Regions Financial Corp (RF) 2003 Q3 法說會逐字稿

Good day ladies and gentlemen, and welcome to the third quarter 2003 Regions Financial Corp. earnings conference call.

At this time all participants are in a listen-only mode with a question-and-answer session to follow the presentation.

My name is Mike and I will be your conference coordinator today. (OPERATOR INSTRUCTIONS) As a reminder, this conference is being recorded.

I would now like to turn the program over to your host for today's conference, Director of Investor Relations, Jenifer Goforth.

Please proceed.

Thank you very much for joining us today.

Carl Jones, Regions' Chairman and CEO and Bryan Jordan, Regions' Chief Financial Officer will be commenting on third-quarter earnings.

Our earnings release and supplement has been filed on form 8-K and is also located at Regions.com in the Investor Relations earnings release section of the Web site.

I will remind you that we do not provide specific earnings guidance; however, we will be happy to answer your questions after the presentation as thoroughly as possible.

As always I should remind you that certain statements made in this call may be forward-looking statements.

These forward-looking statements reflect Regions current views with respect to future events and financial performance.

Actual results could differ substantially and materially from what we have projected.

Such statements are made in good faith pursuant to the Safe Harbor provisions of the Private Securities Litigation Reform Act of 1995.

Please refer to our press release filed on form 8-K dated today October 16, 2003 for factors that could affect the accuracy of our expectations or calls our future results to differ materially from our expectations.

With that I will turn it over to Mr. Jones.

Thank you, Jennifer, and good morning everyone.

It is great to be able to discuss our third quarter with you because it was a very good, solid quarter financially.

There were no nonrecurring items that affected our bottom line or no noise in the numbers as some of you like to say.

So 73 cents earnings per share ties our record performance from the previous quarter, and it's a 5.3 percent increase from last year's third quarter which also was a solid quarter.

We think that this is really a revenue story.

Diversification of our revenue stream continues to work very well this quarter.

Net interest income was up for the second quarter in a row, and margin was stable only a 3 basis point change.

We also continue to have strong topline performance from our mortgage, brokerage and insurance operations.

Overall fee income contributed 49 percent of our revenue stream compared to 50 percent last quarter, still a very balanced, diversified topline.

Let's take a few minutes and look at our larger lines of business.

Our community banking franchise is, of course, the largest.

And here our primary focus continues to be the enhancement of our sales culture.

You will remember that we are in our fifth year of building the sales culture, and we measure many things, including behavior.

These measurements show high levels of sales contacts with big improvements over prior periods.

For instance, our associates have completed almost half one million customer profiles so far this year, and that is a 76 percent increase over last year.

And referrals are up 79 percent year-to-date over last year.

These efforts are designed to uncover customer needs and provide financial solutions.

And the two most popular solutions are our Equity AssetLines and our fixed annuity products. $300 million of net new outstandings were booked to Equity AssetLine in the third quarter this year.

All to our customers and with an average FICO score of 738 and an average LTV of 74 percent.

Fixed annuity production has been strong all year with year-to-date sales exceeding $150 million, more than tripling last year's pace.

Another big story with our community franchise is the continuing change in deposit mix.

Overall deposits have been relatively flat, but higher priced CDs have declined almost $2 billion in the last 12 months.

That's a 20 percent attrition.

Some of those funds have moved to other types of accounts with us.

Some have gone into annuity products, and some have been replaced with new deposits.

But overall, we feel good about the change in our deposit mix.

Bryan will talk a little more about these higher cost CDs in a few minutes.

Another aspect of deposit mix and growth other than same-store sales are our new stores.

We continue to execute on the strategy of expanding the franchise through de novo branching and high growth potential areas.

We've opened 15 new branches so far this year in good markets in Florida, Georgia, in the Carolinas, Tennessee and Texas.

We have 23 branches under construction as of quarter end.

Primarily in Texas, Florida and Tennessee.

Our strategy is to continue building out the franchise in higher growth areas where we have a smaller than desired presence.

Before I conclude my thoughts about our banks, let's look at loan demand and asset quality.

Asset quality remains stable.

There is less than one percent change in nonperformers on a linked-quarter basis.

Net charge-offs for the quarter 39 basis points.

But two problem credits accounted for 11 of those basis points.

Year-to-date net charge-offs are 31 basis points versus 35 basis points last year.

Classified loans are down, and past due loans are down.

Those are two encouraging signs.

And an interesting insight into our other real estate.

We started the year with $59.6 million of ORE, end of the third quarter that was down about 5 percent to 56.9 million.

But the real story is the turnover.

It has been rapid.

We have actually sold $72 million of ROE year-to-date with an overall gain on sale of a little more than $700,000.

Some conclusions you might draw from that are there are still some trouble credits out there, but the real estate market generally is still good.

And we have an effective internal process of dealing with our foreclosed properties.

Commercial (ph) demand, we still are not seeing tangible evidence of a pickup in commercial loan growth.

There are some encouraging economic signals in the national picture, but we are yet to see this translate into loan growth.

However, our continued expansion of the franchise through the de novo branching strategy that I talked about earlier into the higher growth potential markets we think will give us the opportunity to participate in increased loan demand once the demand for loans improved.

Now let me turn to our other lines of business, our fee income generators.

And the news is all good.

Contributing to our strong performance in fee income this quarter was good growth in our insurance operations.

These agencies contributed fee income in excess of $19 million this quarter, a linked quarter growth of over 40 percent.

You will remember that we announced the acquisition of an insurance agency at the end of the third quarter, which will allow us to continue growing this line of business.

And we will continue to look for additional opportunities to add to our insurance operations as we move forward.

But in the meantime, the net income year-to-date from our insurance operations are up 12.6 percent over last year.

Morgan Keegan continues to be a success story.

This was the second-best quarter in Morgan Keegan's history.

Net income of $21.7 million in the third quarter, up 27 percent over same quarter last year.

And there was a shift in revenue this quarter to more contributions from private clients and equity capital markets.

Still there is a lot of opportunity to participate in municipal financing in Morgan Keegan's footprint, so we expect continued good production from the fixed income division going forward.

I think we can safely say that the momentum at Morgan Keegan is good, with us opening approximately 15,000 new customer accounts in each of the last two quarters and with customer assets at Morgan Keegan now over $37 billion.

And finally, our mortgage operations had another strong quarter, stronger than we really expected as the quarter began.

Another record of production for this quarter approaching $2.8 billion.

Our two mortgage divisions helped to produce a balanced mortgage platform, which Bryan will talk about more later.

And we have plans to continue growing this line of business by expanding our EquiFirst division into some new market areas on the West Coast.

As you know, we were able to recapture $20 million of mortgage impairment this quarter.

But we decided to offset this with a like amount of loss from early payoff of federal home loan bank advances.

Though the mortgage impairment recapture did not flow to our bottom line but will flow into margin at about the rate of $1 million a month for the next 20 months.

So the bottom line contribution in the third quarter from our mortgage companies, net of impairment or recapture was $27.1 million, versus 14.4 million third quarter of last year for another outstanding quarter for our mortgage bankers.

So all in all we think the third quarter is a very, very good quarter.

We remain committed to our customers; we remain committed to capital management; we remain committed to shareholder value through dividends and stock enhancement.

We look forward to the rest of this year and to '04.

So now let me ask Bryn to come and give you a few more specifics about the financials.

Thank you, Carl.

Thanks to those of you joining us on the call today and thanks to our Regions associates.

We feel good about performance of Regions balance sheet and our business units during the quarter.

Our community banking businesses had a solid quarter and mortgage banking in Morgan Keegan continued to perform well.

Our net income for the quarter totaled $165 million or 73 cents per share, up 5 percent from the third quarter of last year and in line with the second quarter of 2003.

We are pleased our net interest income increased for the quarter and our net interest margin remained fairly stable at 3.44 percent.

Fee income as a percentage of total revenue was a solid 49 percent in the third quarter.

Our overall revenues continued to demonstrate stability and diversity, especially our fee sources of revenue.

Cost control efforts throughout the Company continued to be effective.

Rates on ten-year treasuries rose around 40 basis points from June 30th to September 30th, during a large portion of the quarter the ten-year treasury was up very significantly, as much as 107 basis points.

Following the second quarter we received a number of questions about how Morgan Keegan and our mortgage banking businesses would perform at higher interest rate environments.

Both of these businesses performed very well during this quarter of rising rates.

Over the next couple minutes I will discuss these business units in some details.

In the third quarter Morgan Keegan earned $22 million; as Carl said their second-best quarter ever.

Total revenues were $175 million for the quarter versus $188 million in the second quarter.

We did have a shift in the mix of revenue between the different lines of business; in the second quarter fixed income accounted for 41 percent and private client accounted for 27 percent of total Morgan Keegan revenues.

In the third quarter private client revenues accounted for 30 percent of total revenues and fixed income was down to 33 percent of total revenues.

Revenues increased in each of Morgan Keegan's lines of business with the exception of fixed income.

We are very comfortable with the stability of our business model at Morgan Keegan.

Morgan Keegan has 900 financial advisers; over 90 of these financial advisers are located in Regions Bank branches.

Assets held in Morgan Keegan customer accounts and assets per financial adviser continue to increase, totaling $37.4 billion and $53.6 million respectively at September 30th.

Morgan Keegan has performed very well over a long history in changing economic and interest rate environments.

As we plan for 2004, given an economy and an interest rate environment similar to the current one, we expect year-over-year revenue growth in Morgan Keegan.

One of the things we have not done well enough in the past is describe our two mortgage banking subsidiaries.

EquiFirst, our nonconforming mortgage company and Regions Mortgage, our conforming mortgage company.

I will spend a couple minutes discussing these two key pieces of our mortgage banking business.

The key point to leave you with is that we have a more stable mortgage banking business.

EquiFirst is primarily a nonconforming mortgage company.

EquiFirst originates mortgages in 44 states.

These nonconforming mortgages are sold whole loan, servicing released to third party investors.

In other words, no residual interest is retained.

Nonconforming mortgages by their very nature are less sensitive to movements in interest rates.

EquiFirst lending tends to be more needs-based.

In addition to a home or a consolidation of debt as compared to the more traditional rate term, refinance activity of a conforming mortgage company.

During the third quarter EquiFirst originated 1.2 billion dollars of loans, up $300 million from the second quarter originations and up $600 million from the third quarter of last year.

EquiFirst third-quarter originations had an average FICO score of 657 and a loan to value of 91 percent.

EquiFirst earnings totaled $12 million in the third quarter versus $8 million in the second quarter and $6 million in the third quarter a year ago.

EquiFirst is a business we believe has good growth opportunity and expect to continue expanding.

Later this year we expect to open a West Coast branch to expand our origination and underwriting platform to the western United States.

In our view, Regions production and profitability is less sensitive to the interest rate environment and acts to stabilize our overall mortgage banking business.

Regions Mortgage, our conforming mortgage lender, tends to be a footprint-based lender with a significant portion of its originations coming from the Regions community banking customer base.

Regions Mortgage originated $1.7 billion of mortgages in the third quarter, up from $1.6 billion in the second quarter.

Refinance volume versus purchased money mortgage originations in the third quarter split 65 percent versus 35 percent.

In the second quarter, refinance volume totaled 70 percent of total originations.

Clearly Regions Mortgage had a full pipeline at June 30th and that volume did serve to elevate third-quarter originations.

As we start the fourth quarter, we have a somewhat smaller pipeline of $800 million.

On the expense side, we work very hard to keep the cost structure at Regions Mortgage scaleable as refinance activity was increasing over the past few years.

We used overtime and temporary staff where possible to keep our cost flexible to allow us to reduce costs quickly as refinance activity subsides.

Our servicing portfolio declined $600 million to $16 billion at the end of the third quarter.

Our servicing rights at Regions Mortgage were recorded at 77 basis points of total servicing at September 30th.

During third quarter, rising interest rates and the corresponding decline in refinance activities drove a reduction in the amount of reserve required for mortgage servicing rights impairment.

As a result, we reduced our reserve for MSR impairment by $20 million in the third quarter.

We expect to expand the Regions Mortgage servicing portfolio through origination activity and small, attractively priced low (ph) acquisitions.

Currently we can expand the servicing portfolio at little to no incremental cost to services.

For the third quarter, Regions Mortgage earned $13 million, excluding MSR reserve changes down slightly from the second quarter.

As we mentioned earlier, recorded in non-interest expense is a $20 million MSR impairment reversal.

Also recorded in non-interest expenses are the losses on the prepayment of the Federal Home Loan bank advances totaling $20.6 million.

These losses were incurred upon prepaying $650 million of FHLB advances with weighted average cost of 3.74 percent.

These FHLB losses will result in improved net interest income over the next couple of years.

As you may recall, we do not have a FAS-133 hedge for MSR's but we used our securities portfolio as an economic hedge for our servicing portfolio and as a result of have taken security gains to offset MSR impairment over three of the preceding four quarters.

As we were able to recapture a portion of MSR reserves this quarter, we used the opportunity to restructure a portion of funding and improve our net interest income and margin, essentially partially offsetting the negative impact on the margin of selling securities previously.

Our net interest income increased $2.6 million for the quarter to $369 million.

Our net interest margin declined slightly to 3.44 percent from 3.47 percent in the second quarter.

Average earning assets for the quarter were slightly higher at $44.5 billion versus $44.3 billion for the second quarter.

The increase in average earning assets results from increased loans available for sale somewhat offset by lower average in and other earning asset categories.

On average, our investment security portfolio declined $380 million to $9.2 billion at September 30th.

We did see a continuation of security prepayments, resulting in an additional $3 million of premium amortization.

This excess premium amortization accounts for virtually all, all of the decline in third quarter net interest margin.

We have about $136 million of unamortized premiums on securities at September 30th.

Almost half of those premiums relate to bullet (ph) agencies which do not carry prepayment risks.

The weighted average yield on our portfolio at September 30th is 4 percent with a 2.82 year weighted average duration.

Based on current modeling and stable interest rates our net interest margin over the next quarter should remain within a few basis points of the third quarter.

During the third quarter we recorded a provision of $30 million versus charge-offs of $30.6 million.

Our reserve to loans and leases at the end of the quarter totaled 1.44 percent, and our nonperforming assets increased slightly to $327 million.

Included in nonaccruing loans are 72 million of single-family residential loans or 27 percent of total (technical difficulty) loans.

Included in charge-offs for the quarter are two commercial losses totaling $8.4 million.

These two loans have been rated substandard for some period of time; the first a manufacturing concern expected to emerge from bankruptcy in the next few quarters at a shared national credit.

As a result of the borrowers bankruptcy plan and the most recent shared national credit review, we moved this loan from troubled debt restructuring classification to nonaccrual and charged off $4.8 million or approximately 20 percent of the outstanding balance.

As of September, this borrower is and has been current on its payments.

It is important to remember that our shared national credits total approximately $500 million or only about 1.5 percent of total loans.

Our shared national exposures are generally to companies in our footprint with which we have a very good chance of developing a larger, noncredit banking relationship.

The second large loss in the quarter totaling $3.6 million was to an agribusiness concern in the footprint.

Otherwise, loan losses during the quarter were normal based on the nature of our loan portfolio.

At September 30th, total past due loans were 94 basis points of loans and leases, down $38 million from 1.06 percent at June 30th.

Furthermore, at September 30th loans greater than 90 days were down approximately $5 million.

The classified loans were down 17 percent to $900 million at September 30th.

Overall, we believe credit costs are stable.

Noninterest income for the quarter totaled $348 million, to 49 percent of total revenues.

Compared with the third quarter of 2002, non-interest income excluding securities gains and losses increased 14 percent.

Versus the second quarter of this year, non-interest income declined by $15 million principally due to lower trading, derivative and brokerage revenue.

Offsetting these declines were increases in trust, insurance and community banking related fees.

Noninterest expenses declined $9 million from the second quarter to $456 million for the third quarter.

This comparison excludes the impact of MSR impairment reserve recorded in the second quarter and a reversal portion of those reserves in the third quarter, as well as a better home loan bank advanced prepayment losses incurred on extinguishment of that debt.

Community bank expenses were relatively flat compared to the second quarter and down for the nine months ended September 30, versus 2002.

Our community bankers continued to remain focused on cost controls.

At Morgan Keegan non-interest expense was down approximately $9 million, primarily related to commissions and incentives.

During the second quarter we repurchased -- excuse me -- during the third quarter we repurchased approximately 780,000 shares under our share repurchase authorization.

At September 30th we have 11.8 million shares remaining under our repurchase authorization.

Our community banking loan growth during the quarter was very low.

Loan demand continues to be light although there does seem to be increased anecdotal evidence of interest in borrowing money, it is not translated into significant new loan volume.

Our investment security portfolio declined $370 million during the quarter to $9.1 billion at September 30th.

On the deposit side, deposits were fairly stable as in the past few quarters we continued to reduce our reliance on high cost, single product certificates of deposit.

At September 30th we do remain slightly asset sensitive.

Our present bias, if any, is to increase asset sensitivity in our balance sheet over the next several quarters in anticipation of a rising interest rate environment.

Our net interest margin in a stable rate environment where the yield shape similarly to today's should remain within a few basis points of the third-quarter margins.

We continue to feel good about the balance in our community banking, brokerage and investment banking businesses and our mortgage banking companies.

We believe we are well-positioned with both a broad product set to meet customer needs and a diverse revenue stream to produce solid returns for our shareholders.

In summary, we had continued good performance from our mortgage companies, Regions Mortgage and EquiFirst and for Morgan Keegan.

Our community banking business continued to produce solid results in a slow economic environment.

With that, operator, I will turn it over to you for questions.

(OPERATOR INSTRUCTIONS) Jeff Davis with FTN Financial.

Bryan, a couple questions, one clarification, (indiscernible) my notes.

Could you walk us again through the earnings off the mortgage side between EquiFirst and the overall mortgage operation?

The total mortgage -- there are really three components to the mortgage operation; the total was a little over $27 million.

The two pieces that I talked about make up about 25 million of that plus or minus rounding.

Thirteen million from Regions Mortgage and 12 from EquiFirst.

We also have a mortgage warehouse lender Regions Funding which I didn't talk about, they make up the differential.

And that excludes the MSR recapture?

Yes it does, Jeff.

And Bryan what came (technical difficulty) in last quarter?

Last quarter it was slightly down at Regions Mortgage, about $2 million or so.

And at EquiFirst it was up about $4 million from $8 million in the second quarter.

Regions Funding was flattish.

Okay, so a total of 17?

If I did my math right?

Last quarter?

Yes.

It was a little more than that, I think.

If this is in the release, I just flat overlooking -- I apologize.

Last quarter Regions Mortgage was, call it $15 million.

EquiFirst was 8.

Okay, it's 25.

Yes.

Okay, and a little bit more color and if you said it, I apologize -- I just flat missed it.

When we look at the linked quarter balances on the C&I side you all were down 580 million linked quarter.

Is there one or two things in particular that accounted for that reduction?

Yes, there are.

Probably the biggest piece of it is at Regions Funding.

The warehouse lender loans that they make are included in that C&I portfolio.

That counts for about $200 million of it.

The rest is just the across the board lack of demand on the C&I front.

And then how much is the warehouse, Bryan?

That warehouse is, I think about $400 million at the end of September.

Okay, and then when we look down below that is included in the wholesale loans, is it not?

No, that is not.

That is not.

That is customer related activity.

We don't include that in the wholesale loans.

Okay, and last question, is Alan Morgan on the phone?

Yes, I am.

Alan a question on the equity inside.

C&I is, continues to be soft around the country.

What about the equity pipelines?

Are you seeing that build for smaller, middle market companies?

The lowest point in the business both retail business and the equity capital markets was the spring or the February/March, and since then everything has begun to feel better.

And we do see more activity in our equity capital markets banking, anticipate that in the fourth quarter as we do the pickup in the retail business, which has been improving sort of all summer.

And how are you feeling about those two components of your business lines versus say if we went back five years ago?

Is there more earning power potential there?

Well there is.

The margins are not as great, well they can be in the capital markets business with investment banking.

The margins are not as great in that business as say the fixed income business.

But we have sort of kept all of our people together during this merger with Regions.

So we feel like we are really well-positioned in the retail and the capital markets area.

And of course we like (technical difficulty) have cut a lot of overhead in those areas.

So I think that all of Wall Street, not just us, will be very profitable in those areas as (technical difficulty) continue to recover.

Very good.

Thank you.

Amy Eisner with Friedman, Billings, Ramsey.

A quick question on the deposit side.

Do you expect additional high cost (technical difficulty) in the fourth quarter, and if so, how much?

The vast majority of it has occurred during the first three quarters of this year.

We will have a little bit more; the average cost on those is slightly lower than what we've seen previously.

But the vast majority has already rolled through.

Okay, thanks.

Todd Hagerman with Fox-Pitt, Kelton.

Bryan, I apologize, I missed, I was writing down when you were going through the MBS amortization comparisons.

Could you just quickly walk through that one more time just comparing the quarter on the MBS amortization premium?

The premium amortization was down -- it was up about $3 million versus the second quarter of additional premium amortization, which is about 3 basis points.

We have about $135, $137 million of unamortized premium, about half of that is related to bullet agencies which will not prepay.

The rest is related to mortgage-backed.

And what have you been buying in the quarter?

What, is it still in the bullets or some of the hybrid ARM products?

We borrow a little bit of everything, we bought a few bullets in, we bought some the hybrid ARM product, we haven't changed our mix significantly from June 30th.

In total we have tried to stay on the shorter end of the curve, reduce extension risk in the portfolio.

As I stated, our bias is towards rising rates and asset sensitivity, and so we are trying to manage that very carefully.

Okay, great.

If I could, just a second on a related question going back to the mortgage.

I know you folks have been pretty bullish on both the conforming and nonconforming mortgage businesses as part of Regions.

I thought it was interesting one of your competitors noted this morning that the investment community should expect kind of a transition period.

Kind of on a go forward basis on the cost side of the equation for the mortgage business.

I was wondering if you could just talk a little bit about how, kind of given your high expectations for your businesses, how you are making adjustments on the cost side of the equation as we go forward into '04.

Let me try to answer that one.

Bryan alluded to it a little bit in that we didn't ramp up our costs maybe as much as some others during the peak of the refi season.

We tried to do that with some temps.

We tried to do that with some overtime, and we tried to do that by adjusting our pricing a little bit.

So we do not think we have as much to adjust in the way on a cost side as maybe some others.

But at the same time, we think we are looking at it like we have got a lot of capacity there yet that we can use, maybe on the servicing side and we will be aggressively trying to add some additional servicing.

And through our own bank branches we think there is some production capacity there that we haven't fully tapped.

And so we fully expect to -- the housing market itself is still strong.

And so we fully expect to participate in this, and so we will be looking to continue generating revenues.

And we just don't think we have as far to fall back on the cost side.

Yes, I just make the note I think Bryan mentioned that the pipeline heading into the fourth quarter had dropped;

I think it was roughly in half down to about $800 million or so.

And I am just trying to translate that into the back office support and what adjustments might need to be made.

You are right, those are the numbers I stated, about 1.6 billion to $800 million dollars, and as Carl said, we didn't increase the back office support significantly to support that demand.

We did it through temporary work, we did it through overtime, and we did it by keeping our prices flexible to control demand and flow.

So we think we are well positioned to deal with the decline in overall volume.

Great.

Thanks very much.

Jefferson Harralson with K. B. W.

Can I ask some questions about the moving parts of the margin?

If I am doing my math right the FHLB prepayment that adds one million a month would give you 3 basis points added to your margin next quarter, and it seems like the bond premium amortization could be similar.

So just kind of the back of the envelope seems like you got a 6 basis point add.

Is there anything -- that is (indiscernible) understand about right first of all.

And second, is there some other moving parts such as CD runoff or repricing assets that's going to negatively affect that kind of plus 6 basis point starting point that we seem to be at?

The math on those two components is correct.

They are both about 3 basis points.

The CD runoff won't have as much impact as it has had in the last few quarters, but the volume is almost worked through the balance sheet there, and the average cost of what is remaining is significantly lower.

The offsetting, if anything would be slight further declines in the yields on the investment security portfolio.

And just a natural prepayment of fixed-rate assets that roll through the balance sheet, installment loans, any fixed-rate commercial loans that we have out there.

So there will be a general trend of some decline in the asset side of the balance sheet, but in general we expect it to be stable, up slightly next quarter.

Okay, thank you.

Jeff Davis with FTN Financial.

Carl and Bryan, aside from the quarterly numbers bouncing around, what are your thoughts with regards to earning power?

You all on a reported basis have been fairly consistent in an ROA of 130, 135 and ROE of 15, 15.5.

Is, and I know the pieces change over time and how you get there and I am going to assume it is sustainable.

Can it go higher?

Well, I think the way we are looking at that is we feel really good about the infrastructure we have in place right now.

We feel really good about the diversity of our topline.

We feel really good about our capital strength.

The ingredient we've got to add to that formula is some balance sheet growth, some loan growth and some deposit growth in our community banks.

And that is how we think it will be sustainable by growing -- and we try and tackle that now with de novo branching and some high-growth markets and a sales culture.

And so that is -- I don't know how to give you a real answer there except that that is our overall strategy as to how we will be attempting to make this sustainable.

Clearly as our fee income businesses continue to grow and become more profitable, that will have some influence on it, as that mix we talked about 49, 50 percent of total revenue changes.

Clearly we can take our excess capital that we are generating and do a number of things, one of which would be to leverage the balance sheet.

The other will be to buy back stock, and we have chose to use the balance sheet to facilitate customer needs as opposed to increasing the size of the investment portfolio or put in a lot of long dated or thirty-year mortgages on the balance sheet.

So we are trying to be fairly disciplined in this economic environment until we get into a mode of good customer base demand.

But Bryan you are not working from a strategic standpoint that over the next two, three years you can take -- without leaving the leverage aside -- that you can take the -- and the 15 is absolutely fine -- but that you can take it up to 17.

You are not working with the business model that would tell you that investors should expect that?

We are working with a business model to improve ROE.

We are not working with a target of anything other than working to always be efficient, more efficient in the way we employ capital towards a goal of driving higher returns on equity.

And are you all seeing any thoughts on is deal activity look like, it is picking up some, and I would assume that the bankers are putting more books in front of you all.

Any thoughts on appetite, you haven't done anything there in a while on the depository side?

No, we are seeing several opportunities.

I wouldn't say the pace is picking up.

I would say, though, that the gap between seller expectations and our ability and (technical difficulty) to pay is still pretty wide.

And so I don't see a whole lot of pickup in activity in the foreseeable future.

Very good.

Thank you.

Christopher Marinac with FIG Partners.

Brian, a couple of minor questions for you.

What were the intangible assets, goodwill and CDI (ph) at the end of the quarter?

At the end of the quarter -- let me look to confirm -- I think I've got it here, one second.

Stop focusing on that number so much, we stopped amortizing, we didn't have anything go in there.

I think it was about 1.7 billion.

All right.

Great.

Do you have a figure handy on your weighted average servicing fee?

Are you getting 25 basis points on that or something in that neighborhood?

It is a little higher than that.

It is in the low 30s.

All right.

And then last point on the numbers as sort of a -- can you give us any outlook on the tax rate going forward?

Should we assume that it is sort of in the same neighborhood?

Is there anything that would be driving it up or down in the next year?

We have been stable at 28.5 percent all year.

At this point I don't have any additional guidance around that.

No, Chris.

That's great.

I guess as a follow-up on Jeff's question on M&A (inaudible) what is sort of the pricing plan (indiscernible) your are willingness to look at, I mean, as you look at deals is there a certain dilution threshold that you are not willing to cross over or any color to that?

Our discipline is that we really like to be accretive as we start the second year.

In other words, we would be willing to maybe take a little dilution in the first year.

But that is generally the discipline that we follow, and then we have an internal rate of return hurdle that we also look at.

And then the growth possibilities.

So it is a fairly complicated process that we go through, but right today there is still just a, we think pretty huge gap between what sellers are expecting and what we think we should do.

I understand.

Okay, great.

Thank you very much.

Chris, I want to follow-up.

I found my intangible numbers.

We had core deposit intangible was fairly small.

Our goodwill number was just over $1 billion.

So 1.7 billion, is that too high?

Yes, that is too high.

(inaudible)

A billion, 1.1 billion, yes.

Thanks very much.

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