Regions Financial Corp (RF) 2002 Q1 法說會逐字稿

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Good afternoon, my name is

and I will be your conference facilitator today. At this time, I would like to welcome everyone to the AmSouth Bank Analyst conference call. All lines have been placed on mute to prevent any background noise.

After the speaker's remarks, there will be a question-and-answer period. If you would like to ask a question during this time, simply press star, them the number one on your telephone keypad, and questions will be taken in the order they are received. If you would like to withdraw your question, press the pound key. Thank you.

Mr. Ritter, you may begin your conference.

Good afternoon, everyone. This is

. We appreciate your participation, knowing how busy all of you are with the numerous earnings announcements today.

Our presentation discusses AmSouth's business outlook and includes forward-looking statements. Those statements include descriptions of management's plans, objectives, or goals for future operations, products or services, forecasts of financial or other performance measures, and statements about AmSouth's general outlook for economic and business conditions.

We also may make other forward-looking statements in the question-and-answer period following management's discussion. These forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from those discussed today. Information on the risk factors that could cause actual results to differ are available from the earnings press release that was released today in form 10-K for the year ended December 31, 2001.

Forward-looking statements are effective only as of the date they are made and we assume no obligation to update information concerning its expectations. Dale?

Thank you,

. And good afternoon, everyone. Also joining us today, of course, is our chief financial officer, Sloan Gibson. Let me give you the results for the quarter.

Earlier today, AmSouth reported our first quarter diluted earnings per share of 40 cents, on net income of $146 million. That represents a 17.6-percent increase over the first quarter of 2001 earnings per share.

Return on equity increased to 19.8 percent. And the efficiency ratio improved to a record low of 51.6 percent. The sustained improvement in our results reflects our focus on internally generated growth through our fundamental banking businesses by executing our six strategic initiatives, an building on the momentum we established last year.

Let's look at a few of the highlights for the quarter. Our net interest margin expanded 72 basis points, to 4.65 percent compared to the first quarter last year, and was seven basis points higher than the fourth quarter of 2001. The margin expansion was again driven by a mixed shift on both the funding and asset sides of our balance sheet. Growth among several core categories

to the improved results over the first quarter of 2001.

Our service charges grew nine percent, bank card income was up 22 percent over first quarter of 2001. Mortgage income was 20

past year. On balance sheet, the key highlights continue to be growth in low-cost deposits and home equity loans. Average low-cost deposits were up 1.2 billion, or eight percent, compared to the first quarter of last year, due primarily to our focus on growing consumer and small business households.

Consumer checking households grew nearly four percent, compared to the first quarter of last year, while business banking households were up eight percent over the same period.

We also continued to see strong demand for our home equity lending products as customers realized the benefits and convenience of a home equity loan or line of credit. We're continuing to see favorable trends in sales productivity and business activity in our markets. Our best practices program, where our branches and our sales people share successful ideas for setting and then achieving very aggressive goals, has paid off.

Our results for the quarter also benefited from very successful sales campaigns and blitzes for consumer checking accounting, business relationship, plus our signature small business and business check cards and home equity lines.

As the economy strengthens, we continue to believe that AmSouth is very well positioned to further improve.

Let me turn it over to Sloan now to discuss the quarter in greater detail.

Sloan?

As

mentioned, diluted earnings per share were 40 cents on net income of $145.6 million. That represents a 17.6-percent increase in earnings per share compared to the first quarter of 2001.

Adjusting for our year earnings for the impact of goodwill amortization, earnings per share are 40 cents compared to 36 cents a year ago, an 11.1 percent growth rate.

Return on equity improved to 19 percent and return on assets increased to a 1.56 percent. Our efficiency ratio also improved to 51.6 percent.

During the first quarter we repurchased 2.1 million. Earnings from the quarter was $378 million, an increase of three percent annualized for the quarter. Growth was driven by continued expansion of the net interest margin due to the favorable mix shift on both sides of the balance sheet.

The net interest margin improved seven basis points to 4.65 percent in the first quarter compared to the fourth quarter. As has been the case over the last several quarters, a favorable mix shift in both assets and liabilities and the repricing of time deposits and other interest-bearing liabilities were the drivers of the margin expansion.

On the asset side, higher yielding consumer loans, excluding residential mortgages grew $294 million, or 11.5 percent annualized one quarter.

The investment portfolio declined by $358 million, or 16.5 percent between quarters. For our lower-yielding commercial loans, and feds funds sold declined by $187 million in a combined basis.

Average low-cost deposits grew by 8.6 percent or $351 million while higher cost time deposits declined $445 million between quarters

basically flat.

On a year over year basis, the shifts and the mix of the balance sheet have been more meaningful in terms of their impact on the margin. Starting with the assets, lower yield fed funds sold were down on average $1.5 billion between years. Higher-yielding average consumer loans, including first mortgages, increase $1.5 billion in the first quarter of 2000 versus the same period a year ago.

The $1 billion decline in earning assets was primarily the result of a $285, or six percent decline in total commercial loans, with a large part of that decline from our syndicated portfolio. And a $249 million or 2.9 percent

decrease in fixed rates and

investment securities.

On the funding side of the balance sheet, higher cost time deposits declined $16.7 billion from

billion for nearly eight percent year over year. At the same time, fed funds purchased and other short-term borrowings declined $581 million, or 22 percent, in the first quarter compared to last year's first quarter.

Our current outlook is for loan growth to accelerate in the second half of the year, resulting in a gradual decline in the margin over the next several quarters, reaching the 4.5 percent level by the end of the year.

At the same time, our interest rate sensitivity modeling shows that we continue to be neutrally positioned. For example, in an up 100 basis points scenario, net interest income is positively impacted 0.2 percent over a 12-month period.

This neutral interest rate risk profile is a result of continued actions taken over the last several quarters. Among the more significant changes, increased $1.2 billion, while total fixed-rate consumer loans have declined a total of $728 million.

Variable rate loans increased from 66 percent to 72 percent of total loans for commercial and commercial real estate compared to a year ago. Non-interest-bearing and less rate sensitive interest-bearing deposits have increased $864 million. Fixed-rate investments and received fix pay floating interest rate swaps decreased $1.1 billion over the past 12 and $2.3 billion

over the past six months.

We will continue to sustain our neutral interest rate position by emphasizing variable rate lending and allowing $685 million of received fix pay floating interest rate swaps to mature in 2000 and not replace. All of these actions are expected to allow us to maintain our neutral rate position.

Average loans on the balance sheet for the first quarter were $25.3 billion, an increase of $325 million or 5.2 percent annualized versus the fourth quarter.

As we mentioned earlier, the increase was the result of growth in consumer loans led by home equity lending. Home equity lending balances

million during the quarter. Home equity lines of credit continue to be a core consumer product with great potential considering AmSouth has 670,000 customers who are homeowners but who don't have an AmSouth equity loan or line of credit. It's one of our most profitable loan portfolios, with attractive spreads and historically low levels of losses.

The increased production

increased marketing activity, back office improvements that make our product more attractive to customers and easier for our branch personnel to book, and our general management emphasis. This increase in volume has been accomplished at the same time we have tightened our underwriting.

Trends in the quality of new home equity originations have improved steadily since 2000, as we saw the economy start to weaken and we initiated a series of steps to enhance our underwriting criteria.

Since that time, we've tightened our underwriting standards, raised minimum FICO scores and installed a new custom scorecard. Today the average loan to value on new home equity production is 81 percent, and the median FICO score is 733. This compares to a FICO score of 704 at the beginning of 2000.

In the 90 percent plus loan to value category, FICO scores on the new production have risen to 750 from 699 at the beginning of 2000, reflecting more conservative

. At the same time, the portion of new production in the 90 percent loan to value category has declined in the first quarter from 2000's level.

Our initiative to tighten standards culminated in the fourth quarter with the implementation of a new custom scorecard for equity lending that was developed using our own internal database of consumer credit history, in addition to FICO scores. We expect the use of our custom scorecard in tandem with FICO scores to produce a lower and more predictable level of losses

and over time further lower the risk profile of the home equity portfolio.

direct loans on the balance sheet grew $51 million or six percent annualized versus the fourth quarter,

steady improvement since we began tightening underwriting in 2000. Today, the median FICO scores for new dealer or indirect originations is 725 compared to 697 at the beginning of 2000.

Like home equity, we believe that using the new custom scorecard for indirect loans with FICO scores to underwrite new dealer and direct loans will further improve the risk profile of the portfolio, producing a more predictable and lower level of losses.

On a managed basis, average loans in the first quarter were $29.4 billion, a decrease of $49 million or 0.7 percent compared to the fourth quarter.

On the funding side of the balance sheet, low-cost deposits grew again during the first quarter by $350 million

, or about 8.5 percent annualized. That marks five consecutive quarters of solid growth in low-cost deposits.

Non-interest-bearing deposits grew 8.6 percent, and interest-bearing

deposits grew 8.7 percent compared to the last quarter.

Our emphasis on promoting sales of consumer checking accounts and Business Relationship Plus, our signature small business relationship product

and small-business household growth continue to be the primary catalysts for low-cost deposit growth. Per branch production of new consumer checking accounts was up six percent

compared to the same period last year, while consumer checking households grew nearly four percent over that same period.

Turning now to credit quality, non-performing assets for the quarter were $193 million, an increase of $1.9 million compared to the fourth quarter. The ratio of non-performing assets was .76 percent, unchanged from the fourth quarter, and below first quarter 2001's level of .93 percent.

Non-performers had declined in each of the three previous quarters. There were no non-performing loan sales in the first quarter, nor were there any sales that took place throughout 2001. The

reserve coverage of non-performing loans improved to 232 percent during the first quarter. As we indicated last quarter, we expect non-performing assets to fluctuate in a relatively narrow band around this level for the remainder of the year.

Net charge-offs increased $1.2 million, to $51.9 million compared to the fourth quarter. That represents .83 percent of loans. Provision expense was $56.1 million for the first quarter, $4.2 million greater than net charge-offs. This resulted in a loan loss reserve to net loans of 1.45 percent at the end of the quarter.

In the first quarter, commercial charge-offs were $19 million, down from $21 million in the fourth quarter. Commercial charge-offs during the quarter include $2 million on syndicated loans. The balance of the charge-offs were smaller, widely diversified credits that were part of our commercial and small business portfolios.

Consumer charge-offs, which exclude residential mortgages, were 124 basis points in the first quarter. Dealer and direct charge-offs were 191 basis points, 25 basis points higher than the fourth quarter.

indirect charge-offs followed seasonal trends in the first quarter, remaining at the fourth quarter levels through January and February, before falling substantially in March. For the second quarter, we expect charge-offs to flatten out at the reduced March levels.

In addition, used car prices firmed during the first quarter, lowering our average loss per automobile by five percent, late in the quarter, from fourth quarter's levels.

Home equity net charge-offs were 44 basis points in the first quarter, up six basis points compared to the fourth quarter. The trend in net charge-offs during the first quarter mirrored the seasonal trend

the entire consumer portfolio. Importantly, housing prices across all of our markets remained firm.

Despite higher consumer net charge-offs in the quarter, we saw encouraging trends. Delinquencies in the first quarter

the economy strengthens, and we begin to realize benefits from our entire underwriting standards,

quality trends in the consumer portfolio will improve. Our expectations for total net charge-offs this year are unchanged from our fourth quarter guidance.

Turning for a moment to the syndicated portfolio, at the end of the first quarter, our syndicated portfolio was relatively flat at $757 million, or 2.5 percent of managed loans.

That represents a 47 percent reduction since the end of 2000. There were no loan sales in the first quarter and reductions have come from charge-offs, pay downs or refinance activity. Our targeted level of syndicated loans continues to be a range of $400 to $500 million, and we expect to exit another $150 to $200 million in 2002.

Turning now to interest, non-interest revenues, non-interest revenues declined by $8.3 million last quarter primarily as a result of a $6.7 million increase in mortgage income. Service charges and interchange income were lower following the seasonally higher fourth quarter.

Investment services income was also lower as a result of the lower sales of variable annuity problems. This follows an industry trend that began last year and carried over into the first quarter.

Fixed annuity sales and low-cost deposits benefited from this trend. Further impacting trends and non-interest revenues has been a steady decrease in fee income in the auto securitization and the conduits as those balances decline. The decline has been offset by a higher net interest income as new loan growth has shown on the balance sheet.

Declines in these categories will be

offset by increases in trust, bank card and other non-interest revenues.

We continue to expect non-interest revenue growth in the low single digit range with the strongest growth occurring in the low single digit range with the strongest growth occurring in service charges, trust, investment services

ratio was 51.6 percent, down 20 basis points from the fourth quarter after adjusting for goodwill amortization.

Non-interest expenses for the first quarter were $14.5 million lower compared to the fourth quarter. After adjusting for goodwill amortization expense of $7.3 million, non-interest expenses declined $7.2 million or 9.5 percent annualized.

Expenses were down across almost all expense categories. Personnel costs were $4

million higher

reflecting higher payroll taxes in employee benefits costs and a partial quarter of merit increases.

Our efforts to control head count discussed during the fourth quarter earnings call continue to positively impact our below single digit range in the second quarter, primarily reflecting a full quarter's impact in merit raises, and then remain relatively stable for the rest of the year.

Looking ahead, we expect the economy to continue to strengthen and for consumer and business borrowing patterns to improve.

Today, we expect earnings for 2002 to be in a range of $1.63 to $1.68. Earnings growth should result from a strong net interest margin and accelerating loan growth. The investment portfolio should decline modestly each quarter.

We continue to target low cost deposits growth of at least five percent, driven by growth in consumer and small business households and checking

. And we expect the decline in time deposits to slow with the repricing cycle largely behind us.

We expect credit quality indicators to fluctuate in a relatively narrow range following the last two quarters.

Non-interest revenue and a non-interest expense growth in the low single digits should also contribute to earnings growth. We expect share repurchases to continue at their current pace.

Overall, we're looking forward to a strong

. As you just heard, we continue to deliver solid

through our focus on execution of our six strategic initiatives and generating sustainable earnings growth.

End 2002 with strong earnings momentum. Our net interest margin is higher and weeks that position.

We've improved the credit risk profile in our loan portfolios by reducing our syndicated loan portfolio by more than half, by aggressively managing portfolio concentrations, tightening the consumer and small business underwriting standards, and most recently, the installation of our own custom scorecards for consumer lending.

Fortunately, AmSouth does business in some of the most attractive high growth markets in the country where growth rates outpace national and regional averages.

Finally, but perhaps most importantly, our management team at all levels and across every area of our

is stronger than ever before. And we have a work force of well-trained, highly motivated individuals who are accustomed to setting aggressive sales goals.

Together, we see signs that the economy is recovering and believe that AmSouth is well positioned to take advantage of new growth opportunities in the wake of stronger economic activity. Our objective is to deliver sustainable forward earnings driven largely by top line revenue growth.

We are targeting quality earnings as reflected in our performance today with visibility for sustained earnings growth and improved performance trends

banking businesses.

One of the ways that we'll sustain our growth is by shifting our branch expansion into a higher gear. By the end of 2001 we completed a plan to open one new branch per month over 30 months, primarily in Florida. Today our plan is to accelerate that growth to 30 new branches every 12 months throughout the franchise. That represents about five percent of our current branches.

We currently have 24 branches scheduled to open in 2002, including three of the former Huntington branches that we are in the process of purchasing. And we've already identified 30 sites for completion in 2003.

The reason I mention this is a simple one. Building branches in our high growth markets can achieve profitability faster than most branch or small bank acquisitions. Branches opened under our Genoble expansion have consistently generated rates of return in excess of 25 percent compared with large branch acquisitions that report half that.

We can also staff a new branch from day one with a mixture of AmSouth veterans in field performance, share their successful ideas and sales practices with others in the organization continues to gain momentum and produce extremely positive results. Programs like call nights, sales campaigns and product blitzes have become very popular ways to focus our employees and successful sales practices and productivity improvements.

A few examples just during the first quarter, we had added emphasis on our business check card product and it produced 43,000 new business check card sales for small business customers during the quarter.

The catalyst for the growth was one week long that week. The sales blitz not only produced a substantial volume of sales, it also served as a source for dozens of beset practices ideas that has been used to maintain higher levels of sales production.

A business relationship plus campaign also produced nearly 21,000 new business relationship plus accounts that brought in more than $200 million in new deposit balances, overall achieving over 108 percent of our goal for that blitz.

A consumer checking campaign produced 13,000 new consumer checking accounts in one week during the first quarter, more than double the campaign goal in triple our average weekly production. Accounts opened during the campaign averaged a health $1,770 per account for $23 million in new deposits.

Our first quarter sales of home equity lending products produced new home equity originations totally $1.3 billion or 110 percent of the quarter's goal.

Now that even after the sales campaign is over, sales productivity often remains higher because of the best practices, because of the product knowledge, because of the sales techniques that are learned as a part of those campaigns.

For example, prior to the fourth quarter, our branches averaged opening about one new business relationship plus week per branch. Best practices in sales techniques continued to carry over and it

and improvement and it enabled us to sustain higher levels of sales productivity. It's important because sustaining high levels of sale productivity is key to sustaining our earnings growth.

Opening new

powerful plays will continue to be a catalyst for sustained growth. These factors gives us a great deal of confidence that we're capable of continuing to -- reaching higher levels of performance and meeting or exceeding our long-term strategic goals.

Earnings per share growth of 12 to 15 percent and a return on equity of 20 to 22 percent.

As many of you

not only

market but other banks as well.

Following our strong performance in 2001, AMSouth has achieved a 17.5 percent return through the first quarter of 2002 and to a 3/10 stock -- still trades at a discount to the top 50 banks despite performance that ranks us among the more

companies. We continue to believe that sustained performance, like we're delivering today, will justify a higher valuation.

Before I close and open up for questions, let me just remind all

9:15. I will tell you, we're not going to stick to our normal investor presentation. We're planning a unique discussion that day that really goes into, in-depth, how we operate this company today and the things that, really, we focus on to drive our performance.

I hope that many of you will be able to join us because we certainly will look forward to seeing you.

Operator, that would conclude our remarks. And why don't we open up for questions.

At this time I would like to remind everyone -- in order to ask a question, please press star, then the number one on your telephone keypad, now.

We'll pause for just a moment to compile the Q&A roster.

Your first question comes from Mr. Fred Fair, of the Fair Foundation.

what is your average cost of money, and hat is the average costs of opening a branch, and how long do you advertise that

over?

Well, let me scramble here a minute to get that out -- the total average cost...

If you look, Fred, in the press release in the rate yield analysis -- for all of our interest-bearing liabilities in the end of this most recent quarter, the total cost was 2.79 percent. That doesn't blend in the interest-free component of the demand deposits, which of course would drive that down to a lower blended cost.

So, it's ramped basically around what, 2.0 or 2.5 percent?

Yeah, in that neighborhood, between two and 2.5, easily, yes.

All right.

And the cost on the branch construction would, of course, the amortization period would vary, everywhere from probably three years for some of the technology equipment that would be in a branch, to up to 30 years for some of the building.

Are you owning the bricks and mortar in these buildings, or are you leasing some of them?

On our new branches, it's virtually all owned property. We do have some legacy locations that are leased properties that we've come by over the years, but virtually all of our new expansion is owned property.

Would it be reasonable to say that the assets on your books in here, which are land, bricks and mortar, stuff in there, are undervalued compared to the current value of today's market? Is there a kicker there? That you could move up the book value?

An awful lot of the assets that we have -- the fixed assets that we have on our books, particularly land and buildings, we've had for a long time.

Right.

So it's probably...

So they've depreciated down.

I don't think it's an unreasonable assumption that there's hidden value there.

OK. That's fair enough. That was a nice quarter. I hope to see you the next quarter at about 47 cents.

Gives us something to shoot for.

Yeah. OK, thanks.

Thank you.

Your next question comes from Mr. Bob Acks of Moore Capital.

Good afternoon. I was wondering if you could tell me if there were any sales residual interests during the quarter?

And after that I have a question on the variable rate home equity product. Just, you know, why would a customer want a variable rate loan now as opposed to a fixed rate?

Thank you very much.

Well, on the first question, there were no sales of residual interest in the quarter.

On the variable rate home equity product, and you know, today's rate, base rate on those is very attractive. It's under five percent for an awful lot of borrowers that are high quality borrowers. So it's a very attractive short-term rate.

Your next question comes from Mr. Jefferson Harrelson of KBW.

Well, I have two questions related on the loan growth was a little higher than we expected this quarter. Do you think you can match that five percent sequential annualized loan growth in the second? And secondly, do you guys feel like you're still on track to be growing earning assets by midyear?

You know, if you -- you may have picked up in the press release today, but the length quarter decline in commercial this quarter was only $123 million. That's the smallest decline length quarter that we've had in that part of the loan portfolio for at least six quarters, perhaps longer than that.

You know, if we can continue this more firm line about $360 million this quarter, while we do expect the investment portfolio to decline by a very small amount each quarter, that's more than what we would expect to happen. The month of January, I think, was the all time highest level of prepays I think we've ever had in our investment portfolio. And we just didn't feel -- we didn't see the opportunities in the market to replace all of that. So the average impact for the quarter was a little bit larger than what we would have otherwise expected.

So the other part of -- the short answer there is that I do think we're well positioned to see some modest earning asset growth quarter by quarter from this point on.

In the case

the marginal would be in the 440 to 450 range. And now you're saying you feel like it may kind of drift back down to 450 by year end. Is that some change in something you're seeing or a change in net?

The softer the loan volume, the stronger the margin's going to stay over the course of the year.

OK. Thank you.

Your next question comes from Mr. Jason Goldberg of Lehman Brothers.

Thank you. Good afternoon, gentlemen.

Hey, Jason.

Hey, Jason.

You know, Dan, in your comments you mentioned, you know, the benefit of being, you know, in good markets and that you're seeing signs of an economic recovery. And if you look at kind of the EPS guidance that Sloan laid out, you're kind of -- adjusting for a kind of

142. It comes to, you know, eight to 10 percent earnings growth, versus, you know, your stated goal of kind of 12 to 15 percent or better earnings growth.

If you can kind of reconcile, you know, what's driving the difference in, you know, if you don't do 12 to 15 percent to, you know, how do you make that leap into those rates?

Jason, we've had this discussion before I believe.

No, we absolutely think that the 12 to 15 percent is sustainable. As Sloan just mentioned his previous remarks on asset growth, we see a little bit of asset growth and you talk about how into 2003 with the margin we

revenues and I can get there pretty easily in 2003 just with everything else staying as it is.

Jason, this is still a pretty challenging environment to be producing earnings per share growth normalized for the accounting changes in the 12 to 15-percent range. You know, those are long-term goals for us. And you know, if we've got a shot at 12 percent this year, I think the answer is yes. Are we prepared to tell you today that that's what we think we're going to deliver? I think it's too early in the year and there are too many uncertainties out there.

Fair enough. And then an unrelated question if you could, you know the FTE adjustment was down about $ six million one quarter, which I think kind of helped reduce your tax rate in terms of kind of what's driving that, and is that sustainable?

Well, the $16 million adjustment was a downward adjustment. That's what you're referring to, isn't it Jason, length quarter?

The $6 million.

I meant the $6 million. The $6 million...

Right.

That's the result of the lease residual transaction that

small transactions done in the fourth quarter of last year. There was no lease residual transaction done in the first quarter and we don't expect any to be done at this time over the course of 2002.

Well, if there are no further questions, let me thank all of you for joining us. We appreciate it, and we will stand adjourned.

Thank you.