Regions Financial Corp (RF) 2002 Q4 法說會逐字稿

Good afternoon.

My name is Shereve (ph), and I will be your conference facilitator.

At this time, I would like to welcome everyone to the AmSouth Bancorporation fourth quarter earnings conference call.

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

After the speakers' 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 1, on your telephone keypad.

If you would like to withdraw your question, press star, then the number 2 on your telephone keypad.

As a reminder, this call is being recorded.

Thank you.

Mr. Dowd Ritter, you may begin your conference.

Good afternoon, everybody.

This is Les Underwood (ph).

We appreciate your participation today.

Our presentation will discuss AmSouth's business outlook and includes forward-looking statements.

Those statements include descriptions of management's plans, objectives, or 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 the discussion.

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

Information on the risk factors that could cause actual results to differ are available from today's earnings press release, Form 10-Q, for the quarter ended September 30th, 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 we assume no obligation to update information concerning our expectations - Dowd.

Thank you, Les, and good afternoon, everyone.

Also with us today, of course, is our Chief Financial Officer, Sloan Gibson.

Let me turn now to the results for the quarter.

Earlier today, AmSouth reported fourth quarter diluted earnings per share of 44 cents on net income of 155 million.

That represents a 16% increase over the fourth quarter of 2001 earnings per share.

Return on equity for the quarter was 20%, and the efficiency ratio was 50%.

Highlights from the quarter included average earning assets grew nearly $1 billion compared to the third quarter, primarily on continued strength in consumer and residential mortgage lending.

Commercial loans also grew modestly on a linked quarter basis, reflecting improving market conditions, as well as the success of our middle market new business program.

Total average deposits also grew almost $1 billion, with increases in nearly every deposit category.

Average non-interest-bearing deposits increased 13% linked quarter, interest checking grew 4%, and average money market deposits increased 46% on an annualized basis.

We opened 14 new branches during the fourth quarter, bringing total new branch openings for the year to 26, which would include 18 in Florida, 5 in Alabama, 2 in Louisiana, and 1 in Mississippi.

In spite of a very difficult environment that challenged all financial institutions in 2002, AmSouth remained focused on our long-term goal of sustainable quality earnings growth.

Through our continued focus on and our execution of our strategic initiatives, we've produced another year of solid results that ranked among the best-performing banks in the country.

Some of the highlights for the full year were -- excuse me -- record earnings of $609.1 million, resulting in diluted EPS for the year of $1.68, an increase of 16% over 2001.

Return on equity reached 20.1% for 2002, and the efficiency ratio was a record low 50.5%.

The net interest margin was 4.46 for the full year.

The results reflect the execution of our strategic initiatives and our focus on sales productivity across the franchise.

Higher net interest income, stable credit quality, and diligent expense control were key earnings drivers throughout the year.

We made substantial progress on our strategic initiatives during 2002, and after Sloan's discussion of the results for the quarter, I'd like to share some more about our progress on those initiatives.

Finally, during the fourth quarter, AmSouth's board of directors raised the dividend for the 32nd consecutive year.

That dividend was increased 4.5 percent to 92 cents per share on an annual basis.

Now let me turn it over to Sloan to discuss the fourth quarter in more detail - Sloan.

Thanks, Dowd.

Diluted earnings per share were 44 cents on net income of $155 million.

That's a 16% increase in earnings per share compared to the fourth quarter of 2001.

Adjusting prior-year earnings for the impact of goodwill amortization, this quarter's 44 cents compares to 40 cents a year ago, or 10% higher.

Return on equity was 20%, return on assets 155, and the efficiency ratio was 50%.

Also during the fourth quarter, we repurchased 5.1 million shares of AmSouth's stock, leaving approximately 9.5 million shares under the current authorization.

Net interest income for the quarter was $372 million, up slightly compared to the third quarter.

The principal driver of the improvement was a $976 million increase in average earning assets.

The net interest margin declined 12 basis points to 4.24%, which was toward the top end of our previous guidance range.

Average earning assets were $35.9 billion during the quarter, an 11.2% increase annualized (inaudible).

Average loans on the balance sheet for the fourth quarter were $26.8 billion, an increase of $940 million or 14.5 percent annualized.

The growth was concentrated in consumer loans and residential mortgages, but we were also very encouraged by increased activity in commercial lending.

Consumer loans, excluding mortgages, grew $158 million or 5.6% annualized.

Home equity lending balances were up $213 million or 14% increased annualized.

Demand for home equity products continues to be strong among our core consumer customers.

The cross-sell ratio for new home equity sales was, again, strong this quarter at 6.1 products per household.

Trends in the quality of new home equity originations were also strong.

This quarter, the average loan to value on our production was 77%, and the median FICO (ph) score was 737.

Average dealer indirect loans declined $29 million compared to the third quarter.

On a managed basis, dealer loans declined $139 million.

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

In the fourth quarter, the median FICO score for our dealer originations was 741.

Average commercial and commercial real estate loans, including business banking, were $24 million higher compared to the third quarter.

Average C&I loans increased $135 million.

Partially offsetting the growth in these categories was an $81 million decline in average commercial real estate loans, which reflected accelerated prepayment from late in the third quarter and early in the fourth quarter.

Average small business loans included in the commercial and commercial real estate categories were up modestly by about $3.5 million.

Average residential mortgages increased $758 million compared to the third quarter, reflecting a decision we made a couple of quarters back to begin to retain more residential mortgages on balance sheet.

On a managed basis, which reflects the inclusion of the mortgages held in off-balance sheet conduits, average residential mortgages were $559 million higher; about $200 million worth of runoff in the conduit structures there.

The decision to retain residential mortgages on the balance sheet is based on a lower credit risk profile of these assets and their ready marketability.

$233 million of fixed rate mortgages were securitized and sold at the end of the quarter, which is not reflected in the average balance for the quarter.

On balance sheet mortgage growth was funded in part by incremental fixed rate borrowing, which mitigates the interest rate risk of these fixed rate and adjustable rate assets.

Looking ahead, we're encouraged by the strong momentum in loan growth that occurred during the quarter.

You focus on the linked quarter ending balances, which are the numbers that are available by category in the press release, you see that 24.7 billion was the ending balance of total loans for the quarter, up $1.1 billion versus third quarter ending balances.

It also represents an ending balance that was $533 million higher than the average balance for the full quarter, which signals good momentum as we look at the -- at the first quarter.

Perhaps most encouraging of all this, of that $533 million in higher ending balances, the various commercial categories, C&I, commercial real estate, and small business, accounted for $281 million worth of total growth point to point and C&I, and it was about $260 million of the difference between ending and average.

At the end of the fourth quarter, loans in the conduits were $2.5 billion, $360 million lower compared to the end of the third quarter.

On the funding side of the balance sheet, average deposits increased $967 million, or 15%, compared to the third quarter.

Average low-cost deposits were up $818 million, or 19.5 percent annualized, driven by growth in both non-interest bearing and interest checking and money market deposits.

Non-interest bearing deposits were up $158 million during the quarter, while interest checking deposits were up 54 million.

Money market deposits were up 613 million, which includes growth from our new money market product that focuses on wealth management and trust clients, providing them the option of earning a higher return on their liquid (ph) funds.

Total time deposits grew $148 million during the quarter.

Looking at the margin, we were able to fully absorb the 50 basis point Fed funds reduction in November.

You may recall in our third quarter conference call that we'd indicated that we'd taken a somewhat more aggressive position on deposit pricing, particularly in the higher-cost categories such as time deposits and money market.

That gave us the room to lower deposit rates in the face of the Fed's 50 basis points rate cut and still remain competitively priced.

For example, today we offer a money market product where a substantial portion of our balances are concentrated, offering a 1.25% rate, quite a bit higher than the roughly 80 basis points or so national money market fund average.

There are two principal reasons for the margin compression that you saw in the fourth quarter.

First, we replaced the continuing decline in off balance sheet net interest income, that decline coming both from loan conduits, runoff there, as well as a decline in the swap book.

We replaced that volume with on balance sheet earning asset growth.

The effect of this was to increase the amount of net interest income, but narrow the net interest margin.

The other factor in the margin's decline in the quarter was the lower yield on the investment portfolio as prepayment -- as prepayments remained high.

Our interest rate sensitivity modeling shows that we continue to be neutrally positioned.

In an up 100 basis points scenario, net interest income is positively impacted .9% over a 12-month period.

Even as stress test scenario, assuming 10% deposit outflows, an immediate 100 basis point rise in short-term interest rates, and a corresponding rise in deposit rates, net interest income would be essentially unchanged.

Turning now to credit quality, non-performing assets for the quarter were $197 million, up $8.3 million compared to the third quarter.

All of the increase was attributable to one commercial credit in the heavy manufacturing industry, which we wrote down approximately 20% during the quarter.

The ratio of non-performing assets to loans was flat at .72%, while the loan loss reserve coverage of non-performing loans declined slightly to 240% from the fourth quarter.

Net charge-offs were up $8.8 million to $51.7 million compared to the third quarter.

That works out to .77% of loans compared to .66% in the third quarter.

The increase was largely due to seasonal increases in consumer charge-offs.

Provision expense was $53.5 million, up $2.1 million from the previous quarter.

Our loan loss reserve to net loans was 1.40%, reflecting the improvement in leading indicators in our loan portfolio, as well as a mix shift toward a greater proportion of residential mortgages held on balance sheet, which carry inherently lower risk.

In the fourth quarter, commercial and commercial real estate charge-offs were $18.4 million, up $3.7 million compared to the third quarter.

The majority of this increase was the result of the $3 million write-down on the heavy manufacturing credit I mentioned earlier that migrated to non-performing status during the quarter.

The remainder of the commercial charge-offs were spread among numerous credits.

For the fourth quarter, classified commercial loans declined substantially, falling 19% compared to the third quarter levels, and a decline of 38% from their peak in the second quarter of 2001.

This favorable trend produced declines in commercial classified loans in four of the last six quarters.

Finally, during the fourth quarter, the syndicated loan portfolio declined to $564 million, which is about a $15 million decline, and now represents about 1.9% of managed loans, and gets ever closer to that target level that we've mentioned of $400 million to $500 million.

On the consumer side, charge-offs, excluding residential mortgages, were 113 basis points for the quarter.

That's up 17 basis points from the third quarter.

Deal indirect (ph) charge-offs were 149 basis points, 39 basis points higher than the third quarter, while home equity charge-offs increased 11 basis points to .61%.

Approximately $1.9 million, or 12 basis points, of the home equity charge-offs were the result of tightening our process for the collection of bankrupt accounts that are not reflective of our expected run rate.

Excluding this impact, home equity charge-offs were essentially flat compared to the third quarter.

Compared to the same period a year ago, fourth quarter consumer charge-offs were flat at 113 basis points.

Despite expected fourth quarter seasonality in consumer and the one larger commercial charge-off that we recognized this quarter, we would continue to see underlying favorable trends within the lone portfolio, including the substantial reductions that we've achieved in syndicated and healthcare exposure, syndicated alone down $1 billion over the last nine quarters, as well as the reduction in classified commercial loans that I just mentioned.

Favorable trends in consumer and commercial delinquencies.

You can see in the press release improvement in the 90-day delinquencies, but we saw comparable improvements in virtually every other consumer and commercial category.

Improving consumer origination quality, particularly in the home equity and dealer indirect portfolios that we've talked about before, as evidenced by improving FICO scores.

And then lastly, a favorable mix shift that we're seeing in the portfolio toward a higher level of lower-risk residential mortgages held on balance sheet.

We would expect, as the economy strengthens and we continue to realize benefits from our tighter underwriting standards, that we would see further improvement in credit quality trends.

Turning to non-interest revenues.

Non-interest revenues were up $3.9 million or 8.3% annualized.

Service charges on deposits were up $1.2 million over the third quarter, reflecting higher consumer account activity and corporate analysis fees.

Interchange income was up more than $500,000 linked quarter reflecting increased volumes associated with holiday shopping, as was bank card volume up modestly for the quarter.

Increases in portfolio income and other non-interest revenues were also higher linked quarter.

Partially offsetting these increases were declines in trust fees, investment services income, and mortgage revenue.

Lower trust in investment services income reflect continued weakness in market-based revenues and lower annuity sales, primarily fixed annuity sales.

The decline in mortgage revenues reflects our decision to hold a somewhat higher level of residential mortgage on the balance sheet, selling a somewhat smaller amount in the secondary market, reducing sales on secondary market.

Looking at expenses, total non-interest expenses increased $5.2 million during the quarter, reflect -- which includes the $3 million third quarter benefit that we realized associated with the sale of a credit derivative that we had previously written off prior to that quarter.

The remaining $2.2 million increase was due to higher personnel costs and net occupancy expense.

Partially offsetting these increases were linked quarter declines in equipment, communication, and professional fees.

The efficiency ratio was 50% during the quarter.

For 2003, we expect full-year diluted earnings per share in a range of $1.78 to $1.83.

Our forecast is predicated on gradual improvement in the economy as the year progresses.

Earnings improvement in 2003 we expect to be driven by moderate earning asset growth, funded primarily with increases in deposits.

Specific categories of loan growth should be a function primarily of market growth opportunities.

The net interest margin is expected to be relatively flat during the first half of the year, and then gradually decline as a result of accelerating loan growth.

Our projections also reflect stronger non-interest revenue growth and moderate expense growth.

We expect the loan loss provision to increase slightly in 2003, with any improvement that we see in charge-offs being absorbed by provision for loan growth.

Aside from one-off events in commercial and typical seasonality in consumer not unlike what we saw in the fourth quarter, we are confident that the favorable trends in credit quality will continue, with improvement later in the year.

Dowd, that concludes my remarks.

Thank you, Sloan.

AmSouth completed this year with strong momentum in many of our key business areas that will carry well into 2003.

Earnings per share growth and return on equity, the two measures of our long-term strategic goals and key drivers of shareholder value, continued to improve in 2002.

The drivers of the improvement have been our focus on our strategic initiatives and our sales management process, which emphasizes aggressive goal setting, continuous measurement of results against goals, and strong incentive programs that will link rewards directly to performance.

With that in mind, let me take a few moments today to reflect on the progress that was made during 2002 on our strategic initiatives.

In consumer banking, we focused on four key areas last year: Average consumer low-cost deposits grew more than 380 million over the prior year.

The home equity portfolio is up 18% compared to the previous year, while the median FICO score on new originations last year was a 737 compared to a 719 in 2001 originations.

We had solid growth in new consumer checking account households during the year, and the consumer cross-sell ratio improved to 4.4 products per household.

Looking ahead, we see two opportunities for additional growth in consumer banking.

In 2002, we originated nearly 3 billion of residential mortgages, and especially considering our growing presence in Florida, we think that there is substantial room for improvement in the growth rate of originations.

Secondly, over the last year, interchange income from debit cards has grown at a solid 17% rate due to higher utilization rates and other payment card sales incentives.

We'll continue to emphasize our new payment card products and higher utilization rates for these products in 2003 so as to leverage that momentum.

In business banking, new households grew 8.2%, and low-cost deposits increased 15%.

One of the drivers of growth in new households and deposits in 2002 was strong sales of AmSouth's business relationship plus product.

As you'll remember, that's a bundled relationship product for small business customers that meets both the needs of their business and their personal financial affairs.

In 2002, we sold 93,500 new business relationship products, which is more than double the sales from the prior year.

Looking ahead, one of the benefits of strong growth in new business relationships will be new opportunities that develop with these new customers as the economy improves.

Growth on the loan side of the business is a prime example, and we began to see some encouraging signs in small business lending activity during the fourth quarter.

In wealth management, a successful campaign produced more than 4,000 new business referrals.

So far, these referrals have resulted in a substantial number of new business wins and prospects for many more new wealth management relationships.

During 2002, we also made a substantial investment in sales and product training for all wealth management personnel that will ensure every client's needs will be met by knowledgeable, trusted advisers with a complete array of products and resources.

In 2002, private client households increased by 15%, adding an additional new 2,000 private client relationships to our wealth management group. 2002 was a good year for AmSouth mutual funds.

By the end of the year, AmSouth had 10 funds rated either 4 or 5 stars by Morningstar Investment Services, and in January, three AmSouth funds were recognized as category kings for leading performance by "The Wall Street Journal."

That would be our AmSouth Select Equity, our AmSouth Growth and Income, and our AmSouth Growth Portfolio Funds.

While our wealth management group has faced the same challenges that other investment managers have in terms of a slow economy and volatile financial markets, we've used this time wisely to build a very solid foundation for future growth, which we expect will produce even better performance, particularly as the economy improves.

In Florida, we have exceeded our goal to grow the pretax contribution from our high-growth Florida markets -- talking about Orlando, Tampa, Naples, and Jacksonville.

Through the end of 2002, the three-year average growth rate for those markets was 38%, resulting in a pretax contribution of over $100 million from those markets this year.

In 2002, consumer households in those markets grew by 14%, with business banking households growing 24%, resulting in solid growth for the year in low-cost deposits, fees, and consumer loans.

In addition, we added 18 branches in Florida during 2002, bringing our total distribution network in the state to 158 branches at year-end.

Looking ahead, we plan to open at least 30 new branches, concentrated in our fastest-growing Florida markets in 2003.

These markets continue to represent our most dynamic growth opportunities in the franchise, and we will continue to focus on them by devoting additional resources such as increased marketing support, more aggressive incentive programs, and intensified tracking of results in an effort to gain market share there.

In terms of sales productivity, 2002 was one of our most active years for sales campaigns, call nights (ph), and product blitzes.

As you've just heard, the results have continued strong sales of consumer checking accounts, business relationship plus accounts, consumer and small business check cards, and home equity products.

During 2002, we adopted a new customer service satisfaction survey that is administered by the Gallup organization.

While AmSouth has always surveyed some 6,000 customers per month in order to measure customer service levels, the power of the new survey lies in our ability, through Gallup, to compare service levels to our competition's to ensure that the bar is set appropriately high.

For the fourth quarter, the survey indicated that our customers gave us a 4.7 on a 5-point scale.

While that's good enough to rank AmSouth among the top quartile of our competitors, internally we've set a goal to reach a score of 4.9.

In commercial banking, our Power to Know program resulted in many stronger relationships and additional new business with existing customers.

Under the Power to Know program, we follow up directly with 1,400 to 1,500 of our best business customers to determine what specifically is important to them and what additional needs we might meet.

The goal of the program is to ensure that we identify and meet all of our customers' needs by providing a higher level of service.

Many of our key relationships were strengthened last year through this program, and as a matter of fact, additional new business was earned from 36% of these relationships where additional needs were identified and met as a result of this process.

Looking ahead, superior customer service will continue to be a key differentiator for AmSouth that will ensure that our customers recognize the benefits of an AmSouth relationship.

In an effort to further strengthen service quality in 2002, we've made substantial investments in new technology in all business areas.

One of those investments is a new operations center that will be occupied in phases during the first eight months of 2003.

This new operations center is the culmination of a plan that actually began 10 years ago in our operations technology and processing capabilities to be sure we stay in a leadership position and keep our service levels at top -- as top in the industry.

Our initiative to leverage the Internet across all of our business segments has also resulted in more than 700,000 Internet customers.

In 2002, we averaged more than 550 Internet-based product sales per month, and today we estimate that the Internet channel contributes about 6 million annually, or a penny per share.

In 2003, we'll continue to focus on ways to drive more traffic to our Internet channels, where appropriate.

That will include continuing campaigns to attract new customers and encourage more activation and utilization of all of our Internet-based services by our customers, whether they be consumer, small business, or commercial.

Finally, you might remember we added a seventh strategic initiative in 2002 to grow commercial banking.

The goal of this initiative is to raise the growth rate of commercial banking to levels more consistent with our financial strategic goals while preserving strong credit quality.

Through this initiative, we've renewed our focus on commercial middle market firms, which we define as those with $5 million to $50 million in sales.

In 2002, we got off to a tremendous start, as our middle market new customer sales campaign resulted in over 7,500 calls on new prospects which resulted in 500 new relationships which will yield some $27 million in new annualized revenues.

This initiative will also focus on our core commercial real estate business, where we've developed specific strengths over the last five to seven years and growing fee and deposit businesses by way of treasury management services, as well as international and corporate finance.

In 2002, AmSouth's treasury management added more than 300 new customers per month to AmSouth's I-treasury, Internet-based treasury management product.

Today, our commercial deposit services, including treasury management, produces nearly $80 million in annual revenues.

As you've just heard, we're executing our seventh strategic initiatives to produce consistent earnings growth and profitability today, and at the same time, to place AmSouth in a position of strength for an improving economy in 2003 and for sustained performance for years to come.

These results are actually the continuation of efforts that began back in the third quarter of 2000.

Since that time, we've lowered our interest rate risk, we've improved our credit quality, we've enhanced liquidity, we've strengthened our capital position, we've invested heavily in long-term business prospects by adding new branches, new technology, and continuing to hire and train top performers in every area of the company.

Now, none of these improvements help near-term results, and despite the challenging economic environment throughout this period, we were able to consistently deliver double-digit earnings per share growth, a return on equity exceeding 20%, and an efficiency ratio of 50%.

In addition, based on our current stock price, our dividend yield of 4.5 percent is one of the highest in the industry, and in 2002, we increased it for the 32nd consecutive year.

We've recently been recognized by "The Wall Street Journal" for our strong dividend yields and its potential benefit under President Bush's proposed tax legislation.

These elements have combined to produce a 62% total return to AmSouth's shareholders since the third quarter of 2000.

The momentum that we carry into 2003, along with the combination of our talented people and our fast-growing markets, our continued focus on fundamentals and relentless execution by our people, gives us a tremendous amount of confidence that 2003 will be another strong year for AmSouth.

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

Okay.

And at this time, if you do have a question, please press star, then the number 1 on your telephone keypad.

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

Your first question comes from Jeff Davis (ph).

Good afternoon.

How are you-all doing?

How are you?

I'm fine, thanks.

Good quarter.

Question for you.

Two parts.

Sloan, the -- what is your rate assumption for the coming year?

And then secondly, if one of you could comment with regards to commercial loan growth, what you're seeing in metro markets, and maybe dividing it among Florida, metro Alabama, Atlanta, New Orleans, and middle Tennessee.

Okay.

And any differences in demand and type of demand.

Sure.

I'll try to tackle both of those.

First of all, in our financial plan -- we craft a financial plan that's based on a flat-rate environment.

And particularly in light of where our interest rate sensitivity lies, we think that's the right -- that's the right position to be in.

You know, as you heard in the comments there, if we see rates trend up a little bit, it's going to help us some.

If rates stay flat, you know, it's going to be a neutral outcome for us there.

I think the least likely alternative would be to see rates decline somewhat and stay down and, you know, if that happens, that's going to hurt.

We're going to get some compression in the margin from these interest rate levels.

But I think that, from a financial plan standpoint, inherent -- implicit in that guidance is a flat-rate scenario.

On the commercial loan growth, one of the real strengths that we've -- that we've seen is that the majority of the growth we saw in the fourth quarter, particularly toward the -- in November and December, is growth that's coming out of our -- out of our core middle market business, where we've been focusing -- Dowd mentioned on the campaign over the previous year, focusing particularly on the lower end of the commercial middle market.

10 of the 13 major market areas that we serve, where we have a physical presence, had good quarter over quarter loan growth in that commercial middle market area, and it accounted for about half of the total commercial growth that you saw on an ending basis during the quarter.

We really don't have much commercial business in the Atlanta market.

We do a little bit of commercial real estate business over there, but not very much.

Something, you know, on the order of maybe 100 million to 150 million in outstandings.

Very little C&I business there.

I'd say that the rest of it is just -- it's pretty well-balanced among the other large markets that we have a presence in.

Okay.

Very good.

Thank you.

Sure.

Your next question comes from Chris Merinat (ph).

Yeah, hi.

Good afternoon.

Dowd, I wanted to talk about the branch strategy in terms of opening new branches in Florida.

Can you give us an update on how that's going, and also just remind us on the timing of when those turn profitable?

Sure can, Chris.

As you remember, 18 last year.

Probably have opened 30 in Florida in the past 26 months.

We follow those extremely closely.

We have special incentive programs for the personnel in those new offices, and we have a special team that really monitors the pro formas based upon why we built that branch and where we built it.

And I say all that to say there's much more productivity and sales management that goes on in those new offices than really does in our existing offices.

And, you know, the average one, we're going to have a slight loss in year one, we'll break even in year two, and they are profitable in year three.

And we are extremely pleased with what we're seeing.

I think we've referenced before that the return on those offices is in the -- is well up in the -- over 25%.

And so we see it as a smart business decision, not to mention the way to keep growing deposits and consumer and business banking households, and also, with Florida's case, private client households.

They get an awful lot of attention as almost a separate business line, and particularly with our commitment to ramp up faster in that regard.

Are there any teaser rates that you're using in some of those markets to get customers in the door?

No, there are not.

They're using the regular loan and deposit rates.

If there's -- you know, if there's anything special they get, it's -- their incentive systems are more aggressive for those employees, and their marketing dollars and resources are stronger than some of our normal branches.

But due to the fact that, you know, you think about it, you open up the doors, you don't have any customers, they're very sales-oriented employees and, you know, 90% of their effort is on sales and service, and so that's the main focus.

Very well.

One quick follow-up question.

On your time deposits, can you give us just a rundown in terms of the maturity average on that $6.5 million -- or $6.5 billion, rather?

I don't have it right in front of me, but I'll -- but we'll handle it with you in a follow-up call.

That would be great.

Thank you.

Your next question comes from Jefferson Harrelson (ph).

My question is on the consumer losses.

What would you expect the home equity and the indirect losses to be for the whole year of 2003?

I'd say something in the -- in the range of 40 to 50 basis points.

That's home equity?

Yes.

How about indirect?

On indirect -- I'm looking for an answer here.

I'll get you an answer.

Great.

Secondly, on the margin, are we going to see more mix change, and are the conduits going to be continuing to run down, and don't both of those mean that we're going to see a trend towards a declining margin from here, or is there something offsetting that, or am I missing something?

You know, the -- if you -- if you look at the linked quarter impact that we've seen the last couple of quarters from the decline in the off balance sheet position, it's both conduits and (ph) from the declining swap position, from second to third quarter, the net interest income impact was $6 million down.

In third quarter to fourth quarter, the net interest income impact was a decline of about $5 million down.

We expect right now that the impact between fourth quarter and first quarter to be a little less than $1 million, and that's reflecting -- you'll recall back in the third quarter, we talked about the fact that we had a higher level of maturities in the swap book that hit during the third quarter, and we'd see part of that impact in the third quarter and part of that impact in the fourth quarter.

Over the course of 2002, the swap book basically declined by half, about $1 billion.

Over the course of all of 2003, we'll see less than $300 million in swap runoff.

And as the conduits continue to get -- continue to be smaller and smaller in relation to the overall balance sheet, while there are still some dollars declining in the conduit, it becomes a smaller and smaller percentage of the impact.

So we're going to be sailing against a good bit less headwind in that regard.

Okay.

Thanks, guys.

Let me give you the answer to the indirect question.

Look at 100 to 110 basis points on the indirect portfolio.

All right.

Thank you.

Your next question comes from Roger Lister (ph).

Roger, your line is open.

Hi, this is Roger Lister.

Hey, Roger.

Hello.

Yeah.

I guess the question I have is, what kinds of indicators, or how do you monitor the sort of transition from great customer service to delivering earnings?

What kinds of things are you looking at as you move your program through from sort of thinking of all the ideas, implementing the steps, and now getting results?

I mean, is it things like, you know, better attention, attracting customer, more cross-sell?

You know, how do you -- what kind of metrics?

And are those the kinds of things you can start to sort of release along with just the basic sort of earnings that tell us you're on the right track?

Roger, we could absolutely take you through that, and if your inference is that they are absolutely intertwined, they are.

Solid earnings growth in this business, I am convinced, is -- the real differentiator is outstanding customer service.

That results in multiple products used per household.

It results in better retention rates.

And we follow all of those things in each of our business lines.

In terms of products per customer on the commercial side, it's revenues per customer, and we actually get into the main commercial customers into a profitability analysis on each of those, but we absolutely, in every major product on the consumer and small business side, and by customer on the commercial side, ultimately all of this relates to profitability.

Because it seems to me that's sort of the key driver for all the work you do to improve customer service, whether or not you ultimately deliver.

There is no doubt about it.

That is absolutely correct.

Shifting -- and I don't know if I -- I've been trying to do a couple of things here, but on auto lending, what are you seeing on the delinquencies in terms of, like, the value of repossessed autos, and house prices holding up across your markets?

Any sense of any weaknesses in house prices or anything, despite all the press?

Let me take the house price question first.

We've not seen any declines in home prices in our markets.

And that's something we are in the -- not only do we see evidence, as we go through foreclosure processes, but we also see an awful lot of that out in our residential construction lending businesses that's around our footprint, and we've continued to see relative firmness in the prices.

May not be seeing prices increase quite as quickly, but we're certainly not seeing declines in prices.

On the dealer -- on the dealer business, first of all, from a delinquency standpoint, we did see a nice improvement on a year-over-year basis in those delinquencies.

And within the charge-off numbers, while the dollar amount -- the year-over-year charge-offs in dealer went from 166 basis points to 149 basis points, the dollar charge-offs were relatively flat.

What's happening, if you look inside of that, the number of units that we had a charge-off on declined 12% year over year, so we're having a lower incidence of charge-off.

But when we take a charge-off, the per-vehicle loss is larger.

It's up about 5% year over year.

Now, part of what that's telling us, there are some things we can control and some we can't.

We can't control the used car market, but we believe that the declining incidence of loss in that portfolio is a reflection of some of the improved underwriting that started really two years ago in that business segment.

And just in terms of foreclosed real estate on the single-family homes, are you finding any differences in the amount of time it takes you to sort of -- to liquidate the foreclosed properties?

You know, I don't know that we're seeing a much longer period of time there, in terms of liquidation.

That segment of the portfolio for the last several quarters has been relatively stable, the residential mortgage OREO portfolio, which would suggest to me that the -- that the turnover in that portfolio is staying at about the same pace.

So, all in, despite a lot of the noise around, you know, employment not looking so good and everything else, the consumer remains, you know, reasonably sort of stable, I guess is the answer?

Well, in our markets, we're seeing that, but again, I think the other thing -- the other thing we're seeing in our portfolio is some relatively early evidence, emerging evidence, of the improved underlying quality in the portfolio.

And, you know, we saw -- for example, in October and November, as we were looking at bankruptcy filing rates, we were actually down year over year in terms of the number of bankruptcies that we're seeing.

Now, it ticked back up in December and it's too early.

We haven't had a chance to compare notes with other banks to see if they saw a similar uptick in December.

But, you know, we've been generally performing better in terms of bankruptcy trends and the like than what we're hearing more broadly in the industry, which suggests to us that maybe there's some early signs there of better quality.

Thank you.

Sure.

Your next question comes from Fred Fair (ph).

Yes.

In Florida, it seems to be a great thing, and you've gotten (ph) a lot of offices down there where they're doing construction financing and then rolling it over to a permanent loan.

Are you increasing your mortgages business on houses down there by doing this?

And the other question is, a year or so ---and-a-half, you brought in a bunch of, let's say, gurus out of New York to run this wealth management division, and you put a lot of emphasis and advertising and money and personnel in that.

How is that doing as far as profitability?

I'll do the construction firm answer, and Dowd will handle the wealth management answer.

We've -- AmSouth for, I don't know how many years, has had a construction firm (ph) product that we actually rolled out first in the Alabama market and had up here for a long time and have used with great success.

Half of our residential construction portfolio -- more than half -- is in the construction perm (ph) product.

It's a great product for customers because they only have to go to one closing, and -- but the loan is to our final borrower, the mortgage holder, and we monitor construction during that phase, and that's been a good product for us for a long time, including in the Florida market.

Fred, I'll comment on that guru and those people that came in from wealth management.

We did, as you indicate, add some talent a little over a year ago.

The markets have certainly not cooperated, but I would tell you, in terms of personnel, in training, in product development, in positioning, all the right things are happening.

You don't see it yet in the investment services.

Sloan referenced in his comments the fixed annuities, just the rate environment.

We just -- it isn't as popular, and rightly so, for customers, which was a big part of that investment services.

And on the trust side, with the market values down, you see the revenues down there.

That said, the other piece of that is that private client services household, and when I referenced the addition of 2,000 households there, those are households that -- of our most wealthy individuals.

They average about 10 products per household, so you can imagine the combination of loan, deposits, and investment-oriented products they have.

It's several thousand dollars profitability per household, so we are very pleased with that.

If the other part of the question -- and I've -- I know you're probably inferring -- is it where we want it to be?

As I've said before, no.

We're probably six months behind result-wise what I would expect to see, and believe me, everybody is working on that because I think that can only make the numbers we're looking at today stronger.

So that's not contributing right yet to profits in there?

It's still a drain?

You -- well, no, it's contributing in that private client services, but you're not seeing in trust or investment services, you're not seeing year-over-year profitability improvements in that from a revenue growth.

There have been some things on the expense side that have helped that, but they haven't been main contributors.

Just as we talked, you know, this time last year commercial was profitable, just like wealth management is very profitable, but were they this time last year contributing to our ultimate goal of double-digit EPS growth?

No.

Commercial is well on its way back to that, and wealth management is right behind, in my opinion.

Okay.

Thank you.

Thanks.

Your next question comes from Tom Purcell (ph).

Hi.

I had a very quick question.

I noticed, in terms of your loan balances, that the commercial real estate loan balance is basically kind of down year-over-year and it was flat last year.

Some of your competitors have grown those commercial real estate loans more aggressively than you guys.

Have you got a different view of the market that you think -- than some of your competitors?

I think what you're seeing there is, back six or seven, maybe eight years ago now, as we started to build our real professional commercial real estate business, more of our focus shifted toward doing construction financing, project financing, to upper-tier developers in top-tier markets and away from the kind of five- to seven- to nine-year kind of mini-perm financing where you basically get a lot of embedded commercial real estate risk in the portfolio.

And what we've seen over this intervening period of time, because there's a relatively higher concentration of construction and project financing in there, is borrowers taking advantage of the much lower permanent financing.

We're not a permanent financier of commercial real estate.

And so they've taken advantage of that opportunity to refinance, and that's what's caused the balance to decline somewhat over time.

You know we've seen -- actually seen production pick up a little bit, almost 10% year over year, comparing 2002 to 2001, but because of the early prepayments, it's just not showing up on the balance sheet.

We think that gives us a lower risk commercial real estate portfolio -- for example, to the best of my recollection, when Kmart filed bankruptcy, we did not have a single Kmart center in our commercial real estate portfolio.

Okay.

Thanks.

And can I ask one other quick one?

You had mentioned the conduits.

I just noticed your -- the yield on your securities is reasonably high, at 7.5 percent.

How much of that is the impact of the conduits, and where should that come down to?

Yeah.

The IO strip is -- the IO strip is in there.

The base yield on the core portfolio right now is just over 6%.

And, you know, I would expect that to continue to drift down somewhat as we -- as long as we stay in this very low interest rate environment and the level of prepayments is as high as it is.

Thank you.

Sure.

Your final question comes from Charlie Erntz (ph).

Hey, guys.

A couple questions for you.

Hi, Charlie.

One, where are you guys comfortable with the loan to average earning asset ratio, since your loan growth appears to be pretty strong right now?

That's my first question.

You know, I don't know that I've got an absolute number.

It's -- we're at, you know, around 75% right now.

If that ratio drifted up to 80% or something like that, I think we'd be very comfortable with the loans to earning asset ratio at that level.

But it's really -- it's really a function of what we do with core funding growth, and it's also a function of what's going on in the residential market.

You know, that's -- one of the opportunities there would be to maybe hold a little higher level of residential mortgages on the balance sheet -- they're core customer assets -- and a little lower level of securities over time.

But that's -- it's a fairly narrow range there.

We don't -- we don't envision a dramatic change in that relationship between loans and earning assets.

And can you go through again the income in the single-family portfolio this quarter?

How much of that was actually fixed-rate?

And then -- and also, the securitization gain, was there a gain?

And why did the period-end loan numbers look so strong relative to the average, since that did happen at the end of the quarter?

Okay.

I don't know if I'll remember every one of those questions, Charlie, but if I miss one, make me come back to it.

Let's see.

First of all, there was a gain on the $230 million sale of mortgages that took place at the end of the year.

That shows up in the mortgage income line item in non-interest revenue, and you see it was down a little bit year over -- or quarter over quarter, and that's because there was a little smaller amount of gains or mortgages sold during the particular quarter.

Let's see.

The next question was the level of single-family mortgages.

Help me out there, Charlie.

First of all, how much -- how much of the production was fixed rate ...

Oh.

... of the single-family.

I don't have a production number at the end of my fingertips, but I can tell you that, where we stood at the end of the quarter on a managed real estate -- managed residential mortgage basis, is we're about 60/40 adjustable rate.

And that's a slight increase from where we were a year ago.

We were at about 70/30 on a managed basis.

So it's a little bit higher, you know.

The -- at the same time, we've -- I mentioned in passing, in the conference call comments, that we had layered in some fixed rate funding.

Late in December, we took down $850 million in fixed rate FHLB (ph) financing, three-year and four-year fixed rate at a blended rate of about 2.5 percent. 500 million of that replaces 500 million that's scheduled to mature that we had in place in the month of January, and it runs off at about four-ten, or 4%, somewhere in that neighborhood.

So what we've done here is, while there's a little bit higher level of residential mortgage on the balance sheet, we've really taken care of the interest rate risk that would be associated with that.

And lastly, Sloan, when you're just looking at the period-end numbers, they were even stronger than the average for the quarter, which is a little bit surprising, since I'm assuming the securitization would have lowered the period-end growth number.

Are you talking about residential mortgages?

No.

Just the overall loan portfolio.

Overall loans?

Yeah.

Yeah.

We were -- ending loans were $530 million higher than average loans.

And as I mentioned in the comments -- it might not have been very clear -- of that 530 million, about 260 million of that was commercial.

So we're -- we just -- we look at that as being, you know, very positive going into the first quarter.

That's roughly $500 million worth of good core loan growth that's already in the can for the quarter.

Thanks a lot.

Sure.

That concludes today's conference call.

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You may now disconnect.

Thank you.