Regions Financial (RF)

Q3 2011 Earnings Call

October 25, 2011 11:00 am ET


Matthew Lusco -

O. B. Grayson Hall - Vice Chairman, Chief Executive Officer, President, Chief Executive Officer of Regions Bank, President of Regions Bank and Director of Regions Bank

M. List Underwood - Director of Investor Relations

David J. Turner - Chief Financial Officer, Senior Executive Vice President, Member of the Executive Council, President of Central Region, Chief Financial Officer of Regions Bank and Senior Executive Vice President of Regions Bank

Barb Godin - EVP and Consumer Credit Executive


Robert Placet - Deutsche Bank AG, Research Division

Jefferson Harralson - Keefe, Bruyette, & Woods, Inc., Research Division

Jennifer H. Demba - SunTrust Robinson Humphrey, Inc., Research Division

John G. Pancari - Evercore Partners Inc., Research Division

Erika Penala - Merrill Lynch

Kenneth M. Usdin - Jefferies & Company, Inc., Research Division

Betsy Graseck - Morgan Stanley, Research Division

Unknown Analyst -

Brian Foran - Nomura Securities Co. Ltd., Research Division



Good morning, and welcome to the Regions Financial Corporation's quarterly earnings call. My name is Melissa, and I will be your operator for today's call. [Operator Instructions] I will now turn the call over to Mr. List Underwood to begin.

M. List Underwood

Thank you, Operator, and good morning, everyone. We appreciate your participation on our call. Our presenters today are our President and Chief Executive Officer, Grayson Hall; our Chief Financial Officer, David Turner; and also available to answer questions this morning are Matt Lusco, our Chief Risk Officer; and Barb Godin, our Chief Credit Officer.

As part of our earnings call, we will be referencing a slide presentation that is available under the Investor Relations section of With that said, let me remind you that in this call, we may make forward-looking statements, which reflect our current views with respect to future events and financial performance. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results or other developments. Those statements are based on general assumptions and are subject to various risks, uncertainties and other factors that may cause actual results to differ materially from the views, beliefs and projections expressed in such statements. Additional information regarding these factors can be found on our forward-looking statement that is located in the appendix of the presentation.

Now that we have all of that covered, I will turn it over to our President and CEO, Grayson Hall.

O. B. Grayson Hall

Thank you, List, and welcome, everyone, to Regions' third quarter earnings conference call. The third quarter results provide additional evidence that our disciplined efforts are paying off, that we are successfully executing our business plans as we deliver another quarter of progress. Regions earned $101 million or $0.08 per diluted share this quarter. Adjusted pretax pre-provision income rose to $540 million, up 19% year-over-year and the highest level in more than 3 years, demonstrating ongoing improvement in our core business performance.

Further, adjusted pretax pre-provision income exceeded the loan loss provision for the second consecutive quarter, which is critical to Regions' achieving sustainable profitability. Although results met our expectations and demonstrated incremental progress, signs of a weakening economic recovery and reduced consumer and business confidence began to surface during the third quarter, causing us to take an increasingly cautious and disciplined stance on credit quality. This environment led to a $200 million linked quarter rise in gross non-performing loans, inflows largely driven by investor real estate credits. David will provide much more detail, but it's important to note that 63% of these gross inflows were still current and performing as agreed.

Our credit metrics showed improvement linked quarter as total non-performing assets declined 6%. Net charge-offs decreased 7%. Business Services' criticized loans fell 8%, and delinquencies, both early and late stage, improved.

While we remain cautious given the current uncertain economic backdrop, we do expect credit costs to resume their downward trend in the fourth quarter and credit quality metrics overall to continue to improve. Our investor real estate exposure continued to decline this quarter with total outstandings down $4 billion or 25% thus far this year. Within this portfolio, construction loans are down 48% so far this year. I'm particularly pleased with the progress we're continuing to make in fundamentally improving Regions' business model, both from the standpoint of generating profitable revenue streams and enhancing productivity. Our ongoing focus on customer needs and superior customer service has enabled us to grow adjusted revenue to 1% year-to-date versus prior year despite greater economic and regulatory challenges. At the same time, we have focused on controlling the expenses, as evidenced by a 3% decline in year-to-date adjustment noninterest expenses versus the prior year.

In the third quarter, we generated $14.7 billion in new or renewed loan commitments. In Business Services, loan production totaled a solid $12.5 billion, down linked quarter but stable year-over-year. Commercial and industrial loan growth remained strong, with ending balances up 3% linked quarter and nearly 13% higher from that a year ago. Importantly, commitments increased approximately 3% during the quarter, and line utilization rose to 43%. Middle market C&I lending, particularly specialized industries such as energy, healthcare and franchise restaurant, continue to drive the growth. We do expect commercial loan growth to continue even as economic uncertainty weighs on customer confidence, which does have a moderating effect on investment by businesses. While we are seeing incremental pricing competition, especially in the middle market space, our relationship banking approach and brand differentiation has, for the most part, mitigated this impact. Our spreads remained above those experienced prior to the recession.

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