Regions Financial Corp (RF) 2003 Q1 法說會逐字稿

Good afternoon.

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

At this time, I would like to welcome everyone to the AmSouth Bancorporation first 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 and the number one on your telephone keypad.

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

As a reminder, today's conference is being recorded.

Thank you.

Mr. Dowd Ritter, you may begin your conference.

Good afternoon, everyone, this is Les Underwood (ph).

We appreciate your participation in today's conference call.

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

Those statements include description 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 condition.

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 and form 10-K for the year ended December 31, 2002.

And finally, let me remind you that forward-looking statements are effective only as of the date that they are made, and we assume no obligation to update information concerning our expectations - Dowd?

Thank you, Les.

Also joining me today is our chief financial officer, Sloan Gibson.

Let me turn now to the results for the quarter.

Today, AmSouth reported first quarter diluted EPS of 44 cents on net income of 155 million.

That represents a 10% increase over first quarter 2002 earnings per share.

Our return on equity for the quarter was 20% and the efficiency ratio, 51%.

Highlights from the quarter included our average total loans grew more than $1 billion compared to the fourth quarter, primarily on continued strength in consumer and residential mortgage lending and favorable trends in commercial and small business.

Continued improvement in credit quality, including lower charge-offs, lower non-performing assets, and lower past due loans further contributed to the results for the quarter.

Our total average deposits were also higher, driven by a 12% increase in low cost deposits.

The catalyst for growth during the quarter included two sales campaigns with an emphasis on growing consumer and small business deposits.

During March, we hosted our first ever Big Blue sale, which featured special sales promotions and incentives in our branches across the franchise.

The campaign focused on sales of checking accounts, convenience services such as free Internet banking with bill payment, and a renewed emphasis on time deposits.

In business banking, a sales campaign that we titled our "winter warm-up," focused on sales of AmSouth's signature package product for small business services called Business Relationship Plus.

That campaign produced more than 11,500 new Business Relationship Plus relationships with an average balance per account of $8,500.

That would represent about a 48% increase for a similar time frame without that contest.

In a similar fashion, we kicked off a "showdown of the states" campaign for the second quarter that pits our geographies against one another in a showdown for deposit growth.

These campaigns are an integral part of AmSouth's sales culture and are key tactics for rewarding and motivating sales productivity among our employees.

Our wealth management area experienced positive momentum in the trust and private client services area.

New trust sales produced more than 6 million in annualized revenues during the quarter, or about 102% of their goal and our new private client sales resulted in nearly 17 million in annualized revenues, or 111% of their goal for the quarter.

We also added over 400 new private client households representing nearly 10% annualized growth.

We were encouraged by favorable trends on the balance sheet in both loans and deposits that carried over from last year's fourth quarter.

For example, our average commercial and commercial real estate loans, which include business banking loans, increased 326 million or 10% on a link quarter annualized base.

In commercial middle market, we continue to add new customers.

We estimate that more than one-third of our new business during the quarter came from new relationships, and nearly half of our current pipeline is attributable to new prospects.

Our new business pipeline continued to increase during the first quarter, and at the same time credit quality in the commercial portfolio continued to improve.

In commercial real estate, new loan commitments are up 22% to more than $800 million, and fees collected were up 50% versus the first quarter of 2002.

Commercial real estate pipeline is up 46% compared to this time period last year.

And credit quality remains very strong, with loans past due, non-performers, and classified assets at historical lows.

In business banking, our average loans were up 78 million compared to the fourth quarter.

That represents annualized growth of 12%, compared to the fourth quarter, reflecting a continuation in the momentum that began late last year.

The pipeline of new business continues to show strong application volumes.

Let me turn now to our residential mortgage and consumer lending.

You may recall that last quarter we introduced an increased emphasis on residential mortgage lending, which was one of the products of one of our recent Stone Mountain project teams.

Most of you will remember that our Stone Mountain projects are the result of leadership training events for our senior and mid level managers.

Stone Mountain teams are given an AmSouth business issue or a new opportunity for which they develop solutions.

This particular team that worked on the mortgage product developed a plan to leverage AmSouth's existing distribution system, along with some streamlining in the back office support areas in an effort to effectively in a relatively short timeframe double the production of mortgage originations.

During the first quarter, we successfully completed several initial steps related to this mortgage initiative that included training all of our branch personnel and rolling out our automated mortgage application system in the branches.

We also have hired additional teams of mortgage loan officers and will continue to add new people in sales and administrative areas to support this initiative.

With these steps behind us, the mortgage initiative is well underway and positioned to achieve even stronger results as we go forward.

Production of new residential mortgage closings were more than 900 million during the first quarter, and application volume reached a record one and a half billion.

A key driver for this activity was referrals from our branches, which in this first quarter amounted to $350 million.

In consumer lending, home equity was the leading growth area, producing for the eighth consecutive quarter originations exceeding $1 billion.

Demand for home equity products continues to be strong.

And the product represents a core relationship product that opens numerous cross-sell opportunities as averaged by our continuing cross-sell ratio of just over six products per household for new home equity sales.

In addition, many home equity referrals come from our mortgage loan operations area, creating deeper relationships with those customers.

At the same time we continue to maintain very high credit standards with our new originations.

Let me now turn it over to Sloan to discuss the quarter in even greater detail -- Sloan?

Thanks, Dowd.

Diluted EPS for 44 cents on net income of $155 million represents a 10% increase in earnings per share compared to the first quarter of 2002.

Return on equity was 20.3% and the return on assets was 1.54%.

The efficiency ratio is 51%.

During the first quarter we repurchased 4.8 million shares of AmSouth stock, leaving approximately 4.7 million shares under the current authorization.

Interest income for the quarter was $363 million, up $2.6 million compared to the fourth quarter.

The principal driver of the improvement was a billion dollar increase in average earning assets for the quarter.

Net interest margin was 4.11%, down one basis points from the fourth quarter.

Average earning assets were $37 billion during the first quarter, an 11.6% increase annualized on the quarter.

Average loans on the balance sheet for the first quarter were $27.8 billion, an increase of $1 billion to 15.1% annualized versus the fourth quarter.

We continued to see favorable trends in lending activity in most loan categories.

Average commercial loans increased $326 million or 10% annualized compared to the fourth quarter.

The growth was distributed across commercial middle market, commercial real estate and business banking loan categories.

The growth was also widely dispersed across industries and geographic markets.

A considerable amount of this new production originated from new customer relationships.

The first quarter growth in consumer and residential mortgages was solid as well.

Consumer loans excluding mortgages grew $176 million or 6.2% annualized.

Home equity lending balances grew $164 million or 11% annually.

Home equity products continued to be a core relationship within the -- with strong customer demand.

Home equity customers tend to maintain higher loan to deposit balances, use more products than the typical consumer customer, making it more profitable for the bank.

Today, approximately 175,000 customers use AmSouth home equity products, maintain an average loan balance of approximately $30,000.

The portfolio is geographically dispersed across the Southeast markets and home values continue to hold firm.

The quality of new originations continues to be strong, with a median FICO score of 743 and average loan to value of 77% for the first quarter origination.

Average dealer and direct loans on balance sheet increased $27 million compared to the fourth quarter.

On a managed basis, dealer loans declined $66 million.

While the dealer and direct portfolio has declined steadily over the last two years, today's new loan production is higher in quality and reflects tighter underwriting standards that began more than two years ago.

These standards are evidenced by a median FICO score of 741 for the first quarter originations and lower loss rates compared to the previous quarter and the same period last year.

During the first quarter we experienced a continuation of the momentum in commercial loan activity that began in the fourth quarter.

Average commercial, commercial real estate, and business banking loans combined were $326 million higher compared to the fourth quarter.

Commercial and industrial loans grew $187 million in the quarter.

This growth was broadly based across industries and geographies with nine of AmSouth's 13 geographic markets reporting commercial loan growth for the quarter.

Despite high pre-payment activity, commercial real estate loans increased $61 million, and small business loans were up $78 million for the quarter.

Average residential mortgages on balance sheet increased $510 million during the first quarter.

On a managed basis, average residential mortgage was $331 million higher for the quarter. $530 million of fixed rate mortgage were sold at the end of the quarter and $110 million were securitized and transferred to the investment portfolio.

Thus, ending balances were up only $65 million on the quarter.

On a managed basis, average total loans were $30.5 billion for the quarter, an increase of 10%.

At the end of the first quarter, loans in the conduits were $2.4 billion, a decrease of $251 million versus the fourth quarter.

We expect loans in the conduits to decline below $2 billion by the end of the year.

On the funding side of the balance sheet, total average deposits increased $321 million or 5% annualized.

Average low cost deposits grew $547 million during the first quarter, or 13% link quarter annualized driven by growth in both interest and non-interest bearing checking, as well as money market deposits.

Although average time deposits declined $226 million during the quarter, ending time deposit balances were down only $53 million compared to the end of the fourth quarter, reflecting a renewed sales emphasis in the time deposit area.

In terms of interest rate sensitivity, we continue to position ourselves neutrally across the range of interest rate scenarios.

Our base case model continues to show that we are slightly asset sensitive.

In an up 100 basis points scenario, net interest income is positively impacted 1.1% over a 12-month period.

In a down 50 basis points scenario in the near term and assuming those rates stay down at that level, net interest income is negatively impacted 1.7% annually.

Turning now to credit quality, we experienced favorable credit quality trends during the quarter.

Non-performing assets were $191 million, down $6 million compared to the fourth quarter.

The ratio of non-performing assets to loans was .69%, a decline of 3 basis points.

The loan loss reserve coverage of non-performing loans improved to 257% for the first quarter.

And total loans 90 days past due declined on a link quarter basis (inaudible) and a half million dollars.

Net charge offs were down $9.4 million to $42.3 million versus the fourth quarter.

That represents .62% of loans compared to .77% last quarter.

The decline reflects decreases in commercial and consumer charge-offs, reflecting both seasonality and better inherent performance.

Provision expense was $44.7 million, down $8.8 million compared to the last quarter and exceeded charge-offs by $2.4 million.

The loan loss reserve to net loans declined one basis point compared to last quarter and ended at 1.39%.

In the first quarter, commercial and commercial real estate charge offs were $13 million, down one and a half million dollars compared to the fourth quarter.

Commercial charge offs were spread among a number of credits, syndicated losses for the quarter totaled only $148,000 and represent less and less of a factor in the bank's overall loss experience.

Classified commercial loans declined again during the first quarter following 12%, not annualized, compared to the fourth quarter levels and down 45% since reaching their peak in the second quarter of 2001.

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

On the consumer side, charge offs which exclude residential mortgages were 101 basis points for the quarter, down 12 basis points.

Dealer and direct charge offs were 134 basis points, down 15 basis points from last quarter and down 57 basis points from the same quarter a year ago.

Likewise, home equity charge offs decreased 18 basis points to .43% linked quarter and they were down one basis point compared to last year's first quarter.

We continue to see relative stability in the portfolio and underlying favorable trends, including lower delinquencies in both consumer and commercial categories, continued strength in consumer origination quality and the favorable mix shift.

We believe we are well positioned to see continued improvement in credit quality.

Turning now to non-interest revenues.

Trust income increased $1.2 million and mortgage income increased $3.3 million.

Increases in these categories were offset by declines in service charges, bank card income, interchange income and other non-interest revenue, primarily reflecting (inaudible) a seasonally higher fourth quarter.

Investment services income remained flat over the same period. (audio gap)

Overall, non-interest revenues were up slightly compared to the fourth quarter.

Looking at expenses, total non-interest expenses increased $12.9 million during the quarter, primarily reflecting seasonal increases in personnel costs and higher pension costs.

Personnel costs are traditionally higher in the first quarter due to the initial impact of merit increases, as well as higher payroll taxes associated with year end incentive bonuses.

For the quarter, personnel expense increased $11.4 million.

FICA taxes accounted for 6 million dollars of that increase.

Increases in medical insurance costs were $1 million, while pension cost increases were $2 million and the impact of merit raises was also $2 million.

Health care costs were higher compared to the fourth quarter due to rate increases and our pension cost increase is a result of changes in plan assumptions effective for 2003.

Assumptions included lowering the discount rate, the rate of compensation increase, and a rate of return on plan assets.

Net occupancy, communications and professional fees also contributed to the increase in non-interest expense.

The efficiency ratio was 51% in the first quarter.

As we reported in January, we continue to expect full year diluted earnings per share in the range of $1.78 to $1.83.

While not expected to impact our current earnings guidance, accelerated pre-payment activity and the continuing low interest rate environment are expected to create downward pressure on the net interest margin.

Our expectation would be that growth in the loan portfolio as we saw in the first quarter would mitigate that margin compression and at least offset the impact on net interest income.

Forecast continues to be predicated on a gradually improving economy as the year progresses.

Expected earnings drivers include continued growth in loans and deposits, modest non-interest revenue growth and continued credit quality improvement.

Dowd, that concludes my remarks.

Thanks, Sloan.

We feel that 2003 is off to a good start, driven by favorable trends in loans and deposits and improving credit quality.

Our challenge now is to improve on those results, despite the difficulties brought on by continuing economic weakness and the uncertainties due to the war.

Our goal continues to be sustainable quality earnings growth and higher profitability achieved through internal growth driven by the execution of our seven strategic initiatives.

You've heard us speak at length over the last year about AmSouth's sales management process and the unique culture in our sales management process.

AmSouth's 2002 annual report demonstrates this value led, achievement driven culture that is the foundation of our success in building relationships and delivering solid performance through focused execution.

A prime example of that philosophy lies in how we execute our branch expansion strategy.

As we've stated previously, we plan to add at least 30 branches each year over the next several years, mostly in Florida.

That's an annual growth rate of about 5%.

I thought we might spend a few minutes discussing these expansion plans in a little greater detail.

AmSouth has had an active branch expansion program in place since 1998 when we began adding new branches in Florida.

As a matter of fact, we've added 60 branches since 1998, including 26 branches just last year.

I say that because AmSouth isn't embarking on a new expansion program as much as accelerating and strengthening the process we already had in place.

Like every other initiative at AmSouth, successful branch expansion relies heavily on proven processes, relentlessly executed by an experienced team and a systems of incentives and performance measurement that recognize and rewards achievement of clearly established goals.

The opening of our new branches is coordinated by a dedicated Florida-based management team.

This team is led by Stan Crouder (ph), who reports to our head of the Florida bank, Rusty Stevenson (ph).

Stan is a senior manager formerly with First Union who brings 10 years of Florida experience in addition to his experience running a statewide franchise.

This group ensures coordination of site selection, development and construction as well as the hiring, training, and coordinated marketing and promotions through the grand openings and support for our area executives and consumer banking managers in our cities.

The process begins with extensive market analysis that identifies the most attractive growth opportunities.

Markets are analyzed based on criteria including demographics, projected growth rates, small business activity, expected new development, and competition just to name a few.

Our site selection process consists of a combination of market analysis, third-party market confirmation, as well as market validation through AmSouth's local management.

Once sub-markets are approved, an AmSouth real estate officer works extensively with several real estate brokerage firms on site selection.

It generally takes almost 13 months from the beginning of the site selection to the opening of the branch.

Marketing is another key element in our branch expansion plans.

Special marketing programs are customized for new branches based on successful company-wide programs.

These focused marketing efforts continue for a full year after that branch is open.

Phase one of the campaign covers the period prior to the opening through the first three months after opening.

Pre-opening activities begin two months prior to the opening of the branch and include sales planning, sales calls, community outreach, development of centers of influence in the community.

Local identity campaigns also accompany each new branch.

Grand opening activities include not just public relations and media support and VIP events, but an AmSouth hello patrol, as we call it, made up of AmSouth representatives who patrol the neighborhoods and the businesses in that area, performing what we refer to as random acts of hospitality on behalf of AmSouth.

Those random acts might include offering to pay for a stranger's gas at a local gas station or going into a local restaurant and picking up someone's appetizer or dessert at that restaurant.

Direct mail also plays a vital role at opening events by distributing coupons, premium offers and referral rewards for new customers.

These events continue through the first full 12 months after the opening.

AmSouth grand openings are designed to be neighborhood block parties, but they are also staffed to take advantage of each person that drops by.

For example, in a recent opening at the Blue Angel Park in Pensacola, Florida, a doctor and his wife were driving by, stopped in to visit and they ended up renting three safety deposit boxes.

They left there so impressed that they returned home -- returned back to the bank after going home with their checkbooks and moved their checking accounts.

Shortly thereafter, they were already meeting with our wealth management representatives working on some trust and investment management business.

Phase two activity follows for the next three to six months and focuses on sustaining local support along with direct mail campaigns, sweepstakes, media merchandising, employee incentives, along with clinics and seminars and thank you mailings.

Finally, the third phase focuses on sustaining the momentum by leveraging the successes that, that particular branch has enjoyed the first six months.

All marketing campaigns for new branches are centered around earning the customer's relationship and then building on it through additional products so that we meet more of that particular customer's needs.

As you might expect, we have an incentive plan.

It is a special one.

It is a five-year incentive plan critical to the expansion program, which sets aggressive goals for new business and also encourages the retention of the branch managers at that branch for a minimum of five years.

It is based on achieving deposit growth of 10 million per year for the first five years of that branch being in existence.

Managers at new branches can earn anywhere from 10,000 in the first year to 50,000 in year five for consecutive achievement of that annual deposit growth goal, and that's on top of their normal quarterly consumer scorecard initiatives.

Most importantly, all of these plans are structured so that our new branches begin contributing to earnings during year two.

New branches are staffed with trained sales representatives who provide sales consulting for annuity and mutual fund sales, as well as wealth management and small business services, so that the new branches aren't really totally relying on retail deposit business to generate positive returns.

We look at the profitability of all of our new branches as a group on a rolling five-year basis.

By maintaining a steady pace of openings, the branches that open earlier in the cycle help fund the initial operations of the newer branches.

As mentioned earlier, much of our expansion is occurring in Florida where our presence in existing markets leads itself to significant expansion.

We continue to believe that de novo branching provides substantially better benefits compared to filling in by small community bank acquisitions.

The freedom to choose the most attractive locations, build an AmSouth designed facility, staff it with AmSouth trained employees, gives us the ability to expand profitably in a disciplined, controlled methodology that we can constantly monitor and adjust as the markets develop.

The returns are also much greater after the first year.

As I've said, AmSouth's branch expansion initiative is based on a proven process executed by a seasoned team of leaders.

The plan uses a specially designed system of goals and incentives that assure that our employees are motivated to succeed and gives us flexibility to generate internal growth using a disciplined approach.

The branches that we've added over the last five years are contributing to earnings today and they are on track to produce an internal rate of return of 25% or greater.

Before closing, let me say a word about a special group of AmSouth employees.

We have 18 AmSouth employees not to mention spouses and family members and many others that have been called up for active duty to serve their country.

Everyone at AmSouth would like to say a special word of thanks to them and their fellow soldiers stationed throughout the world.

We support them and their families and all who defend the freedoms that all of us enjoy.

Operator, that would conclude our remarks and we can open it up now for questions

At this time I would like to remind everyone in order to ask a question, please press star and then the number one on your telephone key pad.

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

First question comes from Nathan Goldberg (ph).

It's actually Jason Goldberg.

I was hoping - I guess, one, just talk to -- it looks like in your 10-K you reclassified how you record the net interest margin.

Maybe give us some more color surrounding that.

And then secondly, the K also stated that you expect a modest decrease as the year progresses.

Maybe you can help put some quantification around that.

Okay.

On the re-class, Jason, what we -- we had historically, because residential mortgages had been a relatively smaller line item for us.

The origination fee had been a relatively smaller line item.

And because a large percentage of our residential mortgages were consistently originated and turned around and sold in a secondary market.

We had accounted for the origination fee on a cash basis.

We didn't defer the fee or the origination expense.

As that origination volume became somewhat more significant, and as we began to hold somewhat more of those originations on the balance sheet, we concluded that it would make the most sense to conform those two categories with FAS 91.

Therefore, what you saw in the K was a re-class that had us deferring the fee as well as deferring the origination cost.

No bottom line impact.

Just really a shift between those two categories.

In terms of the net interest margin trend, I can't imagine any bank in this interest rate environment expecting to hold on to their margin, given everything that is going on and the level of interest rates and the speed of pre-payments that are taking place in various fixed rate portfolios.

Our hope as we go -- and we are not any different than that.

We do expect to see compression as the year progresses.

Our expectation and our plan is that the growth, the loan growth primarily that we are able to produce over the next couple of quarters will be at least sufficient to offset the impact of that narrowing margin so that net interest income is at a minimum flat, if not up modestly quarter by quarter.

Okay.

And then separately, in the non-performing asset section you had repossessions, not a huge number, but jump up by a fairly decent amount, from 4 million to 7 million in link quarter.

Can you put more color on that?

We were able to implement an enhancement on our consumer loan software system that allowed us to begin to recognize partial write downs at an individual loan level and our indirect portfolio.

And that allowed us to move away from our prior approach, which had been to do -- to use some estimating and reserving in order to be able to timely recognize the losses.

What you saw there was a one-time shift in that level of repos.

Lastly, your middle market small business commercial loan growth is kind of bucking an industry trend.

We talked a little bit in terms of how you are doing it.

But I guess more color in terms of, is there anything you have to do differently in terms of pricing or structuring that is allowing you to take some market share?

Well, the chief current officer is sitting right next to me and he would assure you that there's nothing that we are doing on the structure front.

On the pricing front, Jason, you're familiar with the pricing model that we use to document and justify the pricing on every single commercial loan transaction a half a million dollars and larger, which basically requires a 21% relationship ROE.

And, you know, any level of pricing that doesn't meet that relationship standard is subjected to a higher level of approval authority and a tracking report on a monthly basis.

So I don't think it's pricing and I don't think it's structure.

I do think as we talked about last quarter, the effort that the -- whoever is running a tape on their adding machine, that's audible to everybody on the call.

So you may want to mute your telephone.

The initiative that we talked about last quarter to go back to target new, entirely new customer relationships in our commercial area focused on the lower end of the middle market, the five to $50 million size companies and from a sales standpoint.

As we indicated last year, in that nine-month period we brought new business in that will produce $27 million in annualized revenue.

We saw the benefits of that continue in the first quarter.

We know, as Dowd mentioned, about a third of the new business that we booked came -- this quarter -- came from new relationships.

While we didn't say it in the comments, we know that about half of our new business pipeline that we see in the commercial area, which is as strong as it has ever been, is new business from entirely new relationships.

So I think a lot of that has to do with the focus and the emphasis and the execution we've got going there.

Sounds great.

Appreciate the color.

Next question comes from Jeff Davis (ph) of FTN Securities.

Good afternoon.

Good quarter.

Thanks, Jeff.

Thanks, Jeff.

Two part question.

First, and if you said it I completely missed it.

I apologize.

Guidance for the coming year.

Dowd, I guess I heard you briefly mentioning you were comfortable with what was out there.

But it wasn't really quantified.

Jeff, I didn't say it.

I worry in this environment so much about the new Reg FD, I wasn't sure whether to say it there.

But Sloan did say the number this afternoon, which we knew would be appropriate and we are just reiterating that that range out there of $1.78 to $1.83, that's what I was referencing this morning with our comfort level.

I apologize for missing that.

Secondly, unrelated, I know that the commercial real estate book is small and I know that in the Southeast we are just not seeing much commercial real estate issues.

I know your snick (ph) book has been significantly shrunk.

Has the OCC given you any sort of heads up on what they are likely to be looking at this coming quarter on the exam?

And then is that going to include a focus, if they have it, is it going to include a focus drilling down on commercial real estate this year?

First of all, we are a Fed, state chartered Fed member bank.

So they would be our primary regulator.

No, there has not been any indication of a targeted focus on commercial real estate.

I don't know how far I can go with that, but I guess one observation is, as Moody's has come in, I recall their public disclosure, the last time they looked at our commercial real estate portfolio and probably more importantly our management practices in that business, they came away and publicly expressed their comfort with that part of the business, our business, and that was done at the same time that they were sort of raising the flag up on commercial real estate as a concern in a number of regional banks.

So we think we are in good shape on the real estate front.

Okay.

Very good, thank you.

Next call comes from Christopher Marinac (ph) of SunTrust Robinson Humphrey.

(inaudible) I wanted to follow up, Sloan, on the pricing you mentioned a few questions ago.

How much equity are you putting against the - with the 21% relationship ROE standard?

We used a plain old 7.5% book equity.

We don't do any economic allocation of equity or anything like that.

It's the full load regardless of the risk rating.

Okay.

That's good.

And then from a standpoint of size, can you give us a sense in terms of loan granularity in terms of the size of the new loans on the books and any disparity from what the normal book was in your growth spurt?

The production that we are seeing right now I can tell you is concentrated in the 500,000 to $5 million range.

When you get outside of that range, it's more -- it's a bit more unusual.

It's not out of the ordinary.

I mean, clearly we do some larger transactions.

I know Mike Willoby (ph) would tell you that once you get up over $15 million, we start looking a whole lot more closely at a borrower relationship.

To that end, Sloan, how much of the portfolio would be north of 5 million or even north of 15, if you can slice it that way?

Chris, it would be a wild guess if I gave you a number.

Let me do a little homework on that.

Fair enough.

Thank you.

Your next question comes from Edward Najarian (ph) from Merrill Lynch.

Good afternoon, guys.

Sorry about that.

Hi, Ed.

The question is regarding sort of the leveraging the balance sheet a bit.

I mean, one of the things that helped to offset margin pressure in terms of generating net interest income growth has been increasing the amount of residential mortgages held in the loan portfolio that has gone up from an average of 1.8 billion in the third quarter to 3.1 here in the first quarter.

To what extent would you expect to continue adding residential mortgages to the balance sheet on growing sort of the size of the balance sheet above and beyond other forms of loan growth in an effort to sort of offset some of this effect of the margin pressure going forward?

Two comments there, Ed.

You are very accurate in terms of looking at the growth in residential mortgages between those quarters on the balance sheet.

The growth on the managed basis is a good bit less than that.

Obviously, there's nothing new going into the residential mortgage conduit.

We are experiencing a lot of run off there.

So from a rate risk standpoint or a concentration standpoint, we tend to look at that on a managed basis.

We have indicated that we expected to hold a somewhat higher level of residential mortgages on the balance sheet.

And I would expect that over time as the rest of the portfolio grows, you continue to see some modest growth in residential mortgages.

Keep in mind as we talked about earlier, we sold over $500 million in fixed rate mortgages right at the end of the quarter.

That had the effect of reducing that concentration on an ending basis and as we entered into the second quarter.

So we are very mindful of the undue concentration there, primarily because of the interest rate risk issues associated with holding those mortgages.

Ed, also I would add that Sloan referred to, as we indicated earlier, I think it was last quarter or the third quarter we also signaled that we were going to start doing this.

As we indicated that not only from risk and volatility, but as we compared ourselves to a peer group of banks, one of the things that stood out is we were retaining a much smaller portion of real estate mortgages on our balance sheet, and we said we were intentionally going to grow that.

So in that regard, should we look at the 3 billion level in the first quarter as something that is going to be sort of stable going forward?

Do you expect to go up from there?

Do you expect to now remain down at the two and a half billion level, you know, subsequent to the 500 million that went away at the end of the quarter?

I think near term you could see some additional growth in that balance.

You know, over the long-term, as we see other loan growth categories strengthening, and as we see trends in core funding develop, it's one of the great things about residential mortgage originations.

It gives us the flexibility to originate and sell.

That mortgage project that Dowd had alluded to earlier, one of the stipulations is that whatever we are originating has to be eligible for sale on the secondary market.

So there may be some additional amount of growth there, but I don't think it would be of an extraordinary amount.

Okay.

It would probably definitely be though, Ed, as Sloan said, some growth, because don't forget I gave a figure of record application volume which we went into the second quarter with one and a half billion dollars of applications.

So we would expect this quarter to be better than last quarter in terms of our residential mortgage closings and activities.

Okay.

Great.

And any color on the pace of share repurchase activity going forward?

I imagine it will come down from 4.8 million this quarter.

Any outlook on what it should be?

The 4.8 million, most all of you will recall, included some repurchase activity associated with option exercised during the quarter.

There was a vantage of options that we're terminating.

That is a higher level than what you would normally expect us to undertake in a quarter.

I think we have been running 2 to 3 million shares a quarter as a kind of general run rate.

Okay, thank you.

Next question comes from David Hunnel (ph) of ABW.

It's Jefferson Harralson (ph).

My question is on the 500 million of residential loans that you sold at the end of the quarter, what are you reinvesting that in?

Is there a yield differential there that we need to be concerned about?

Well, right now it's sitting in Fed funds sold.

And what I expect that we will see there is that just good core loan growth and some mortgage production during this quarter will fairly quickly absorb that surplus liquidity.

Okay.

And on the securities book, X the conduits in the securitizations, you are looking at around 590 yield.

Most of that is MBS and CMOs.

It implies that the underlying mortgages are 640 or so.

What is the premium attached to that?

What is your concern about the pre-payment of that book?

We did see in the - and I know there was some attention given to the CMO issue earlier in the quarter.

CMOs do represent about half of that securities portfolio.

Our average life in that CMO book is 2.1 years, which is very close to the two and a half year average life of the total portfolio.

We did see an increase in the premium amortization in the CMO book of about $2 million from the fourth quarter.

And as we have looked ahead, we would expect to see that premium amortization increase slightly in the second quarter and then a bit more in the third and fourth quarters, assuming that we continue to have the same very high level of pre-payment activity.

I think all told that premium amortization impact for the balance of the year we think could maybe cost us a penny a share.

Are you buying more CMOs with the cash flow, more mortgage back to the cash flow is coming off?

Is there a point where the extension risk gets high enough where you say okay, let's go to treasuries or agencies with this book?

We have continued to stay within primarily in mortgage back and CMO.

We are trying to protect ourselves against near term pre-payment risk.

Obviously we factor that into our interest rate sensitivity modeling every month when we go to rerun that model to ensure that we are not developing a miss match in the book.

Thanks, guys.

At this time there are no further questions.

Are there any closing remarks?

Operator, if there are no further questions, let me just remind everyone before we go that on Tuesday, May 6, AmSouth will be hosting our annual analyst meeting here in Birmingham.

We will start with breakfast at 630.

Excuse me, 7:30 a.m.

And I got up so early this morning, that sounded late.

The presentation will begin at 8:00 o'clock and last with plenty of time for questions until about 10:30 a.m.

I know you have another presentation in town after that.

Sloan and I plan to make brief presentations under the theory that you hear us enough.

We do want you to hear from our heads of consumer banking, commercial banking and wealth management as well as our head of Florida.

But our entire senior team will be there.

We look forward to seeing you and, of course, if you are unable to make that trip, we will webcast live for you to participate by way of the Internet.

With that let me say thanks for joining us today.

We appreciate it.

Thank you for participating in today's conference call.

You may now disconnect.