Regions Financial Corp. and AmSouth Bancorp. have different dynamics working in their balance sheets as Regions nears its $10 billion acquisition of its fellow Birmingham, Ala., company.
Jeff Davis, an analyst at First Horizon National Corp.'s FTN Midwest Securities Corp., wrote in note sent to clients Tuesday that AmSouth is likely to report that third-quarter loan growth rose 12% from a year earlier. In comparison, he expects Regions to report its loan portfolio grew by just 3% over the same period.
The differences involve selectivity and loan mix, Mr. Davis said in an interview. Commercial and industrial lending and commercial construction have been fueling AmSouth's loan growth, but Regions has "had the luxury" of purposefully slowing its loan growth, because of expanding net interest margins, he said.
In the second quarter Regions' margin rose 39 basis points from a year earlier, to 4.24%.
Mr. Davis wrote in his note that Regions' third-quarter margin was probably flat from the second quarter, but that AmSouth could report a contraction of 2 basis points, because its deposits have been shifting to certificates of deposit.
FTN Midwest issued notes on Regions and AmSouth to coincide with their shareholder meetings Tuesday to vote on the deal.
Shareholders for the $86 billion-asset Regions and the $53.9 billion-asset AmSouth voted overwhelmingly to approve the deal, which is expected to close next month, the companies said. However, both companies said it is not their policy to comment on analyst reports.
Mr. Davis said that even though an inverted yield curve has made combining their balance sheets "less desirable," a significant retooling appears unnecessary. He wrote in his note that adding AmSouth's large bond portfolio "will not be bad" for the asset-sensitive Regions and should nudge it to a more neutral position. He said he has a "positive bias" toward the deal, despite his "neutral" ratings on the companies' stocks.
Recent comments by Regions' chief financial officer, D. Bryan Jordan, indicate that there will not be "a lot of hard tilting" in the balance sheet, Mr. Davis said. "They seem to feel like things are in pretty good shape."
Mr. Jordan discussed a possible balance-sheet restructuring during a bank conference in August. He said that AmSouth's position should provide some protection once rates stop rising, and that Regions has invested in swaps to reduce asset sensitivity.
Though Mr. Jordan said the companies would examine their balance sheets, he saw nothing "that gives us any concern about the ability to put the balance sheets together and to manage our sensitivity."
John Pandtle, an analyst at Raymond James & Associates Inc., said that banking companies may find it difficult to restructure their balance sheets, given the inverted yield curve.
"The question is where do you look to reinvest the money," he said Tuesday in an interview. "The options just aren't very attractive."
In his note, Mr. Davis also addressed market perceptions about the Regions-AmSouth deal. Since it was announced in May, some analysts have voiced concerns about the discount Regions would pay for AmSouth and plans to put C. Dowd Ritter, AmSouth's chairman, president, and chief executive, in charge of Regions.
Mr. Davis wrote that the price makes sense, since AmSouth's contribution to Regions' earnings would be in line with the 38% stake that AmSouth would get in Regions from the acquisition. Premiums "can prove illusive" should the acquirer's stock fall, because of "stretch pricing, stretch assumptions, and/or poor execution."
There is "some angst" about Mr. Ritter's taking over, but the acquisition would settle a succession issue for Regions' president, chairman, and CEO, Jackson W. Moore, according to Mr. Davis.
He also wrote that Alan Morgan, a Regions vice chairman and its largest shareholder, would probably become its chairman when Mr. Moore retires.
