Regions Financial Corp (RF) 2004 Q3 法說會逐字稿

Good afternoon.

My name is Tanya and I will be your conference facilitator.

At this time I would like to welcome everyone to the AmSouth Bancorporation 3rd 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 one on your telephone keypad.

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

Thank you.

I would now like to turn the conference call over to Mr. Dowd Ritter.

Please go ahead, sir.

Good afternoon, everyone.

This is List Underwood.

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, the 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 is available from today's earnings press release or our Form 10(K) for the year ended December 31, 2003, Form 10(Q) for the quarter ended June 30, 2004, and the Form 8(K) that we filed today.

As a reminder, 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, List, and good afternoon, everyone.

We appreciate you joining us for AmSouth's 3rd quarter earnings conference call.

Also with us today, of course, is Beth Mooney, our Chief Financial Officer.

On today's call I'd like to cover a couple of topics.

First I'll provide an overview of AmSouth's 3rd quarter performance and, second, I'd like to address the recently announced agreements AmSouth entered into with the U.S.

Attorney for the Southern District of Mississippi, the Federal Reserve, the Alabama Department of Banking and FNSN.

Following my remarks Beth Mooney will offer a more detailed review of our 3rd quarter results.

With that let me start with the 3rd quarter results.

As announced in this morning's press release, we reported diluted earnings per share of 33 cents for the 3rd quarter while net income of 119.6 million.

This includes a $50 million charge for payments related to the agreements that we reached with the U.S.

Attorney for the Southern District of Mississippi, the Federal Reserve, the State of Alabama Banking Department, and FNSN which as I said I am going to talk about in a minute.

Excluding the impact of these payments and $4 million of related professional fees, earnings per diluted share in the 3rd quarter were 48 cents, net income was 172 million, and profitability was strong with a return on equity of 20.4%.

Our efficiency ratio also improved to 51.4%.

Let me briefly touch upon a few key points.

First of all, we can't begin to discuss our 3rd quarter results without talking about the impact of the unprecedented four major hurricanes that hit significant parts of our franchise.

From mid-August until the end of September, business has been anything but business as usual.

Our customers, employees and the communities we serve have experienced loss of life, destroyed homes and businesses, loss of personal belongings and long periods without usage of utilities.

There are many ways that this disruption has been felt within AmSouth.

We lost 650 branch business days in the quarter due to being closed, 30% or about 191 of our branch facilities sustained some type of damage.

Seven of our branches had major damage and are in the process of being rebuilt.

New account volumes are down nearly 3,000 accounts for the quarter.

And we had more than a dozen employees whose homes were totally destroyed.

In the storm-affected areas. consumer and small business loan production was down significantly in the quarter from the prior quarter levels.

Our dealer loan volumes, depending on which area, were down anywhere from 20 to 23%, home equity volumes down 22 to 30%, residential mortgage production was off between 30 and 41%, and small business loan production from nine to 24%.

Again, in those affected areas, revenues from investment services were also significantly lower from 20 to 23%.

Careful planning for the inevitable business disruption allowed to us minimize the time that our branches were closed and resume serving our customers as soon as possible.

In many cases generators allowed to us reopen our branches well ahead of power restoration in certain neighborhoods.

All together our branches operated over 300 days on generators during the quarter and used nearly 22,000 of gasolines, many of which we had to transport into those branches.

In some cases, in fact, the branches were still on generator power from the prior storm when the next hurricane hit.

We didn't forget our communities either.

We donated the use of generators to United Ways, Red Cross and even a local water utility as the situations continued to deteriorate.

This was in addition to numerous cash contributions and numerous employee volunteer hours with local charitable groups.

We feel fortunate that none of our employees were seriously injured and, as I said earlier, only seven of our more than 670 branches sustained significant damage.

And obviously insurance covered a large portion of our losses.

Despite these potential distractions, we remained focused on our initiatives that make up our three-year strategic plan and we continue to make good, solid progress.

We were pleased by the growth in key business lines in the quarter, especially commercial and home equity lending.

Average total loans grew $1.4 billion, or 18.9% annualized, compared to the 2nd quarter, with total commercial loans growing about 10.5% on a linked quarter annualized basis and our home equity portfolio increasing by 18.7% on that same basis.

As anticipated, our net interest margin in the 3rd quarter stabilized at 3.44%.

The strong loan growth combined with a stable net interest margin resulted in a 16% increase in net interest income compared to the prior quarter.

Turning briefly to credit quality, trends in the 3rd quarter remained solid.

Net charge-offs were only slightly higher at 36 basis points, while nonperforming assets continued to decline down to 119 million at the end of the quarter.

During the quarter we also continued to effectively manage expenses.

Excluding the charges and those related costs with our settlements, noninterest expenses were down 3.3 million compared to the 2nd quarter.

Overall, we continue to be encouraged by positive trends in our business, particularly with respect to loan and deposit growth as well as credit quality.

We remain focused on our initiatives to grow top line revenues while at the same time containing our expenses in order to drive earnings growth.

Now I'd like to spend a few minutes to review the recent agreements we've entered into with the U.S.

Attorney for the Southern District of Mississippi, the Federal Reserve, the Alabama Department of Banking and FNSN.

As many of you probably remember this matter initially arose out of a previously disclosed fraudulent note scheme committed by two former bank customers, Louis Hamricht and Victor Nance, beginning in the year 2000.

Subsequently the U.S.

Attorney's Office for the Southern District of Mississippi and the Federal Reserve began investigations on whether AmSouth failed to discover this fraud and timely file a suspicious activity report in this matter as required by the Bank Secrecy Act.

The investigations were later broadened to include other specific matters in Bank Secrecy Act compliance in general.

Our goals have been to enhance our compliance policies and procedures and to achieve resolution of these investigations.

To that end on October 12 we entered into a deferred prosecution agreement with the U.S.

Attorney for the Southern District of Mississippi relating to the deficiencies in the bank's reporting of suspicious activities under the Bank Secrecy Act.

We have also entered into at the same time a cease and desist order with the Federal Reserve, the Alabama Department of Banking and an order with FNSN, all relating to AmSouth deficiencies in compliance with the Bank Secrecy Act.

Many of you will be thinking, what exactly does this mean for the bank?

And under the deferred prosecution agreement with the U.S.

Attorney acting on behalf of the Department of Justice, AmSouth has agreed to make a payment of $40 million to the United States and provided that we comply with the obligations under the agreement for a period of 12 months, the U.S.

Attorney has agreed not to take further action against the company in connection with this matter.

With respect to the Federal Reserve and the FNSN Order, AmSouth has been assessed a civil money penalty in the amount of $10 million and in addition the Federal Reserve has indicated it will restrict the company's expansion activities including our branch program until such time as it believes that AmSouth is in substantial compliance with the requirements of the order.

As part of the agreements we've agreed to take additional actions to insure compliance with the Bank Secrecy Act.

Among other things, these actions include independent 3rd party reviews of all of our activities related to provisions of the Bank Secrecy Act, enhanced training of personnel, submission of written plans, the adoption of approved policies and procedures.

As all of you know, the Bank Secrecy Act was amended after September 11 by the U.S.

Patriot Act of 2001, expanding upon the important role the government expects banks to play in detecting and reporting suspicious activity.

I can't emphasize enough how committed we are as an organization, and I am personally, in meeting the high standards in all aspects of this business.

We take our obligations in this regard extremely seriously and are committed to meeting all provisions of the agreement so that we may move forward.

We've already taken a number of remedial actions and are extremely focused on taking further actions to continue to strengthen our processes to insure we are appropriately responding to the bank's obligation including those under the Bank Secrecy Act.

Before I wrap up, I would like to briefly address the financial implications of these agreements for the full year.

As I mentioned, we made a $40 million payment to the United States and paid a civil money penalty of 10 million to the Federal Reserve.

As a result in the 3rd quarter, we took a charge of $50 million comprising those $50 million in payments.

We also incurred charges in the quarter related to a professional fees associated with this of $4 million.

The other obvious question is what impact do these agreements have on our branch expansion program?

I would remind you that we've opened 31 new branches so far this year, 25 of those in Florida.

We have regulatory approval to open nine more de novo branches that are scheduled prior to the end of this year including six in Florida, obviously some of which were delayed by the recent hurricanes.

The effect on branch expansion in 2005 is the subject of continuing discussions with the Federal Reserve and the State of Alabama but we anticipate they will restrict our branching activities as I said earlier until such time that they feel we are in substantial compliance with the requirements of the order.

I would point out, however, that we've opened 98 branches since the beginning of 2002.

These branches have contributed almost $500 million in deposit growth through the first nine months of the year and almost $400 million of consumer and small business loans.

They will also contribute nearly 2 cents to earnings per share this year.

So as you can see, their performance should only improve going forward.

As a result of this charge and the related costs, AmSouth expects to report earnings per share in the range of $1.72 to $1.77 for the full year 2004.

Excluding the charge and the related costs, 2004 diluted earnings per share is expected to be consistent with our previous guidance in the range of $1.87 to $1.92.

As I'm sure you can appreciate, our counsel has advised me that I shouldn't answer any questions today relating to the substance of these investigations.

With that overview, let me now turn it over to Beth Mooney who will take us into more detail on the 3rd quarter financial results.

Beth?

Thank you, Dowd.

Let me share some of the details.

Net interest income for the quarter was 375.9 million, an increase of 14.5 million, or 16% linked quarter annualized.

A higher level of net interest income primarily reflects an acceleration in loan growth during the quarter to 18.9% annualized, in a stable net interest margin of 3.44%.

Other factors contributing to the higher net interest income included 6 million lower premium amortization from investment securities, an increase in low cost deposits and other lower cost funding sources and a modest benefit from the earlier prime rate increases.

Let's now turn to some of the specifics behind the strong loan growth.

Average commercial middle market loans grew 129.8 million, or 11.9% annualized compared to the 2nd quarter.

The growth was broad-based and well diversified by both geography and industry.

New business generation was the main driver of the growth, reflecting our sales calling efforts and new relationship campaign that focused on adding new customers and new business.

Average commercial real estate loans grew 10.2% annualized versus the 2nd quarter and reflects both the funding of record production from the prior year as well as new business in 2004.

Commercial real estate closings this year are on another record pace with production exceeding last year by 29%.

Through September 30 we have closed 4 billion in commercial real estate transactions.

Small business lending was also strong in the 3rd quarter.

Average small business loans increased 12.8% on a linked quarter annualized basis and reflect the success of recent calling efforts.

Our continued emphasis on home equity lending resulted in our 15th consecutive quarter of $1 billion or more of loan production.

And average outstandings on a linked quarter annualized basis were up 18.7%.

New originations of residential mortgages this year have kept pace with 2003's record production.

This quarter we originated $900 million in loans and importantly, 80% of the volume continues to represent new purchases.

There has been a shift in demand away from fixed rate loans to adjustable rate mortgages, resulting in more loans funded on the balance sheet.

These attractive customer based loans in the 3rd quarter increase on average 702 million versus the 2nd quarter.

The investment securities portfolio on an average declined 3.7% on an annualized basis between the 2nd and 3rd quarters.

At period end, the portfolio was 12.6 billion and represented 28% of total earning assets, both below 2nd quarter levels.

Duration of the portfolio also declined at the end of the 3rd quarter to 3.6 years from 4.2 years at June 30.

This decline reflects the shorter duration, more stable cash flows of our recent investment purchases and the level of market rates.

In terms of interest rate risk, our position is essentially unchanged from the previous few quarters and we remain in a neutral risk position overall.

Thus far we have been successful in managing the timing and magnitude of loan and deposit pricing as market and fed set rates have changed and do not expect further moderate Federal Reserve rate increases to adversely impact near term net interest income.

Shifting to the funding side of the balance sheet for a moment, deposit growth did slow somewhat from the strong pace of the 2nd quarter, reflecting what was traditionally a seasonally slower quarter for deposits.

The growth does reflect broad-based sales efforts across all lines of business, overall household growth and our branch expansion program.

Low cost deposits were up on average 3.6% annualized between quarters.

And growth in noninterest bearing checking deposits was a primary catalyst, being up 7.8%.

The interest bearing checking, money market accounts and savings deposits all contributed to the growth as well.

Household growth across the company also contributed to deposit growth.

Consumer Banking achieved an annualized household growth of 4.9% through the first nine months of the year.

Business bank grew household by 8.2% and private client household increased 22.8%.

Finally, we did open an additional eight branches in the 3rd quarter bringing our total for the year to 31 and on average new branches reach break-even around the 15th month of operation.

What is notable about the very solid growth in our loans and deposits during the 3rd quarter is that it occurred during the some of the worst weather conditions on record.

As Dowd pointed out in his remarks, loan production in the loan affected areas was down in many of our consumer categories.

We expect that much of this loss in revenue from this lending activity will be recovered in subsequent quarters as delayed closings get scheduled.

Although timing remains somewhat uncertain, history suggests that business recovers quickly and that growth in both loans and deposits accelerates following events like these.

Turning now to asset quality, credit metrics continue to improve ahead of our expectations.

Net charge-offs for .36% of average loans for the 3rd quarter and of particular note was the 5 basis point improvement to .26% in home equity net charge-offs for the quarter.

The improvement reflects our continued enhanced underwriting standards and strength in collection processes.

Net charge-offs in Commercial Banking of .23% of average loan reflects the continued asset credit quality in this category as well.

The loan loss reserve to net loans ended the quarter at 1.17% while loan loss coverage of nonperforming loans improved to 410%.

Nonperforming asset levels continued their improvement declining to 119.2 million at the end of the 3rd quarter, while the ratio of nonperforming assets to loans plus foreclosed properties and repossessions declined another 6 basis points from the 2nd quarter to .37%.

Today's credit qualities reflects the benefits of our efforts over the past few years to tighten underwriting standards in consumer and commercial lending, to strengthen our credit review function, to improve processes in the collection area and to reduce exposure to certain segments of commercial lending.

Turning now to noninterest revenues, total noninterest revenues in the 3rd quarter were 213.2 million, 5.1 million below the 2nd quarter.

The primary reason for the decline was lower revenues from our wealth management business.

Investment services income was particularly hard hit by an overall slowdown in capital markets activity in the quarter and the previously mentioned lower sales volume in the storm affected areas.

Service charges increased 9% primarily reflecting a higher volume of activity.

Mortgage income at 4.2 million was up slightly from the 2nd quarter and ahead what we would have expected.

Interchange fees were down on a linked quarter basis reflecting lower activity volume.

And as anticipated, portfolio income at 5.9 million for the quarter, declined 2.2 million from the 2nd quarter.

We expect portfolio income to moderate or to continue to decrease in subsequent quarters depending on market rates.

Finally other noninterest revenues reflect a $2.8 million gain recognized during the 3rd quarter on the sale of 85 million of recreational vehicle and marine loans.

The gain included a $1.3 million reduction in the allowance for loan losses on these loans.

We had discontinued lending in this market segment some time ago and most of these loans were not in our footprint.

It is also consistent with our efforts of the last few years to reduce loss volatility in our loan portfolio.

Looking at expenses excluding the impact in the 54 million of charges and related professional fees, total noninterest expenses were 308.5 million, down 3.3 million from the 2nd quarter and represents a linked quarter annualized decline of 4.2%.

The primary drivers of the decline was lower personnel expenses reflecting a reduction in the average number of personnel and lower incentive costs.

Again, excluding the impact of the charges and related costs, our efficiency ratio declined this quarter to 51.4%.

That concludes our remarks and operator, we can now open the line to questions.

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

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

Your first question comes from the line of Jon Balkind with Fox-Pitt.

Two questions.

One technical question for you, Dowd, on the regulatory issue, and then one quick clean up question on credit.

In terms of the expansion issue which you guys are facing, it was interesting to me that the actual cease and desist order didn't say anything about expansion.

Can you provide any color on how that evolved since it's not actually in the order?

Jon, I really can't.

There was, as you note, the word expansion was used in some of it.

I don't know if it was exactly in their order, I'm trying to go from memory now, or in a supplemental.

But basically as I mentioned earlier, it's still between us and the Federal Reserve and the Alabama Banking Department as to branching permission beyond kind of what I mentioned has already been approved to be open the remainder of this year and that's the type thing that we are still talking about and obviously it's in their hands right now.

Okay.

Sounds good.

And then I just had one quick follow up on credit.

Ninety days past due was up quite a bit.

I assume that was because of the storms but is there any other color you can put around that?

Yeah, it went up from 50 to $60 million.

Consumer there is some seasonal trends in there and then in commercial we had several problem loans in the process of being renewed that will fall back out in the 4th quarter.

But that increase in our view does not translate into any loss.

Great.

Thank you very much.

Your next question comes from the line of Jason Goldberg with Lehman Brothers.

Thank you.

Good afternoon.

You mentioned continuing discussions with the regulators with respect to opening new branches.

Any sense in terms of when we'll have a resolution?

Jason, no.

If I knew it would be 30 days I would tell you but I don't know.

We've just entered into these last week and they clarified the ones that are in process that I mentioned, those nine that could be opened.

But basically beyond that we are still in discussion.

Are there any other limitations on growth?

Not that I know of.

And as, you know, as you saw it's just, that's the real focus.

I mean obviously if we were an acquisitive organization and were out doing a lot of M&A activity that would be what would you normally find in there but since that is not a part of our normal business plan that isn't a part of it.

Okay.

And then you I think $4 million in professional fees this quarter associated with these actions.

Looking out we are going to see third party reviews, I guess additional training, probably systems upgrades associated with compliance with the Bank Secrecy Act, et cetera.

Any sense in terms of what the cost over the next several quarters we could expect from these actions?

I can give you a pretty good guesstimate and you're right on target, Jason, with what you're saying whether it be bank Secrecy Act, suspicious activity reporting, and money laundering.

We've already added a good many people over the past few months as additions to staff.

We will be adding more.

There is new training programs.

There will be more.

We have brought in an outside consultant that is a leader in this field in our industry.

They will be working with us for a, you know, several months longer as we finalize all this.

There is going to be an upgrade in technology.

We will be using the same technology that the largest financial institutions in the world use in terms of detecting suspicious activity and customer activity that could possibly be improper.

And all said, when I total all this up, my best guess today is that on an ongoing basis this could add as much as a penny next year.

Okay.

And then just lastly unrelated it looks like the mark-to-market on your securities book was a negative $93 million this quarter.

Much wider loss than last quarter despite rates coming down.

Just some more color around that?

Jason, I think we are going to have to call you back because we actually got almost $100 million benefit in our mark-to-market on our AFS book and derivatives and before I try to venture into what you're looking at why don't we get John Kotmer to call you back because we actually have about a $100 million benefit within the quarter with market rates.

Perfect.

Sorry about that.

Thanks.

Your next question comes from the line of Cameron Hurst with Portal Partners.

Good afternoon.

Good afternoon.

I was hoping you could expand a little bit on any deposit problems that you are having in relation to the cease and desist, whether you are seeing more, I guess on the side of your commercial clients, if there was anybody that was not allowed to hold their deposits at a bank that was under a C&D?

The answer there, Cameron, is absolutely not.

I don't want to in any way make light or slight of what you just asked but as you would expect everything from our call centers to conference calls with people throughout our footprint, we had for the first few days following that announcement, we had a few elderly consumers that called in that had recently moved business wondering if this in any way hurt the bank but I can tell you from a check with our Commercial Banking people, there has been absolutely no activity whatsoever in that regard.

Okay.

Great.

Cameron, if I may I would like to add I think it was important to us that Moody, S&P and Fitch all reaffirmed our ratings and I think that's an important component of the process with our commercial customers.

Okay.

Thank you.

And secondly, on the deposits, the time deposits, I noticed that it was not on the large deposits but on the regular, your yield was on an average basis down one basis point.

But your balances really were actually starting to slide off there.

I was wondering if you had, if you were thinking about it in terms of trying to hold the pricing point and let the balances worry about themselves or what your thinking was there?

Are you referring to the core time books?

That's right.

Yes, we've had some shift between our core time book as well as our national market funding certificates of deposit as part of a funding mix and strategy to help optimize the cost of that book and that's what I think you are seeing in our 3rd quarter.

So would you expect to see that, the balance slide continue and will it be mostly going into the same place?

Actually we have leveled out and have shown some slight growth in the 3rd quarter.

That would be on the linked quarter.

You may recall that in the 2nd quarter we had that significant maturing book so that's some piece of it but at this point in time we see ourselves as level to slightly up on that core time book with core price liability.

Okay.

Thank you very much.

Your next question comes from the line of Kevin Fitzsimmons with Sandler O'Neill.

Good afternoon.

I was wondering if you could give a little color behind the, you know, the large uptick in residential mortgages.

I know, Beth, you said that really it was due to the shift in appetite to arms and decision to retain more of those.

Just trying to get a gauge for going forward what your appetite is there, how much of that do you want to retain, how big do you want that to become of the portfolio?

And of all those arms that you are putting on what kind of years are they in terms of just, are they three or five years or even longer?

Thanks.

Sure, Kevin, be glad to.

First, I think part of what you saw on our 3rd quarter growth was the level of 2nd quarter productions.

We had a 1.4 billion production in the 2nd quarter and if you look at our ending balances in June, some piece of the average growth reflects that 2nd quarter momentum in growth as well as 3rd quarter.

And there has been a definite mix shift this year for arm production and we've been careful to put on price and put on LIBOR, floating LIBOR three and five-year arms, and I would say over 75% of that production is five years or less and we consider it very attractive.

Those are largely private client customer base mortgages.

And I would say our level of growth will flow this quarter because some piece of what you saw in the 3rd quarter was the strong seasonally high 2nd quarter production.

Great.

Thank you.

Your next question comes from the line of Gary Townsend with FBR.

Good afternoon, all.

So none of the mortgage production was purchased, this was all originated.

Is that right?

There was one small purchase that we had entertained of about $150 million in August and on average that was about $60 million of a linked quarter increase.

So it was by far and away customer mortgages.

And then secondly, as I understand it the limitations on expansion are a typical, usual part of this type of C&D related to Bank Secrecy Act.

Is that your understanding as well?

That is my understanding from others that I have read, yes.

Okay.

Thank you.

Your next question comes from the line of David Stumpf with A.G. Edwards.

David, your line is now open.

Good afternoon, can you hear me now?

Yes.

I'm sorry about that.

Is it conceivable, Dowd, that in the wake of the hurricanes that the rebuilding effort, if you will, the deposit, the inflows of insurance proceeds, could that result in increased deposits and the rebuilding effort increase loan volumes?

Well, David if history is any example, yes.

You know, I guess what do they say, I heard one source say 100 years, another one 150 years since we had four storms hit a state in a given hurricane season.

But I would say it's too soon to tell first but a normal pattern from others that over the years I've been here have seen, is the first thing you have is huge deposit inflows from insurance proceeds, and then you have loan demand pickup in terms of rebuilding for the uninsured.

And, you know, it's way too early to say.

We are three weeks into October but I can tell you demand deposits, something has happened.

I've never seen an October spike like we are seeing thus far in demand deposit growth.

So it could very well be related, obviously?

Yes.

Unrelated, from a earnings growth outlook perspective at least shorter term, let's say as we get into next year, the fact that you all are not, might not open as many branches as we thought, although we obviously don't like the longer term ramifications of that from a shorter term perspective obviously it could actually have a net positive impact on earnings given they won't be a drag because they lose money for the first 18 months.

Is that not accurate?

David, that is actually accurate, as Dowd pointed out in his remarks, we've opened 98 branches in 2002.

The 31 we currently opened this year plus the nine additional that are scheduled to open in the 4th quarter will be 40 new branches.

If we were to do that same level of activity in 2005, that's about a 2 cent cost to NIE that won't be repeated and on the other hand we will have that almost 100 branches where we will be getting them into the various stages of break even and into profitability.

So for 2005 earning purposes it will be a net benefit.

We can sort of crudely offset the incremental compliance costs, at least from again for an '05 perspective possibly with the lack of a profitability drag on unprofitable branches, sort of crudely offset each other.

I would say you're right on target.

Okay, thanks.

Your next question comes from the line of Jerry Godfrey with Godfrey Capital.

My question has been asked.

Thank you.

Thank you.

Your next question comes from the line of Chris Marinac with FIG Partners.

Hi, good afternoon.

Hi, Chris.

Hey, Chris.

Beth, can you give us a sort of, you know, weighted average time to recess the variable rate loan portfolio and if it's easier to talk about the arms separate that's okay, just curious if you could give us a little color on that.

Chris, I do not have that schedule with me.

And like I said, I know roughly the mix in what we have been putting on in those LIBOR based three to five-year buckets but why don't we go ahead and follow up with you so we can give you a little more on the weighted average.

Okay.

That's great.

And I guess a separate question, you know, speaking of sort of hurricane impact going forward the next few quarters, Dowd, have you seen in your experience and time that there is an impact on loan pricing in addition to deposit flows and pricing as well?

I could barely hear the last part but what I think you were asking was having to do with loan pricing as we come out into this hurricane.

That's correct.

Basically I think you will see nothing out of the ordinary.

If anything you might see a little more aggressive from some of the banks offering terms to help the people.

I.e., early on people that already have loans you may extend the terms, allow them to skip a payment or two.

And you might see some competitive rate offers in the market for new home mortgages, new home equity lines, new automobile loans, those type things.

But again it's too early to see that but I would expect a fairly competitive market.

Okay.

And, Dowd, do you think that you might get more of the impact in the 1st quarter than the 4th in terms of the recovery?

In terms of -- Oh, I think that in terms of from the hurricane deposit growth, loan growth?

Right.

I think you look for that to be, I mean these things happened in six weeks, I think you're looking at several years that you will see the benefit.

I mean, I heard someone and, you know, I am quoting the source here, that I won't say who but it was someone in the construction end in Florida told me that 30% of the residences in Florida had to have new carpet.

You take something like that, it's, there isn't a carpet mill right now that can manufacture enough carpet to send down to Florida.

It's going to be years before some of these are completed.

High-rises that took two years to build, they are going to have to borrow, you know, be in a position, and furniture and all these things, it's not a one or two quarter, it's a two, three, four-year process would be my guess.

Great.

That's helpful.

Thank you.

Thank you.

Your next question comes from the line of Jefferson Harrelson with KBW.

Hello there.

Quick question on the ongoing costs of the regulatory environment that we are in.

You were mentioning you thought it might be a penny for next year.

You also mentioned training, consulting and technology, a bunch of things that sounded very expensive.

Was it more like a penny a quarter or is a penny a year a good estimate of what do you think these ongoing costs are going to be?

Jefferson, I gave you my best guest at a penny a year.

You know, obviously you purchase a price of software it's going to be depreciated over the life of that software.

The consultant is a front end expense that we'll have early on and is someone who can tell you, I feel like if all 13,000 employees are going to go through some training, as someone I've already been through the past 30 days myself, suspicious activity report training, ethics training and office of Federal Assets Control training, and a lot of that is computer-based and can be done pre and post work hours and once you get that set up a lot of this being done by our own training people.

Okay.

Thanks, that's helpful.

Lastly on MPA's, the improving MPA's have helped you match charge-offs and provisions even though you had a lot of loan growth.

Do you suspect that MPA's are going to continue to shrink or do you think that it has kind of reached bottom on MPA's and hence reached near bottom on the reserve?

As it relates to nonperforming assets if you look at the absolute dollar amount you can tell that at some point while we are extremely pleased with the level, and I think this is something north of a twenty-year record at AmSouth at this level, I wouldn't expect to see much continued further improvement because the absolute size is so low.

As relates to the general reserve we look at this monthly, quarterly and constantly evaluate our position, the mix of our loans and the aggregate quality improvements that we've experienced over the last year suggest that we are appropriately reserved.

All right.

Thanks a lot.

That's helpful.

Your next question comes from the line of John Pandtle with Raymond James and Associates.

Hi, good afternoon, everyone.

Hi, I had a couple of questions.

First the expansion restrictions.

Any restrictions on hiring revenue producing employees, and then is there any restrictions related on buying back stock?

And maybe if you can comment on your capital position.

No, there is no restriction on obviously on hiring people and nothing has been mentioned about share repurchases as well.

Okay.

And could you update, you know, what you see in terms of your opportunity with the Wachovia South Trust acquisition and if you think that these agreements, you know, distract you in any way from trying to take advantage of the potential market share opportunities?

I can answer that pretty directly.

Since the announcement last Tuesday we thought it prudent to call any and everyone that we had a pending offer waiting on the closing of that transaction and I'm delighted to say without exception everyone that we contacted will be joining us as planned.

We do expect to add some revenue producing people.

And obviously hope that they will bring some business.

And that should take place, you know, starting fairly shortly.

Okay.

And then your thoughts on share repurchases and your capital position?

Yes, John, I'll go ahead and as we indicated earlier, given our balance sheet growth, investing in the growth of the company is a far more attractive option than share repurchase and in this quarter other than usual dividend reinvestment we had no active share repurchases and continue our use of capital to support the balance sheet growth is the appropriate thing to do.

Okay, and then one final question, I apologize but the branches that you've opened since 2002, that's providing a 2 cent benefit in '04, is that what you said?

That was correct.

Okay.

So even if you didn't open, say, 30 branches in '05 the expected EPS impact of those branches in '06 would be probably around less to less than a penny I would think?

The net of the two?

Yes.

I would say that math is roughly accurate.

Okay.

Great.

Thank you.

Your next question comes from the line of Ken Usden [ph] with Banc of America Securities.

Thanks.

Good afternoon.

Two quick questions.

First of all you mentioned that the margin is kind of stabilized here.

Are we kind of at the bottom here and should we expect the, you know, the margins should start to move back up as you benefit from higher rates?

Yeah, Ken, I'll go ahead and answer that.

You know, while we've attained a higher run rate in our net interest income we did benefit this quarter from lower premium amortization and we believe that's in our run rate going forward.

We've got solid loan and deposit growth.

So while we do expect some continued moderate increase in our net interest income, I would be willing to say that there still could be some slight margin compression because obviously our growth if you look at it particularly with the heavy emphasis in commercial and home equity loans, are at trends that are less than our current margins.

So I would say it would be a much more stable margin going forward but there could be as much as two to four basis points in any given quarter.

Okay.

I mean, is that like an ongoing, you know, from, does that mean that we could, we should expect just a continued margin pressure?

Is it like two to four, two to four, two to four from here or does it kind of bounce around?

I would say that if we look out to the 4th quarter I can see some slight margin compression but I see it as something that is stabilizing at some level going forward.

Okay.

Okay.

And on that same subject, I notice on the liability side you had really good loan growth the last couple quarters and deposit growth being slower you have gone out and expanded in the other borrowed funds category.

I was wondering if you could just tell the kind of difference between the rates you are paying there and the other borrowed funds and does that have any impact also on the ability to extend margin in the future if you have to go out and get wholesale funding?

On the other borrowed funds if you look at the quarter end compared to the average for the quarter, we get the opportunity from time to time to get some tax treasury and loan deposits that we get actually at a lower cost than any other overnight funding.

And when those come in they typically hit at a quarter end.

If you look at our average it is less than our ending and we had some of those at September 30th and to the tune of 1.6 billion they are 25 basis points less than fed funds but they have already left the bank.

So if you look at our mix on average that gives you a better roadmap for the funding side.

Okay, that's helpful.

Then my second question is on the expense side.

You've managed to really keep a tight lid especially on the salary and benefits line throughout this year.

Knowing that there is seasonality typically in the 1st quarter when you have FICA adjustments but given the context where you've been hiring people in the commercial side, building out wealth management and building a lot of branches can you tell us how you have managed to contain the salary and benefits line and, you know, kind of when do we see that starting to grow with the growth of the business?

Yeah, sure.

What we have done is a variety of things.

We have continued to invest in the right people and the right shares in revenue producing areas but we have also had some pretty tight expense control and staffing control and discipline around our staffing models and other areas to help balance it out from a personnel point of view.

And then in the 3rd quarter as you can see with the investor services revenues as well as mortgage production being less than it was in the 2nd quarter, some piece of the benefit in the 3rd quarter was incentive related to variable revenue generation.

So do you have a pretty good immediate quarter ability to have flexibility on that comp line?

Well, on the comp line it reflects the production levels for the quarter and obviously investment services for the capital market in the 3rd quarter as well as our storm related was lower as a result and then mortgage production was down from the 2nd quarter.

Okay.

Can you just talk us through the 3rd to 4th, any typical seasonality you have in the expense lines outside of obviously what's going on with hurricane related business getting pushed?

I would say that there would be some moderate increases in noninterest expenses into the 4th quarter but I wouldn't think they would be significant.

They would be up slightly and some of those would be revenue based.

Right.

Okay.

Great.

Thanks a lot.

Your next question comes from the line of Matthew Clark with Deutsche Bank.

Good afternoon.

Most of my questions have actually been answered.

But related to production being down and so forth related to the hurricanes.

And the branch expansion being halted mainly until next year, I guess is there any change or any thought to adjust your initiatives for your three-year goals particularly in Florida?

No, they are not, Matthew.

And that is, I talked to people in Florida and frankly you think about it, the people on the ground that have been hiring, training and staffing 40 new offices this year in Florida, if they don't do that, that's more time, effort and energy that they can devote to growing their business and serving their customers down there and I think we will see business improve.

Particularly coming out of the things we talked about, the positives that normally have to happen after the devastation of something like these four hurricanes.

Okay, great.

Thank you.

Your next question comes from the line of Cameron Hurst with Portal Partners.

Hi, I just had one follow-up.

Actually in hearing what you're saying that you expected, and correct me if I'm wrong, but you expected about two cents per share savings if it was in fact true that you weren't able to open branches next year.

Doesn't that back into only about 11 or $12 million in operating expense savings?

And if that's right, then that implies to me that there are some sum costs in these branches planned for next year and I was wondering if you could talk about that?

Cameron, I'll tell you what, can List and I get back to you offline?

I'm not sure off the top of my head I'm following you and I think we can give you a better understanding if we could get a picture of your math and what you're trying to get to.

Sure.

Okay, that would be great.

At this time there are no further questions.

Mr. Ritter, are there any closing remarks?

Operator, there are not.

Let me just thank everyone for joining us today.

We appreciate your time and we will stand adjourned.

Thank you.

This concludes today's conference.

You may now disconnect.