Regions Financial Corp (RF) 2003 Q2 法說會逐字稿

Good day, ladies and gentlemen.

And welcome to the Regions Financial Corp.'s second quarter earnings conference call.

At this time all participants are in a listen-only mode.

Later we will conduct a question and answer session, and instructions will follow at that time.

Should you require assistance during today's conference call, please press star followed by zero, and a conference coordinator will be happy to assist you.

As a reminder, this conference call is being recorded for replay purposes.

I would now like to turn the program over to today's host for your conference, Ms. Jennifer Goforth.

Please proceed, ma'am.

Good morning.

I'm Jennifer Goforth, Director of Investor Relations at Regions.

Welcome to the first Region Financial Corp.’s quarterly earnings conference call.

Several of you have indicated that a quarterly call to discuss earnings would be helpful, so hopefully it will be.

We look forward to your feedback.

You'll find the earnings release and supplement on our website in the investor relation’s news review section at www.Regions.com.

We'll refer to this information throughout the call.

Today you will hear from Carl Jones, chairman and CEO, and Bryan Jordan, Chief Financial Officer.

As has been our custom in the past, we don't intend to provide specific earnings guidance, however we'll answer your questions after the presentation to the best of our ability.

Having said that, please be aware that certain statements made in this call may be forward-looking statements.

These forward-looking statements reflect Region's current views with respect to future events and performance.

Actual results could differ substantially and materially from what we've of we have projected.

Such statements are made in good faith pursuant to the safe harbor provisions of the private security litigation reform act of 1995.

Please refer to our press release filed on form 8K, dated July 17, 2003, for factors that could affect the accuracy of expectations to differ materially from our expectation.

Mr. Jones, I'll turn it over to you.

Well, thank you, Jennifer, and thanks to all of you for listening in on this, our very first quarterly earnings conference call.

Heretofore we have provided lots of written information and responded to inquiries for further clarification.

Ronnie Jackson, our previous spokesman, did a great job with this, and we received many compliments about his efforts.

But at the same time, we received many requests to have a conference call such as this.

Basically, the requests were telling us that we are one of the very few that don't do conference calls.

Well, we listened.

And here we are.

Meanwhile, Ronnie has been promoted to comptroller of the company, and Jennifer Goforth has stepped into his shoes with a full-time role where Ronnie's was part time.

Jennifer, while new to this investor relations job, knows our company very well, and will do a great job.

I want you to feel free to check in with her as you see fit.

Well, as we look back at this second quarter, we are quite pleased.

There are a lot of positives to discuss with you.

Certainly our earnings is a positive.

It's a record for us.

Up 9% from a year ago.

We are obviously pleased with these results.

We attribute it primarily to some balance and diversity in our top line.

Three years ago we set out to diversify our revenues, to broaden our offering of financial services.

And to be not so dependent on net-interest income.

We set a target of 50/50 for that top line. 50% to be net-interest income, and 50% to be fee income.

Well, we're there.

In this second quarter, we've grew both components.

Net-interest income is up 7% annualized from the first quarter.

And fee income's up 37% annualized from the first quarter.

Let me talk first about the non-interest income, which is the fastest-growing component.

It's been driven mostly by the Non-banking parts of the company.

Mortgage, insurance, and our broker dealer operations.

We look first at mortgage.

Our mortgage operations had another record quarter.

Three quarters now of production in excess of $2 billion.

And this quarter just ended, we exceeded $2.5 billion of production.

And if we exclude the impairment charge, which we'll talk more about later, in the second quarter, our mortgage operations contributed almost $32 million to our net.

Put that into perspective, that's about 19% of our company's bottom line.

Our insurance revenues and earnings continue strong.

Year to date revenues are up 24% and earnings up 39%.

It's still a small part of the overall company, but we're very pleased with its solid growth and performance.

Well, Morgan Keegan's probably the biggest step we've took to achieve this 50/50 balance.

They had another record quarter.

Not just a record quarter, but 50% better than last year's second quarter, which was a record second quarter.

Their net earnings now contribute almost 15% for the total company's bottom line.

And I guess what I'm really pleased about is all components of Morgan Keegan showed healthy growth over the first quarter.

Fixed income was up, private client or the retail brokerage was up, trust and investment advisory services were up, and even equity capital markets were up over the first quarter.

A particularly big hitter for Morgan Keegan in the second quarter was the very successful sale of $250 million of proprietary closed-end Regions Morgan Keegan high-income fund.

Allen Morgan, who I understand is on this call today, who is actually in New York, can help me answer some questions about that later, if you so desire.

While I've talked primarily about our non-bank activities, and they are what have predominantly helped balance our top line, I'm pleased also with the performance of our community banks.

In this quart or just ended, they increased both their fee income and their net-interest income.

Modest increases but nevertheless positive increases.

We had some modest but positive growth in loans, and we continue making progress in changing our deposit mix.

Growing low-cost deposit, transaction deposits really at a double-digit pace, and letting our high-cost CDs run off, particularly those held by what we call single-product customers.

This activity, plus some really hard work by our front-line bankers with their pricing decisions, have helped control the margin squeeze.

Only a 3 basis point decline in margin from first quarter to second quarter.

And I'm proud, too, of the improvement in our asset qualities shown by our banks.

Charge-offs stay low, only 29 basis points in the second quarter, non-performers declined, and delinquencies remain low.

In the first half of this year, as you look at our numbers, you'll see we've continued to build capital.

There's no M & A activity to report to you today except that in our view, stellar expectations are still very high and we just can't make their numbers work.

But we have opened 11 new branches so far this year, another 11 are in it is process of construction with several more still on the drawing board.

Well, if I go back to the 11 that have already opened and the 11 that are nearly opened, and you might be asking where were they, seven are in Texas, four in Florida, four in South Carolina, three in Georgia, two in North Carolina.

All in areas where we currently are, we just expanding our presence.

But even after this denovo expansion, we still will be building capital.

And Bryan will be discussing in a minute or so some of our thinking about the use of this capital.

So let me mention this theme of balance one more time.

We have more errors in our quiver than ever before.

And some performed better in this environment than others, but in other environments, somewhat of a role reversal will occur.

Right now mortgage and broker dealer are performing very, very well.

But when the economy becomes more robust, loan growth will improve, interest rates should rise, and margins should improve.

But we really don't expect much winds in the economy sails until the first of next year.

Greenspan and the markets seem to agree that for the rest of this year, rates will be low.

D & P growth will be slow.

Nothing really out there to really increase the wins -- winds in the sail.

Labor markets are very weak.

The large trade in balance is growing.

There's overcapacity in our manufacturing sectors.

But meanwhile back here, for the rest of this year, our pipelines at Morgan Keegan and mortgage are very, very busy.

We believe our positive performance should continue while we wait for the winds in the sails.

And we think that with our diversified revenue stream, we'll be able to perform equally well when the economic winds pick up.

Now let me turn the mic over to our CFO, Bryan Jordan for additional specificity on the numbers.

Bryan?

Thank you, Carl.

Thanks to those of you joining us on the call today.

I'll take the next few minutes to discuss highlights of the quarter and provide some color where appropriate.

In the second quarter, Regions had earnings of 165 million or 73 cents per share, up 9 cents per share.

This quarter is a reflection of the balance in our business model, our top-line revenue was up 21% annualized.

Non-interest income increased 30.6 million or 37% annualized based principally on the strength of our fee income businesses, especially Morgan Keegan and mortgage banking.

Also contributing to this top-line growth was a 7.1% annualized or $6 million link quarter increase in net-interest income.

Our expense control was good with the majority of increases coming from variable costs, incentives and commissions and mortgage servicing impairment.

If you take just community banking franchise, direct costs are flat year over year.

Credit quality was improved in the quarter, and non-performing asset levels declined, and we provided $7 million in excess of charge-offs, resulting in an increase in the ratio of allowance for loan losses to 1.44%.

Additionally, we're pleased to announce the increase in our share repurchase authorization by 10 million shares, and a dividend increase of 2 cents to 32 cents per share payable on October 1.

Specifically, we're pleased with trends in net-interest income.

Net-interest income increased 7.12% annualized for the three months ended June 30th verse the first quarter.

Versus last year net-interest income was down 2.5%, in the second quarter and the first half of 2003.

Our net interest margin of 3.47% for the second quarter and 3.48 for the six months ended June 2003 compared to a margin of 3.789 and 3.82% for the same periods in 2002.

As we said for the past few quarters, we're asset-sensitive.

Although fed funds did not decline till late in the quarter certain rates were lower throughout the quarter.

For example, average LIBOR from 1.32% to 1.24% in the quarter.

In the secretary quarter, 20% of our total loans priced off of LIBOR.

Obviously, security yields also declined due to premium amortization and lower coupons securities in place of runoff.

As a result, the declining net interest margin declined only a modest 3 basis points.

We do continue to be somewhat disappointed in the yields that come with high quality investment security alternatives in -- in the second quarter.

The average yield on our portfolio at June 30 is 4.06% and the weighted average duration is 2.31%.

In reaction to the low rate of rush on investment opportunities and the manage interest rate risk, we reduced the size of our available for sale portfolio by $190 million in the second quarter.

And we're staying on the shorter end of the curve.

That trend is likely to continue over the rest of 2003 as we attempt to reduce extension risk and the duration of the portfolio.

In addition, we'll likely rely more on fixed rate funding as the year progressing to position the balance sheet in a somewhat more asset sensitive position.

Loan and deposit trends remain satisfactory.

Our emphasis on equity asset lines on the consumer side continues to allow us to originate high quality, high FICO score, low LTV lines through our branches and Regions mortgage.

Our equity asset lines now total $1.5 billion, an increase of over $200 million in the second quarter.

Community banking loans grew 5% year over year.

The largest growth was in C & I, real estate and equity asset lines.

Commercial and commercial real estate loan growth remains steady.

Our commercial real estate portfolio's dispersed geographically and by time.

The quality remains very strong with past dues of .8%, non-accruals of .92%.

Annualized charge-offs year to date are .08% or 8 basis points of average loans outstanding.

For the commercial and commercial real estate portfolios as a whole, risk adjusted pricing remains good.

We've been able to maintain risk adjusted spreads and in many cases improve them.

As many of you know, we use a risk based pricing tools and our incentive plans for the leaders of our line bank are partially based on risk adjusted returns and economic profits.

As Carl mentioned, we continue to deemphasize the use of CDs as a significant source of funding in the second quarter, especially single product CD customer.

Our percentage of CDs less than 100,000 to total deposits declined to 17.5% from 20% and 22.7% in the first quarter of 2003 and 2nd Quarter of 2002 respectively.

In the second quarter, we re-priced over 800 million of auction CDs with a 6.45% average cost.

Low cost deposits continued steady growth in the quarter, up 5.2% on a link quarter basis and up 11.1% versus a year ago.

In terms of credit quality, charge-offs totaled 23 million or 29 basis points versus 19 million or 25 basis points in the first quarter.

Non-performing asset trends continued to improve.

Non-performing asset declined around $16 million in the second quarter to $324 million.

We continue to emphasize two points around our non-performing assets.

One, $78 million or 31% of our Non-accruals are secured by single-family residences.

Second, our largest non-accrual loan is $10.6 million, and the 25th largest, the top 25 that are just under 1.3 million.

In other words, fairly small and granular exposure.

In addition, de -- to declining non-performing assets, past-due loans including 30 to 89 days past due declined 25% or so in the second quarter to just over 1%. 90 day past dues declined over 9 million or 20% in the second quarter.

Our allowance to period end loans reached 1.44% from 1.42 in the first quarter of 2003 and 1.39 at June 30th, 2002.

With respect to fee income, excluding security gains, fee income totaled 50% of total revenue.

During the quarter, mortgage banking and Morgan Keegan led the way in fee revenue growth.

Revenues increased $28 million to $188 million or 70% annualized increase versus the first quarter at Morgan Keegan.

This increase was driven by improving private client commissions, proprietary product development and sales and fixed income commissions.

Carl mentioned proprietary products.

We closed $250 million closed end mutual fund in June, the Regions Keegan Morgan income fund.

Approximately $180 million of the fund was sold in house resulting in 5.6 million in additional commissions.

Fixed income investment banking and sales and trading were also very strong in the second quarter.

Fixed income alone earned $5.9 million in fees in the of June, an all-time record.

We saw increased activity in the private client group with the improving markets of the second quarter.

Mortgage banking continued to provide a significant source of fee income, 2nd quarter mortgage originations as Carl mentioned totaled $2.5 billion.

Mortgage servicing rights were recorded at 58 basis points at the end of June.

You'll note we recorded a $15.8 million gain on security sales to partially offset a $19.2 million charge to increase our reserve from mortgage service and impairment.

For the past few years, our strategy has been to own bullet agency securities as hedges against mortgage servicing rights impairment.

You may recall we had similar offsetting mortgage servicing right impairment charges and security gains in the third and fourth quarters of 2002.

At June 30th we have a net basis of $96 million in recorded mortgage servicing rights.

Our reserve for mortgage servicing impairment totals 59.5 million at June 30th.

Our servicing portfolio declined from $17.1 billion at March 31 to $16.6 billion at June 30th.

Morgan Keegan and mortgage banking have clearly performed very well in this low-rate environment.

Although pipelines look strong for now, we do not expect this level of performance quarter after quarter.

We believe both of these business models will do very well in higher interest rate environments due to the mix and balance in their businesses and they will compliment a more robust environment for growth in the community banking franchise.

Expense trends continue to be good.

As I mentioned earlier, expenses in the community banking business remained flat over the past year.

As a result of our continued efforts to streamline and standardize processes.

FTE counts in the banking business have declined slightly over the past year.

Excluding rising pension costs allocated at banks, salaries and employee benefits are down in community banking.

I mentioned MSR impairment earlier, excluding MSR impairment, non-interest expenses increased $16.6 million from the first quarter levels, principally related to commissions, incentives and other costs associated with revenue growth.

As always, we do continue our focus on expense control.

We continue to work for efficiency by streamlining processes and utilizing technology.

For the second quarter, our effective tax rate remained at 28.5%.

During the second quarter, we did not -- we did not repurchase any shares, our fully diluted average share was 225 million versus 224 versus in the first quarter, up slightly and 229 million a year ago.

As mentioned earlier, our board of directors authorized management to repurchase up to 10 million shares in addition to the 2.6 million shares remaining on our previous authorization.

In total, management has authorization to purchase up to 12.6 million shares or a little over 5% of outstanding shares.

We will clearly manage our repurchases to take advantage of pricing opportunities and to manage the adequacy of our overall capital levels.

Also as mentioned earlier, the company's dividend has been increased by 2 cents to 32 cents per share, a 7% increase.

We have a commitment to maintaining adequate capital to support the growth in our business and to capitalize the company in such a manner as to maintain our debt ratings.

Our projections for the next few years currently show us generating more than sufficient equity to accomplish the objectives I just mentioned and to increase our dividend and repurchase shares when appropriate.

The dividend increase in the repurchase authorization demonstrate our boards and management's commitment to shareholder value creation.

In terms of outlook, we remain slightly asset-sensitive at June 30th and our net interest margin.

However, our earnings sensitivity is likely more balanced.

How the interest rate environment changes as we go forward and how those changes influence net-interest income will likely have some offsetting positive or negative to impact on Morgan Keegan and mortgage banking businesses.

In other words, our overall earnings sensitivity will be influenced not only by the shape of the yield curve but also the magnitude and timing of changes in rates.

If I had to guess today, Regions will position the balance sheet for greater asset sense activity over the course of the year in preparation for potentially higher interest rates.

Overall, we're pleased with the second quarter.

The balanced business model that we have in place continues to pay off.

In summary, we have stabled improving credit quality trends, we've had a fair whether I stable margin and given no further declines in rates, the margins should be stable for the third quarter.

We had outstanding growth in our fee income businesses, and we had good expense control.

With that, operator, I'll turn it over to you for questions.

Thank you.

Ladies and gentlemen, if you have a question at this time, please press star followed by 1 on your touch-tone telephone.

If your question has been answered and you wish to withdraw your question, please press star followed by 2.

Questions will be taken in the order they are received.

Again, please press star-1 for questions.

One moment for our first question.

The first question is from Brian Schultz of Credit Suisse First Boston.

Your question, please.

It's actually Rose Levy.

Good morning, guys.

Quick question, Bryan, on what you mentioned about the deposit mix.

I believe you said you had runoff $600 million CDs and an average cost of 6.45.

Is there more of that to come?

Yes, roz.

We'll have probably another $700 million or so re-priced in the third quarter and probably have 300 million re-pricing in the fourth quarter.

That's CDs are put on three or four years ago when we had a higher rate environment, so that's working its way through the system right now.

That's great.

And is it possible to pose a question to Allen Morgan?

You mentioned he was on the line.

Yes, it is.

I would just love to get his perspective on what he expects in the fixed income business.

Obviously you guys are already at record levels.

I think you said June was a record.

We've had a seeping in the curve since the end of the quarter.

Maybe he could comment on what his outlook is for that business.

Allen, let's see if the technology works.

I know you're in New York, but can you answer that question?

Operator, are you there to give Allen instructions on how he can respond to that?

Mr. Morgan, your line is open.

There is no answer from his line.

Maybe next time, then.

Thanks anyway.

Well, maybe Bryan can answer that question a little bit.

Respective for fixed income for the rest of this year, I guess.

Well, we're still in a wait-and-see mode.

Obviously, the rates have been bouncing around a little bit.

When I last looked this morning, the ten-year was a little over 4% again.

It's likely to have some impact.

Given where we are with strong Pipelines, I don't have anything I can tell you about a firm view at this point, roz.

Good enough, thanks.

Hearing me.

Are you back, Allen.

I'm here, yeah.

All right.

Did you hear the question, Allen?

Yes.

Well, do you have a perspective on that.

Well, you know, the business continues to be strong, and I'd say, you know, a year ago we thought we wouldn't see the kind of activity we've seen in the last year.

So it's sort of hard to call when that business will slow down, which it will at some point, but it certainly continues right now, and I guess in the low-interest-rate environment, volume is going to continue.

Certainly the investment banking part of the fixed income.

The backlog looks very good.

So we expect -- it's been stronger than we've anticipated all year long and sort of continues to be at this point.

The next question is from Amy Eisner of Friedman, Billings and Ramsey.

Your question.

Hi, everyone.

Good morning.

Good morning.

On commercial loans, they were relatively flat on the sequential quarter basis.

Can you talk a bit about what kind of demand you're seeing and if there are any markets in particular that are stronger or weaker than others?

Thanks.

Well, this is Carl Jones.

Let me try that one.

We are seeing more demand on the east and west borders of our footprint.

In other words, the Atlantic seaboard and the Texas market.

I'd say it's more into small and mid-sized business.

The larger businesses, and particularly the manufacturing sector, are really just not quite yet ready to commit to expansions or capital equipment replacements.

We're thinking that maybe as they get into their budget cycle this fall, they'll start thinking positively about next year.

But right now there's still a lot of cautious conservatives.

And so to sort of answer your question, geographically, we're seeing most of it on the east and the west part of our franchise.

And then as to the type of C & I activity, it's small and mid-sized business.

Thank you.

The next question is from Todd Hagerman of Fox-Pitt and Kelton.

Your question, please.

Good morning, everyone.

Good morning.

Carl, I was wondering if you could just expand a little in terms of your comments on the denovo and give us an update in terms of you where you are in terms of the community bank and branch rationalization.

If you look at your footprint, where you might be for more inclined to pare back or where you're seeing the best momentum right now.

Well, I talked about where we're locating new facilities.

Our branch rationalization project, I guess, will be with us forever, but the big part of that is completed at this point.

And that was really two years ago when we closed or consolidated about 70 branches.

Since that time, it's been an ongoing process, but it's related to performance.

And we've divided our banks up into four quadrants, as some of you know, and we're measuring their performance based on differing sets of expectations.

So it's very much performance-related.

How they utilize their capital, what their economic profit is, what their growth prospects are.

But we see that as being fine-tuning at this point as opposed to any sort of big, big gigantic effort.

So until we can find some opportunities and the acquisition arena, we'll be expanding our franchise of denovo, but in locations where we currently are.

And it will be sort of a modest but steady growth.

Okay.

Great.

And if I could just add to that, you know, your comment in terms of acquisitions, as the activity or what you're seeing at all picked up at all in the last few months or more opportunities coming up as of late as opposed to fewer?

I think there's more conversation now than six months ago.

But we haven't had much of a meeting of minds between buyers and sellers as to value.

And so we have to work our way through that a little bit.

Okay.

Great.

Thank you.

Okay.

The next question is from Jeff Davis of FTN Midwest Research.

Your question, please.

Good morning.

Good quarter, gentlemen.

Thanks.

Thank you.

Bryan, question for you.

I know quarter positive trends were very good.

But with the strong equity markets, are you seeing any movement of funds back into the equity capital markets, and if you are, is any quantification of what Morgan Keegan might be capturing there?

We've not seen significant trends in that at this point, Jeff.

We have a concerted effort to have Morgan Keegan in place in the branches anecdotally we've seen a couple of cases where we had a situation where a customer came in upset about something, and we ended up selling a Morgan Keegan account off of it.

But as to the anecdotal sufficient, we don't see any big trends of deposits moving back into the equity markets off the balance sheet, but we're ready for it.

Okay.

And follow up, on the repurchase --

Jeff, Jeff, Jeff, this is Carl.

If I can add something to that, we are seeing a substantial growth in annuity sales that maybe would occur in a scenario like you were painting.

With the variable or fixed?

Fixed.

Okay.

And then a related or unrelated follow-up, --

Yeah.

Jeff Davis Outlook for repurchase activity.

Do you expect to be heavy this quarter, or is it more you're keeping your powder dry in case the market's soft and or acquisition activities pops up?

Yeah, we're going to use our powder, but we're going to use it, I hope, smartly.

We're going to pick our spots.

We're going to start in the third quarter, I would expect.

But I wouldn't expect us to be extremely aggressive.

Okay.

And not like the equity forge you did a year ago?

Correct.

Okay.

Thank you.

Yes, sir.

The next question is from Andrea Jao of Lehman Brothers.

Your question, please.

Good morning, everyone.

Good morning.

I have two or three related questions.

I was hoping that you could talk more about how you manage your securities portfolio.

Its impact on the name, probably a forecast of the net interest margin for the remainder of the year, given that becoming more asset-sensitivity.

And also, if you have the numbers available, what kind of unrealized gains you have remaining in the portfolio versus, you know, projected MSR impairments?

Thank you.

Let me -- I'll start in reverse order, if I can, Andrea.

The security gains, unrealized are north of $200 million at the end of June.

We've managed the portfolio, trying to keep it flat, and actually allow it to decline some through the second quarter.

As I mentioned earlier, we're probably seeing it decline some over the remainder of 2003.

Our yields are fairly low.

We're not all that excited about what we can buy in the marketplaces.

We're trying to stay on the shorter end of the curve.

We're very sensitive to managing our extension risk in the portfolios.

So our objectives in this window here are to shorten up the duration of the portfolio and to keep the size flat to down.

Okay.

Great.

Any outlook for the margin for the remainder of the year?

I don't have a specific number.

We were at 347 in the second quarter.

I would guess that it would be stable, if not flattish in the third and fourth quarters.

Okay.

Great.

Thank you.

Okay.

Once again, ladies and gentlemen, if you have a question at this time, please press star followed by 1.

The next question is a follow-up question from Jeff Davis of FTN Midwest Research.

Your question, please.

Carl, could I get to you comment broadly on what you're seeing in the Atlanta market particularly on the commercial real estate side?

Oh, we're -- I'm a little more optimistic about the Atlanta market today than I was, like, 60 days ago.

There seems to be some signs of Atlanta market picking up a little bit.

Job growth is in the positive category, again, which really, really should drive all the real estate activity.

And so I guess I'm feeling a little better about it than I did two months ago.

But I wasn’t feeling really bad about it.

It's just that Atlanta's had such a run that anything -- anytime you compare something to that kind of positive explosion that they've gone through, it's a little bit less.

But we're feeling -- we're still feeling good about Atlanta.

Okay.

Thank you.

There are no more questions at this time.

All right.

Well, then, let's conclude the call, and let me end by thanking everybody who participated today and who listened in.

We very much appreciate your interest.

Let me also add that Jennifer and others will be available if you have any follow-up questions.

Thanks again for participating.

Ladies and gentlemen thank you for your participation in today's conference.

This concludes the program.

You may now disconnect.

Good day.