Regions Financial Corp (RF) 2002 Q2 法說會逐字稿

Good afternoon.

My name is

) and I will be your conference facilitator.

At this time I would like to welcome everyone to the AmSouth Bancorporation earning's conference call.

All lines have been placed on mute to prevent any background noise.

As a reminder, this is call is being recorded on today, July 16th, 2002.

After the speaker's remarks, there will be a question and answer period.

If you would like to ask a question during this time, simply press star, then the number one on your telephone keypad.

If you would like to withdraw your question, press star, then the number two on your telephone keypad.

Thank you ladies and gentlemen, I would now like to turn the conference over to Mr. Dowd Ritter.

Mr. Ritter, you may begin your conference.

Good afternoon everyone.

This is List Underwood.

We appreciate your participation today, knowing how busy all of you are with the numerous earnings announcements.

Our presentation today discusses AmSouth's business outlook and includes forward-looking statements.

Those statements include descriptions of management's plans, objectives and goals for future operations, products or services, forecasts of financial or other performance measures, and statements about AmSouth's general outlook for economic and business conditions.

We also may make other forward-looking statements in the question and answer period following management's discussion.

These forward-looking statements are subject to a number of risks and uncertainties, and actual results may differ materially from those discussed today.

Information on the risk factors that could cause actual results to differ are available from the earning's press release that was released this morning, Form 10-Q for the quarter ended March 31, 2002, and Form 10-K for the year ended December 31st, 2001.

Forward-looking statements are effective only as of the date they are made, and AmSouth assumes no obligation to update information concerning its expectations.

Dowd?

Thank you List, and good afternoon everyone.

Also joining me today is our Chief Financial Officer, Sloan Gibson.

Turning now to the results of the second quarter, today AmSouth reported second quarter diluted earnings per share of 42 cents on net income of $152 million.

That represents a 16.7 percent increase over the second quarter of 2001 EPS.

Net income increased 18.7 percent on an annualized linked quarter basis.

Return on equity increased to 20.4 percent within our long-range goal of 20 to 22 percent, and the efficiency ratio improved to a record low 50.8 percent.

Growth in loans and low cost deposits, combined with revenue growth and solid expense control were keys to our performance during the second quarter.

The quarter's performance demonstrates the results of our relentless focus on the execution of our six strategic initiatives, and the success of our sales management process.

As the economic recovery gains strength, we expect steady improvement across all of our businesses.

Let's look at a few highlights for the quarter.

Net interest income grew 4.2 percent, to 382 million, compared to the prior quarter.

The growth was the result of earning asset growth, and a relatively stable net interest margin.

Growth in non-interest revenues also contributed to linked quarter top line revenue growth.

Non-interest revenues were higher in many categories, including service charges, investment services, bankcard income and interchange fees.

On the balance sheet the key highlights were continued growth in loans and core deposits.

Average loans grew 429 million or seven percent compared to the first quarter.

Consumer loans were the leading growth area.

New originations of home equity lines and loans continued their solid pace during the second quarter while residential mortgages and dealer indirect also contributed to the growth.

Declines in C&I loan balances slowed compared to previous quarters.

Average low-cost deposits were up two percent or $66 million versus the first quarter and on a year-over-year basis increased $1 billion or 6.3 percent, due primarily to our focus on growing consumer and small business households.

Consumer checking households grew 2-and-a-half percent compared to last year's second quarter, while business banking households were up 9.2 percent over the same time period.

Continued emphasis on sale of consumer checking and business relationship plus accounts produced strong new account growth for the quarter.

As most of you know, much of AmSouth's growth over the last two years has come from three primary areas: consumer and small business banking; a ramp up in our sales productivity in our new markets; and continued solid growth in our high-growth, low-share markets in Florida.

While these trends in these areas remained favorable, we anticipate more meaningful growth coming from our Wealth Management and Commercial Banking areas and business and market conditions improve.

In wealth managing the strengthening of our leadership team and improved approach to relationship-based sales management, enhanced skills training programs, and an expanded product line and systems and operational refinements have all combined to form a solid foundation from which to grow going forward.

We're squarely focused on execution and leveraging AmSouth's strengths in trust, investment management, and our private client services businesses.

Commercial Banking is now well positioned to take advantage of improving economic conditions.

Through our renewed focus on the core middle market business segment we expect Commercial Banking to be a stronger contributor to earnings growth as we go forward.

I'll share a few more details about Commercial Banking and Wealth Management in a few moments, but now let me turn it over to Sloan to discuss this quarter in more detail.

Sloan.

Thank you, Dowd.

Diluted earnings per share were 42 cents on net income of $152 million.

That represents a 16.7 percent increase in earnings per share compared to the second quarter of 2001.

Adjusting prior year earnings for the impact of goodwill amortization earnings per share were 42 cents versus 38 cents a year ago, 10-and-a-half percent growth.

Return on equity improved to 20.4 percent, return on assets increased to 1.61 percent.

The efficiency ratio also improved to 50.8 percent.

During the second quarter we repurchased 2-and-a-half million share of AmSouth's stock.

Interest income for the quarter was $382 million, an increase of 4.2 percent annualized

quarter.

The increase was driven mainly by loan growth.

The net interest margin at 4.61 percent has remained relatively stable for the last three quarters after adjusting for the day count in the first quarter.

Average earning assets were $283 million higher during the second quarter, a 3.3 percent increase annualized

quarter.

Average loans on the balance sheet for the second quarter were $25.7 billion - an increase of $429 million or seven percent annualized.

Consumer loans excluding residential mortgages grew $418 million or 15.9 percent annualized.

Total commercial and commercial real estate loans were $84 million lower compared to the first quarter primarily due to a $52 million decline in commercial real estate loans.

loans decreased 43 million or two-and-a-half percent on an annualized

quarter basis, reflecting the substantial slowdown in the pace of declining commercial loan balances compared to the last two years.

Three hundred million of mortgage loans were securitized and moved to the investment portfolio late in the quarter.

The transaction had almost no impact on average loan and investment portfolio balances and no gain or loss was recognized.

Among other interest-earning assets, the investment portfolio

funds sold decreased by $139 million compared to the first quarter.

Home equity lending balances grew $280 million this quarter.

The increased production in home equity lending has been driven by strong sales efforts aided by an emphasis on our branch

scorecard, increased marketing activity, back office improvements to make our product more attractive to customers and easier for our branch personnel to book, and our general management emphasis.

Home equity lines of credit continue to be a core consumer product with great potential within our existing customer base, while about 85 percent of recent origination volume is occurring throughout AmSouth's existing households, only 15 percent of our homeowner customer base currently has a home equity product with us.

This will lead to better cross-sell penetration of our customer base over time.

Trends in the quality of new home equity originations continue to improve.

Today the average loaned value on our new home equity production is 79 percent and the median FICO score is 740.

At the same, our average FICO score for production in the 90 percent plus loaned value category was 752 for the quarter.

loans grew $217 million compared to the first quarter due to seasonally strong second quarter sales period for autos.

On a managed basis, the auto loans increased $82 million.

Similar to home equity, the credit quality trend for new dealer originations continues to improve.

In the second quarter, the median FICO score for

originations was 728.

scorecards used in conjunction with higher FICO score cutoffs are the drivers of the higher quality of newer consumer originations and should reflect lower levels of losses in the future.

On a managed basis, average loans in the second quarter were $29.4 billion - an increase of $62 million compared to the first quarter.

While consumer loan demand remains robust, we're beginning to see early signs of improving loan demand among small businesses and commercial customers.

Our current outlook continues to be for loan growth to accelerate in the second half of the year resulting in a gradual decline in the margin.

At the same time, our interest rate sensitivity modeling shows that we continue to be neutrally positioned.

For example, in an

100 basis point scenario, net interest income is positively impacted .5 percent over a 12-month period.

Our goal has been to virtually eliminate the influence of changing interest rates on our balance sheet and income statement, thereby minimizing volatility in our earnings.

We've achieved this by managing our rate sensitivity to a neutral position with a risk tolerance near zero through an improved balance sheet mix and interest rate risk management process.

We're confident that AmSouth is well positioned for an eventual rise in interest rates.

On the funding side of the balance sheet, average low-cost deposits grew $66 million during the quarter or 1.6 percent

quarter annualized.

six consecutive quarters of growth in low-cost deposits.

Our emphasis on household growth and promoting sales of consumer checking accounts and business relationship plus our signature small business relationship product, continue to be the primary catalysts for low cost deposit growth.

Consumer households were up two and a half percent, compared to the end of last year's second quarter, while business banking households were up 9.2 percent.

Turning now to credit quality.

Non-performing assets for the quarter were $189.5 million, down $4 million compared to the first quarter.

The ratio of non-performing assets was .74 percent, down two basis points compared to last quarter.

There were no non-performing loan sales in the second quarter.

The loan loss reserve coverage of non-performing loans improved to 243 percent.

As we indicated the last two quarters, we expect non-performing assets to fluctuate in a relatively narrow band around this level for the remainder of the year.

Net charge-offs were down $2.9 million to $49 million, compared to the first quarter.

That represents .76 percent of loans, compared to .83 percent in the first quarter.

Provision expense was $52.6 million, down $3.5 million from the first quarter.

For the second quarter, provision exceeded net charge-offs by $3.6 million.

This resulted in a loan loss reserve ratio to net loans of 1.45 percent, unchanged compared to the first quarter.

In the second quarter, commercial charge-offs were $23 million, up $3.2 million from the first quarter.

The majority of the charge-offs were on smaller loans, which were part of our core commercial and small business portfolios.

Classified commercial loans declined $12 million in the second quarter, and have declined in three of the last four quarters.

Consumer charge-offs, which exclude residential mortgages, were 92 basis points for the quarter, down 32 basis points versus the first quarter, reflecting typical seasonality.

Dealer indirect charge-offs were 105 basis points, 86 basis points lower than the first quarter, while home equity charge-offs were relatively stable.

Housing prices have remained firm in all of our markets.

We continue to see encouraging trends in our consumer portfolios.

Delinquencies in the second quarter were lower, again, in every category, while the number of new bankruptcies filed were down compared to last year's second quarter.

We expect that over time, as the economy strengthens, and we begin to realize the benefits from our tighter underwriting standards, improvement in credit quality trends in the consumer portfolio will continue.

Turning to our syndicated portfolio, during the second quarter, the syndicated loan balances declined $174 million to $582.5 million, or about two percent of managed loans, and much closer to our targeted level of 400 to $500 million.

There were no loan sales in the second quarter, and reductions have come from pay downs, refinance activities, or charge-off.

Turning now to non-interest revenues.

Non-interest revenues increased $3.5 million, or 7.8 percent on an annualized linked quarter basis.

Most categories of non-interest revenues were higher compared to the first quarter.

Increase in service charges on deposit products primarily reflects the three additional business days in the quarter.

Investment services income was higher, primarily on stronger sales of fixed annuity products, compared to the previous quarter.

Bankcard revenues increased as a result of both seasonality and our emphasis on the small business purchasing card.

Interchange income was up due to recent emphasis on debit card sales and increased utilization rates.

The dollar volume of debit card transactions increased 12.8 percent during the second quarter, compared to the first quarter, and the transaction volume was up 12.7 percent.

Today AmSouth has over 900,000 debit cards issued to our customers.

Mortgage income was down $1.4 million, linked quarter decline here reflected lower business volume.

Looking at expenses, the efficiency ratio is 50.8 percent, down 78 basis points from the first quarter, demonstrating some diligence in expense control and the movement in higher revenues.

Noninterest expenses for the second quarter were $872,000 lower compared to the first quarter, reflecting lower personnel costs, marketing, communications, and postage and supplies.

Personnel cost, the largest category of noninterest expense, was $4 million lower, a decline of 10.2 percent compared to the first quarter.

Second quarter noninterest expenses included $3.7 million related to the early termination of a credit derivative hedging our exposure on a loan that was paid off during the second quarter.

That cost would have been incurred over the next four quarters had the loan continued to its maturity.

Looking ahead we expect the economy to continue to strengthen and business borrowing patterns to improve.

Earnings growth should results from a strong net interest margin and accelerating loan growth.

The investment portfolio should remain relatively flat.

We continue to target low-cost deposit growth of at least five percent driven by growth in consumer and small business households and checking products.

And we decline - and we expect a decline in time deposits to slow.

We would expect credit quality indicators to fluctuate in a relatively narrow range around the results from the last several quarters with losses trending lower beginning in 2003.

Noninterest revenue in the low to mid single digits and well contained expense control should also contribute to earnings growth.

We expect share repurchases to continue at their current pace.

Overall, we're looking forward to stronger performance as the year progresses.

That concludes my remarks, Dowd.

Thank you, Sloan.

As you've just heard, AmSouth delivered solid results for the second quarter as a result of our focus on building sustainable earnings power through internally generated growth.

Growth in top line revenue, earning assets and low-cost deposits during the second quarter reflect our success.

Let me take a moment here to share a few examples of how internal growth is driving our performance.

We told you last quarter about or plans to accelerate our branch expansion over the next several years.

As we ramp up towards our target of 30 new branches per year we plan to open 24 new branches by year end 2002, including three that we acquired as a result of Huntington's exit from Florida.

AmSouth has a successful track record of de novo branch expansion that has typically produced internal rates of return of 25 percent or greater.

De novo expansion is a low-risk approach that gives us access to new households in growth markets and represents a key source of sustainable low-cost deposit and revenue growth.

I mentioned earlier that changes are underway in the Commercial Banking area.

Our middle market Commercial Banking, which serves business with sales from $5 to $100 million is partnering with other areas of the bank to target new relationships and new revenue growth opportunities.

Joint calling and referrals and sales from employees and existing customers are a top priority for this business segment.

Each commercial middle market relationship manager and team leader has a goal this year of making at least 150 sales calls with prospects.

We set a goal to produce $9 million of annualized new revenue from new customers.

We were on pace to exceed that goal ahead of schedule, so we've raised the goal 50 percent to 13 million.

Incidentally, a significant portion of this new revenue growth is coming to us in fee income categories.

In addition to this effort, we recently completed one of our Stone Mountain projects that focused specifically on the commercial middle market.

As many of you know, Stone Mountain projects are part of our senior management leadership development training.

The recommendations that came from this project team included plans to enhance our sales process, our incentive plans, and our support areas to allow our relationship managers to spend more times with their customers, similar to refinements last year made in our home equity lending area.

As they're implemented, the changes should help accelerate the growth rate in revenues in our commercial banking area.

One key area of emphasis in commercial middle market is in our treasury management services.

We're adding 400 new customers per month to AmSouth's

, a Web-based treasury management tool for our business customers.

We're also promoting AmSouth's direct payroll deposit product to deepen relationships with our commercial and small business customers and their employees.

The goal is to double monthly sales production by the end of the campaign the end of this August.

Today, treasury management, which includes commercial deposit services, contributes more than 80 million in annual revenues.

In wealth management, a campaign entitled "Summer Splash" is designed to increase referrals to our trusted investment management businesses.

So far, this campaign, which kicked off June 1, has produced more than 1,700 new referrals and in the short period of time, those referrals have resulted in over 800 appointments with prospects and more than 100 new pieces of business representing sales of trust and investment management services as well as the more typical mortgage home equity line and deposit products.

We estimate that AmSouth has 30,000 high net worth customers within the consumer franchise, another 33,000 high net worth prospects among our business banking clients, and 1,500 key relationships in commercial banking that each have three to five senior executives that meet our target private client profile.

With prospects like these just within our existing customer base, we're very optimistic about the potential for new business in our wealth management area.

A key element of the sales management process at AmSouth is the frequent sales campaigns and product blitzes that focus our employees on sales goals and maybe more importantly on developing best practices.

During the second quarter, we were actively engaged in some form of sales promotion in almost every area of our business.

In addition to the promotions that I've just mentioned, we also had a consumer check card blitz in the month of May called "Swipe Out" that produced more than 48,000 new check card sales.

Now these 48,000 new check cards to those customers can enjoy the convenience of making purchases with their AmSouth check cards.

That's a product, I would remind you, that produces about 40 million in annual revenues today.

A

campaign called "Swing for the Fences" helped build significant new

accounts with core deposits in checking and money market accounts and business check cards as well as increasing cross-sell opportunities.

The results from the week-long campaign was almost 8,000 new

accounts, 3,800 plus new business check cards, and almost $40 million in new deposits or right at $5,000 per new account.

For the quarter,

sales totaled over 27,000 new accounts.

A consumer checking campaign called checking marks the spot, produced nearly 26,000 new consumer and business banking checking accounts during the month of June.

This single campaign produced 80 million in new low cost deposits, and obviously thousands of new cross sell opportunities within our customer base.

As we ramp up our sales productivity, we continue to manage the company toward a lower risk profile that produces sustainable earnings growth, with low volatility.

We're reducing credit risk by managing portfolio concentrations more aggressively, continuously improving the credit risk management process, and concentrating our consumer originations in higher-quality tiers.

We've managed interest rate risk to a neutral position, primarily through a favorable mix shift on the balance sheet, and process improvements that include more rigorous testing of variety of rate movements and pricing scenarios.

We continue to take steps to assure our neutral position.

For these reasons, we're confident in our ability to sustain higher levels of performance, and meet our long-term strategic goals, earnings per share growth of 12 to 15 percent, and a return on equity of 20 to 22 percent.

We focus on these goals, as you know, because we believe they're the key drivers of our share price, and sustained performance that meets or exceeds these goal should produce shareholder returns that out perform not only other banks, but the broader market.

Before closing, let me briefly address a topic that I know is on the minds of everyone today.

AmSouth takes very seriously the issues that are being discussed widely today under the label of corporate governance.

There are a variety of legislative and regulatory agency proposals circulating today to improve the transparency and accuracy of financial reporting by public companies, and to improve management's accountability for that reporting.

AmSouth is already in compliance with most of the substantive proposals.

For example, 12 out of our 13 directors are non-employees whom we believe absolutely meet almost any test being brought forward in terms of independence.

All of the members of AmSouth's nominating, audit and compensation committees are non-employee, independent directors.

AmSouth board, for several years now, holds regular executive sessions without management present, including me.

Any stock options granted to employees are issued under plans that have previously been approved by our shareholders.

AmSouth has a detailed code of contact, of conduct, that's been in effect for over 25 years, which is constantly updated and designed to prohibit conflicts of interest on the part of management and directors.

And I also note that as a bank, AmSouth has many, all banks have experienced for many years, been subject to numerous banking laws and regulations, which already impose many of the same rules of conflicts of interest, and accuracy of financial reporting, that are now being discussed for public companies in general.

AmSouth stands ready to abide by the tightening of such rules that might be enacted by new laws or regulations.

I would tell you that I'm firmly a believer that on of AmSouth's six basic values, which is do the right thing, embodies not only our relationship with each other and with our customers, but also to the investing public.

That would conclude our remarks this afternoon, and operator, why don't we open it up for questions.

At this time I would like to remind everyone, if you would like to ask a question please press star, then the number one on your telephone keypad.

We'll pause for just a moment to compile the Q&A roster.

The first question comes from Jason

.

Thank you.

Good afternoon, gentlemen.

Good afternoon.

Good afternoon.

This is

the first quarter and the last eight or nine quarters where we say, you know, balance sheet, you know, actually grow.

Have you kind of - are we at the point we've run off enough of the loans that we don't want that we should see kind of balance sheet growth, you know, going forward, particularly in the second half of the year?

We're pleased to see the growth of earning assets on the balance sheet.

Investment securities declined just a little bit, but I tell you that that probably had more to do with the tough time you have in this market defined acceptable yields in the bond market.

So, you know, we think that that should be relatively stable assuming that we can find the product to cover run

.

On the loan side probably the biggest change there was on the commercial portfolio, which was down about $80 million

quarter, by far the smallest decline that we've seen over the last couple of years.

At the same time we exited about 175 million in syndicated loans.

With that coming close to a conclusion, you know, we're encouraged about the prospects for net earning asset growth here over the near term.

Good.

And then I guess previously you have intimated that the margin should fall to kind of the 450 level by the end of the year.

Do you think now maybe you could do better than that or that still sounds accurate?

Well, you know, I think somewhere in the neighborhood of 450.

I tell you, really, if anything right now that might be on the low side of 450.

There are a couple of things that we've done fairly recently, some additional tightening that we've done that has reduced our expected volume of higher-yielding, fixed-rate consumer loans, I think, could have some modest impact on the margin.

And, second, some of the things that we've been doing in the time deposit portfolio from a pricing standpoint to be able to extend maturities there a little bit.

We've been seeing a steady decline in time deposits and you look over the last 60 days or so we're up a couple hundred million dollars in that category, which probably about a $400 million swing from where we otherwise would have been.

So I think 450's still not a bad number but we could be just a hair on the low side of that.

Thank you.

Sure.

Our next question comes from

Davis with Mid West Research.

Good afternoon.

Hey,

.

Two-part question, the first is with regards to the yield on the available for sales portfolio was up about 28 basis points,

quarter was - the conduits were what was driving that?

And then secondly, Sloan, if I heard you right, the losses on the indirect portfolio dropped to 105.

I don't remember our number from last quarter but I know it was substantially above that.

What was the driver of that and was it the rebound we've seen in used car prices?

First, on the first question the yield on the available for sale is a result of additional spread income coming off of the conduits.

We talked last quarter and I think also back in the fourth quarter about some term commercial paper funding we had put in place for the conduit back first quarter of 2001.

A lot of that matured in the first quarter of 2002.

Rates obviously had moved lower in that.

We had the fully - the full core impact of the re - of the re-pricing affect us in the second quarter.

So that's really what all of that - of that impact was in the higher available for sale portfolio yield.

On the dealer loss issue, I think there were two or three things happening there.

One, we do normally see a nice seasonal improvement between first quarter and second quarter in dealer charge-offs.

Secondly, we've really made great progress in our collections area over the last year or so and I think we're seeing some impact improved collection activity.

And then, thirdly, you know, I think we may be beginning to see some of the evidence of the tighter underwriting criteria that we've put in place in stages over the last, really, seven or eight quarters now.

So I think it was all of those together.

OK, very good.

Any change in the guidance for the year?

Well, we said - you mean for earnings or charge-offs?

Charge-off - or, earnings, I'm sorry.

Earnings we said last quarter $1.63 to $1.68 and, you know, I guess when you look at a 42-cent quarter, it's probably reasonable to think that we're looking more toward the high end of that ranges.

OK, very good.

Thank you.

Our next question comes from Christopher Marinac with SunTrust.

Yes, hi, Dowd and Sloan - wanted to get your perspective on the trust business.

And if you look back in the - in the tenure of Geoff von Kuhn, sort of what has he accomplished so far?

And probably more importantly, what have been some of the inflows and outflows of the business that are sort of not seen in the trust fee numbers?

Chris, good afternoon.

A couple of things - Geoff - since Geoff has joined us, as you're aware, we've tried to announce them as they've happened.

We've really redone the entire senior team.

At the same time, we've made some product enhancements and revisions.

We're just finishing up - well, in fairness, I guess it'll be the end of August before we complete everybody going through a new sales training process.

I guess I would say that we have been positioning and changing

business whether it be trust, investment management, or our old private banking now called "Private

Services," all were three very large business segments for us which we had a substantial profitability in and as you know have stated what our objective is over three years to double the revenue from that.

And Geoff and I are both still very comfortable with that.

In fairness, we're probably six months behind, which had to do with reorganization and hiring and positioning, but just as the early tip of the iceberg I guess is while people are still in training to think of last month, those 100 pieces of new business that I mentioned that were booked, I want to say we've added in the past four or five weeks probably 160 million in new trust assets.

I know of - you know, some of this is putting in a much more aggressive sales management process in those businesses that we've enjoyed in other lines of business for a few years now.

You know, yesterday morning I got an email and then a phone call, and then another phone call on a new $35 million piece of business they'd gotten on the trust side.

That's the kind of atmosphere that we've been trying to build, and with the competencies and the base we have, and the position that we have in those businesses, I am very excited about the potential, and I think we'll start seeing some really good things in spite of the fact that as we all know, the equity markets, the financial markets in general are not our friends in growing the revenues right now for part of that business.

Super.

What is the, what is the base of business you have now, as of the end of Q2?

In terms of assets under management.

Assets under management would be about $25 billion.

OK.

On the trust side.

And that includes custody?

That includes the custody piece.

I would say it'd be closer to 16, 15 to 16 billion in discretionary.

Perfect.

OK.

Excellent.

Thanks a lot Dowd.

Thank you.

Your next question comes from

with KBW.

Regarding the commercial lending you guys were talking about, you said you were getting some indication that you felt like a turn could be near in the commercial lending area.

What types of things are you seeing there that gives you hope for near-term commercial loan growth?

Well I think first of all, just what we saw showing up on the balance sheet.

In terms of the smallest net decline in commercial.

As Dowd mentioned, it's, the focus here is on the middle market segment, the commercial middle market segment, five to 100 million.

We've seen some strengthening there in the pipeline.

I'd also tell you, even though you don't see it net on the balance sheet, we've actually had a pretty good first half of this year in commercial real estate production.

The payoffs continue to slightly, very slightly outpace the production.

Our production numbers, first year annualized revenue for commercial real estate's up about 20 percent from the first quarter of last year.

So we're seeing good production there.

If we see then, if we see the repayment activity slow a little bit, a little bit more of that volume sticks as well.

Thank you.

And

, I would have to add, you've got to remember that syndicated portfolio, which has been coming down so substantially over the past several quarters, mitigating and really almost masking any kind of new business going on, that's getting much, much closer to our targeted levels, and so that in itself will start to see some balance sheet growth.

OK.

Thanks.

Your next question comes from

with UBS Warburg.

Hey guys, how are you?

Hey

.

Hey

.

Just a couple of points, most of my questions got asked.

What specific areas, where are you seeing the loan growth in terms of franchise?

Two, what's going on with the Internet growth of deposits, and what's the profitability on that?

And three, Sloan you talked about the margin, with a 100 basis point shock, and next year the curve has flattened out quite a bit.

Where do you guys see, on a more drastic of a shock, a 200 or 300 basis point move?

OK.

First of all, on the loan growth question, we've continued to see strong growth in equity lending.

This quarter was stronger than normal, than what we've been seeing in dealer, and I would probably expect that to moderate a little bit in future quarters.

On the commercial side, we're seeing some in commercial middle market, although some declines in the large corporate side of the business.

Let's see, what am I leaving out here.

Commercial real estate has continued to decline moderately on the balance sheet, but that's to my earlier points the production's been pretty good.

As you look at commercial and commercial real estate, it's been fairly broadly based.

I wouldn't say that there's any particular geographic market or customer segment that we're seeing more business from.

In commercial real estate, you know, we're not seeing any office, for example, but we are seeing, you know, some residential, multi-family, little bit of local market retail and the like.

And on the commercial side it's broadly based.

Let's see, second question was Internet?

Yeah, let me - Bob, on the Internet, as you'll remember, we set some what we thought were aggressive goals and in about seven month we hit a 24-month goal so we re-upped those goals.

And we continue - we've probably got 550,000 of our customers today that are signed up for our Internet-based services.

When you talk about profitability of the service I guess I would tell you I don't quite look at it that way in total in that, you know, every time someone will use the Internet to check on a balance inquiry or transfer funds and you compare that to either using our branch teller system or an ATM or even our telephone banking, the cost of that is so much less that the more volume we can drive to the Internet for just general inquiries greatly reduces our cost.

The other thing is we track that 550,000 customers as to their relationships with the bank.

And we have found that from that perspective it's a very solid customer.

They use on average about 5.6 services with us compared to probably 3-and-a-half for the average consumer household.

They're twice as likely to have a mortgage with us.

They have higher balances, deposit balances.

Their loan balances, the ones that have loans with us, have twice as much outstanding on a loan.

So all in all we see it as a very solid customer and the attrition rates are about half of what the rest of the customer base is.

So, you know, you could back into a profitability, you know, are they profitable?

Yes, the customers that use it.

Does the Internet itself provide profitability?

I'd say that really isn't the purpose of it.

Bob, your third quarter was on the margin.

And there in the up 200 scenario we estimate a positive impact of .8 percent of net interest income.

And in the up 300 scenario we estimate a positive impact of 1.1 percent.

Now what you see from all that, clearly, is that at least in our base case run we're showing just a tiny bit of asset sensitivity there.

Thanks, guys, I appreciate that.

Sure.

Your next question comes from

with Merrill Lynch.

Good afternoon.

Hey,

.

Hey,

.

Two questions, first questions is with respect to the 24 new branches that you outlined to open next year, can you talk about the expense that you expect related to that and are there any off-sets that you anticipate next year to that expense that, you know, might sort of be lower expenses and sort of restrain overall expense growth?

And then secondarily, given all the success of the campaigns that you spoke about, what do you attribute sort of the deceleration in deposit growth this quarter when you think about it on a linked quarter basis up only 1.6 percent annualized from the first quarter?

Thanks.

, the 24 branches are this year's number.

We would expect to do about 30 or more next year.

You can use as a general rule of thumb about a half a million dollars in annualized expense per branch just as a walking around number, so the 24 branches that we open this year would have full-year expense next year of about $12 million just in round numbers.

Those branches next year I would expect in total would operate as

very - they would - they would be approaching break-even as we got to the end of the year.

I think we estimated earlier that this branching program on an ongoing run rate basis would add maybe one percent non-interest expense growth at the top of the company.

That gets you, again, back to about the $12 million number level for the 25 to 30 branches.

And no, we would not see any particular offsets in next year from an expense standpoint.

You know, the offset really comes with the revenue growth that we've got and the improving profit contribution that we - that we have falling in from branches that were open prior to this year.

On the campaigns - and, you know, we have seen an awful lot of good results there - the - we did see some deceleration in the low-cost category.

All of the deceleration occurred in money market categories.

If you look at non-interest-bearing deposits, I think our - I think our

net of float were up about 10 percent linked quarter annualized.

It was six or seven percent gross and then the interest checking accounts I want to say were up about nine percent linked quarter annualized.

So we saw really good growth in both of those two categories.

Where we saw a little softer performance in the second quarter was in the money market category.

And, you know, I think there were several things going on in the market including some of our CD promotion activity that we had going on.

So you think potentially that sort of pushing some of the higher-rate CDs cause people to move money out of money markets and into some of the CD products?

Personally, I think there was a little bit of that that happened.

And, you know, what we were trying to do there was to extend a little bit on the re-pricing horizon there, and we'll continue to do some of that.

Maybe we give up a little bit in the - in the short run, but I think it positions us better for an eventual rise in rates.

OK, thank you.

Sure.

There are no further questions at this time.

Well, if there are no further questions, operator, let me thank everyone for joining us.

We appreciate your time this afternoon.

We'll stand adjourned.

This concludes today's AmSouth Bancorporation conference call.

You may now disconnect.