Regions Financial Corporation (RF)

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Regions Financial Corp. (RF)

Q3 2010 Earnings Call

October 26, 2010 11:00 am ET


Grayson Hall - President & CEO

David Turner - CFO

Bill Wells - Chief Risk Officer

Barb Godin - Head, Consumer Credit


Marty Mosby - Guggenheim Securities

Craig Siegenthaler - Credit Suisse

Betsy Graseck - Morgan Stanley

Matt O'Connor - Deutsche Bank

Casey Ambrecht - Millennium

Heather Wolf - UBS

Jefferson Harralson - KBW

Scott Valentin - FBR Capital Markets



Appreciate your participation this morning. Our presenters today are our President, Chief Executive Officer, Grayson Hall; our Chief Financial Officer, David Turner; and also here and available to answer questions is Bill Wells, our Chief Risk Officer.

Let me quickly touch on our presentation format. We've prepared a short slide presentation to accompany David's comments. It's available under the Investor Relations section of For those of you in the investment community that dialed in by phone, once you are on the Investor Relations section of our website, just click on Live Phone Player, and the slides will automatically advance in sync with the audio of the presentation. A copy of the slides is available on our website.

With that said, I will direct your attention to the forward-looking statements slide that should be on the screen right now. And now I will turn it over to Grayson.

Grayson Hall

Good morning, and thank you for your time and participation in our conference call. Although we saw continued improvements in our core business performance this quarter, we have announced the third quarter loss of $0.17 per share due to still elevated credit expense with an economy that is demonstrating a slow paced recovery and actions that we have taken to accelerate the disposal of problem assets, and reduce our balance sheet risk going forward.

In addition to absorbing higher costs related to problem asset sales and loans transferred to held for sale, we also reported a loan loss provision essentially equal to the elevated level of loan charge-offs. Loan loss provision, OREO and held for sale cost in total were an estimated $0.41 per share after tax this quarter.

We executed disposition of $1 billion in problem loans, including 709 in distressed asset sales. We remain confident our business plans and our determination to execute these plans and returning Regions to sustainable profitability as powerfully and prudently as possible. Our actions are moving Region to Regions closer to the improvement needed to achieve a breakeven point. We are encouraged by this course of business progress that result in steps towards achieving that goal. Our credit teams are diligently working to resolve credit related issues. Majority of our associates have demonstrated a focus on profitably grow our revenue and constraining operating expenses in our core businesses.

In the third quarter net interest income rose 1% from second quarter driven as expected by continued reduction in overall cost of deposits and a favorable shift and mix. And while our fee based revenues declined 1% versus last quarter, the drop was primarily driven by the impact from regulation E on service charges. Notably, while the implication of Reg E did negatively impact the quarter that impact was less than we forecasted, and we continue to be encouraged by the efforts of our associates and our branches and our call centers to further mitigate the impact in this regulatory requirement as we assist customers in making the best decisions to accommodate their needs.

At the same time, operating expenses on being closely managed did unfortunately increase due to the impact of higher credit related expenses. We remain confident in the current progress we're making in spite of the slow paced economic recovery. Our strategies are working with discipline and are focused on customers, and we have developed strong accountability for execution and results.

The operating environment does continue to be a challenge. The economy is gradually recovering. But growth is forecasted to be unfavorably slow for the next few quarters with stubbornly high unemployment, a weak housing market and unusually low interest rates.

Today economic recovery within our markets has been uneven. Residential home values have now stabilized in many of our markets, especially the markets within the state of Florida where we could potentially experience another 10% or so decline relative to mid 2010 prices depending on the ability of the banks and the courts to process foreclosures effectively, and the amount of shadow inventory remaining in the system.

With that in mind, we are careful when making general statements. It may prove to be inaccurate due to the inconsistent valuation from market to market. But we are starting to see what appears to be stabilization in some of our market.

Fortunately, the Gulf oil spills impact on individuals and business customers has been far less economically negative than initially forecasted. It's still a difficult situation for these markets, but far less impacted than earlier feared.

Regions maximum loss potential is projected now to be $20 million or less, sharply less than our initial $100 million estimate. That being said, the long term economic environmental impacts remain a concern as the markets and businesses along the Gulf Coast recover very slowly.

Across all of our markets, I am convinced the economic conditions are improving. But the slow pace of recovery is weighing on borrowers capacity, and borrowers willingness to continue to fill credit obligations. And thus has decreased the implied potential benefit of guarantor support on many of our credits. As such we have become incrementally more cautious on our economic outlook, which was a driving factor in the increased gross migration loans moving to a non-performing status.

I think it's important, however to consider the composition of that migration. Of the $1.4 billion of third quarter gross non-performing additions approximately $390 million were disposed off during the quarter. Of the commercial loans remaining $933 million 62% or $575 million were current home payments.

Overall the percentage of non-performing commercial loans their internal payments has risen from 24% at the end of second quarter to 36% at the end of third quarter giving us more confidence in the ability to manage the potential loss content and the potential to restructure in some cases. It's also important to point out that our internally risk-rated problem loans declined on a linked quarter basis. Our early stage and late stage delinquencies have stabilized and our moderating.

The lingering effects of the slow pace of the economic recovery has not helped many of our borrowers, and we have acted cautiously and prudently reassessing and modifying risks ratings as appropriate. We are focused on being very careful and accurate in assessing the financial condition of our borrowers in taking prompt action as required and as appropriate.

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