Filed by Regions Financial Corporation
Pursuant to Rule 425
under the Securities Act of 1933 and
deemed filed pursuant to Rule 14a-12 of
the Securities Exchange Act of 1934
Subject Company: AmSouth Bancorporation (Commission File No. 1-7476)
FORWARD LOOKING STATEMENTS
This transcript contains forward-looking statements made pursuant to the
safe-harbor provisions of the Private Securities Litigation Act of 1995. These
include statements as to the benefits of the proposed merger between Regions
Financial and AmSouth (the "Merger"), including future financial and operating
results, cost savings, enhanced revenues and the accretion/dilution to reported
earnings that may be realized from the Merger as well as other statements of
expectations regarding the Merger and any other statements regarding future
results or expectations. These statements involve risks and uncertainties that
may cause results to differ materially from those set forth in these statements.
Regions and AmSouth caution readers that results and events subject to
forward-looking statements could differ materially due to the following factors,
among others: the risk that the businesses of Regions Financial and/or AmSouth
in connection with the Merger will not be integrated successfully or such
integration may be more difficult, time-consuming or costly than expected;
expected revenue synergies and cost savings from the Merger may not be fully
realized or realized within the expected time frame; revenues following the
Merger may be lower than expected; customer and employee relationships and
business operations may be disrupted by the merger; the ability to obtain
required governmental and stockholder approvals, and the ability to complete the
merger on the expected timeframe; possible changes in economic and business
conditions; the existence or exacerbation of general geopolitical instability
and uncertainty; the ability of Regions and AmSouth to integrate recent
acquisitions and attract new customers; possible changes in monetary and fiscal
policies, and laws and regulations; the effects of easing of restrictions on
participants in the financial services industry; the cost and other effects of
legal and administrative cases; possible changes in the credit worthiness of
customers and the possible impairment of collectibility of loans; the effects of
changes in interest rates and other risks and factors identified in each
company's filings with the Securities and Exchange Commission (the "SEC").
Regions Financial and AmSouth do not undertake any obligation to update any
forward-looking statement, whether written or oral, relating to the matters
discussed in this transcript.
ADDITIONAL INFORMATION
The proposed Merger will be submitted to Regions Financial's and AmSouth's
stockholders for their consideration. Regions Financial has filed a preliminary
registration statement, which includes a joint proxy statement/prospectus to be
sent to each company's stockholders, and each of Regions Financial and AmSouth
may file other relevant documents concerning the proposed Merger with the SEC.
Stockholders are urged to read the preliminary registration statement and the
joint proxy statement/prospectus regarding the proposed Merger and any other
relevant documents filed with the SEC, as well as any amendments or supplements
to those documents, because they will contain important information. You may
obtain a free copy of the joint proxy statement/prospectus, as well as other
filings containing information about Regions Financial and AmSouth, at the SEC's
Web site (http://www.sec.gov). You may also obtain these documents, free of
charge, by accessing Regions Financial's website (http://www.Regions.com) under
the tab "Investor Relations" and then under the heading "SEC Filings", or by
accessing AmSouth's Web site (http://www.amsouth.com) under the tab "About
AmSouth," then under the tab "Investor Relations" and then under the heading
"SEC Filings."
Regions Financial and AmSouth and their respective directors and executive
officers may be deemed to be participants in the solicitation of proxies from
the stockholders of Regions Financial and/or AmSouth in connection with the
proposed Merger. Information about the directors and executive officers of
Regions Financial is set forth in the proxy statement for Regions Financial's
2006 annual meeting of stockholders, as filed with the SEC on April 5, 2006.
Information about the directors and executive officers of AmSouth is set forth
in the proxy statement for AmSouth's 2006 annual meeting of stockholders, as
filed with the SEC on March 16, 2006. Additional information regarding the
interests of those participants and other persons who may be deemed participants
in the transaction may be obtained by reading the joint proxy
statement/prospectus regarding the proposed Merger. You may obtain free copies
of these documents as described above.
FINAL TRANSCRIPT
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JUL.14.2006/10:00AM, RF-Q2 2006 REGIONS FINANCIAL CORP. EARNINGS CONFERENCE CALL
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Good day, ladies and gentlemen, and welcome to the second quarter 2006 Regions
Financial Corp. conference call. My name is Dwanda and I will be your
coordinator for today.
At this time, all participants are in listen-only mode. We will conduct a
question-and-answer ses-sion towards the end of the conference. If at any time
during the call you require assistance, please key start followed by zero and
the coordinator will be happy to assist you. As a reminder, this conference is
being recorded for replay purposes.
I would now like to turn the call over to Ms. Jenifer Kimbrough, Director of
Investor Relations. Please proceed.
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JENIFER KIMBROUGH - REGIONS FINANCIAL CORPORATION - DIRECTOR INVESTOR RELATIONS
Thank you and good morning. Thank you all for joining us.
Commenting on our second quarter 2006 earnings results will be Jack Moore,
Regions Chair-man, CEO and President and Bryan Jordan, Regions Chief Financial
Officer. Rick Horsley, Regions Vice Chairman and CEO of [Bennett's] Business
Enterprises will also be available for questions.
Our earnings release and supplement has been filed on Form 8-K and is also
located at re-gions.com in the Investor Relations Earnings Release section of
the Web site.
Certain statements made in this call may be forward looking. These
forward-looking statements reflect Regions' current views with respect to future
events and financial performance.
Actual results could differ substantially and materially from what we have
projected. Such statements are made in good faith pursuant to the Safe Harbor
provisions of the Private Security Litigation Reform Act of 1995.
Please refer to our press release filed on Form 8-K dated today, July 14, 2006
for factors that could affect the accuracy of our expectations or cause our
future results to differ materially from our expectations.
Now I'll turn over the call to Mr. Moore.
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JACK MOORE - REGIONS FINANCIAL CORPORATION - CHAIRMAN, CEO, PRESIDENT
Thanks, Jenifer. We appreciate all of you joining us this morning.
This has been an exceptional quarter for Regions. In mid-May, our stock reached
an all-time high. Later that month, we announced our strategic MOE with AmSouth
and now we are pleased to report record quarterly earnings.
Regions' second quarter results were outstanding, with earnings reaching a new
record level of $0.75 per share, 17% above the first quarter and 27% higher than
year ago core EPS of $0.59. We have begun to realize the pow-erful benefits of
two years of hard work surrounding our mid-2004 strategic merger with Union
Planters.
Second quarter's revenue strength shows we're making good headway is
capitalizing on revenue opportunities and there's also notable operating
efficiency improvement, almost 400 basis points year-over-year.
Net interest income climbed to a new high in the second quarter, helped by
continued excellent balance sheet management and continued pricing discipline in
the field. Fee-based revenues were strong, expenses dropped from the first
quarter and credit quality remained outstanding.
As a result, Regions' annualized return on tangible common equity increased to
about 26%, which met one of our key milestones. It was, by all accounts, a very
solid core performance quarter.
I am extremely encouraged by our continued progress and believe Regions is well
positioned to achieve record full-year 2006 operating profits.
I'm also very pleased and excited about our pending merger with AmSouth, which
we an-nounced May 25th. The merger planning process is about six weeks underway
and progressing well, with a fourth quarter close still targeted.
Our teams are working well together and we've announced over 100 key leaders in
the combined company. We strongly believe the combination of these two strong
franchises offers considerable opportunities, both from an expense reduction and
revenue generation standpoint.
I remain confident in our ability to fully capitalize on these opportunities.
Regions' trends are positive, demonstrating the foundation of our belief that
mergers such Regions Union Planters and Regions AmSouth can create tremendous
value.
We believe the Regions AmSouth merger has the power to enable us to become the
leading re-gional financial services company. We are committed to successfully
combining the two companies, building on the successes of both companies and
benefiting from both Regions and AmSouth's key strengths, enhanced combined
footprint and combined product offerings.
At the same time, we will continue to focus on providing superior products and
service for our customers and to fostering a workplace that attracts, retains,
and rewards talented associates. The outcome should be consis-tently
above-average profitably and returns for our shareholders.
Bryan will now provide more details about our second quarter's financial
results.
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BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Thanks, Jack. Good morning, everyone.
As Jack said, it was a great quarter that demonstrates the power of a successful
merger. Higher revenue and lower expenses boosted EPS $0.11 linked quarter.
Total taxable equivalent revenues increased $45 million, or 3.7%, expenses
dropped $30 million.
Our banking business posted a very good quarter with revenue per FTE rising to
$287,000 on a year-to-date basis, 2% above first quarter's $281,000. The banking
franchise's second quarter operating efficiency ratio im-proved to 50% from 53%
in the first quarter.
Community banking loan growth accelerated at period end to an annualized 6%, up
from first quarter's average 1% annualized pace. CNI lending was a primary
driver, with active across industry groups and across our foot-print, although
it was more pronounced in areas like Atlanta and Miami.
Low-cost community banking deposits did begin to decline a bit as the mix shift
towards higher rate product became more evident. Increases in retail CDs were
largely offset by declines in low-cost deposits as customers continued to seek
higher yields.
Toward quarter end, we launched a money market deposit campaign which enables us
to further emphasize transaction accounts.
We saw an approximate $80 million deposit outflow in the Katrina-affected area,
primarily to fund rebuilding efforts. The good news is that we are starting to
see some loan activity in these areas, particularly in the Missis-sippi Gulf
Coast region.
There is also increasing activity around GO Zone financing at both the bank and
Morgan Keegan.
Credit quality was outstanding. Nonperforming assets dropped $89 million linked
quarter and $136 million, or 30% year-over-year June 30th.
In the second quarter, we sold $10 million of foreclosed real estate and $59
million of non-performing residential mortgages. Inflows of new problem credits,
including Katrina-related, were low.
Net loan losses were an annualized 21 basis points of average loans, slightly
above first quarter seasonally low 20 basis points, but below a year earlier's
23 basis points.
Katrina-area write-offs were just a little over $1 million. We currently expect
full-year 2006 net charge offs to be in the mid-20 basis points.
Our allowance for loan losses remains strong, or 1.23% of total loans at June
30th. Little change from March 31, 2006's 1.34% and slightly above mid-2005's
1.30%. The second quarter provision largely covered write-offs.
Taxable equivalent net interest income increased $25 million first to second
quarter and $75 mil-lion, or 10% year-over-year primarily due to a higher net
interest margin. A well positioned balance sheet continued to sup-port our net
interest margin, which rose 6 basis points linked quarter to 4.24%.
At the end of the first quarter, we expected some margin compression in the
second quarter as a result of the changing mix in deposits and a generally more
competitive deposit market.
We did continue to see a migration of deposits from lower-cost transaction
accounts into CDs, however, there were a couple of other items that worked in
our favor. Interest-bearing deposit costs for the quarter were up only 29 basis
points, even given the mix shift as we continued to be very successful in
controlling deposit costs.
The other major factor driving higher margin was the record EquiFirst production
that we saw during the quarter. Average EquiFirst loans held for sale increased
approximately $650 million at a rough yield of 8.5%, up approximately 50 basis
points.
In total earning asset yields were up 28 basis points while interest-bearing
liabilities were up 27 basis points.
We continue to expect deposit mix shifts, competitive pressure, and the overall
lag in deposit pricing resulting from sustained fed rate increases to place some
pressure on the margin, especially when rate increases end. The midpoint of our
expected range for all of 2006 approximates 4.1%.
Whether we end up at the high end of our range or the lower end will be
influenced by the Fed's interest rate policy, the impact of market forces on
deposit costs, and our ability to manage or react to those forces. We do ex-pect
modest growth in earning assets in the second half of the year, which should
offset some of the margin contraction.
Please keep in mind we are asset-sensitive and as such, we should be have well
prepared or posi-tioned for further increases in interest rates.
Turning to non-interest revenue, we were pleased with both the strength and the
diversity. Fee-based revenues were up $21 million linked quarter despite first
quarter's exceptionally strong capital markets contribution.
Linked quarter, there was particular improvement in service charges on deposit
accounts and mortgage banking revenues. Year-over-year second quarter total fees
grew $45 million, or 10% excluding securities transactions and business line
sales.
Morgan Keegan reported another good quarter with revenue and earnings of $239
million and $33 million respectively.
Earnings were 34% above a year earlier. They were only $8 million below first
quarter's record level, which included a $9 million after-tax gain on the swap
of the NYSE seats for stock.
Business flows were healthy across the board, but fixed income capital markets
and asset man-agement were especially robust, growing revenue a respective 18%
and 12% linked quarter.
Equity capital markets had its best June ever. We continue to expect Morgan
Keegan to achieve record full-year 2006 profits given its larger sales force,
increased number of locations, and cross selling momentum.
Mortgage banking earnings bounced back to $10 million due to a $6 million
positive swing in EquiFirst linked quarter results and improved conforming
mortgage profits. In line with expectations, EquiFirst gain on sale margin
rebounded about 30 basis points to around 2.20% and origination volume picked up
to $3 billion.
Mortgage banking's second half quarterly earnings will largely depend on
industry competitive pressures and the affect of higher interest rates on
customer demand. Non interest expenses dropped $30 million linked quarter.
Seasonality explained a lot of the reduction, but we're also making headway in
streamlining op-erations. For example, as a result of the implementation of
consistent banking models across the franchise, we continued to see a reduction
in headcount this quarter in our banking unit, and we've closed two mortgage
operation centers.
Operating efficiency improvement has been and remains a key focus and in the
second quarter, we made good progress. Given lower linked quarter core expenses
and a gain in total revenues, Regions' operating efficiency ratio improved to
57% from first quarter's 61% and a year ago's second quarter 61.5%.
Second quarter's effective tax rate declined slightly to 30.5% from first
quarter's 31.4%, due to slightly higher tax credits and higher tax-free income.
The third quarter's rates should be around 31%.
During the quarter 3.6 million shares of common stock were repurchased, which
left Regions' June 30th tangible common equity ratio at a strong 6.69%.
Second half quarterly repurchases will decline from second quarter's level due
to merger-related restrictions. Once the merger is completed, we should be able
to make up this year's buy back shortfall relative to prior expectations.
To sum up, second quarter's earnings were strong. Regions has good, core
operating earnings power that we anticipate to be sustained during the second
half of 2006.
Q U E S T I O N S A N D A N S W E R S
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
With that Operator, we're ready to take questions.
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OPERATOR
[OPERATOR INSTRUCTIONS] Your first question comes from the line of Gary Townsend
with Friedman, Billings Ramsey. Please proceed.
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GARY TOWNSEND - FRIEDMAN, BILLINGS RAMSEY GROUP - ANALYST
Good morning, gentleman.
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JACK MOORE - REGIONS FINANCIAL CORPORATION - CHAIRMAN, CEO, PRESIDENT
Good morning.
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BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Good morning, Gary.
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GARY TOWNSEND - FRIEDMAN, BILLINGS RAMSEY GROUP - ANALYST
Nice quarter.
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BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Thank you.
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JACK MOORE - REGIONS FINANCIAL CORPORATION - CHAIRMAN, CEO, PRESIDENT
Thank you.
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GARY TOWNSEND - FRIEDMAN, BILLINGS RAMSEY GROUP - ANALYST
Could you please discuss again the margin guidance? You're saying it will
average 4.1% for the year, as I understood you.
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BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Yeah, I'm glad you asked that.
What I said was, is that we have a range of expectation, I said I think the
midpoint will be around 4.1%. It's difficult to pin that down given all of the
factors that go into forecasting that, market competition, customer preference,
what the Feds are going to do, so we develop what we think is a very good
forecast and I think we do as good a job as anybody at forecasting it.
Every day we come in and work very hard to manage that margin as absolutely as
high as we can while attracting the maximum number of customers that we can. And
so I said 4.1 being in the midpoint of a range, we're working very hard to make
it at the higher end of that range.
GARY TOWNSEND - FRIEDMAN, BILLINGS RAMSEY GROUP - ANALYST
Well, if you think it's hard to predict your net interest margin, imagine it
from our perspective.
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BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO I UNDERSTAND.
Gary Townsend - Friedman, Billings Ramsey Group - Analyst
What that implies, though, is that with the margin having been much stronger
than that in the first half of the year, that the margin would have to fall to
something closer to 4 in the final two quarters.
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BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Yeah, don't -- Gary, don't, I encourage you not to get caught up on a point
estimate because that's not what we're trying to say.
Given the structure of our balance sheet, that the factors that will affect it
when rate increases stop is that some amount of deposit lag will come out
placing pressure on that margin to the extent that the Fed or interest rates
continue to move up, that should benefit that margin. And that's why I think
it's difficult to sort of pin it down to an exact number, because you can't
really get to what the rate environment is going to look like.
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GARY TOWNSEND - FRIEDMAN, BILLINGS RAMSEY GROUP - ANALYST
Perhaps I should ask what your assumptions are with regard to federal reserve
moves going forward?
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BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Well, in terms of our modeling and coming up with that range, we're working off
the Ford curve, which basically has another 25 basis points in.
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GARY TOWNSEND - FRIEDMAN, BILLINGS RAMSEY GROUP - ANALYST
The other question I had was with regard to deposit fees, which moves up to
about 24 bips of av-erage deposits from 21 the prior quarter. And at that level,
it seems quite a bit higher than it's been historically. Can you talk about what
moved that to that level? Did you do something else?
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JACK MOORE - REGIONS FINANCIAL CORPORATION - CHAIRMAN, CEO, PRESIDENT
Gary, this is Jack.
Two or three things. One, more volume, more business days, we did have a fee
increase that went in February 1 and a combination of those factors really
started to flow through in the income statement.
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GARY TOWNSEND - FRIEDMAN, BILLINGS RAMSEY GROUP - ANALYST
So you would say this level is sustainable then?
JACK MOORE - REGIONS FINANCIAL CORPORATION - CHAIRMAN, CEO, PRESIDENT
I would say this level is sustainable given the same number of business days,
the new fee struc-ture's in place. You know, it was interesting, last year I
think the industry went through a whole time frame where NSF charges, there was
a dramatic shift and I think they're now seeing normalcy coming back to that and
volume levels have picked back up and volume times rate and number of days that
the volume occurs drives what increased that number.
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GARY TOWNSEND - FRIEDMAN, BILLINGS RAMSEY GROUP - ANALYST
Thank you, Jack.
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OPERATOR
Your next question comes from the line of Jed Gore with Sinova Capital. Please
proceed.
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JED GORE - SINOVA CAPITAL - ANALYST
Thanks for taking my question.
I'm looking at your January of 2004 slide deck of the deal between Union
Planters and Regions and it looks like, obviously the Fed raised rates 17 times
in between then and now, but it looks like you're there in terms of hav-ing
achieved whated up to achieve with that merger, obviously it's a couple years
later, but just looking at the results out of Morgan Keegan and what you've done
with the efficiency ratio, for example, this quarter, can you kind of comment on
how you feel about where the mergers come to and how that makes you feel about
your pending transaction with AmSouth and the assumptions there?
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JACK MOORE - REGIONS FINANCIAL CORPORATION - CHAIRMAN, CEO, PRESIDENT
This is Jack.
We see it the same way you see it. We think it validates, as I said, validates
the reason for the strategic combination between Regions and Union Planters.
Morgan Keegan is expanded their offices, certainly their revenues, our cross
sales are up, our expenses are down, our revenue per FTE, things that we've been
working on the last couple of years in putting those organiza-tions together, if
you look at all of the various components that drive profitably, there's
improvement on all of them and it was all a direct result of the merger and we
think that the same thing is going to occur with the AmSouth merger, obviously
it's go-ing to take time, it's another large merger. It's got to be done
correctly, which we're confident of.
Great opportunities, again, for Morgan Keegan within that franchise. Good
efficiency opportuni-ties as we continue to implement the business model that we
were going to and pretty much the same business model from an op-erating
standpoint that AmSouth has now, that will accelerate our ability to get there.
We would expect similar improvements and profitably, growth, as the merger gets
completed and the power of the merger on revenues, expense, margin, credit
starts flowing through the P&L.
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JED GORE - SINOVA CAPITAL - ANALYST
The next thing is, this time you're starting with assumptions where the yield
curve is flat and not like then where it was an all-time steepness.
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JACK MOORE - REGIONS FINANCIAL CORPORATION - CHAIRMAN, CEO, PRESIDENT
That is correct.
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JED GORE - SINOVA CAPITAL - ANALYST
Thank you. Good luck.
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JACK MOORE - REGIONS FINANCIAL CORPORATION - CHAIRMAN, CEO, PRESIDENT
Thank you.
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OPERATOR
Your next question comes from the line of Kevin Fitzsimmons with Sandler
O'Neill. Please pro-ceed.
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KEVIN FITZSIMMONS - SANDLER O'NEILL & PARTNERS - ANALYST
Good morning, guys.
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JACK MOORE - REGIONS FINANCIAL CORPORATION - CHAIRMAN, CEO, PRESIDENT
Good morning, Kevin.
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KEVIN FITZSIMMONS - SANDLER O'NEILL & PARTNERS - ANALYST
I was wondering if you could comment on loan growth? You commented on strength
in certain geographies, but just more by category.
It seemed like CNI and construction were strong this quarter, while you have
declines in com-mercial real estate and consumer. Just kind of tie that on what
was kind of causing some of those declines with your expectations for earning
asset growth to accelerate or be more positive than it has been in the second
half.
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BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Yeah, Kevin, this is Bryan. Let me just deal with the, sort of the mechanics
that were presented in the supplemental Page 8.
There's a certain class of reclassification that is going on. Essentially taking
some loans out of commercial real estate and putting them into CNI. Essentially
moving it from collateral-type classification to purpose code lending.
So essentially, commercial real estate was basically flat, the CNI increase was
roughly half of what you see there. Given that, we continue to see pretty good
geographic diversity around our lending efforts.
We did see a pickup in CNI lending over the last several months. We feel good
about sort of how we're positioned in the marketplace, a trend lines look pretty
good.
We saw a little bit of line utilization decline on the HELOC, or the home equity
line of credit side. But in general, we feel like we're getting what we want out
of the lending processes.
We're getting good profitable volume that looks good from a credit quality and a
structure per-spective that's coming across the franchise. Parts of the
Southeast being a little stronger than some areas I mentioned. But in general,
we feel good about the trend line and our ability to continue to grow our loans
during the course of the remainder of this year.
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KEVIN FITZSIMMONS - SANDLER O'NEILL & PARTNERS - ANALYST
Bryan, you mentioned what you're seeing is good profitable growth. So are you
seeing actually pricing competition easing, or are you getting more willing to
step out a little more on the pricing curve or is it more just de-mand, more
volume out there?
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BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
I don't think there's a tremendous amount of easing in the pricing. I think
we've got a couple of things going on. We've been focused on the profitability
of our lending for a while and that pays off when you see that in our margins.
I think what's improving the trend line, is we got through the conversion, the
conversion activity late last year, momentum started picking up in the banking
franchise as we moved into the early part of 2006. I think you see that
extending in the second quarter and so I don't think competitive forces or loan
demand as significantly changed from what they were 90 days ago, but the
momentum in our franchise is a little bit better.
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KEVIN FITZSIMMONS - SANDLER O'NEILL & PARTNERS - ANALYST
Okay, great. Thanks, guys.
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BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Sure thing.
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JACK MOORE - REGIONS FINANCIAL CORPORATION - CHAIRMAN, CEO, PRESIDENT
Let me add this. This is Jack.
I'd like to add one other thing to that. We've said this before. Historically,
and if you go back a couple of years, we, our main asset generation
classification loan was CRE. And one of the things that we focused on was to
remix, try to remix our loan composition, focus on CNI lending and less focus on
CRE.
There's still a lot of CRE lending, still a lot of good CRE loans out there.
You'll see that re-ported. I'm sure, from other Southeastern organizations as
they report their earnings and we're still making our share of them. But we've
tried to keep the mix of CRE loans and the other types of loans on our balance
sheet more in line with a little more diversity than we have had in the past.
OPERATOR
Your next question comes from the line of Jefferson Harralson of Keefe,
Bruyette. Please proceed.
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JEFFERSON HARRALSON - KEEFE, BRUYETTE & WOODS - ANALYST
Thanks.
I want to ask you guys about your business strategies, not to lose business in
the areas where you have the most overlap between AmSouth and Regions, do you
have some market share losses built into your model, and what specifically are
you doing to try not to lose market share where you're going to lose people by
design?
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BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Hey, Jefferson. This is Bryan.
We're working very hard on developing the plans for the integration and
strategies around the people side of it. As Jack commented, we've announced
100-plus senior leaders in the organization. We're working real hard to give
people a view about what that organization is going to look like, we're working
hard to develop our plans about how we're going to do business, system
selections, those kinds of things, we're very focused on customer retention.
We believe that in the Regions' UP integration, we were very successful in not
only retaining customers, but were able to grow the customer base. We recognize
the differences in the market overlap we have with Regions AmSouth, and believe
me, folks on both side of 20th Street are very focused on that and working very,
very hard to make sure associates in both organizations have and see great
opportunities and that we do a good job and retain them through this
integration.
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JEFFERSON HARRALSON - KEEFE, BRUYETTE & WOODS - ANALYST
Okay. A quick follow-up on the service charge increases.
Were they increased to match AmSouth, or were these increased done, kind of
independently of AmSouth?
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JACK MOORE - REGIONS FINANCIAL CORPORATION - CHAIRMAN, CEO, PRESIDENT
No, these were done and planned last year. It just takes that long to get them
in through the sys-tem, unrelated, we have not mapped across our products,
haven't done anything relative to common pricing or common products with
AmSouth.
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JEFFERSON HARRALSON - KEEFE, BRUYETTE & WOODS - ANALYST
Okay, thanks a lot, guys.
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OPERATOR
Your next question comes from the line of Jeff Davis with FTN Financial. Please
proceed.
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JEFF DAVIS - FTN FINANCIAL - ANALYST
Hey, good morning, and very good quarter.
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JACK MOORE - REGIONS FINANCIAL CORPORATION - CHAIRMAN, CEO, PRESIDENT
Thanks, Jeff.
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JEFF DAVIS - FTN FINANCIAL - ANALYST
Bryan, could you comment on -- when you and had great timing when UPC was loaded
in, could you give us your thoughts on as you merge with AmSouth and whatever it
will be through three months, four months and what sort of tweaking or not so
subtle changes in the balance sheet dispositions may occur then?
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BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
We still have a lot of work to do, Jeff, and sort of a lot is going to be
dependent on what we think about the interest rate environment as we get closer
to the deal. The two balance sheets, in our view, go together very nicely. It
tends to look very good and balanced out.
We're a little less asset-sensitive probably on a combined basis than Regions
would be. We think that's probably where we need to end up in the long-run.
In fact, during this quarter we took some actions to reduce the downside to
falling rates by buy-ing some floors. So in general I think the two balance
sheets will go together very well.
I don't think there's a strong or compelling reason we see today to make a
significant restructur-ing of either balance sheet.
-------------------------------------------------------------------------------
JEFF DAVIS - FTN FINANCIAL - ANALYST
Okay.
And Jack, as your teams have sat down on the lending side. And obviously all
know each other well and have competed together or competed against each other
for decades, but any -- leaving aside policies and procedures, is
philosophically, what's your view?
Are the organizations fairly close or not that -- not as close? and certainly
over the last couple of years and we know with the merger with UP there was a
structural reason, but AmSouth has posted much stronger loan growth vis-a-vis
Regions. Is the difference a structural reason, or are they really closer
together than they appear?
-------------------------------------------------------------------------------
JACK MOORE - REGIONS FINANCIAL CORPORATION - CHAIRMAN, CEO, PRESIDENT
I think they're really closer together than they appear and I think that will
play out and become evident as we go forward, Jeff. Policies, all those
underlying things are very similar process, clearly underwriting standards.
Part of it here, as I said earlier, if you go back and look at where the vast
majority of the growth had been in the Regions organization, it had been in
predominantly CRE. And we have, to a degree, I won't say de-emphasize, but as I
said earlier in
response to the question, we have tried to put as much focus or more focus on
other types of lending in the CNI area. We've recently came out with a HELOAN
and home equity and have put a lot of focus around that.
So I don't think you'll see -- if you look at the percentage of CRE loans to
total loans on the AmSouth balance sheet versus the Region's balance sheet, it
is a much smaller percentage. So AmSouth would have a lot more room to add CRE
credits to their balance sheet than we felt that we could continue to add CRE
credits.
That's why we went into syndication and did syndications on a lot of credits,
held very firm on our hold limits over the last 18 months or so and still get
great CNI I mean, excuse me, get high-quality CRE loans, we're not growing them
as fast as we once did.
--------------------------------------------------------------------------------
JEFF DAVIS - FTN FINANCIAL - ANALYST
Okay. Thanks. And then last question, if I may.
Bryan, on the mortgage side, is mortgage was given the -- given the environment
had a good quarter, would it be reasonable to assume then barring a complete
collapse in the market that the mortgage component staying profitable for the
balance of the year?
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Yeah, that would be our expectation, Jeff. We don't see it changing a whole lot
one direction or the other. We're hopeful that EquiFirst business may get better
by the end of the year, but I don't see significant moving up or down at this
point.
--------------------------------------------------------------------------------
JEFF DAVIS - FTN FINANCIAL - ANALYST
Okay. Thank you.
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Yes, sir.
--------------------------------------------------------------------------------
OPERATOR
Your next question come from the line of Ken Usdin with Banc of America
Securities.
--------------------------------------------------------------------------------
KEN USDIN - BANC OF AMERICA SECURITIES - ANALYST
Thanks, good morning, everyone.
--------------------------------------------------------------------------------
JACK MOORE - REGIONS FINANCIAL CORPORATION - CHAIRMAN, CEO, PRESIDENT
Good morning, Ken.
--------------------------------------------------------------------------------
KEN USDIN - BANC OF AMERICA SECURITIES - ANALYST
Two questions, just a first one on the MSR side.
Bryan, you typically take an offset to the impairment in security gains or
losses. Any particular reason why you didn't do that this time? Does it relate
to anything going on within the portfolio itself?
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
No, it doesn't. We're down to about $6 million of remaining reserve. We actually
recorded about $3.8 million of permanent impairment and as you said, we reversed
about $10 million of MSR. That had been our practice.
There's more discussion about the appropriateness of taking or selling
securities at a loss. We decided that there wasn't anything compelling we needed
to do with the balance sheet at this point in time, and so we let it flow
through.
--------------------------------------------------------------------------------
KEN USDIN - BANC OF AMERICA SECURITIES - ANALYST
Okay.
And as that relates to, I guess, going forward, the securities portfolio on a
combined company basis, do you anticipate the combined levels being where you
want them to be? Meaning, do you anticipate shrinking the portfolio or growing
the portfolio further as a combined entity?
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
I don't -- at this point, I don't see significant changes in that, Ken. That's
going to be a lot bounded by what we think rates are going to do from that point
forward.
We're going to have to evaluate the prepayment characteristics of the portfolio
or the extension characteristics of the portfolio and so we'll make those
decisions much later on this year as we get closer to closing. But as I said, I
don't see a significant reason today to make significant changes.
--------------------------------------------------------------------------------
KEN USDIN - BANC OF AMERICA SECURITIES - ANALYST
Okay. And my other question relates to the expense side.
In the first quarter, you had mentioned that you had gotten to your run rate
from the UP deal, and you showed very good cost control partially because of the
rolloff of employment-related expenses, but can you just give us some more color
on the great control that you had sequentially? How much of it was due to either
incremental UP, how much of it was due to savings from Regions, and did you pull
back at all on your reinvesting initiatives?
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
No. Everything -- there's a certain amount of seasonality that flows through to
expenses and things that occur in first quarter payroll taxes is an example
don't go away.
But I would attribute 95-plus percent of it to the follow-on efforts of Regions
next and the effort works we have in place and we've been focusing on in the
last six to nine months to be a much more profitable and effective organization.
KEN USDIN - BANC OF AMERICA SECURITIES - ANALYST
Can you update us on the reinvestment dollars that you'd been spending? Is that
still kind of at a continuous run rate or have you changed your views on that
given the upcoming AmSouth merger?
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
No, we've made no changes on that at all, Ken. A lot of those infrastructure
investments were made and they're sort of running in the expense levels.
We've continued to build open branches. I think we've opened somewhere in the
neighborhood of 25 branches this yearful we'll probably open another 15 or 16.
We're continuing to invest in the franchise and haven't made a significant
change there at all.
--------------------------------------------------------------------------------
KEN USDIN - BANC OF AMERICA SECURITIES - ANALYST
Thanks a lot.
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Yes, sir.
--------------------------------------------------------------------------------
OPERATOR
Your next question comes from the line of Christopher Chouinard with Morgan
Stanley.
--------------------------------------------------------------------------------
CHRISTOPHER CHOUINARD - MORGAN STANLEY - ANALYST
Hi. Good morning.
--------------------------------------------------------------------------------
JACK MOORE - REGIONS FINANCIAL CORPORATION - CHAIRMAN, CEO, PRESIDENT
Hi, Chris.
--------------------------------------------------------------------------------
CHRISTOPHER CHOUINARD - MORGAN STANLEY - ANALYST
I wanted to circle back to something you mentioned earlier about the
reclassification. Can you sort of help us quantify what the impact that was
exactly on the growth rates of commercial and commercial real estate, just to
get a sense for, you know, and if you've got an estimate of what kind of a
period to period like definition growth rate would have been?
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Yeah --
--------------------------------------------------------------------------------
UNIDENTIFIED
Categories.
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
In terms of the reclassification, I'd call it $500 million. So it would
essentially cut the growth rate in the commercial CNI lending on an annualized
basis to that 10 to 12% range and then you'd have something in the neighbor-hood
of flattish in commercial real estate lending.
--------------------------------------------------------------------------------
CHRISTOPHER CHOUINARD - MORGAN STANLEY - ANALYST
Got it. Got it.
And on the deposit side with the fees being up as strongly as they were, was
part of that -- I know you adjusted your fees, but was there a higher incidence
of overdraft this quarter that was maybe more than expected?
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
No, not more than expected. Seasonally, it ticks up a little bit and then as
Jack suggested, you get an additional day or two of charges in the quarter and
then you had the flow through of the rate increase that we put in place February
1. But there was nothing demonstrately different about customer behavior.
--------------------------------------------------------------------------------
CHRISTOPHER CHOUINARD - MORGAN STANLEY - ANALYST
And also on the deposit side, could you talk about maybe -- and I know this is
sort of putting on your forecasting hat a little bit, but thinking about how
much success you've had so far lagging your deposit rates relative to what's
been going on and your loan yields, when -- and it seems like there's an
expectation that at some point that will change.
Could you talk a little bit about when that happens, how quickly it will
develop? It seems like to the extent we've seen pre-announcements at other banks
and other Regions this quarter, it seems to have snuck up on some people and is
it an expectation that this is something that could happen fairly fast if it
does happen?
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Well, the -- I think, Chris, that our modeling is -- we look at historical
norms, we put a lot of en-ergy into that. If you looked at the last quarter or
two, we've probably got a little more of that built into our modeling than is
actu-ally incurred. So I'm optimistic that may be we have under -- overstated
that creeping up on us and we've been maybe a hair conservative in our modeling.
Our bankers are doing an excellent job of managing customer relationships,
managing the mix, working with treasury in that regard. So I think we've got a
fair amount of it built into our modeling and I think if anything issues it's
sort of right on target to maybe a hair conservative.
--------------------------------------------------------------------------------
CHRISTOPHER CHOUINARD - MORGAN STANLEY - ANALYST
Understood. Okay. Well, thanks very much.
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Sure thing.
--------------------------------------------------------------------------------
OPERATOR
Your next question comes from the line of Todd Hagerman with Fox-Pitt Kelton.
Please proceed.
--------------------------------------------------------------------------------
TODD HAGERMAN - FOX-PITT KELTON - ANALYST
Good morning, everybody.
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Morning, Todd.
--------------------------------------------------------------------------------
TODD HAGERMAN - FOX-PITT KELTON - ANALYST
Bryan, just a follow-up to that last question.
I was just kind of curious on the deposit side and the pricing. You had
mentioned last quarter that you were lagging, or you were about 10 basis points
behind plan in terms of deposit costs. Is there any influence as you look out to
AmSouth and their funding structure into in terms of how you're thinking about
the integration that may be influencing deposit pricing going into the deal?
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
No, we're not, no, we're not, we're not able to do that and we're not doing that
until we close the merger, we're competing with each other across the street.
That's something we will have to work through when we close the deal, but at
this point it hasn't changed our behavior.
--------------------------------------------------------------------------------
TODD HAGERMAN - FOX-PITT KELTON - ANALYST
Or I guess I should say is there anything within the various line items that are
quite a bit different from each other in terms of any particular products that
in terms of the post-accounting adjustments will be noteworthy?
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
There are some differences, but I think they can be worked through.
--------------------------------------------------------------------------------
TODD HAGERMAN - FOX-PITT KELTON - ANALYST
Okay.
And then just getting back, on the held for sale, you had mentioned the benefit
you had picked up this quarter, there was quite a bit of increase this quarter
in terms of held for sale. I'm assuming the trend there is lower going into the
third quarter, is there anything significant in that mix that's going to
influence the margin going into the next couple of quarters? The held for sale
volume ticked up, production ticked up at EquiFirst roughly 70%. Origination
volumes have been running north of $1 billion a month. The next couple of
quarters, it looks pretty high, too.
Obviously, the amount of volume we do will be bounded by the product that
borrowers want to buy and what investors are willing to pay for it so it may --
it's going to ebb and flow a little bit. I don't think it rolls out of bed.
The other factors impacting the margin in a significant way will be what happens
with that de-posit cost and what happens with federate movementing being the too
primary ones. Okay. And just lastly, can you add any color or context to the --
I noticed the FTE number was down quite a bit sequentially. Is there anything
there that we should be aware of or is anything there tightening the Regions
neck or anything is attributable to some of the recent management an-nouncements
that you've made in terms of the new structure?
--------------------------------------------------------------------------------
JACK MOORE - REGIONS FINANCIAL CORPORATION - CHAIRMAN, CEO, PRESIDENT
This is Jack.
Really, I think that is just the flow-through of business model implementation
which is really driven around Regions next, staffing models out across the
branch system, just blocking and tackling and putting in the plan and
re-ductions come through that and the FTE reductions show up in that process. So
nothing unusual there other than what we'd already planned.
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
This is Bryan again.
One thing to add to that is with the announcement of the merger, that will
further enhance our ability to control FTE because as positions open up, we will
obviously try to hold those open and make sure we place associates of either one
of the companies in those as we progress. So I think there's probably a little
bit of momentum that comes from the announcement of the merger.
--------------------------------------------------------------------------------
JACK MOORE - REGIONS FINANCIAL CORPORATION - CHAIRMAN, CEO, PRESIDENT
And also, I'll say one other thing, and we talked about it earlier in the year
and Bryan mentioned it in his comments earlier. One of the key components of the
bonus plan for management, those of us in this room and those of us that are
managing the business units and those that are managing the banking units across
the field is revenue for FTE.
There's a numerator and a denominator, obviously, so there's a lot more focus on
FTE con-trolled, the contribution of every FTE in the Company, and I think that
is attributed also to that reduction.
--------------------------------------------------------------------------------
TODD HAGERMAN - FOX-PITT KELTON - ANALYST
That's helpful. Thanks very much, Jack.
--------------------------------------------------------------------------------
OPERATOR
Your next question comes from the line of Christopher Marinac with FIG Partners.
Please proceed.
--------------------------------------------------------------------------------
CHRISTOPHER MARINAC - FIG PARTNERS - ANALYST
Hi, guys, good morning. Just one more follow-up question on deposits.
Bryan, you mentioned the money market campaign started at the end of the
quarter. What's the incremental difference between the money market campaign and
what you pay on CDs?
-------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
The incremental difference is not going to be that great. The money market
campaign is a four-product campaign, it's got higher balances, it's designed to
attract higher net worth, higher deposit-bearing customers, build out
relationships with it.
It's designed to compete with the shorter duration CDs we had emphasized over
the last several quarters. And we're seeing pretty good success in the early
days of that.
-------------------------------------------------------------------------------
CHRISTOPHER MARINAC - FIG PARTNERS - ANALYST
Great, that's helpful.
I guess to the extent your low-mix consider or low-cost deposits are relative
today, do you have a goal where that becomes whether it's Regions standalone or
AmSouth?
-------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Our goal as of --?
-------------------------------------------------------------------------------
CHRISTOPHER MARINAC - FIG PARTNERS - ANALYST
The low-cost deposits as a total of funding.
-------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
We don't work off a goal, we work really hard to maximize that. We push that as
hard as we can. We work really hard on the interest-free balances in particular
with the free checking product and we've had good success on that, but was don't
work off of a goal.
-------------------------------------------------------------------------------
CHRISTOPHER MARINAC - FIG PARTNERS - ANALYST
Great, Bryan, thanks very much.
-------------------------------------------------------------------------------
OPERATOR
Your next question comes from the line of John Pandtle with Raymond James.
Please proceed.
-------------------------------------------------------------------------------
JOHN PANDTLE - RAYMOND JAMES & ASSOCIATES - ANALYST
Bryan, how much opportunity remains to pick up more incremental savings from
Regions Next. Should we expect just on the expense side of the efficiency ratio
additional improvement going into the Regions AmSouth deal and the expense
savings that you projected for Regions and AmSouth, that transaction, were they
based off of a specific efficiency ratio for Regions only going into the merger?
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
No, there's -- we think there's some additional upside in Regions Next. We are
confident in our ability to get that, I think, as late -- at the end of last
year, we hold expenses generally flattish with the exception of market-sensitive
revenues for Regions this year. We see good success in that.
When we built up the cost-saving opportunities in the Regions AmSouth merger and
integration, we built it from a bottoms up. We looked at what we were spending
in various areas. And so we're very, very confident that the $400 million of
cost savings can be achieved and in addition to what we have built into our
baselines.
--------------------------------------------------------------------------------
JOHN PANDTLE - RAYMOND JAMES & ASSOCIATES - ANALYST
Okay. Thank you.
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
You're welcome.
--------------------------------------------------------------------------------
OPERATOR
Your next question comes from the line of David Stumpf with A.G. Edwards. Please
proceed.
--------------------------------------------------------------------------------
DAVID STUMPF - A.G. EDWARDS & SONS - ANALYST
--------------------------------------------------------------------------------
Thanks. Most of my questions have been answered, Bryan, but I would like to just
dig a little bit deeper, a little more detail on the increase.
That was an area of a lot of volatility and a lot of pressure. For you to be
able to raise that fee is, I guess, intriguing. Where was your base fee with
regard to the free checking product? Where were you relative to your
com-petitors? And have you brought it up to the competition, or are you ahead of
the competition? Put some color on that.
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
I think it went from 30 to $31, and in most markets, we are still under our pier
competitors, I will say. Obviously there are a lot of community banks in a lot
of the markets we are in, and those are all over the board but comparatively,
AmSouth is $36.
--------------------------------------------------------------------------------
DAVID STUMPF - A.G. EDWARDS & SONS - ANALYST
Okay.
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Right today. I'm familiar with that but I can't quote you what Wachovia's is,
but we know ours are -- it was the increase of $30 to $31. And we have surveyed
the markets and that was competitive and still below most of our peer
competitors in our markets.
--------------------------------------------------------------------------------
DAVID STUMPF - A.G. EDWARDS & SONS - ANALYST
That's very helpful. Thank you.
--------------------------------------------------------------------------------
OPERATOR
Your next question comes from the line of Chris Mutascio with Credit Suisse.
Please proceed.
--------------------------------------------------------------------------------
CHRIS MUTASCIO - CREDIT SUISSE SECURITIES - ANALYST
Good morning.
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
MORNING.
--------------------------------------------------------------------------------
CHRIS MUTASCIO - CREDIT SUISSE SECURITIES - ANALYST
Bryan, you partially answered my question already in terms of saying you
purchased some floors but assuming we're near the end of the Fed tightening, why
not more aggressively use some of the better than expected earn-ings to protect
future earnings growth for when the Fed goes on hold, via selling of
low-yielding loans or securities or more ag-gressively protecting yourself with
interest rate derivatives?
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Timing is everything, I suppose. We looked at the floors in the second quarter,
volatility seemed awful cheap. We bought a couple billion of downside
protection. We are looking at the markets and consider whether we buy more.
We have a significant portion of the balance sheet that could very easily be
swapped to floating -- to fixed, which would have very good characteristics in a
falling rate environment. So we think we have a number of levers.
We're focused on it, as in most things that we do, we're taking what we think
are hopefully cau-tious and majored steps, trying not to place big bets at any
one point in time in the cycle. But I'm pretty comfortable that we can protect
our margin and I think -- all things being equal, if the Fed stops either in
August or after August, you have some of the pressure I talked about with
deposit rates catching up, but I also think we can make some systemic changes in
the balance sheet and protect that margin and have a pretty good-looking margin
for 2007.
--------------------------------------------------------------------------------
CHRIS MUTASCIO - CREDIT SUISSE SECURITIES - ANALYST
Fair enough. Thank you.
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
You're welcome.
-------------------------------------------------------------------------------
OPERATOR
Your next question comes from the line of Ed Najarian. Please proceed.
-------------------------------------------------------------------------------
ED NAJARIAN - MERRILL LYNCH - ANALYST
My question has to do with Morgan Keegan. We've seen Morgan Keegan put up two
great quar-ters in a row, as most of the investment bapgs have yet it seems like
we're moving into an environment, interest rates are up, the market is down to
some extent.
Really just looking at a perspective from you guys on the sustainability on
these types of first and second quarter sustainability.
Can they grow from here, or will a tougher operating environment make it tougher
to sustain these kind of numbers?
-------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Well, one of the things -- this is Bryan, Ed.
One of the things about Morgan Keegan is it's naturally going to have more
volatility than a lot of our lines of businesses. As we look out over the
horizon today, we feel like a lot of what they're doing is sustainable.
We see good flows in most if not all of our businesses. We think it's good core
quality customer business.
It's not a trading business in any way. It's about making markets for customers,
serving custom-ers. We're doing very well in the investment banking businesses,
both on the fixed income and the equity capital market side, so we feel good
about it of the but it's going to ebb and flow a little bit.
And whether it's $33 million next quarter or 30 or 35, it's very difficult to
sort of pin down de-pending on what you think about those market sense at
sensitivities and they will influence it.
-------------------------------------------------------------------------------
ED NAJARIAN - MERRILL LYNCH - ANALYST
Do you think a lower interest market and a backdrop has -- it's hard for us to
gauge what the sen-sitivity to the earnings are to those things. Can you give us
any insight there?
-------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Well, I think, the shape of the curve is going to have an impact on their
business. It's going to have an impact on what investors are willing to do in
the private client businesses, both buying and selling. If it stays this kind of
environment, I think it will be pretty stable for the rest of this year.
-------------------------------------------------------------------------------
ED NAJARIAN - MERRILL LYNCH - ANALYST
Okay. Thanks a lot.
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
You're welcome.
-------------------------------------------------------------------------------
OPERATOR
Your next question comes from the line of Jennifer Demba with SunTrust Robinson
Humphrey. Please proceed.
-------------------------------------------------------------------------------
JENNIFER DEMBA - SUNTRUST ROBINSON HUMPHREY - ANALYST
Thank you, good morning.
-------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Good morning, Jennifer.
-------------------------------------------------------------------------------
JENNIFER DEMBA - SUNTRUST ROBINSON HUMPHREY - ANALYST
Question on high-rise condo lending. I wondered if you could give us an update
on what your exposure there is right now. And it looks like as we look across
the Southeast, there's more and more high-rise condo bilge, but it's on and off
the coast, I'm wondering what where are appetite is for that product right now
and what changes you may or may not be seeing in demand?
-------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Jennifer, this is Bryan.
I'm not aware of any significant exposure to high-rise condo lending and to my
knowledge, we have not made any changes in our appetite for that. That's not
been a business that we've done a significant amount of over time.
-------------------------------------------------------------------------------
JENNIFER DEMBA - SUNTRUST ROBINSON HUMPHREY - ANALYST
Okay. So can you give us any idea of what your exposure is, in dollar amounts?
-------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
No, not off the top of my head, because it's not a significant number. I can get
Jenifer to call you back on that one.
-------------------------------------------------------------------------------
JENNIFER DEMBA - SUNTRUST ROBINSON HUMPHREY - ANALYST
Okay. No hurry at all.
-------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Okay.
JENNIFER DEMBA - SUNTRUST ROBINSON HUMPHREY - ANALYST
And so, follow-up on a question before about head counts. So are you -- you're
expecting a fur-ther reduction in headcount here in the second half of the year
with your staffing models being refined?
-------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
I think my best guess would be flat to down, yes.
-------------------------------------------------------------------------------
JENNIFER DEMBA - SUNTRUST ROBINSON HUMPHREY - ANALYST
Okay. Thank you.
-------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
You're welcome.
-------------------------------------------------------------------------------
OPERATOR
Your next question comes from the line of Richard Bove with Punk, Ziegel. Please
proceed.
-------------------------------------------------------------------------------
RICHARD BOVE - PUNK, ZIEGEL & COMPANY - ANALYST
Thank you. I wondered if I could ask you a couple of quick questions.
The first one is, the signs of your allowance relative to your non-performing
assets makes me wonder if the SEC at some point might seek a reserve of lease
from your company?
-------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
This is Bryan, Dick.
I don't -- it's almost impossible to suggest or guess what the SEC or
accountants -- we go through a -- We do our analysis, the accountants do an
analyst, verify that historic perspective current prospective loss, we go there
are detailed analyses once a month to look at the adequacysy of those reserves
to the level of risk we see in the portfolio, also keeping in mind the exposure
of roughly a billion, billion one exposure we have in the Katrina markets. So we
spend a lot of time on it. We spend a lot of time documenting it and our outside
auditors spend an awful lot of time auditing it.
-------------------------------------------------------------------------------
RICHARD BOVE - PUNK, ZIEGEL & COMPANY - ANALYST
Okay.
I guess the second quick question would be, the relationship between core
deposits and non-interest income fees or deposit fees. If your core deposits are
going down, presumably because some corporations are moving funds to areas of
higher return, does that mean that there should be a sustainable increase in
deposit fees because they're now paying you with fees as opposed to compensating
balances?
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
I don't think changes in commercial activity is going to have as much influence
on our service charge activity as you would see from the consumer side. If you
start to see significant changes in customer accounts on the con-sumer side or
customer behavior there, that will have a much more significant impact on it.
So I don't think -- I think the service charge levels that we see are reasonably
sustainable. But -- and I don't see a significant impact of commercial activity
on that.
--------------------------------------------------------------------------------
RICHARD BOVE - PUNK, ZIEGEL & COMPANY - ANALYST
I see.
Another one would be on this headcount issue. Is it possible that a number of
the people who are looking at this AmSouth merger coming in the future are now
reducing employment in expectation that they will be get-ting a whole new set of
people when the merger occurs, so that what you're getting is cost reductions
from head count reduc-tions in expectation of the AmSouth merger.
--------------------------------------------------------------------------------
BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Dick, this is Bryan again.
What's going on in the franchise today is principally two things. It's the
proactivity we have had around Regions Next and our consistent business model
and our staffing plans and the other is normal attrition we have that just sort
of goes on month in, month out. There's nothing done today in anticipation of
putting things together.
--------------------------------------------------------------------------------
RICHARD BOVE - PUNK, ZIEGEL & COMPANY - ANALYST
I see. And a final question, which is, I guess, the most complicated one.
When you're talking about the margins, you've indicated that you're
asset-sensitive, which pre-sumably means as rates go up, your margins would go
up but you're also mentioning you have shift in your deposit mix, which is
causing a compression in your margins and then thirdly, of course, you've got
this increase in loan volume, which has an impact on overall net interest
income.
And when I try to sort the three things out, I'm confused as to, A, where the
margin might end up, and B, what might happen to that interest income? Can you
clarify any of that?
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BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
Yeah, I don't think I want to improve, or can improve on sort of a range with
the midpoint somewhere around 410. Our balance sheet is structured in such a way
that when the Fed moves, i.e. market rates, then our loans re-price, deposit
costs are managed, 60% of our loans repriced, roughly, and then our deposit
costs are managed overtime.
So there's a certain amount of lag built into the deposit costs. And so what
happens is, we are asset-sensitive, it should improve the margin somewhat if
rates go up, deposit costs lag over time will be into or erode that over time.
Loan growth, depending on the profitability and the spread we put it on will
either have a slightly positive or slightly negative impact on the margin, but
it should be additive to net interest income. I know I haven't given you an
answer to what I think net interest income is going to be, but I think that's
sort of the way it's going to behave.
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RICHARD BOVE - PUNK, ZIEGEL & COMPANY - ANALYST
Okay. Thank you very much.
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BRYAN JORDAN - REGIONS FINANCIAL CORPORATION - CFO
You're welcome.
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OPERATOR
There are no further questions in queue.
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JACK MOORE - REGIONS FINANCIAL CORPORATION - CHAIRMAN, CEO, PRESIDENT
Well, thank you very much. Appreciate your interest and discussion and on to the
third quarter.
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OPERATOR
Thank you for your participation in today's conference. This concludes the
presentation. You may now disconnect and have a great day.
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