Regions Financial 2 nd Quarter Earnings Conference Call July 26, 2011 |
Continued Progress; Core PPNR* reaches $500MM › 3 rd consecutive quarter of profitability, highest level since third quarter 2008 › Continued solid core business performance, core PPNR increased 9%* linked quarter › Credit costs** negatively impacted EPS ($0.22) per share › Reached settlement with SEC, FINRA and state regulators; review of strategic alternatives for Morgan Keegan underway › Announced formation of new Wealth Management Line of Business › Profitably gaining market share, growing customer base and expanding existing relationships › Re-entry into credit card business -- repurchased $1.2B in customer balances › Focused on improving productivity and efficiencies ($ in millions) 2Q10 1Q11 2Q11 Net Income (Loss) ($335) $17 $55 EPS ($0.28) $0.01 $0.04 Net Interest Margin 2.87% 3.07% 3.05% Loan Loss Provision $651 $482 $398 Earnings Highlights * See appendix for non-GAAP reconciliation ** Includes loan loss provision, other real estate expense and net loss / (gain) on HFS sales 1 |
Solid Core Performance 2 Improvement › Key credit metrics continue to improve › Formation of non-performing loans declined for the 3rd consecutive quarter › Non-performing loans, excluding loans held for sale, declined for the 5th consecutive quarter or 10% › Total loan loss provision declined 17% linked quarter or $84MM › Criticized and classified loans continued to decline Business Performance Improvement › Targeting a more diversified and balanced loan mix › Consumer loan production increased 14% year-to-date and 8% linked quarter › Growth in indirect lending – expected to sign 1,200 auto dealerships by year end › Purchase of credit card portfolio allows us to better serve our customers › Product innovation will contribute to fee revenue and further diversify revenue streams › Business services loan production increased 14% over prior year › Commercial and industrial commitments increased 7% year to date › Small business remains a priority -- providing loans, fee income and deposits › Average low-cost deposits increased 4% versus prior year, deposit costs declined 26 bps › Despite legislative and regulatory rule changes, service charges revenue grew 7% over prior quarter Asset Quality |
2Q11 Earnings Highlights 3 › Adjusted PPNR reaches highest level since third quarter 2008 › Loan loss provision declined $84MM impacted by loan loss reserve reduction of $150MM related primarily to asset dispositions › $44 million tax benefit related to a portion of the regulatory settlement * See appendix for non-GAAP reconciliation ($ in millions, except EPS) 2Q10 1Q11 2Q11 $ % $ % Net Interest Income $ 856 $ 863 $ 864 $ 1 0% $ 8 1% Adjusted Non-Interest Revenue* 756 764 757 (7) -1% 1 0% Adjusted Non-Interest Expense* 1,126 1,167 1,121 (46) -4% (5) 0% Adjusted PPNR* 486 460 500 40 9% 14 3% Net Charge-Offs 651 481 548 67 14% (103) -16% Loan Loss Reserve Build / (Reduction) - 1 (150) (151) NM (150) NM Loan Loss Provision 651 482 398 (84) -17% (253) -39% Net Income (Loss) Available to Common Shareholders $ (135) $ 17 $ 55 $ 38 224% $ 190 141% EPS ($0.28) $0.01 $0.04 $0.03 337% $0.32 116% Adjusted EPS* ($0.11) ($0.03) $0.04 $0.06 -221% $0.15 131% 2Q11 vs. 1Q11 2Q11 vs. 2Q10 |
Non-Performing Loan Inflows Declined 24% Ending Balances 4 NPL Inflows by Type Business Services Gross NPLs |
Non-Performing Loans* Declined 10% 5 › Non-performing loans, excluding loans held for sale, declined $303 million or 10% › $620 million of criticized loans were sold or moved to held for sale › Non-performing assets declined $331 million or 8% › Delinquencies improved for the 5th straight quarter › Business Services criticized loans declined approximately $1.2 billion or 14% * Excluding non-performing loans held for sale Non-Performing Assets |
Allowance Coverage of Non-Performing Loans Increases 9 bps Sales/ HFS (1) (1) Loan charge-offs related to Sales and Transfer to Held for Sale (2) Excludes loans held for sale 6 Loan Loss Provision Allowance and Coverage |
Loan Balances Reflect Commercial Growth offset by Continued Decline in Investor Real Estate › Commercial loan balances on an ending basis increased 7% from one year ago reflecting strength in our middle market segment › Commercial & industrial commitments increased 4% linked quarter to $28 billion › Investor Real Estate declined $1.4 billion from prior quarter on an ending balance and now totals $13.4 billion › Purchased $1.2 billion credit card portfolio › Decrease in loan yield due to loans resetting to declining 30- day LIBOR 7 * Average Balances |
› Our improved deposit mix is resulting in lower deposit costs › Low cost deposits as a % of total deposits increased to 76.6% in 2Q11 from 72.5% in 2Q10 › Repricing opportunities remain with over $6.1 billion of CD’s maturing in the next 6 months at an average rate of 1.48% › Deposit costs declined 6 bps linked quarter; down 26 bps year-over-year 8 * Average Balances Deposit Balances* and Deposit Costs Deposit Costs Decline 6 bps; Driven by Improving Deposit Mix |
Net Interest Income Steadied › Net Interest Margin Up 18 bps versus prior year › Net interest margin decline impacted by excess liquidity › Repositioned securities portfolio, shortened duration resulting in $24 million of securities gains 9 Net Income and Net Interest Margin |
Non-Interest Revenues Reflect Lower Brokerage Income Offset by Solid Service Charges Growth › Adjusted non-interest revenue* 1% lower than prior quarter › Morgan Keegan’s revenues down due to lower private client and capital markets revenue in 2Q11 › Service charges increase reflects ongoing restructure of our accounts to fee-eligible. Interchange income benefited from increased transaction volume › Launch of new products and ongoing restructuring of checking accounts to fee-eligible › Mortgage revenue increased 11% due to improved MSR and related hedging performance 10 * Non – GAAP; Refer to Appendix Adjusted Non-Interest Revenue* |
Focused Expense Management Leads to 4% Decline in Expenses › Adjusted non-interest expenses* 4% lower versus prior quarter › Salaries and benefits declined 6% linked quarter and professional and legal fees declined $20 million linked quarter › FDIC premium expenses increased 38% or $20 million versus 1Q11 › Credit-related expenses declined modestly and represent 8% of second quarter’s adjusted expenses* › Recorded $77 million of charges related to consolidation of approximately 40 branches and property and equipment › Headcount down 568 positions during 2011 11 * Non – GAAP; Refer to Appendix ** Proforma to include 40 branch consolidations Occupancy Detail Headcount Trends Square Footage Branch Count |
Capital Ratios Remain Strong; Liquidity Profile Solid * Current Quarter ratios are estimated ** Non-GAAP - Subject to change as interpretation of Basel III rules is ongoing and dependent on guidance from › Well-positioned with respect to the Liquidity Coverage Ratio prescribed under Basel III › Solid liquidity at both the bank and holding company › Loan-to-deposit ratio of 84.3% 12 Capital Ratios Favorable Liquidity Position Basel and regulators; see appendix for reconciliation |
›Forward- Looking Statements 14 This presentation may include forward-looking statements which reflect Regions’ current views with respect to future events and financial performance. The Private Securities Litigation Reform Act of 1995 (“the Act”) provides a “safe harbor” for forward-looking statements which are identified as such and are accompanied by the identification of important factors that could cause actual results to differ materially from the forward-looking statements. For these statements, we, together with our subsidiaries, claim the protection afforded by the safe harbor in the Act. Forward-looking statements are not based on historical information, but rather are related to future operations, strategies, financial results or other developments. Forward-looking statements are based on management’s expectations as well as certain assumptions and estimates made by, and information available to, management at the time the statements are made. 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. These risks, uncertainties and other factors include, but are not limited to, those described below: The Dodd-Frank Wall Street Reform and Consumer Protection Act became law on July 21, 2010, and a number of legislative, regulatory and tax proposals remain pending. Additionally, the U.S. Treasury and federal banking regulators continue to implement, but are also beginning to wind down, a number of programs to address capital and liquidity in the banking system. Proposed rules, including those that are part of the Basel III process, could require banking institutions to increase levels of capital. All of the foregoing may have significant effects on Regions and the financial services industry, the exact nature of which cannot be determined at this time. The impact of compensation and other restrictions imposed under the Troubled Asset Relief Program (“TARP”) until Regions repays the outstanding preferred stock and warrant issued under the TARP, including restrictions on Regions’ ability to attract and retain talented executives and associates. Possible additional loan losses, impairment of goodwill and other intangibles, and adjustment of valuation allowances on deferred tax assets and the impact on earnings and capital. Possible changes in interest rates may increase funding costs and reduce earning asset yields, thus reducing margins. Increases in benchmark interest rates would also increase debt service requirements for customers whose terms include a variable interest rate, which may negatively impact the ability of borrowers to pay as contractually obligated. Possible changes in general economic and business conditions in the United States in general and in the communities Regions serves in particular, including any prolonging or worsening of the current unfavorable economic conditions including unemployment levels. Possible changes in the creditworthiness of customers and the possible impairment of the collectability of loans. Possible changes in trade, monetary and fiscal policies, laws and regulations and other activities of governments, agencies, and similar organizations, may have an adverse effect on business. The current stresses in the financial and real estate markets, including possible continued deterioration in property values. Regions' ability to manage fluctuations in the value of assets and liabilities and off-balance sheet exposure so as to maintain sufficient capital and liquidity to support Regions' business. Regions' ability to expand into new markets and to maintain profit margins in the face of competitive pressures. Regions' ability to develop competitive new products and services in a timely manner and the acceptance of such products and services by Regions' customers and potential customers. Regions' ability to keep pace with technological changes. Regions' ability to effectively manage credit risk, interest rate risk, market risk, operational risk, legal risk, liquidity risk, and regulatory and compliance risk. Regions’ ability to ensure adequate capitalization which is impacted by inherent uncertainties in forecasting credit losses. The cost and other effects of material contingencies, including litigation contingencies, and any adverse judicial, administrative or arbitral rulings or proceedings. The effects of increased competition from both banks and non-banks. The effects of geopolitical instability and risks such as terrorist attacks. Possible changes in consumer and business spending and saving habits could affect Regions' ability to increase assets and to attract deposits. The effects of weather and natural disasters such as floods, droughts, wind, tornados and hurricanes, and the effects of man-made disasters. Possible downgrades in ratings issued by rating agencies. Potential dilution of holders of shares of Regions’ common stock resulting from the U.S. Treasury’s investment in TARP. Possible changes in the speed of loan prepayments by Regions’ customers and loan origination or sales volumes. Possible acceleration of prepayments on mortgage-backed securities due to low interest rates and the related acceleration of premium amortization on those securities. The effects of problems encountered by larger or similar financial institutions that adversely affect Regions or the banking industry generally. Regions’ ability to receive dividends from its subsidiaries. The effects of the failure of any component of Regions’ business infrastructure which is provided by a third party. Changes in accounting policies or procedures as may be required by the Financial Accounting Standards Board or other regulatory agencies. The effects of any damage to Regions’ reputation resulting from developments related to any of the items identified above. The foregoing list of factors is not exhaustive. For discussion of these and other factors that may cause actual results to differ from expectations, look under the captions “Forward-Looking Statements” and “Risk Factors” in Regions’ Annual Report on Form 10-K for the year ended December 31, 2010 and quarterly report on Form 10-Q for the quarter ended March 31, 2011, as on file with the Securities and Exchange Commission. The words "believe," "expect," "anticipate," "project," and similar expressions often signify forward-looking statements. You should not place undue reliance on any forward-looking statements, which speak only as of the date made. We assume no obligation to update or revise any forward-looking statements that are made from time to time. |
Non-GAAP Reconciliation: PPNR 15 ($ in millions) 2Q10 3Q10 4Q10 1Q11 2Q11 Net interest income (GAAP) 856 $ 868 $ 877 $ 863 $ 864 $ Non-interest income (GAAP) 756 750 1,213 843 781 Adjustments: Securities (gains) losses, net - (2) (333) (82) (24) Leveraged lease termination gains - - (59) - - Loss (gain) on sale of mortgage loans - - (26) 3 - Adjusted non-interest income (non-GAAP) 756 748 795 764 757 Adjusted total revenue (non-GAAP) 1,612 $ 1,616 $ 1,672 $ 1,627 $ 1,621 $ Non-interest expense (GAAP) 1,326 $ 1,163 $ 1,266 $ 1,167 $ 1,198 $ Adjustments: Regulatory charge (200) - - - - Loss on extinguishment of debt - - (55) - - Securities impairment, net - (1) - - - Branch consolidation and property and equipment charges - - - - (77) Adjusted non-interest expense (non-GAAP) 1,126 $ 1,162 $ 1,211 $ 1,167 $ 1,121 $ Adjusted pre-tax pre-provision net revenue 486 $ 454 $ 461 $ 460 $ 500 $ |
Non-GAAP Reconciliation: EPS 16 2Q10 1Q11 2Q11 EPS as reported (GAAP) (0.28) $ 0.01 $ 0.04 $ Significant Items: Regulatory charge and related tax benefit 0.17 - (0.03) Securities (gains) losses, net - (0.04) (0.01) Branch consolidation and property and equipment charges - - 0.04 Adjusted EPS (Non-GAAP) (0.11) $ (0.03) $ 0.04 $ |
Non-GAAP Reconciliation: Capital 17 ($ amounts in millions) 06/30/11 Stockholders' equity (GAAP) 16,888 Non-qualifying goodwill and intangibles (1) (5,754) Adjustments, including other comprehensive income related to cash flow hedges, disallowed deferred tax assets, threshold deductions and other adjustments (877) 10,257 Qualifying non-controlling interests 4 Basel III Tier 1 Capital (non-GAAP) 10,261 Basel III Tier 1 Capital (non-GAAP) 10,261 Preferred Stock (3,398) Qualifying non-controlling interests (4) Basel III Tier 1 Common (non-GAAP) 6,859 Basel I risk-weighted assets 93,855 Basel III risk-weighted assets (2) 95,363 Minimum Basel III Tier 1 Capital Ratio 10.8% 8.5% Basel III Tier 1 Common Ratio 7.2% 7.0% (1) Under Basel III, regulatory capital must be reduced by purchased credit card relationship intangible assets. These assets are partially allowed in Basel I capital. (2) Regions continues to develop systems and internal controls to precisely calculate risk-weighted assets as required by Basel III. The amount included above is a reasonable approximation, based on our understanding of the requirements. |