Regions Financial Corp (RF) 2006 Q3 法說會逐字稿

Good afternoon.

My name is Tanya, and I will be your conference operator today.

At this time, I would like to welcome everyone to the AmSouth Bancorporation third quarter earnings 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 session. [OPERATOR INSTRUCTIONS] Thank you.

I would now like to turn the call over to Mr. Ritter.

Please go ahead.

Good afternoon, everyone.

This is List Underwood, and we appreciate your participation on this busy day.

Our presentation today will discuss 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 the discussion.

These forward-looking statements are subject to a number of risks and uncertainties and actual results may differ materially.

Information on the risk factors that could cause actual results to differ is available from today's earnings press release, our Form 10-K for the year ended December 31, 2005, our Form 10-Qs for the quarters ended March 31 and June 30th, 2006, and the Form 8-K that we filed today.

And as a reminder, forward-looking statements are effective only as of the date they are made, and we assume no obligation to update information concerning our expectations.

Dowd?

Thank you, List, and good afternoon, everyone.

And thanks for joining us for AmSouth's third quarter earnings conference call.

As several of you mentioned to List earlier in the day, we would certainly plan to keep this call relatively brief.

Al Yother, our Chief Financial Officer, is here with us and will cover our quarterly earnings performance in just a moment.

But before we begin, let me say how pleased we are that both AmSouth and Regions shareholders who recognize the tremendous opportunities created by combining these 2 fine companies.

In a special shareholder's meetings 2 weeks ago, both sets of owners overwhelmingly approved our merger, which we would expect to close shortly after final regulatory approvals are received.

Like our other shareholders, we have a great deal of confidence in our combined future and truly believe that we will be able to reach performance levels together that were not achievable separately.

Through combining our franchises, we'll have stronger market positions in some of the fastest-growing markets in the country, broader customer penetration and enhanced fee revenues.

We also expect to realize significant balance sheet benefits, including accelerated deposit growth and improved capital efficiency.

All of these benefits will be layered on top of a more efficient operating base, which will be made leaner through an estimated $400 million of annualized cost savings.

We are indeed excited about this future, and have been working hard developing and executing our merger integration plans.

However, we've also kept our focus on current operations to ensure that we go into this merger on solid footing.

Let me now turn it over to Al to discuss the results of the third quarter.

Al?

Thank you, Dowd.

Before we get into the financial details for the quarter, I did want to remind everyone that AmSouth's balance sheet as of September 30th will change significantly once the merger is consummated between now and year-end, due to purchase accounting adjustment and possible restructuring charges.

The precise effect of those changes, of course, is difficult to project because to a large extent, they're based on the level of interest rates at the time of closing.

The process to identify the mark-to-market adjustments is well underway, and we will provide you the details when we report fourth quarter earnings for the new Company in January of 2007.

Now let's take a look at the quarter's financial results.

Earlier today, AmSouth reported third quarter diluted earnings per share of $0.54 on net income of $187.7 million.

Profitability remained among the highest in the industry, with a return on equity of 20.3%, return on assets for the quarter was 1.38%, and our strong efficiency ratio was at 51.8%.

Earnings during this period were driven by solid loan growth, higher noninterest revenues, lower noninterest expenses, and continued strong credit quality.

However, net interest income in the quarter was constrained by a lower net interest margin, primarily resulting from a shift in our funding mix from lower cost deposit categories into higher cost time deposits and other borrowed funds.

Further pressuring the net interest margin during the quarter were narrower loan spreads, a reflection of the inverted yield curve.

For the quarter, net interest income totalled $388.8 million, a $14 million decrease versus the second quarter, while the net interest margin was 3.19%.

In a closer look at the lending areas, loan demand was solid during the quarter, with loans increasing by an annualized 7.7%.

On a geographic basis, Florida led the way, with overall annualized loan growth of 13%.

Categories experiencing the strongest growth this quarter were commercial real estate, small business lending, and on the consumer side, residential mortgages.

Our commercial real estate portfolio again led the Company, with third quarter annualized growth of 19%.

The portfolio continues to outperform on all fronts, including growth, profitability and credit quality.

Another segment that performed well was small business lending, which posted linked quarter annualized growth of 11%, marking the sixth consecutive quarter of annualized double-digit growth in this line of business.

On the consumer side, demand for home equity products continued to be strong, with third quarter production of $1 billion, while production of residential first mortgages totalled $812 million.

Despite the solid production, however, home equity balances grew at a modest 1.4% during the third quarter due to high payoff levels on existing home equity products.

Residential first mortgage balances increased by 9.2%, driven by lending to our private client customer base and an overall slowdown in loan payoffs.

The investment securities portfolio, at $11.1 billion at period end, was $264 million lower than the second quarter, reflecting our decision not to reinvest cash flows back into securities at this time.

Now shifting to the funding side of the balance sheet, total deposits increased an annualized 4.1% versus last quarter.

As previously stated, growth came mainly from a 16% increase in consumer time deposits, as customer preference continues to move toward these higher-paying deposit types, as well as an increase in short-term, national market certificates of deposit.

Total low-cost deposits actually experienced an annualized decline of 15% between quarters.

Now turning to asset quality, our credit quality continues to be very strong.

At $15.9 million, net charge-offs were a very low 17 basis points of average net loans in the third quarter.

The loan loss provision for the quarter was above charge-offs, and totalled $25.5 million, resulting in an allowance at quarter end of $368.7 million.

As a result, the allowance to net loans was 97 basis points at quarter end, which was up 1 basis point from last quarter.

Non-performing assets were up modestly from the previous quarter, increasing $4 million to $113.5 million at the end of the quarter.

The resulting nonperforming asset ratio ended the quarter at 30 basis points.

Turning now to our noninterest revenues, noninterest revenues totalled $248.4 million for the quarter, which is a $17 million increase versus second quarter.

Within noninterest revenue, you will also notice an increase in other income, which included several gains.

First was a $10.3 million gain from the sale of 6 branches located in non-metropolitan areas of Tennessee.

Just as we've done in past quarters, we've sold these branches as a result of our regular branch and market assessment process.

As always, our objective in this process was to redirect resources from lower growth markets to markets offering significant growth potential.

Also included in other income was an $8.4 million gain from the cancellation of $450 million of long-term repurchase agreements.

If we had not canceled these this quarter, the gains would have been reflected in purchase accounting mark-to-market adjustments.

In addition, we had substantial collateral securing these agreements, and that also was released as a result of paying off these liabilities.

Finally, we had a $5.9 million gain on the sale of an equity investment we had in MasterCard, which also would have been subject to purchase accounting mark-to-market adjustments at merger.

Also contributing to noninterest revenue growth were increases in interchange and commercial credit fee income, up 8% and 54% respectively on an annualized basis.

Higher interchange income was driven by an increase in the number of debit cards and higher usage of existing cards, while commercial credit fees were higher as a result of an increase in customer swap transactions.

Portfolio income was also higher, increasing $2.3 million versus the previous quarter.

On noninterest expense side, noninterest expenses for the second quarter were $335.7 million, which is a decrease of $3.9 million, or 4.5% on an annualized basis compared to the second quarter.

And the majority of this decrease was driven by lower marketing and professional services costs.

And Dowd, that concludes my remarks on the financials.

Thanks, Al.

As I mentioned in my opening remarks, both AmSouth and Regions shareholders have now approved the merger, and it was great to see that of those who voted, a solid 90% plus were in favor of the transaction.

This approval completes the first of 4 important milestones related to our combination.

The next milestone is approval from our 3 primary regulators.

We have received the sign-off from the Alabama Department of Banking in late September, and would expect to hear from the Department of Justice and the Federal Reserve in the very near future.

The third milestone is the required branch divestiture.

We've been very pleased with the responses from several potential buyers, and the due diligence process is completed and final bids submitted, and we would expect to announce the signing of a definitive agreement any day now.

The fourth milestone is the integration of our companies.

This process, of course, by its very nature extends over several months, yet we haven't wasted any time in getting started.

In fact, we began the process of developing and executing our integration plan very shortly after the announcement.

Since that time, literally every department at both companies has identified key differences with their respective counterparts, and have set out in detail the steps necessary to bring these 2 companies together.

As a result, many key decisions have already been made, including the naming of over 600 top management positions in the combined Company.

In addition, you may remember that at the time of our original announcement, we said that we thought we'd be able to consolidate about 150 overlapping branches.

We've done a great deal of market analysis since then and have now identified most of those locations, and would expect detailed communications surrounding these consolidations to be forthcoming.

We've also completed our systems review and have made some critical decisions.

We've chosen Morgan Keegan's system for investments, Regions' systems for mortgage, and AmSouth's systems for core banking applications such as loans, deposits, and trust.

In each case, as we stated at the front end, we chose the system that best suited the needs of the combined Company over the longer term in serving our customers the best.

At the same time, we were reviewing our systems, we were also analyzing product offerings.

One important decision was to maintain Regions' retail product set, which was very comprehensive.

Keeping these products also facilitates the conversion process.

Finally, we know the importance of quickly establishing a common culture for the new Company.

To that end, we have completed extensive culture and customer research involving internal surveys, hundreds of interviews and multiple focus groups.

And based on that information, we've identified common missions, values, and brand identity for the new Regions going forward.

We've previewed the Company identity to certain internal groups and the response has been overwhelmingly strong, and it will obviously be unveiled as we go through the conversion process over the next several quarters.

In summary, we're pleased with our overall progress to date, and expect to meet or exceed all of the stated goals.

We look forward to our future as the new Regions Bank.

That would conclude our remarks this afternoon, and why don't we open it up for any questions.

[OPERATOR INSTRUCTIONS] Jason Goldberg, Lehman Brothers.

I guess with respect to the decline in the margin, I guess, greater than expected and certainly greater than peers, I guess have you looked in terms of what impacted you differently this quarter vis-a-vis others?

And then secondly, was there any, I guess, positioning with respect to your balance sheet on a stand-alone basis this quarter to get ahead of what the combined Company's balance sheet will look like?

Jason, this is Al.

If you look over the past any number of quarters, you can go back 2 years and you can see that both our net interest margin percentage and our deposit retention has been extremely strong and has probably exceeded what the rest -- most -- a lot of the industry has been able to do on deposits.

We knew going into the quarter, and one of the questions we had last time is what does it look like.

And we had previewed that there would be some compression, and it would be based on the mix of deposits and what the Fed did.

We did have more deposits, especially low cost deposit categories, run off than we had expected.

I will say that that trend seems to have pretty much bottomed down and slowed.

We don't have -- we normally have some uptick in deposit growth in the fourth quarter, just seasonal.

So we feel like that what we've done this quarter, is we've not chased deposits aggressively, but we've been in the market.

So as to position and going forward, we didn't do anything unusual.

We just continued to try to grow our deposit base and hold on, but we didn't do anything unusual prepositioning for the merger.

Okay.

And then second, with respect to -- are you targeting a November 1st close, or -- ?

Jason, we're targeting -- an early November would be our preference, but obviously, we're in a critical time path as we speak, waiting on 2 primary regulators.

We're waiting on the Federal Reserve and Justice Department, as we speak.

Okay, thanks.

Ken Usdin, Banc of America Securities.

I was just wondering if you could give us a little more color on the credit outlook as far as you're seeing it just from the AmSouth side.

Obviously, charge-offs were again very low this quarter, and as were the nonperforming.

Could you give us some thoughts on just your expected normalization, if anything, and how long you would expect the low levels to continue?

Based on what we see right now, Ken, things still look very strong.

We don't have any areas of material deterioration.

When we do see something, it's usually just 1 credit, kind of a one-off situation.

If you talk to our credit people, they will always say that at this point, it just doesn't look like it can get a whole lot better.

But quarter after quarter, they continue to produce excellent results.

And when you look at all the metrics, the non-performers, past dues, everything else, there's nothing that appears to be a material change in the near future.

Ken, the other thing that we're seeing that impacts some of the balance sheet growth slowing down is we've seen on the consumer and the commercial side, as rates have gone up, borrowers paying off, particularly that home equity and C&I book, taking those low rate deposits and liquidating debt.

But in terms of credit deterioration, it just -- there's no sign there yet.

Okay, great.

My other question is, Dowd, to your point of continuing to just run the business as is, I noticed a couple of declines in some of your key fee income categories.

Specifically, service charges, trust, consumer investment services.

Anything to read into that as far as, is that connected to the deposit outflows?

Or is that connected at all to maybe some customers already deciding to leave the bank?

Can you just give us a little more color on some of those areas, please?

You've got -- one of the things I remember in service charges is just the day count this quarter versus the prior quarter.

I mean, that in itself about accounts for that.

In terms of households, which would be the key thing we would track, we're actually still seeing net household growth.

But you're not seeing that translate into the deposit growth that we would have a quarter or 2 or 3 ago.

Okay, great.

Thanks a lot.

At this time, there are no further questions.

Are there any closing remarks?

No, ma'am.

We would just thank everyone for joining us.

We appreciate it.

And we'll stand adjourned.

Thank you.

This concludes today's AmSouth Bancorporation third quarter earnings call.

You may now disconnect.