Regions Financial Corp (RF) 2007 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the first-quarter 2007 Regions Financial Corporation earnings conference call.

My name is Annie and I will be your coordinator for today.

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

We will be conducting a question-and-answer session towards the end of this conference.

(OPERATOR INSTRUCTIONS)

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

I would now like to turn the presentation over to your host for today's call, Mr.

List Underwood, Director of Investor Relations.

Please proceed, sir.

Good morning, everyone, and we appreciate your participation today.

Our presentation will discuss Regions' 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 Regions' 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, 2006, and the Form 8-K that we filed today.

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.

Finally, let me also mention that our discussions may include the use of non-GAAP financial measures.

A reconciliation of these to the same measures on a GAAP basis can be found in our earnings release and in related supplemental financial schedules.

Dowd?

Thank you, List, and good morning, everyone.

We appreciate your joining Regions' first-quarter earnings conference call.

Also with me this morning is Al Yother, Regions' newly-appointed Chief Financial Officer.

We announce Al's appointment this past Friday upon receiving the resignation of Bryan Jordan.

Bryan, as you know, has accepted a senior executive position with another financial services company.

Naturally, we regret Bryan is leaving and obviously wish him only the best of success in his new position.

We are very fortunate, however, to have someone with Al's talent and experience and ability to assume these duties immediately.

As many of you know, Al has more than 25 years of banking experience and was AmSouth's Chief Financial Officer at the time of the merger.

Most recently, he served as Regions' Controller and Principal Accounting Officer and has played a major role throughout the merger.

He thoroughly understands the Company and brings an outstanding record of strategic financial management to his new position.

All of these attributes will ensure a smooth transition.

Let me now turn to the quarterly results.

Earlier today, we reported diluted earnings per share of $0.69, excluding merger charges and before the effect of discontinued operations.

And on the same basis, profitability was strong, with a return on tangible equity of 25% and return on assets of 1.46% for the first quarter.

We feel this is a good start to what we would expect to be a very solid year for our Company.

These results were driven by a strong net interest margin, a continuation of sound credit quality, another solid quarter at Morgan Keegan, and merger-related cost saves that continue to build.

In addition, we completed the repurchase of approximately 10 million shares during the quarter.

Al will cover our financial results in more detail, but first I want to make a couple of comments about the EquiFirst sale, as well as provide some specifics on our merger integration progress.

Regarding EquiFirst, we exited the nonconforming mortgage business with the completion of the sale of the subsidiary.

The difficulties of this business today are so well-publicized, I'm not going to dwell on any of those in my discussion.

However, before all of the recent events, it became clear to us that this type of lending was not complementary to the strategic focus of our ongoing business model.

Its sale has not only improved Regions' risk profile, but has freed up capital to be redeployed into more profitable, stable business lines that are better aligned with our ongoing operating model.

Going forward, our exposure to subprime lending is very limited to a very small group of loans for which we are adequately reserved.

Al will give you the details in his remarks.

Turning to merger integration, we continue to successfully execute and remain on track to meet or exceed all of our merger integration goals.

One major milestone that we now have behind us is the divestiture of branches as required by our regulators.

During the first quarter, we successfully closed transactions with three separate buyers.

In total, we sold 52 branches having total deposits of $2.7 billion.

Transactions like these are very involved and impact every customer and every employee in the divested branches.

While we regret having to give up relationships with these customers, we were pleased with how well the systems conversions were done.

Having these sales completed allows us to refocus our internal resources to other ongoing integration efforts.

We also during the quarter completed our brokerage and mortgage system conversions, and our payroll and employee benefit systems conversions were completed in the past two weeks.

Additionally, we are progressing in our plans to consolidate overlapping branches.

In all, we will consolidate some 160 branches throughout the remainder of the year, taking place concurrent with our branch conversions.

This is an efficiency effort that will generate substantial cost saves, as we outlined in our original merger announcement.

Most of these consolidation opportunities are in Alabama, consistent with the majority of the overlap locations.

Very importantly, we continue to devote substantial energy and resources to the retention of both customers and employees.

Continuity and growth of our customer base is a key to our success, and retaining experienced, service-oriented bankers is critical to preserving and expanding that customer base.

As we mentioned in our January conference call, we've instituted attractive retention bonuses, as well as structured new incentive compensation plans to keep our bankers motivated and in close contact with their customers throughout this integration process.

But we aren't leaving anything to chance.

We are tracking attrition by line of business and segment down the branch level, proactively working customer lists.

If even a minor inconvenience is identified, it is catalogued for action and follow-up.

We've also stepped up our tracking of customer sentiment against premerger benchmarks, which will continue throughout the process.

Obviously, it is still relatively early, but our efforts are paying off.

In fact, our household growth rate has actually increased versus comparable premerger measures.

Meanwhile, we are attractively preparing for our first branch conversion event in July and are committed to ensuring a successful, nondisruptive customer transition.

Region has a very experienced integration team that is implementing a detailed plan that includes extensive associate training and systems conversion testing prior to the actual event.

As a matter of fact, just last week we completed our first mock conversion for the July conversion, which by all accounts went very smoothly.

We also established an event command center to monitor and track the status of conversions as they occur.

While our first priority is to be sure the merger integration is successfully executed, we are also working hard to take advantage of the many revenue growth and efficiency improvement opportunities that the merger offers.

The first quarter's solid operating performance demonstrates that our efforts are yielding results.

But we are literally just at the starting line; that is, we strongly believe that we've only begun to scratch the surface when it comes to capitalizing on Regions' long-term profit potential and enhancing returns for our shareholders.

In summary, as I look at our continuing business lines, I'm very pleased with the first quarter's performance and prospects for the remainder of 2007.

Thanks to our dedicated associates' hard work and a focused management team, 2007 is shaping up to be another solid year for Regions.

Most importantly, the stage is being set for an even brighter future as we look ahead.

With those comments, let me turn it over to Al.

Thank you, Dowd, and good morning to everyone.

As Dowd said, we are pleased with this quarter's performance.

We again have a lot of moving parts in the quarter; however, core operating results were very solid.

Excluding merger charges and the impact of discontinued EquiFirst operations, earnings per share increased $0.02 linked-quarter or 12% annualized.

We are particularly pleased with these results given that the first quarter is typically the year's most challenging.

Earnings were driven by a relatively stable net interest margin, another solid quarter at Morgan Keegan, continued low credit cost and good expense control, including additional merger-related cost saves.

I will go through these items in more detail in a moment, but first let me provide some additional color on the EquiFirst sale and another item that impacted our performance this quarter.

Beginning with EquiFirst, we completed the sale on March 30th.

As you well know, the nonconforming mortgage industry deteriorated quickly during the first quarter period.

As a result, EquiFirst reported an after-tax operating loss of $142 million during the period.

Since the final purchase price was based on EquiFirst's closing book value, it was adjusted to $76 million from our previously estimated $225 million.

Impact of this decline in book value is included in the first-quarter income statement's discontinued operations line.

We recognized a slight gain on the sale at the time of closing.

Importantly, any further exposure to EquiFirst is expected to be insignificant and will continue to be shown in discontinued operations.

If you're interested in additional information on this transaction, we have provided more detail on page 16 of the financial supplement.

The second item that deserves further explanation is the adoption of FIN 48 in the first quarter.

As a result of the adoption of FIN 48, we recorded a cumulative reduction in equity of $259 million.

Ongoing, we expect the annual net earnings impact to approximate $50 million after-tax, equal to about $0.07 per share for the year.

This has resulted in an increase in our effective tax rate of approximately 200 basis points.

These adjustments resulted from a change in the recognition of the tax benefit related to a transaction from 2000 with a mortgage-related subsidiary.

Importantly, we are comfortable with our level of reserves related to this transaction, and therefore expect no additional exposure.

Now let's turn back to the first-quarter operating results, which focus on continuing operations.

Our net interest margin again held up very well at 3.99%.

This margin reflects an approximate 7 basis point negative impact due to a lower tax equivalent adjustment to net interest income related to the adoption of FIN 48.

Our fully taxable equivalent net interest income remained strong at $1.2 billion.

We still expect the margin to contract as we move toward midyear, leading to an average of around 3.85% for 2007.

This takes into account the impact of FIN 48, which we just discussed.

Also, it takes into account reduced purchase accounting benefits and assumes lower spreads on new balance sheet growth, status quo for the yield curve, and low single-digit balance sheet growth.

Deposit pricing, however, remains the biggest variable affecting this year's ultimate margins.

Adjusted for the divestitures, low-cost deposits increased an annualized 6.1% for the December 31, 2006 to March 31, 2007 period.

Interest-bearing checking and money market deposits drove that growth.

In fact, due to a successful marketing campaign, the interest-bearing checking account balances at period end increased 13% linked-quarter.

In addition to new campaigns, other drivers of account and household growth during the first quarter included an active calling program, targeted marketing to our best customers to ensure retention and increased marketing support for legacy Regions branches.

Period-end loans were down slightly linked-quarter.

Real estate construction loan growth was more than offset by a slowdown in demand for real estate mortgage loans.

However, with regard to commercial real estate lending, we are seeing stabilization in the pipeline of loans that we have at least 75% confidence of closing, which should stabilize volumes in the coming quarters.

The merger has been a real benefit here, where we have been able to participate in projects that we wouldn't have participated in the past due to our larger current lending capacity.

Overall, our outlook for future loan and deposit growth remains low single digits.

Credit quality remains very good.

Net charge-offs were $46 million, or an annualized 20 basis points for the quarter, down from fourth quarter's 27 basis points, which included an approximately 5 basis point impact to conforming the two companies' credit policies.

The nonperforming assets to total loans plus other real estate ratio ticked up slightly to 45 basis points.

This increase was primarily the result of the underperformance of a few commercial and real estate loans.

These loans are well secured and we don't expect that they will result in significant losses.

On a broader scale, our commercial real estate portfolio is performing well and we do not foresee any large problem areas at this time.

Our total exposure to construction, land and land development loans is very manageable, and to date we are not seeing significant deterioration in this portfolio's non-accrual, past due or foreclosure trends.

As we indicated last quarter, we still expect total 2007 net loan charge-offs in the mid 20 basis point range.

Finally, our credit loss reserve as a percent of loans remains strong at 118 basis points, up 1 basis point from year-end 2006.

In terms of non-interest revenue, Morgan Keegan continues to perform well.

The company earned $45.5 million on $302 million in revenue in what is typically a seasonally low first quarter.

Results were driven by Private Client Retail Brokerage Division and Trust Division, which both increased revenue during the quarter due to strong sales levels.

We did experience a slowdown in Equity Capital Markets activities, which is not unusual in a first quarter.

Service charges, which are typically low in the first quarter, came in as expected at $284.1 million.

We did recognize a $22.3 million pretax gain on the sale of our student loan portfolio.

This sale was the result of the adjusting to a new originated sell business model for student lending.

The first-quarter gain is included in Other noninterest income on the income statement.

And you can expect to see gains of this type, but in smaller amounts, in future periods as other loan sales are closed.

Regions' mortgages results were weaker than anticipated, reflecting both seasonal and industry challenges.

We recognized approximately $51 million in gross merger-related cost saves during the first quarter.

These came in large part from headcount reductions.

In fact, our total headcount is down by nearly 3000 people since the merger was closed in early November of last year.

About one-third of these resulted from severances and normal attrition, while the remaining occurred late in the first quarter related to divestitures and the EquiFirst sale.

These reductions will be a key driver of efficiency going forward, some in the form of merger-related cost saves and others as ongoing operating expense reductions.

While our cost saves will continue to grow through the remainder of this year, we will also incur some investment spending in connection with conversion events that will offset a portion of those saves.

New branches that are remodeling to accommodate consolidations, new signage are examples of the types of spending I'm talking about.

Even with these investments, we are on track to meet or exceed our $150 million in net cost saves this year.

During the first quarter we repurchased 10 million shares of common stock at an average cost of about $36 per share, which leaves about 54 million shares available for repurchase under our current authorization.

We have been reviewing all of our options with respect to capital management and stock repurchase, and plan to continue to buy shares aggressively under this authorization.

Before wrapping up, we recognize that quarterly financial comparisons remain difficult.

First-quarter results include legacy AmSouth for the full period versus just two months in the fourth quarter.

In addition, we completed our divestiture of 52 branches throughout the course of the quarter, with the bulk of the divestiture occurring at the beginning of March.

The vested branches contributed $28 million in first-quarter revenue, $8 million in operating costs and $20 million to pretax income.

We anticipate that quarterly pretax income for the remainder of the year will be impacted by approximately $23 million per quarter as a result of the divestitures.

But setting aside quarterly noise, Regions is delivering strong operating results while successfully executing all of our merger integration plans.

All in all, we really feel good about our first-quarter performance and we remain optimistic about the prospects for the rest of 2007.

Operator, with that, we are now ready to take questions.

(OPERATOR INSTRUCTIONS) Kevin Fitzsimmons with Sandler O'Neill.

Good morning, everyone.

Two quick questions.

First, if you could clarify the margin.

I see that it came at 3.99, and I'm just wondering is that a true margin we should use for the run rate going forward or is that inflated a bit because of EquiFirst.

And the reason I'm asking is I think the quarterly average balance sheet has one number for FTE net income and then you have another number for excluding discontinued operations.

And I just want to make sure for modeling forward that is a good margin.

And then secondly, Dowd, I know you commented earlier about the retention and that you are looking at that closely.

Can you comment specifically about that next layer, that next midlevel layer of managers from Regions and what you are seeing there so far?

Thanks.

Kevin, on the margin piece, the impact of EquiFirst is pretty insignificant.

I think the bigger thing to keep in mind, the 3.99 is somewhat impacted by the fact that there are less days in the first quarter.

I think if you normalize the day count, that is probably worth about 5 basis points.

So a normalized day count basis, that margin number would probably be about 3.94, 3.95.

But ongoing, other than the day-count normalization, that is a good starting point.

Okay, thanks.

Kevin, on your question about that next level, there are about 700 people, just using round numbers, that we identified at that next level that we feel are key throughout the organization -- everything from relationship managers on the commercial side, area executives, [city presidents], even into technology and many of the staff support functions within the Company.

In that regard, as strange as it sounds -- because anecdotally I hear some of the same things -- someone will lift out four people in Mobile from business banking and it's talked about that we are having massive losses of talent in Mobile -- the truth is when we look at that 700 people, the turnover rate thus far is lower than it would have been last year, and even going back the year before for either organization in a normal first quarter -- i.e.

after bonuses have been paid and those type things.

So whether we are helped there by what is a full employment economy or we really are making a difference in paying attention to and talking with and having financial incentives for that group of people, we feel very good about the talent retention at this point in time.

What about, Dowd, specifically, about the merger integration?

Are the key people from the Regions side that were the key point people for integrating, are they still in place for the most part?

Are you talking about like Dave Gordon in Ops and Technology?

Dave is there and working hard seven days a week.

He specifically is one I'm talking about in terms of showing me his turnover is less than it would normally be in a quarter right now with his Technology and Ops --.

Okay, great.

Thank you.

Ed Najarian with Merrill Lynch.

Yes, good morning.

I guess just two quick clarification questions.

And I'm sorry -- I sort of jumped in at the beginning of the call.

Al, could you go over what you were saying just briefly about FIN 48 and how that is going to impact earnings -- I think you said by $0.07 a share?

I just missed that.

Sure.

The impact to the year, we are estimating will be about $50 million for the full year, which does turn into about $0.07 a share.

And that is pretty equally spread throughout the year.

So that is adopting that, and that will impact what line item?

That piece of it affects just the tax line, and it affects the tax equivalent interest income.

Now the base interest income remains unchanged, but the tax equivalent, the adjustment effect is lower -- it lowers net interest -- fully taxable equivalent net interest margin by 7 basis points.

Okay, so that 7 basis points of FTE margin impact is in your 3.85 full-year outlook?

It is.

Okay.

Other than that, the $0.07 impact that you are outlining is because of a higher tax -- will come through as part of a higher tax rate.

That is right.

If you look at the tax percentage, it is up about 200 basis points.

And that is where you see the impact.

And that is already in the 1Q tax rate?

Absolutely.

All right.

And secondarily, you indicated, I guess, that the divestiture of the branches and the deposits would have a $23 million quarterly pretax income impact.

Is that correct?

That is correct.

Is that -- remind me when the branches were sold.

Well, they were sold throughout the first quarter, but the majority of them were sold in early March.

Okay.

So the majority of that $23 million is not in the first-quarter numbers?

That is correct.

Okay, great.

Thank you.

(OPERATOR INSTRUCTIONS) Christopher Marinac with Fig Partners.

Good morning.

Dowd, I was curious on what is happening on a marketing perspective.

Are you still using the AmSouth name in Birmingham for radio advertising or others?

I know the Website is still up.

Is that just a conscious effort to not confuse customers?

Chris, it is very strange, but the effort is not to confuse customers.

But in markets like Birmingham, your question, we absolutely have to operate under two brand names.

And those AmSouth offices still have AmSouth signage, their customers still get AmSouth statements, AmSouth mailings.

So we have a modest amount of what I would call product-specific advertising that those customers would see.

The Regions customers and everyone else in the market would see brand -- any brand activities on marketing would be with the new Regions name.

And of course the offers that are going to Regions customers are very -- they are identical offers, somewhat packaged differently, so that as we get to July, which is the date that we will convert Alabama and Florida, the customers have the same basic product offerings out there.

And we will go to, obviously, then one signage, one brand identity and only one set of advertising.

Okay, great.

That is helpful.

And a separate follow-up is on some of the de novo activity that Regions was doing prior to the merger, such as in Virginia and maybe some select areas in North Carolina.

Is that still ongoing and do you want to continue that in the future?

Well, you know we've said -- I mean, last year we opened I think 87 de novo offices between us.

The majority of those were in Florida.

But you're right, some in Virginia, Georgia, Texas, Carolinas, Tennessee, scattered around.

We've said as a combined company we will go to 50 this year.

Between the closing of the merger and year-end, we opened 14 de novo, and during the first quarter we opened 10 more.

So our plan would have 40 more de novo branches to open the remainder of '07.

Okay.

Good, Dowd.

Thank you very much.

Paul Delaney with Morgan Stanley.

Good morning.

I just wanted to get a little bit more background on the 90-days past due that are up from $144 million to $204 million.

And then I had a second question, just wondering what you are seeing on the construction front.

You had a little bit of growth there; if you could just give us a little bit more detail on what you are seeing there, both from a growth and a credit standpoint?

On the past due, the majority of that is really just a change in -- is conforming policies.

The time at which those loans are being called past due is being pushed out.

So what we've seen is -- the majority of that is residential mortgage, it is well collateralized; there is virtually no loss in that.

But the big part of that increase was really just a policy conformance change.

If you look at total past dues, you will see no increase quarter to quarter.

The 90-day is, as Al said, a conformance to policy.

They are well secured, we don't think there is any loss.

But one of the two companies would have treated that differently at 90 days, and we are going now to a similar interpretation of carrying those delinquent for 180 days, which is standard.

Great.

And then just on the construction side.

We have seen some good construction growth, which has helped because the mortgage piece is not -- we didn't see much growth there at all; we actually had some paydowns in the Real Estate Mortgage.

We like those projects; they are short-term; we have less exposure.

So it has been a good product and our pipelines are still very good there as well.

Where is the growth mainly coming from?

It is pretty well dispersed.

It is pretty well dispersed throughout the whole footprint.

There is no major concentration.

And how over the last few quarters does residential construction track?

Over the last three quarters?

Over the last few quarters, yes.

We've had pretty decent growth in residential construction.

I can get some more specific information and I can get back to you on that, Paul.

Okay, great.

Thanks a lot.

[Fred Fare] with [Fare Foundation]

I've got -- just down there in Florida and it seems like everybody is having the exodus down there.

Real estate prices are very high, taxes are high, insurance is high, and everybody is leaving Florida to come back to Georgia and further north.

Has this had a big impact on your new customers down there and on your home loans in Florida, in particular out of your Jacksonville, St.

Pete offices, and Naples?

Fred, good morning.

This is Dowd.

That is a fair question and there is no doubt about it -- any of us that either vacation there or live there or work there, do business there, know that two years back with the storms it has changed the rate of price appreciation in real estate.

It has actually stopped going up; in some places it has stabilized; in others, it is beginning to decline.

The same thing with real estate sales.

The prior question that dealt with residential construction, I would tell you that in Florida on commercial construction, we've actually seen projects, very well thought out projects, be postponed due to building material costs, due to insurance costs and due to just worrying that the square footage charges wouldn't make the project viable as it was originally planned.

All that said, the population still has a net increase.

There are people that have decided you have to get to probably a certain situation with your own housing in terms of what the rate of insurance increase is before you make that decision.

But Florida has always had people that spend part of their year in Florida and part of their year in the Northeast or the Midwest, and that continues on.

But we don't see any negative in terms of future outstanding viability of Florida as a financial services state.

So you look for continued growth in your Florida market -- maybe not as great as you had, but at least above 2% to 3% then?

Well, I would say first quarter in Florida, like a lot of places, we saw a pretty -- as you see from the balance sheet, we saw some pretty neutral, benign growth.

I would tell you in Florida for the pipelines that Al referenced, our Florida pipelines on commercial, commercial real estate and consumer, are some of the strongest we've ever seen as we go into the second quarter.

Now whether that will materialize, I don't know, but they are very solid.

That is unusual.

That is great though.

That is all I've got.

Keep up the good work; raise the dividend.

Thank you, Fred.

You are welcome.

John Pandtle with Raymond James.

Good morning.

I was wondering if you could talk a little bit about the differences in the credit underwriting policies procedures actual process between AmSouth and Regions, how that is being integrated and any impact on the local markets.

John, good morning.

This is Dowd.

Obviously there were differences in the way the two did it.

We are now into -- this quarter will be the start of our third quarter working together with a similar approval process and primarily that impacts the commercial side.

I hear very positive things as I'm out in the field from both sides.

Because I try and get out and obviously talk to what would be legacy Regions and legacy AmSouth, as to are they getting answers quickly enough, do they feel good about them.

And I would tell you it is getting better and better as the time goes on.

One of the questions I ask people that really infer that they aren't happy with it when that happens, I say have you lost many deals.

And they say, no, I haven't lost a deal.

And I say, well, let's think about why this isn't working so well then.

And part of it is just change.

One of the things we still have to emphasize every day is this is a massive change management process at the heart of it.

And I would tell you on the credit side it is going very well.

As I talk to the key lenders and the line of business and the geographies, I would tell you about another 90 days and I think we will be absolutely synched up side-by-side on the commercial credit side.

On the consumer credit side, there are some technology differences, but I couldn't be more pleased at the huge productivity increases coming through the Regions branches on home equity lending with procedural changes.

And they won't get the full technology support change until conversion date.

So in July, I would expect to see Alabama and Florida branches have greatly increased application flow and approval rates.

Okay.

And this is a follow-up on the same topics.

Was there a blending of the standards between Regions and AmSouth, or are we going to see more influence from the old AmSouth underwriting processes standards in terms of loan size, documentation, etc.?

Obviously on the loan size question, you will see larger sizes, the higher the credit rating on the commercial side, just the new size of the company and the capital base and those things.

You will see what -- I would call it a blending in that the team worked awfully hard together.

There is new terminology for the risk ratings and what they are called, those type things.

But it is trying to take the best of both and be sure that we behave properly in our new size going forward.

Okay.

Thank you very much.

There are no further questions at this time.

I would now like to turn the call back over to Dowd Ritter for closing remarks.

Let me just thank everyone for joining us.

I know there are several releases and this is the start of a busy week.

We thank you for being with us and look forward to talking to you next quarter.

We will stand adjourned, operator.

Thank you for your participation in today's conference.

This concludes the presentation.

You may now disconnect and have a great day.