at 110%. Meanwhile, our loan loss allowance loans remained solid at 2.37% at the end of the first quarter. Based on what we know today, we expect continued improvement in asset quality going forward. Let's take a look at capital and liquidity. As Grayson mentioned, we were pleased with our overall CCAR results and the Federal Reserve having no objections to our capital management plan, which we expect to implement soon. Our capital position remains strong as our estimated Tier 1 ratio at the end of the quarter stood at 12.3% and our estimated Tier 1 common ratio was 11.2%. Now based on our interpretation of Basel III, we expect our pro forma Basel III Tier 1 common ratio will be approximately 9.1%. Liquidity at both the bank and the holding company remained solid with a loan-to-deposit ratio of 79%. And lastly, based on our understanding of the new amendments, Regions remains well positioned to be fully compliant with respect to the liquidity coverage ratio. So overall, this quarter's results are solid and demonstrate the substantial progress we are making, and we look forward to continuing to build our momentum. With that, I'll turn it back over to Grayson for his closing remarks.

Thank you, David. Well, in conclusion, Regions is moving forward and gaining momentum. We are executing our business plans. We're capitalizing on our franchise's opportunities. We're actively managing our strong capital base and incrementally improving profitability quarter-to-quarter. Our first quarter results demonstrates progress we're making on several important fronts and these include: Prudently and profitably expanding our loan application pipelines; expanding and deepening our customer relationships; lowering our overall funding costs; continuing to stabilize our net interest margin while at the same time, continuing to reduce our overall risk profile, while adhering to disciplined expense management. We are committed to further progress in 2013, as we continue to prudently work towards maximizing Regions franchise value. I'll turn the meeting back over to List for the instructions for the Q&A portion of our call. Thank you for your time.

Thank you, Grayson. We are ready to begin the Q&A session of our call. In order to accommodate as many participants as possible this morning, at the top of the hour, I would like to ask each caller to please limit yourself to 1 primary question and 1 related follow-up question. Now let's open up the line.

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

Obviously, you've had some real nice C&I loan growth and we've just heard from some other banks of pricing pressure and some terms being given. Maybe you can just comment a little bit on the rates that you're seeing and the underlying asset quality to what you're adding?

Yes. Matt, clearly, it's a pretty competitive marketplace today and we are seeing pricing pressure within the marketplace. I would tell you that looking at the data, it would seem to indicate that while the pressure's there, we're still holding spread margins slightly above historical rates. But it does appear that spreads continue to very slowly move downward. But I would say, our numbers seem to indicate holding fairly steady with a bias on the downside. But we continue to feel like -- that in our marketplaces and in the segments we're choosing to compete that we are still able to hold pricing at a pretty favorable point. In addition, our overall underwriting and structure, which includes pricing, we continue to believe that we are prudently adding to our balance sheet. And I'll ask Barb Godin, Barb's with us to sort of give you a little bit of color on what we're seeing coming on to the balance sheet.

Thank you, Grayson. Yes, what we're seeing right now, very happy with the asset quality that's going on the book, you have to risk some pressure on structures, the pressure on price. But all in, it's clearly within our risk appetite. In fact, below our risk appetite levels right now. So we anticipate that, that book will perform well, both now and in the future.

And then credit quality overall is obviously very good, again, this quarter. But anything within the C&I book that caused the jump linked quarter in charge-offs. I don't know if it's seasonal or just some lumpiness there, but just looking at the charge-off dollars in C&I went up from $17 million to $58 million, down a little bit year-over-year, but anything that you'd highlight there?

Yes. Matt, it's Barb Godin again. We have 3 C&I credits -- large credits total of $39 million. We had a reserve against them of $32 million. And again, that caused a little bit of the bump in the release that we saw. But again, no trend. It's at the point right now that we're going to see some bumpiness as we move out of the back end of the cycle.

Yes. I mean, I think that C&I charge-offs, by their nature, always is going to be somewhat uneven. And we saw some unevenness this quarter, but still overall asset quality trends continue to be in the right direction.

Your next question comes the line of John Pancari of Evercore Partners.

On that competition question, do you actually have the average new money yields that you're seeing by product, perhaps, in C&I and in CRE, in terms of what you're bringing on the balance sheet right now?

John, let me ask John Asbury very quickly to speak to that issue. John runs our Business Services group and he can speak more specifically to those spreads and yields.

Yes. Thanks, Grayson. Obviously, it depends upon the exact nature of the client with the larger clients, who are among the most creditworthy commanding the best pricing, so you get into mix issues. I would say, typically, what you'll see in terms of going on spreads to LIBOR in the middle market is going to be something in the neighborhood of, say, LIBOR plus 225 to maybe 250; it kind of varies. If you look at the real estate world, it's a little higher. It's probably within commercial real estate average pricing to 60 to 75 over LIBOR on those lines. And you'll see variation; you're up and down, again, depending upon creditworthiness of the client and size.

Okay. That's helpful. And then in terms of your -- the longer-term loan loss reserve level, I mean, you said you're continuing to see some opportunity there to pull back on the reserve. I just want to get your thoughts on where the reserve level could end up leveling out. I know it's at around 240 basis points of loans right now, so I want to see where that could go to.

Yes. John, this is David. We have talked, historically, that we've got the reserve pending. There are some changes in accounting that are coming. So ignoring those for the time being, that our reserves would be in that 1.50% to 2% range. And I know that's a fairly wide margin, and as we get clarity on how things are shaking out, we will refine that. The question is, the time period on when that -- we'll get to that reserve level and is really based off, obviously, charge-offs and what's going on the books. And we're seeing continued improvement in all of our credit metrics. You heard about the 3 credits in C&I. So our charge would have been lower. But I think, going forward, that we would be -- we expected to be in sub-2% range. But the timing of that, we just can't be as clear.

Your next question comes from the line of Josh Levin of Citi.

If the Basel rules are adopted as proposed and you have to mark-to-market the securities portfolio for changes in rates, how much of a capital buffer do you think you'll need for the impact of OCI volatility on regulatory capital?

Yes. Josh, we continue to look at that in terms of our modeling. In just rough numbers, we would be in the 25 to 50 basis points of probably additional capital that we would have to keep to soften any change in market changes because of the rapid change that could occur there. Obviously, we're hopeful that certain things get carved out, the final rules. But right now, as is, that's what the capital impact would be.

Okay. And have you heard of anything from the CFPB regarding payday lending that might impact any of your businesses?

We obviously -- we have a short-term lending product that we offer today. And we've been in close communication with the CFPB. This juncture has not many clarification of our guidance come out on this types of products. We're working with them daily to understand sort of what the direction will be, and we'll adjust accordingly. We continue to adjust the products that we offer to be more customer friendly and continue to try to meet customer needs in that particular part of the segment.

Your next question comes from the line of Gaston Ceron of MorningStar Equity Research.

I just wanted to dig in to the expense line a little bit more. I know you talked about this during your prepared remarks, but I'm wondering if you could give a little more color on the other -- especially the other expense line and how much room do you have to bring that down permanently lower from these levels? I mean, I know you said you expect 2013 expenses to be -- to come under 2012. But I'm just trying to -- as you continue to move, to improve operations or just trying to get a handle on what the normalized level is going to look like?

Yes. Gaston, we've obviously given guidance on total expenses. As you get down into a more granular level, it gets a little more difficult. If you look at those other expense categories, in particular what you saw in there were OREO and held-for-sale expenses, we're seeing some gains on disposition of assets that are in those numbers that have kept those pretty low. Of course, our held-for-sale and OREO balances together are less than about $200 million today. And I'll you from OREO standpoint, that's below historically where we've been. So we see controlling that going forward as being really important to that other expense line item. We kind of like to think about our expenses in terms of the top 3: Salaries and benefits, number 1; occupancy, number 2; furniture and equipment expense, number 3. And so making sure we focus on ensuring we have the right number of talented people working for us is something we look at. We continue to make investments in talent, we'll do that going forward. We've looked at our infrastructure. In terms of branching, we've reduced branches more since 2007 than any other bank, about 16%. But nonetheless, we continue to look at branch locations and we had some consolidation last year of branches as we did the year before, and I'm sure we'll have some this year. And we'll have investments in new branches and new formats. So there's really no one big rock that you can look at in terms of expense reduction. That's why we don't come up -- we haven't developed a branded expense initiative. It is cultural, it is built into every expense line item that we have to make sure that we're prudent with regards to expenses. So I would look at those 4, 5 things that I pointed to in terms of understanding the direction of where our expenses may go.

Okay. And I'm sorry, just a very quick follow-up on what you just said -- regarding branches, I mean, is there any sort of target for a kind of year-end level or anything like that or no? And just kind of see how it develops?

No. Gaston, we continue to be very disciplined and rigorous around looking at our branches in terms of branch activity, in terms of transaction counts, in terms of new accounts open, as well as looking at the overall staffing in those branches. We, as David said, we reduced our number of branch outlets over the past 3 years -- last few years, approximately 16%. We continue to have fairly -- we still continue to make adjustments to those number of branches and that develops over the course of the year, as our process unfolds. But you should not anticipate any large swings in our number of branches. But we make -- we're making course corrections as we see the opportunities and we'll do that every year and we'll continue to do it.

The next question comes from Keith Murray of Nomura.

Do you mind touching on duration extension risk? And just kind of framing where you guys think you are now versus, let's say, 12 months ago? I know you've reshaped the portfolio mix a little bit here.

Yes. If you look at our investment portfolio, we have extended duration slightly, it's just over 3 years. We've done a couple of things there though, we have some new asset classes in the investment portfolio, some new issue CMBS, some corporates that we didn't have that we think protects us a little bit on extension risks. But you really have to look at our balance sheet in total, and isolating it in any one spot can be detrimental. We are still asset sensitive as you see -- as you will see in our disclosures. You saw it in our 10-K, you'll see it in our 10-Q, and we continue to be that way, which is why we're, to the extent, we do have an increase in rates, you should see a fairly sizable improvement in our net interest income and the resulting margin.

I think when you look at the loan portfolio, you see we put 15-year mortgages on our balance sheet, but when you look at the absolute of level that, in relationship with the size of our portfolio it's fairly modest. The other issue is, if you look at our commercial lending, if you look at small business lending, the lower end of middle market, a lot of that is term-based lending with an amortizing loan. But when you -- the further up you go in that market, the less of that you see. And today, on a dollars basis, still 3/4 of our business and commercial portfolio is variable rate priced. And so from a duration standpoint, we still think on the loan portfolio, we're holding ourselves in a pretty good position.

Okay. And then you mentioned that you purchased some mortgage servicing assets in the quarter. Just talk about your appetite there and do you view that as a little bit of a rate hedge as well?

We do view it somewhat of a rate hedge, but also as an NIR opportunity to generate some additional revenues for the company. When you look at it, our servicing portfolio, a little over $40 billion, and adding $3 billion to that, we think we have the capacity to do that. Our appetite, I would call our appetite limited, but still have an appetite for that asset and think it's incrementally favorable to our overall operation. We think we've got a team that's pretty good at that. We want to make sure that we don't create any capacity issues with that team, but we feel pretty good about where our appetite setting is for that business today. We're still a relatively small -- a very small player in that space.

Yes. We're about the 23rd largest servicer roughly, which is about 0.44% market share. So we're really not that large, but we are good at it. And we have our team dedicated to this. Obviously, we went through all the issues and have done a great job, and we like the return profile. You mentioned the rate hedge, that's a part of it. The capacity is part of it too, and we have the ability to add some even from where you are today. And so we'll look opportunistically for those chances to improve that portfolio, increase that portfolio.

Your next question comes from Betsy Graseck of Morgan Stanley.

I have a question about what's going on with housing in your region and impact on the NPAs and just delinquencies in general. I'm hearing that housing is been improving, and I wanted to get your take on what's going on, as well as opportunities to further accelerate the reduction and exposure to legacy assets there.

Yes. Betsy, I would tell you that we've been fairly aggressive in shedding distressed assets related to homebuilders through the cycle and really have a pretty low exposure to that segment today from a distressed standpoint. I would tell you what's changed this quarter from last quarter is, if you look across our 16-state footprint, a quarter ago we saw signs of housing recovery in a number of markets, but not all of them. I would tell you it's more widespread today. We're seeing more signs of recovery more broadly across our franchise footprint than we did. We're seeing inventory levels that are getting back to very low levels and we're seeing homebuilders starting to construct home again -- homes again. So I would say it's more broad; it's more consistent, and we believe that we're in a position to take a very prudent position of opportunity on that -- in the home building space. I'll ask Barb to sort of talk about the disposition of what distressed assets we still have related to that segment. Barb?

Thank you, Grayson. We don't have as many assets in that asset class as we previously did, particularly in the distressed environment. In total, Betsy, I look at our OREO balance as an example, we only have $133 million of those. We were able to get -- move those relatively quickly and [indiscernible] some decent pricing. What we moved in to held-for-sale as a well, I mean, right now we only have $66 million left in our held-for-sale portfolio. Majority of that is being turned within a 12-month period. So we don't see as much coming in the front end, either at the held-for-sale or OREO from the Investor Real Estate classes. We're seeing more in the C&I right now coming in. And in terms of overall pricing, however, going back to that comment, we are seeing a number of markets across our footprint that have increased in pricing. South Florida is one example, we're even seeing the Atlanta market, the Birmingham market. Some of our major markets have clearly moved in a positive direction.

Your NIM is relatively strong compared to peers, and there's more resiliency there. As you look out over the next several quarters, would you consider using that to be a little bit more aggressive on pricing and loan growth generation?

Betsy, we -- our NIM, obviously, is supported in large part due to our -- the liability side of the balance sheet, first and foremost our deposits. So I had mentioned that we have $5.6 billion from the CDs maturing at a 93 basis point rate going into 25 basis point rate. As we think about disposition of those assets, we've had a program for a long time to evaluate every one of those to get our best execution on disposition. And it's not just about getting rid of nonperforming loans and nonperforming assets, but is what is the best long-term play -- best play for our shareholders. And where we see opportunities to sell, we sell. When we see opportunities to work out, we keep that. So we do understand that we can get our NPLs down a whole lot quicker if we just pulled them up and sold them, but we're not confident that that's the best execution for our shareholders, which we why we haven't done it. And Barb, you may want to...

No. I think you hit the nail on the head. I mean, we do evaluate, bottoms up, every quarter. We look at every single loans and look at what the best outcome is for our shareholders. And that might mean holding those loans a little bit longer. But having said, that if you look at some of our numbers our actual numbers that we keep more than a year in NPL has dropped dramatically. Again, in general, we try to turn our nonperforming loan book over in a 12-month period.

Your next question comes from the line of Ken Usdin of Jefferies. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: My first question, I wanted to ask you about the kind of the other side of net interest income story. So the NIM stability is certainly helped by a bunch of the mechanisms you mentioned on the deposit side and on the long-term debt footprint. But the earning asset balances continue to shrink even though it looks like loans have finally, in a good way, started to stabilize. So can you help us understand what your outlook is for when you expect earning assets to bottom and within that again, against a stable NIM backdrop, do you expect NII to grow from here?

Yes. Ken, what you're looking at on the earning assets included the putting -- changes in cash and some of the liability management that we've had and we'll continue to see some liability management. We haven't been specific with those, but we still have opportunities on that front. So earning assets, the biggest driver of earning assets stability will be loan growth. And as we mentioned in our prepared comments, we expect that growth to occur in the low-single digits during this year. The specific timing of that is a little harder because we still are disposing of some of the assets, and in particular in our Investor Real Estate portfolio. But we're encouraged with our increase in production, in our loan categories. And I think that you could see a slowing of the attrition going forward on earning assets. And as we put more loans on the books, that's also going to support a higher overall net interest income. Obviously, we're still a little bit at the mercy of the interest rate environment. You've seen the 10-year jump around quite a bit in the first quarter. And so where we are from reinvesting our cash flows off of our investment portfolios is important to us. It's $500 million a month we have to put to work. And so being able to give you confidence on NII dollars is a little more difficult, but with the loan growth we expect the ability to be able to do that is enhanced.

I think that if you look again trying to say what's different this quarter from last quarter, we still see modest demand for credit. That being said, we've seen better diversity of demand. We're seeing more demand from smaller middle market businesses than we've seen previously. Again, modest but better diversity of demand. Still strong demand in the upper end of C&I, but I would tell you that the mix of demand we're getting today, we consider to be an encouraging sign. Kenneth M. Usdin - Jefferies & Company, Inc., Research Division: Okay. Great. And my second question just relates to operating leverage. We all hear your comments loud and clear about continuing to move expenses lower, and they certainly are on a great path on a year-over-year basis so far. But from an efficiency ratio perspective there's always a little bit of seasonality to think about, but how do we understand how the interplay between that cost control you mention and then the revenue growth that you expect, translate into the potential to improve the efficiency ratio?

Well, I'll speak and I'll let David add to that his comments. But when you think about efficiency, clearly, in a low-rate, slow growth environment, expense management just has to be foundational in the way we operate the business. And we're going to continue to focus on expenses very rigorously. But if you look at the efficiency ratio, the 2 sides of that coin, one is expense, the other is revenue. And quite frankly, when you break our numbers down more granularly, the revenue side of that equation is probably one we need to work on more. The expense side though we continue to focus on, and we still believe that, that will come down. First quarter is always a challenging quarter for a number of seasonal issues and a number of day count issues. But we still see the opportunity to improve that ratio going forward with a balanced approach on both sides of that calculation.

Yes. I will tell you, Ken, that the efficiency ratio, call it, 64% change, from a seasonality standpoint, has a couple of points in there that work against us in this first quarter. Even with that, we would like to get our efficiency ratio down into the high-50s. And we think, in time, we can get there, perhaps needing a little bit of a rate pickup to get there. But while we wait for that, our focus is on improving both NII and NIR. Integrations point revenue is the biggest driver of improvement. So as you think through NII growing loans and having more of our balance sheet, more of our earning assets and loans versus security. So today, we have 25% of our earning assets that are investment securities and that number should be in the 18% range, just round numbers. So getting loan growth and repositioning there is really important to us. We continue to look on the right side of the balance sheet in terms of liability management to help us on interest expense. And then we're also looking at growing our households, and we mentioned that in our prepared comments because it's important to us to continue to add, in particular, checking account households to us because it brings us a source of non-interest revenue. And so we think we can continue to grow NIR through the development of new products and services. I mentioned the Now Banking product, where we've tripled our customers over the past year, have been a great source of non-interest revenue for us. So continuing to understand what our customers need and want, and developing products and services that meet those needs and therefore, growing our total revenue will be the key to us improving that efficiency ratio and our commitment to generating positive operating leverage. So it's not just an expense play for us, it's all about making sure that we can generate positive operating leverage in the long run.

Your next question comes from Ryan Nash of Goldman Sachs.

Just one clarification on the question that Ken had asked. So given the outlook for efficiency and some of the expense headwinds that you faced in the first quarter, can we expect to actually see expenses continue to fall from the current level?

We end up -- our commitment has been, really, kind of year-over-year. The first quarter had some benefits in it relative to held-for-sale and OREO expenses. We had some gains in that quarter. We're continuing to work on those expenses to get them down even further from the first quarter. But right now, our guidance to you is really a year-over-year basis is as far as we've committed thus far.

Got it. And then just on the Investor Real Estate. I know you noted that productions improved and there is something like $800 million of derisking left versus $1 billion left, so implying that there's still some core runoff in the portfolio. I know you made some positive comments about demand potentially picking up. So is there -- are you starting to see enough demand on the other side that you could actually foresee this portfolio starting to grow at some point this year?

We have -- it is very close. I don't know that we can claim victory just yet on it. We're down slightly in the first quarter about $400 million. Production is up, pipelines we're encouraged with, but we still have that $800 million. The timing of how that gets dealt with is what's harder to tell. Again, we've looked at -- in giving guidance on what the year will look like, but we are very close to where that attrition stops in Investor Real Estate. We believe you will see that in the second half of 2013.

Great. And then just a very quick follow-up on the bank of that. Given where we are on the cycle right now, are you expanding your geographic reach in any of your businesses, whether it's in middle market or large corporate C&I or in the commercial real estate business?

No. We're staying -- we are trying to continue to grow our business within our footprint and within the businesses that we compete today. But we have not expanded beyond our footprint. And we have not -- we've not expanded beyond the products we offer today. We don't see doing that at the moment.

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

My first question is a follow-up on your margin outlook, David. In terms of the debt management actions that you did this quarter, could you tell us what specifically they are, how much is left in terms of debt management actions and whether or not what's left is embedded in your guidance for NIM stability?

Let me answer in a little different order, Erika. First, I want to be careful about making any implication of any particular debt instrument that we might deal with. So I have multiple lawyers around me to make sure we don't commit to that. But I think as you look at our balance sheet and you think about where we are from a liquidity standpoint, that doing some liability management make sense for us. We have had some of that liability management that you've seen that has been baked into our analysis of NIMs since the beginning of the year. There are additional pieces that we have not disclosed that I don't want to get in, again, to the specifics, that have not been baked in to our overall margin guidance. So there are potential opportunities to pick up some incremental lift. I would tell you it's not a tremendous amount of lift, but there is some positive upside that could be there if, in fact, we execute?

Got it. And to follow-up, again, this is probably re-asking Ken Usdin's question. But given that outlook should -- is it fair to expect that earning asset growth will lag loan growth in the back half of the year?

Earning asset growth also gets driven by how we use some of our cash and liability management. So it's harder to compare earning asset changes to loan growth. I think the better way to look at it is to think of what the composition of those earning assets will be in the back half of the year versus where they have been, which is obviously more deployment in the loan book than in the securities book, as being a big driver. As we think about overall NIM, we're sitting here at a 3.13%. I mentioned in my prepared comments that 2 of those points are related to day count, so you need to level set there. And we're telling you right now that our margin is relatively stable looking out. If, in fact, we can execute on -- and it's right to do to execute on some additional liability management initiatives, then we might have some incremental lift from there. But again, caution you on -- that wouldn't be a tremendous lift, but it would be incremental.

Your next question comes from Marty Mosby of Guggenheim.

I wanted to just dive in a little bit more to the statement of C&I, broad across geographies and businesses, just to make sure we get a feel for what traction you're seeing in the Southeast region and where is that real strength is coming from?

Well, Marty, as you have -- as you're well aware, I mean, the Southeast has probably been one of the tougher markets to operate in over the last 3 or 4 years. And I would -- my comment was that what's changed over the last quarter for us is that we're seeing broader demand from a physical geography standpoint. We divide up our franchise into a number of different markets, and more of those markets are growing loans this quarter than were last quarter. In addition, we also divide our customer base up into segments. And I would tell you for the last several quarters, for example, in commercial and industrial lending, we've seen most of that demand for credit in the upper end of that market segment is purely from a segmentation standpoint. This quarter, we're seeing more demand in the lower and middle part of that segment, which is an encouraging sign of our recovery. I do think that we're seeing that broadness both on a segmentation basis and on a geography basis. Clearly, some of the strongest geographies in our business, in our footprint, have clearly been in Texas, Louisiana markets. And for a while, we're, to a large degree, limited to some of those markets, but now it's much more broad.

And then, David, I want to talk a little bit more, we kind of had this conversation last year, at this time, about the seasonal impacts. There's probably $0.02 to $0.03 of giveback if you look at taxes and security gains and some of the OREO gains that you wouldn't think of as sustainable. But then there is also the FICA and option expenses, the fees on the service charges of deposits and the day count in NII. Could you look at those 2 things as being kind of, generally, evenhanded in the sense of the givebacks versus the benefit you get from the benefit you get from the seasonality?

Marty, I'd tell you and staying fairly broad that we had, obviously, mentioned our income tax numbers, the $9 million and the $4 million. So you need to think about that in terms of -- and that's tax, right? So that's $0.01 there. You can look at the traction of our quarter-to-quarter in terms of payroll taxes that we would have some pickup there, but we had some favorable held-for-sale and OREO cost too. So it's harder to give you, without giving you specific guidance for the next quarter, which I'm not going to do, but we're trying to -- if you take your $0.23 and start carving out those one-offs that we mentioned, we're trying to give you some guidance as to what would not repeat in the subsequent quarters. But I think you hit the specific ones that you should look at.

It just seemed to me that there's about as much opportunity in the seasonality as in some of the givebacks, and that's all I was trying to think of, generally, not trying to forecast the next quarter but just look at the balance between those 2 items.

Good comment. Good comment.

Your next question comes from Craig Siegenthaler of Credit Suisse. Craig Siegenthaler - Crédit Suisse AG, Research Division: Can you remind us the size of the interest rate swap portfolio and the current impact of the net interest margin?

Craig, I don't have that specifically. Obviously, all that's baked into the overall guidance that I gave you. But I don't have the pieces of that impact and maturities, but we can get that to you. Craig Siegenthaler - Crédit Suisse AG, Research Division: And when you think about that impact, how's the mix of it towards the debt side in terms of kind of protecting interest rate expense on debt and also towards kind of variable rate commercial loans?

Yes. A lot of this -- we have both. Obviously, we have some pieces in debt that are swapped and some that are not. And if you look at our overall long-term debt cost we're just -- we're right at $6 billion. Slightly underneath that, that after swap impact, is just under 5%. That's the liability management initiative if you just take that globally and think about where spreads are for us today that provide us an opportunity to execute some liability management to get that cost down. We do have some swaps on our loan book. I don't recall anything large rolling off anytime in the near term that's going to negatively impact our net interest income and the resulting margin though. Craig Siegenthaler - Crédit Suisse AG, Research Division: Got it. And then just real quick on income CRE, I believe the portfolio is about $6.3 billion now. Can you help us when we think about a trough, expected trough level for this portfolio as we think of runoff decelerating over the next few quarters here?

Yes. That was a little bit of what the -- one of the questions we're trying to get as to when that starts to grow. And it's a little harder -- the kind of guidance that we're trying to give you is if you take our number today at $7.3 billion and you think of 800 of that needing -- $800 million being in a book troubled category of rolling out, our production is increasing. We're encouraged by our pipelines. And when that actually shifts and bottoms out, Craig, is a little hard. It will be in the second half of 13. I don't know that you'll see this by the end of the second quarter. I think you're into the second half before it occurs. And so that's about as good a guidance that we can give you right now. Craig Siegenthaler - Crédit Suisse AG, Research Division: And David, the only reason I dissected the 2 numbers, I just gave you the income CRE non-construction portion, is it looks like the construction portion has already started to grow.

Yes. It's about $7.3 billion in total. You were given just the real estate mortgage number. There's another, I'll call it, $1 billion in construction. And you're right. To your point, we like the growth. It's not a lot of growth, but you can kind of see quarter-over-quarter. Starting in the middle of last year, there was slight growth throughout '13. We are seeing opportunities there, but that book is still fairly small.

Your next question comes from Jennifer Demba of SunTrust.

Just curious on the C&I growth, could you talk about maybe where you're seeing better demand in terms of industry versus weaker demand? And I'm curious about your multifamily exposure and how you're feeling about that right now given how strong it's been recently for the industry.

I'll ask John Asbury to speak to that very quickly.

So as Grayson and David indicated, I would definitely describe the demand by industry as being pretty broad-based. Energy is probably still among the best, but it's not dominating it. And there's really no clear kind of 1, 2, 3 that are driving most of the growth at this point, so it is pretty broad-based. Materials, commercial services, supplies, some retailing, very encouraging sign to see that sort of diversification by industry type. And as Grayson said, also seeing a pretty good spread geographically. In terms of multifamily, we continue to watch a lot of new construction activity within multifamily. We do believe that the fundamentals for multifamily remains strong and we think that there is room for what is going in and that's what is on the books. Having said that, we watch very carefully the markets for evidence of overbuilding, including the submarkets. One thing I will add that's also an encouraging sign is, as we look at new IRE commitments for Q1, multifamily was just about 30% of total new IRE commitments, and that's good. It used to be that most of the IRE construction we were financing -- or providing was being dominated by multifamily. So we're now seeing much more diversification by product type, which is also a healthy sign.

Jennifer, it's Barb Godin. Our actual multifamily outstandings are down on a year-over-year basis, from $2.3 billion down to $1.6 billion. So again, we're being very careful as to what we're putting in to that asset class.

There are lots of equity in those projects well underwritten.

Your next question comes from Matt Burnell of Wells Fargo Securities.

One question for you, Grayson. In terms of capital return, obviously you exited the CCAR process this year with a positive result, I think, in most people's minds. How should we think about 2 issues. One, moving to a dividend payout ratio that's much closer to the 30% line in the sand the regulators have provided. And the pace of your buybacks, your $300 million buyback program over the next 4 quarters. Should we just assume that's going to be even, or is there some other way you all are thinking about it?

Well, I'll tell you that we were, first of all, we were very pleased to get a favorable response to our capital plan recommendations and our -- positioning ourselves to be able to execute those plans over the next several months. If we sort of look at the progress we've made as a company over the last couple of years and trying to put ourselves in position to be able to return more capital to our shareholders, we think we've made good progress. We have been incrementally increasing our action plans to do that. I think you should anticipate that as our company continues to incrementally improve our financial results, then we will seek opportunities to incrementally improve our return to shareholders. It is, as you know, it's a much more disciplined process today, and it's a much more regulated process, and we're working through that process and trying to demonstrate that we can effectively manage our capital position. I think what you saw this year was a very conservative first step on our part and hopefully, over time, we can deliver even better news. I do think that there's opportunities to do that, but we've got to continue to perform. And that's what we're working hard to do.

Okay. And David, a question for you. You've mentioned several times on the call your thoughts around debt management. And I certainly appreciate the power that, that can have for your net interest margin. I'd like to take that question in another direction. What thoughts do you have right now in terms of the OLA and any potential debt issuance you might need to do under that?

Yes. We're continuing to evaluate what that OLA impact will be to the regional space. That's largely, if you look at some of the letters that have been sent in from Congress, in particular, are really leaning towards the bigger money center banks. That being said, we understand that we have to consider everything that's out there in the industry, including how much debt we might need to carry. We are looking for better -- clearer guidance as to what that ultimately would be. As we have deleveraged ourselves, given where our spreads had traded earlier, we thought it was a prudent thing to do for our shareholders. Our spreads have tightened up nicely. They're obviously never good enough for us, but we'd like them to be -- we're encouraged by where they have moved. And as we think about how we've capitalized the bank, and I'm talking about long-term debt and equity capital, and our goal is to make that as efficient as possible over the long haul, such that our capital structure is sustainable for any environment that we may have, whether we're in a low-rate environment or a growth environment. So we obviously think about that efficiency first, and then we think about whatever regulatory implications there might be from changes. So to the extent the rules come out and, say, we need to go on a particular direction, we will adapt and overcome and deal with it. But right now, we don't have that clear guidance as to what that means for the absolute debt levels for the regional bank space.

Your final question comes from the line of Gerard Cassidy of RBC.

The question I have is regarding the loan loss reserves. You guys mentioned that you think that the reserves to total loans could fall into that 1.5% to 2% range at some point in the future. Can you share with us -- it seems to me that over the years, the regulators have focused on the reserve methodology based on classified and criticized loans rather than a GAAP accounting measure that we all look at, which is reserves to total loans. Are they still focused on driving or determining your reserve adequacy by the classified and criticized loans, or are they moving to this GAAP measure?

Gerard, I'll start and Matt or Barb can jump in. I would tell you that those are elements of the same conversation. Obviously, criticized and classified, you heard on our prepared comments, we think now that that's disclosed and available to the public is an important view of what credit quality is in any financial institution. We used that, which is determined by our internal ratings as they are at every other bank, as an indicator of what embedded loss would be based on how those loans migrate through our process. I don't believe the regulators have any stipulated percentage of criticized and classifieds that may have been a way they looked at it globally in the past, but I don't think that's with what they're getting at today. I think they're looking for all of us to have a robust process that's documented and repeatable, that provides both to our shareholders and to them as our regulators, what an appropriate allowance should be. What happens is the coverage ratios, we compare those among peers, just to give us an indication as to how we shake out. But one should be very careful about comparing peer ratios, because we all have different loan books, we all are in different geographies, different loan types. And I think that what you ought to look at is how is our loan credit quality migrating from quarter-to-quarter, which will give you a better indication of what our ultimate reserving needs to be.

Well said.

Great.

And then the second question has to with return on equity. I know you guys provided us with a return on tangible common equity for the period. But whether you use that ratio or a stated return on equity, which we calculated to be in the 8% range this quarter. If you had to choose 1 or 2 metrics that will drive that ratio, the return on equity numbers higher, which would then I think suggest your stock price could exceed stated book value at some point in the future. Is it your loan to deposit ratio? Is it interest rates going up 200 basis points? Is it a lower efficiency ratio, better credit quality? I know all of the above will help, but if you had to pick 1 or 2 items that really will drive that ROE higher to get the stock valuation higher, what 2 would you guys choose?

I'd like to start with net income, be kind of a good one. I think that -- I think underneath that is probably what your question is and what really will drive your income higher, and I'm talking absolute dollars. And so as Grayson mentioned and I've tried to support that, for us, growing our revenue base is important. And when you are essentially a spread bank, 63% of our revenue being in NII, you think about what change is there. So you think of liability management, you think about optimizing the less side of the balance sheet, more loans versus securities, growing earning assets, in particular in loans which is what we're all about. So getting our NII up and getting our result -- resulting margin close to what it had been in the past, which was in that 3.35 range to 3.50 range. And you think of NII and what can grow that revenue, and you think of adding new customers and new products and services, so you've seen that come out of Regions quarter-after-quarter and we will continue to stay focused on that. So really, Gerard, for us, to get the kind of returns that we will all be happy with, is really about growing our revenue base. And of course, we all recognize we're challenged in a low growth environment. So while we're here, we're going to do the things I just talked about, while prudently managing our expenses, such that we generate positive operating leverage, such that we can have a reasonable return to our shareholders until 1 day that the rate environment changes.

Listen, thank you, everyone, for your time this morning. And we certainly appreciate it. And we will talk to you next quarter. Thank you.

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