Investor Day a Big Moment for Regions and New CEO Hall

O.B. Grayson Hall best be ready for a tough crowd Thursday.

Hall and his fellow top executives from Regions Financial Corp. will host the company's investor day in New York, and it promises to be anything but the benign kind of occasion industry executives used to enjoy.

The company's chief executive since April 1, Hall is still searching for its peak in credit problems — and the profits that would probably ensue after that occurs, assuming Regions can find new revenue streams to make up for ones threatened by regulatory reforms and slow lending.

The CEO and his lieutenants will get a chance to address those concerns and manage expectations at the all-day event. Though the Birmingham, Ala., company recently posted its best quarterly results in more than a year, some analysts are skeptical that the momentum can be sustained. Regions has reported five straight quarters of losses.

Improvement in the third quarter "will be difficult following nice progress on both the net interest margin and fee income last quarter," said Craig Siegenthaler, an analyst at Credit Suisse. He said he doesn't expect Regions to return to profitability in the July-to-September period.

Against that backdrop, analysts said they are less concerned with the credit outlook and more interested to hear how Hall, who succeeded C. Dowd Ritter, plans to reinvigorate the company he inherited, and when he thinks it will return to profitability. Attendees will also get a chance to connect with David Turner, who was promoted to chief financial officer in April, and other executives who have taken new positions since Hall took the helm.

Kevin Fitzsimmons, an analyst at Sandler O'Neill & Partners LP, said he doubts Hall will make any major efforts to break from the past, though he said the CEO has a unique opportunity to show investors he has a plan for Regions as the entire industry wrestles with the "new normal."

"Where does this new management team want to take the company?" Fitzsimmons said. "They have a chance to recast how the company is communicating its message. He may have more ability to suggest a new direction because of a tougher environment."

Hall gave some indicators during the second-quarter conference call in July that he was willing to revisit past decisions and move to put festering issues in the rearview mirror. Regions took a $200 million charge in the quarter as it negotiates a settlement with regulators over alleged fraud at its Morgan Keegan & Co. Inc. brokerage unit.

Regions also announced that it would re-enter indirect auto lending, a business it left nearly two years ago under Ritter's leadership. Hall has also created new positions to focus more on small-business lending.

But Hall has said that Regions would not force growth as the economy continues to recover from the lengthy recession. "The slow nature of the economy requires that we remain cautious and prudent in our actions," he said during the quarterly call. He told analysts to expect "a much more conservative, low-growth forecast for our business that requires us to exercise extreme care in the management of our credit risk."

Still, analysts want to hear more about revenue-producing efforts, with particular interest in hearing the degree of the new CEO's commitment to Morgan Keegan.

Ritter frequently had to dismiss speculation that the $135.3 billion-asset company would sell the business.

Fitzsimmons said Hall has a narrow window to decide whether to maintain that relationship or unload the business, which produced $310 million in second-quarter revenue and would have been profitable if not for the big charge.

Details on the company's balance-sheet strategy are a must. Total loans fell 2.5% from a quarter earlier, and some analysts said they have been less than impressed by current plans to rebuild the loan book. Siegenthaler said Regions executives told him during a recent visit that they were looking to mine revenue by underwriting and distributing commercial real estate loans.

"The problem for them is that there is no market for that," he said. "So if that's the plan, it really doesn't excite us."

There are also questions about the net interest margin after the company is done running off higher-cost brokered certificates of deposit. The margin expanded 10 basis points in the second quarter, and analysts for the most part expect a smaller increase this quarter. There are questions about how the margin will respond in the fourth quarter and beyond.

Regions executives have been reluctant to call a peak in credit issues even though nonperforming assets fell 6.5% from the first quarter, to $4.28 billion. A big reason for the decline was a decision to sell $620 million of problem loans at an average discount of 24%. Net chargeoffs fell 7% from a quarter earlier, to $651 million, but unlike many other companies, Regions did not release loan-loss reserves.

"While we are encouraged by this improvement, we remain cautious concerning the outlook for NPAs," Turner told analysts.