Regions Financial Corp (RF) 2005 Q2 法說會逐字稿

At this time I would like to welcome everyone to the AmSouth Bancorporation second quarter earnings conference call. [OPERATOR INSTRUCTIONS] I would like to turn the conference over to Mr. Ritter.

Please go ahead, sir.

Good afternoon, everyone.

This is List Underwood.

Given the busy earnings calendar today, we very much appreciate your participation in our call.

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

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

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

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

Information on the risk factors that could cause actual results to differ is available from today's earnings press release or our form 10-K for the year ended December 31, 2004, form 10-Q for the quarter ended March 31, 2005, 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 thank you for joining us for AmSouth's second quarter earnings conference call.

Of course, also here with me is Beth Mooney, our Chief Financial Officer.

Today, AmSouth reported second quarter diluted earnings per share of $0.52 an increase of 10.6% over the same period a year ago.

Net income in the quarter reached a record level at $184.6 million, while profitability remained strong with a return on equity of 20.9%.

This solid earnings performance was driven by strong growth in low cost deposits, higher noninterest revenues, excellent credit quality, and solid disciplined expense management.

There were a number of highlights in the quarter.

For example, our total average low cost deposits in the second quarter grew 668 million, or 11% in a linked quarter annualized basis.

This growth was driven by strong increases in noninterest bearing deposits of 13% annualized, and money market deposits higher by 23% on a linked quarter annualized basis.

The increase in noninterest bearing deposits continues to be broad-based throughout our footprint.

As you would expect, however, Florida's deposit growth rates were even stronger than the Company's.

Total deposits in Florida grew in the second quarter 26% on a linked quarter annualized basis, while low cost deposits were up 35%, on a comparable basis.

These results were aided by solid growth in households, and a continued favorable impact from the 81 new branches we've opened in Florida since the beginning of 2002.

Loan demand remained strong during the quarter, as measured by production volumes.

Our home equity and first mortgage originations both exceeded $1 billion this quarter, while commercial real estate closings reached 1.7 billion.

Our net interest margin at 3.40% in the quarter is only changed 4 basis points in the last year, despite 9 increases in the federal funds rate, totaling some 225 basis points and a very flat yield curve.

Total noninterest revenues increased in the second quarter 14% on an annualized basis, versus the first quarter.

Led by increases in service charge on deposits, interchange income and fees from commercial credit activities.

Solid credit quality results also contributed to our earnings growth in the period.

Net charge-offs declined to a historical low of 21 basis points.

And at the same time, our nonperforming assets were also lower, improving to 27 basis points of total loans, plus foreclosed properties and repossessions as of the end of the second quarter.

Disciplined expense control during the quarter resulted in a reduction in total noninterest expense, between quarter, of 4.6 million or 5.7% on an annualized basis.

Finally we repurchased 2 million shares during the quarter bringing our total for the year to date to 7 million shares as of the end of the second quarter.

Before I turn it over to Beth for additional details in the quarter, I want to give you a brief update on two important items.

First, as many of you are aware, on June 27, we did announce the sale of our Mutual Fund Management business to Pioneer Investment Management.

In recent years, it has become more and more difficult, as well as expensive, for smaller mutual fund families to compete effectively, and we made the decision to focus on the key services that have distinguished our wealth management business for the past several years.

Our core expertise is providing asset management, trust services, and financial planning to businesses and individuals.

We do anticipate recording a pre-tax gain of approximately $50 million, upon completion of the transaction, which should be some time late this quarter.

We are evaluating alternatives to redeploy the proceeds of the transaction, which would include further share repurchases, additional debt repayment, or other actions.

The transaction of course is still subject to shareholder and regulatory approvals, and obviously we look forward to giving you more details on the redeployment of the proceeds as we close the transaction.

The other item for update today is our Bank Secrecy Act compliance.

List tells me he has gotten a couple of questions even since we released earnings this morning on this, and let me just say that as most of you know, we've implemented new policies and new procedures, both at the top of the Company and across 40 different business units.

We firmly believe that we have a very strong program in place, as strong or stronger that you would find at a bank several times our size.

Our focus now is on making sure that these procedures are ingrained in the culture of the Company, and I can assure you that is happening every day.

Based on this progress, we have every reason to be confident that we have a very effective Bank Secrecy Act and a money laundering program in place.

We look forward to resolving our agreements and being in full compliance with the terms of our order.

But as you would also suspect, any decision on the resolution is at the discretion of our regulators, as is the timing.

There is no further update we can really give you at this time.

But know that we remain committed to resolving these matters as soon as possible.

Beth?

Thank you, Dowd.

Let's start off with a look at some of the key changes to our balance sheet during the quarter.

What you will find is a continuation of strong increases in low cost deposits, coupled with limited earning asset growth.

This increase in liquidity allowed us to forgo the replacement of high cost time deposit, and to pay down some of our long-term debt.

We continued to have strong loan production during the quarter, but our balance sheet growth was muted by unusually high payoffs related to the current interest rate environment.

At the same time, we elected to let our investment portfolio run off.

These changes resulted in average earning assets of 46 billion in the quarter, a net interest margin of 3.4% and net interest income of $378.6 million.

In general, the interest rate environment continues to be challenging.

As you are aware, the Federal Reserve continued to raise short-term rates during the quarter.

The increase on June 30, marked the ninth time during the last 12 months that rates have been raised bringing the total increase over that period to 225 basis points.

Our margin has weathered these increases, and the resulting flattening of the yield curve.

Over the last year, our margin has moved just 4 basis points.

And we are still essentially neutral and we expect this position to continue to serve us well in coming quarters.

Now, let's take a closer look at our lending areas.

The impact of the current rate environment with its higher levels of payoff has been felt most predominantly in our commercial real estate portfolio.

As many of our developers put more of their projects into long-term financing to take advantage of the low rate.

As a result, loans within this category grew a modest 2% annualized versus the first quarter.

Importantly, though, as Dowd had mentioned earlier, commercial real estate loan production in the quarter continued to be strong with closings reaching $1.7 billion, including June's record production of $725 million, our second highest month ever.

At $1.7 billion in new loan production, that is a $400 million increase over our first quarter production levels.

Our commercial middle market loans on average grew 3.6% on an annualized basis in the second quarter.

Again, the principal reason for the slow down versus our strong growth, we have experienced this past year, is a higher level of repayment.

Replacing those outstandings in this increasingly competitive environment is our challenge.

While closings were consistent with first quarter levels, and pipelines remained strong, the level of growth we have experienced over the last year is getting more difficult given recent trends in pricing.

But we have shown our ability to grow loans and we are confident that our continued calling activity, proven production capability, and the markets in which we do business will continue to present us with the right new business opportunities going forward.

While business lending has been less affected by the interest rate environment, and so our new business efforts there have translated into another solid quarter of balance sheet growth.

Average small business loans increased 11% on a linked quarter annualized basis in the second quarter and reflect the continued success of our calling efforts.

Both our home equity and residential mortgage portfolios posted strong quarterly production numbers.

Companywide originations of home equity products this quarter returned to our historically high levels at 1.1 billion, a 23% increase over the first quarter loan production.

However, increased payoffs in the quarter impacted net growth on the balance sheet.

Both in this portfolio in the quarter was also affected by the $215 million loan sale in the first quarter and we also sold 240 million of loans this quarter.

In both cases, these loans were selected because they came from portfolio vintages containing higher risk, fixed-rate loans.

Newer originations of residential mortgages this quarter were also strong, reaching 1.2 billion, or 27% above first quarter's production.

Adjustable rate mortgages continue to be the product of choice by our customers.

You unlike our home equity portfolio, these loans are not influenced by movements in short-term rates so payoff activity was not as high.

In addition, these loans represent high quality private client customers, and we have elected to retain much of this production on our balance sheet.

Consequently, during the second quarter, mortgage loans on average increased 301 million or 23% on a linked quarter annualized based versus the first quarter.

The investment securities portfolio at period end was 12.2 billion, down 326 million from first quarter levels reflecting our decision not to redeploy cash flows into securities at unattractive reinvestment rates.

The portfolio at June 30, represented 27% of total earning assets, while the duration of the portfolio declined to 3.3 years.

Shifting to the funding side of the balance sheet for a moment, as we have experienced over the last several quarters, low cost deposit growth continues to be very strong.

The increase in low cost deposits was 668 million, or 11% on an annualized basis between quarters.

The growth in low cost funds reflects broad-based sales efforts, the continuing effect of our money market campaign, household growth and the branches opened in recent years.

Within the low cost categories, noninterest bearing deposits contributed growth of 13% on an annualized basis between quarters.

While money market deposits also contributed 456 million, or 23% on an annualized basis during the quarter.

We continue to be pleased with the success of the new money market product offering that was introduced in the latter part of 2004.

Especially the retention level of these deposit relationships.

Deposits from small business relationships were a key in this quarter's growth, increasing 31% between quarters.

The growth in low cost funds enabled us to let our higher cost time deposits run off without replacement.

As you can see, the impact is in our noncore, noncustomer time deposits which decreased by $549 million.

Turning now to asset quality, our credit quality continues to exceed our expectations with another quarter of improvement.

Net charge-offs again reached historically low levels during the second quarter of 2005.

At 17.6 million, net charge-offs were 0.21% of average net loans in the second quarter, a decrease of 2 basis points between periods.

The loan loss provision in the second quarter was essentially equal to net charge-offs, at 17.7 million, resulting in an allowance balance at quarter end of $365.6 million.

As a result, the allowance to net loans was 109 basis points at June 30.

At the same time, the allowance coverage of nonperforming loans continued to increase, reaching 519% at quarter end.

Nonperforming assets decreased to $90 million at the end of the second quarter.

And we are now experiencing the best overall credit quality we have seen in over 25 years as evidenced by our nonperforming asset ratio of 0.27 basis points.

Turning now to noninterest revenue.

Noninterest revenues at $223.2 million for the quarter were up 14% as compared to the first quarter.

Service charges on deposit accounts led the way.

Rebounding during the quarter, increasing 6.5 million, or 30% over the first quarter levels.

An increase in consumer service charges produced the majority of the increase, recovering from the unusually low levels in the first quarter.

Also, you may remember that we experienced declines of the hard dollar corporate analysis fees in the first quarter due to higher earnings credit rates, as well as higher average balances paying for services.

Importantly these fees stabilized this quarter.

Also contributing to noninterest revenue growth were increases in interchange income and commercial credit fee income, up 29% and 108% respectively.

On a linked quarter annualized basis.

Interchange income was driven by an increase in transaction volumes.

We now have over 1.7 million check cards issued to our customers.

The commercial credit fee increase resulted from high demand by our commercial customers, taking advantage of this interest rate environment, to lock in their long-term financing costs with interest rate swaps.

Both mortgage and portfolio income were up, as compared to the first quarter as well.

Included in other noninterest income is a $5.3 million gain from the repayment of 575 million of Federal Home Loan bank advances.

As in the first quarter, we elected to use our excess liquidity to repay these advances at an attractive market price, given that they were subject to being called in the near future.

Also included in noninterest revenue was a $2.7 million gain from the sale of the previously mentioned 240 million of fixed rate home equity loans.

As we continue to reduce our credit exposure to an older higher risk vintage.

Reflecting the disciplined approach to expense management, total noninterest expenses for the quarter were $314.9 million, a decline of 4.6 million, or 5.7% on an annualized basis, from the first quarter level of 319.5 million.

This resulted in an overall improvement in our operating leverage as evidenced by our efficiency ratio declining to 51.4%, versus last year's ratio of 52.8%.

And contributed to our solid performance in the second quarter.

Also, due to our increased liquidity, and the deleveraging of our balance sheet this quarter, we opportunistically repurchased 2 million additional shares during the quarter bringing the total repurchase for the year to 7 million shares.

After these transactions, we have approximately 16 million shares remaining under a previous authorization available for future repurchases.

We would expect to continue to opportunistically repurchase shares and consider our shares to be an attractive investment.

Finally, let me take a moment to reiterate earnings guidance for 2005.

As Dowd discussed earlier, we are anticipating a $50 million gain upon the completion of the sale of our mutual funds.

We are evaluating alternatives to redeploy the proceeds of the transaction, including share repurchases, additional debt repayments, or other actions.

We will give you more details as to those actions concurrent with the closing of the transaction, which is now anticipated to be late in the third quarter.

Excluding any impact from the gains and possible redeployment of the proceeds, we continue to expect earnings per share for the year to be in the range of $2 to $2.06.

That concludes my remarks, Dowd.

Thank you, Beth.

As you just heard we've experienced a solid high quality earnings this past quarter.

What is most pleasing to all of us is they were produced in one of the most challenging operating environments in recent memory.

As always, our goal is to have sustainable quality earnings growth and higher profitability from internally generated growth, driven primarily by the execution of our seven strategic initiatives.

We believe that this combination of focus and execution will also result in higher returns for our shareholders.

Operator, that would conclude our remarks, and why don't we open it up now for any questions.

[OPERATOR INSTRUCTIONS] Your first question comes from the line of Jason Goldberg with Lehman Brothers.

Thank you.

Good afternoon.

I guess you have had now these FHLD gains each of the last two quarters.

Is that something we could expect to continue going forward?

Or have you utilized the bulk of that?

Okay, Jason, I will go ahead and answer that.

Yes, we do have additional home loan bank advances that are subject to being called or -- within the next year.

Whether or not we continue to pay those off is really going to be a function of our liquidity and our strong deposit growth, and if that were to continue, I would say that opportunistically we would potentially continue to replace or pre-pay some of these additional federal home loan bank outstandings that are subject to being called.

We think to replace those borrowed funds with core deposits and realize a gain is something that makes good business sense to us, but again it will be a function of our liquidity and our deposit growth that there is a book of home loans bank advances that do mature over the next year or so.

Okay.

That's helpful.

And then secondly, you mentioned you sold some HELOCs during the quarter, I guess some higher risk called vintage portfolios, I guess, how much of some of these older vintage portfolios and maybe by higher risk are left, and do you anticipate future sales there?

Jason, that's really a function of what comes out of our portfolio risk management group.

They are always looking to prune our portfolio of what I would call higher risk books of business, and if you look at our equity charge-offs this quarter, I think you can really see the effect of these portfolios that they have identified from those older vintages.

So that would really be a function of whether or not we continue to see opportunities in this portfolio for the ability to improve our loss rates going forward.

Okay.

And now, I guess -- okay.

I guess looking at other revenues, you've been running in the 27 to $32 million- range each of the last two quarters, historically that ran in the the 8 to $9 million range, are we at a new run rate or should that number come back in in the back half of the year?

Are you looking at other noninterest revenue?

Correct.

Actually, if I look at, it I think historically, it runs around 16 or $17 million.

Even upwards of 19 million.

What is really in there is a variety of, on a run rate basis, items like safe deposit fee, upcharge income, wire, foreign exchange, so I would say a more normalized run rate for that is around 19 million.

And this quarter, you might notice commercial credit fee income used to be in our other noninterest revenues, and we broke that out separately for our press release purposes because one, it has become a significant piece of business, and we thought we should highlight that separately.

Okay.

And then lastly, you sold the credit card book last year, and the asset management unit announced this year.

I guess are there other businesses you are looking at maybe considering pruning or do you kind of like the cards you have at the moment?

Jason, I think we're very comfortable with the business we have, but as you would expect, we always are looking for how businesses are doing, and what is happening in the regulatory environment.

A year or so ago, I probably would have said that the mutual funds business was -- we were very happy with, but as the outside world has changed, it has made us change our view of that, as have many other banks.

Fair enough.

Thank you.

Thank you.

Our next question comes from the line of Christopher Chouinard with Morgan Stanley.

Hi, good afternoon.

Good afternoon.

Two quick questions.

First, the allowance to loan losses, as a percentage of loans, got down to about 109 basis points this quarter, are we at sort of the bottom there?

Well, Chris, I think this is something that you probably heard in other bank conference calls.

We all have a process that's basically been reviewed by our regulators and our external auditors, that does a variety of calculations based on expected loss rates, and particular portfolio characteristics, and it is really heavy with science that also does have some bit of art in it but at the end of the day the formula produces what is the appropriate level of allowance for losses or provision in any given quarter.

And as we have seen our mix of loans shift to a less risky book of business, than we might have had several years ago, as well as our continued credit performance, at this point in time, this is what our formula would suggest is appropriate, but that is recalculated and reviewed on a quarterly basis, and what it says is it will be a function of the facts and circumstances at the time.

Got it.

And separately, on the securities book, looking at your average balance sheet, it looked like the market valuation and the AFS securities actually was a little more negative this quarter than last quarter.

That seems a little surprising given the rally in bonds.

And also I noticed that the yield on the book declined a fair amount in between quarters as well.

Is that due to taking some gains this quarter, or was there something else going on that explains the reason why these would deteriorate in value?

In terms of the yield on the book, we did indeed, as you can see in our portfolio income line, this quarter, take this opportunity and this rate environment, to sell some securities, and that would have impacted the yield quarter over quarter, and I guess I'm looking at the ending value on that securities book and it did actually improve quarter over quarter.

What were the ending values?

I couldn't find those.

Okay.

If you would go to our press release, and you would look at the consolidated period end balance sheet, it would be in our other comprehensive income line that had an improvement from a negative, that includes primarily the mark on the securities book of 144 million at March, that was down to 73 million at the end of the second quarter.

And why is it so different on the average balance sheet?

I mean it is sort of the opposite.

It looks like it got worse.

On the average balance sheet.

I tell you what.

I'm going to have List call you back with John Kottmeyer and get into more detail.

My off the cuff answer would be it has a lot to do with timing and where rates ended at the quarter but in order to make sure we get that answer fully to you I will have have them call you.

Appreciate it.

Thanks.

Chris, those entries are made at the end of the period and that's the reason why your averages don't reflect that full impact.

Your next question comes from the line of Jeff Davis with FTN Financial Securities.

Good afternoon.

Beth, a follow-on question related to the last question, as the mortgage portfolio is built and the securities are worked down, John has always had a high yield in his portfolio vis-a-vis peers.

Is what is rolling off versus what is rolling on through retaining the mortgages roughly a net even swap?

You mean in terms of rates?

Yes, sort of a mouthful, but in effect, securities are coming down, mortgages are coming up the net is you're not giving up much yield.

I would say on net, we're not giving up much yield.

The mortgage book on average, those rates were probably closer to 5%.

And in the investment portfolio, there weren't many opportunities, I would say, in the second quarter for reinvestment at those rates, but also, in our investment portfolio yield, I should mention is the effect of the conduit that which in any given quarter will always take a couple basis points off our yield.

Okay.

And then I want to make sure I heard you correct.

Is that expectations, given that the world stays roughly the same as the margin holds, in the 340 range, plus or minus, and if that in fact is the expectation, we ought to see net interest income growth start to pick up.

Yes, I'm going to take that in two parts, Jeff.

First as it relates to the net interest margin, I think we said over the last several quarters, that there is basically embedded compression in the margin, as a result of basically the reinvestment yields on our loan portfolio in any given quarter could compress the margin, what you've seen them do, that was created the stability in our margin is coupling that loan growth with very, very strong low cost deposit growth and specifically our demand deposit growth.

So we would say the outlook for our margin is relatively stable, with a bias that in any given quarter, you could see some compression depending on the level of loan growth versus the level of deposit growth.

But those two dynamics have served us very well, as you can see, over the last four quarters and yes in any given quarter, I would expect to see net interest income up, as you can see in this quarter, some piece of what we did when we allowed and elected to allow the investment portfolio to run off and experience what we think are an unusual level of repayments and paydowns in our variety of our loan categories you didn't see much earning asset growth so that is the muted again not only the balance sheet growth but net interest income and we would say we are confident and looking forward and assume our loan growth will be more consistent with prior periods, and this quarter was unusual due to the high level of repayments.

Yes, and Beth, that wasn't a loaded question.

Your core trends on the core balance sheet are excellent underneath.

And one follow-up question for Dowd.

That is, once the written agreement is lifted, whenever that might be, historically, you've grown through aggressive de novo building in Florida.

Does your outlook or thoughts on acquiring whole banks, has that changed where we might see AmSouth as an acquirer?

Jeff, actually for the same reasons you will remember, due to the internal rate of returns and the profitability that we've been enjoying from that de novo, we would expect as soon as permitted to aggressively return to de novo, and you should expect to see 12 to 15 new offices a quarter, primarily in Florida.

Okay.

Very good.

Thank you.

Thank you.

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

Good morning, Dowd.

Or afternoon, rather.

Good afternoon.

I take it from your -- if you can grow branches that aggressively in Florida, you've got these pretty well lined up and ready to go?

Well, basically, we have, due to permitting in Florida, is a much longer time line than any other state we operate in, and environmental type permitting, and basically we have probably two years worth of branch sites that we had already purchased just in preparation for our plan as we looked out several years, so that land, those sites, most purchased, some leased, and some shopping centers, we have those ready, and once the regulators give us the authority to get back in action, we will be ready to go fairly quickly.

Do have you any applications that are already approved and that you're operating on or working on or--?

No, if you remember, under the agreement, we can't branch nor can we apply for branches until, and I'm going from memory here, but until we're in substantial compliance.

I remember those two words in the agreement.

And that's to be determined, as I've said earlier, by the regulators and their decision and their timing, but once we get that recognition from them, we will be off and running.

Okay.

Could I just ask about the tax rate?

It seemed to have moved up in the quarter.

From last, and can you provide some color on that, and otherwise help us with the run rate going forward?

Yes, Gary, I would be glad to do that.

If you look back over last year, our tax rate tends to move between 30 to about 31%.

And as a matter of fact, last year, first to second quarter, we experienced a relatively similar jump in our tax rate.

And if I had to look forward, I would say our current level of taxes is probably reflective of what will -- more reflective of what we will have going forward.

I've calculated an effective tax rate of around 33% in the quarter.

Does that sound right?

It sounds high.

My number would be about 31.1%.

I'm sure your number is better than mine.

Thank you.

All right.

Thank you for trusting me on that one.

I like 31 better than 33 anyway, Gary.

Your next question comes from the line of Cameron Hearse with Portals Partners.

Good afternoon.

Two questions, Gary, I got the tax rate, but in terms of the credit, obviously it was excellent this period, but looking, you said some art, some science, I see you've got the formulaic side of it, do you factor in historical charge-offs into your formula?

Cameron, I apologize.

You're breaking up a little bit.

Could you repeat that about the formula on our losses?

Sorry.

In terms of figuring out your allowance for loan losses, present period, do you look at past periods, historical charge-offs?

Yes, the formula takes into account historical trends and historical performance of various classes of loans.

How far back does that look?

I think it -- and again, I could probably get Mike Willoughby to give you a call.

I think it varies by portfolio where you have to go back and pick up a cycle because it is intended to take a normalized period as well as what it can do in a cyclical downturn and merges the two.

Okay.

That call would be great.

Thank you.

And secondly, on the deposit side, if I looked at domestic period end deposits on a linked quarter annualized it was a negative 2.8%.

And the last time you had a negative number was second quarter '02.

So I was wondering if there is anything driving that weakness this quarter?

There is two things.

One, I always think that it is difficult to look at deposit balances.

Loans ending balances tend to be more predictive than deposits because depending on what day of the week things can move around on your deposits and averages tend to be more reliable.

But I do know our ending balances on a couple of portfolios were less than the averages but not predictive of anything, and the only other piece is we have foreign deposits in there, and those tend to be customer based, are highly volatile, that's money they bring in and out and then the only other piece would be that we had some noncore, noncustomer deposits that I mentioned that we allowed to run off over some national market CDs intended to mature around the end of the month.

Okay.

So maybe -- I was looking just domestically and I know you had some pretty good loan growth on the -- or sorry, deposit growth on the foreign side but even if I look on an average balance sheet on domestic deposits it was 5.1% annualized growth versus, sorry sequential annualized versus a year ago and the same metric it was 14.4% so there's a pretty notable slow down this year.

I'll tell you what, Cameron, with that I think what would be best is if we have List bet back to you and look through it.

My top of the head answer is I think it has to do with that national market CD book.

But beyond that if there is more detail I think it would be appropriate for List to give you a call back.

Okay.

Thank you.

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

Good afternoon.

Hey, David.

Dowd, the comment you made about commercial credit fees, I found interesting, you breaking them out because they're sizable.

I guess for educational purposes, help me understand what -- that's a line item we don't see in a lot of banks broken out.

I guess I'm curious, aren't certain commercial credit fees amortized into interest income?

And if so, why or what makes these fees unique or different?

These would not represent loan fees.

Which would be the ones that would typically be included in your net interest income and amortized.

These are customer-based fees such as, like I said in the quarter, we obviously with this interest rate environment had significant derivative transactions and swaps that we entered into our customers, these would be fees for being on a syndicated loan where we are -- where we are doing that, private placement, letters of credit, so it would be customer-based revenues that are not generated by the balance sheet.

Okay.

That's helpful.

Thank you.

Your next question comes from the line of Heather Wolf with Merrill Lynch.

Hi, good afternoon.

I'm wondering if you can comment on your expectations for future loan pay downs in the commercial real estate and commercial books?

Heather, if I could do that, I may be doing something else, but frankly, in this interest rate environment, and credit quality as strong as it is, there is just a lot of customers that a good bit is def come, that commercial real estate book, as you know, normally they have certificates of occupancy before they go to permanent financing, but in this environment, permanent lenders, whether it be insurance companies or pension funds, are willing to take those to permanent financing, and at very attractive rates and we're seeing payoffs substantially above what we would normally see.

These are good credit quality customers obviously and the pipeline is all I can tell you is the pipelines for new business as Beth referenced is strong but I think as long as there is this type rate environment, customers that are getting near permanent financing would love to do it sooner than later.

Okay.

That's helpful.

And then just a follow up question on the margin for Beth.

You said that you think that the margin would be stable with a slight bias to the down side.

But if I look at the average balance sheet, it seems to me that where you lost most of the spread this quarter, quarter over quarter, was in sort of the leverage that you have built into your balance sheet.

What makes you think that that won't necessarily be a drag in future quarters?

Well, if we model out the various interest rate environments and our expectations for loan growth, we see, and again, like I said with a bias to the down side, as you said, Heather, based on the average spread on our loan side, we still continue to model it to be relatively stable with again the assumption that we continue to have good deposit growth.

So it sounds like you're assuming then that we don't see any further compression in the curve in future quarters?

Is that right?

Is that what you're modeling?

We are modeling basically the current environment being extrapolated out.

We don't assume any benefit from rates, and when we also do the modeling, we look at the current -- the short rates going up 50 basis points with no change over the long rate, so we've looked at it and what we think is the most likely rate environment and we are not anticipating improvement in the curve.

Okay.

So your comment about flat with a bias to the down side means no material change?

I would say relatively stable but again our average loan spread today and for a period of several quarters now, our average loan spread is not 340 basis points but depending on the dynamics of our deposit growth, that's my comment on the bias to down side, is really that our loan growth is at a spread less than our average net interest margin, and it is being supplemented and helped supported by our deposit rates -- our deposit base.

Okay.

But if we see further compression in the curve, am I -- hopefully I'm not looking at this wrong but if we see further compression in the curve, then we will likely see further compression in your margin not from loans and deposits but from the borrowings and securities that you have on your balance sheet?

Again, I think we have modeled that in, but I tell you what, Heather, just to make sure, why don't I have List and John Kottmeyer call you but we've tried to model in short-term rate increases, no increase in loan rates, and as we say relatively stable.

Okay.

Thank you very much.

You're welcome.

Your next question comes from the line of Ken Usdin with Banc of America Securities.

Thanks.

Good afternoon.

I was wondering if you could just give us some color on the card and mutual fund business, as far as -- has the card revenues completely gone away to this point?

And where do we expect to see those continue, to I guess leave if they haven't?

And secondly, relative to the mutual fund business, can you just remind us again of the impact that that's going to have in the second half?

On the card business, Ken, when we announced that transaction last fall, we said that we would sub service those through the end of June, so we will see some de minimus decline in our card income going into the third quarter but again that has all been baked in and with the restructuring of home loan bank debt we did last fall, net-net that was an accretive transaction to us, and on the mutual fund side, we are not disclosing that revenue screen just as we didn't on card, but when we do close that transaction, just like we did in the card transaction, we will kind of outline the impact to the Company on a net basis, as we fully redeploy those proceeds and give that reconciliation.

Okay and my second question relates to kind of the wealth management business, as a whole.

You've been spending a lot of time and it is one of your key goals to kind of grow the contribution of that business but when I look at the trust income and the consumer investment services income line, they've kind of been just bouncing along for the last call it, several quarters.

Any updates on kind of what is holding that line back, and progress, when we would expect to see some progress there?

Ken, what you don't see in taking those two pieces of the three main businesses, you're not seeing there the personal private client services, which is the personal individual households that have our most wealthy households.

Those are growing substantially.

As you will remember last year, it was about a 20% household growth.

This year, so far, I think through the first half of the year, it is 13%.

Net household growth.

These are the consumers that have 10 products per household, extremely profitable to the Company.

That's a main focus in there.

And that has been doing substantially better than in this environment the consumer investment services, which in this rate environment fixed annuities, have not been nearly as attractive for consumers.

And then on the trust side, you've had some of the same thing, in terms of the equity and bond markets in our fiduciary side.

So we're pleased, given the markets, at the way those businesses are doing, but you do have to see that third piece of that to really get at the total contribution from wealth management.

And then Dowd, to follow up on that then where do we see -- those improvements in households, what are the types of areas of the income statement and balance sheet where that should manifest itself?

What you see in that is in primarily in deposits.

In real estate mortgages, many of these private client service households have their real estate mortgage with us, and we have been putting those on the books.

You will see those in the income line from check card, debit card, that type activity.

Some of those are in the small trust side.

But those would be the primary.

The two primary ones being deposit and loan, are the highest growth income contributions from that segment, as I recall it.

Okay.

Great.

Thanks a lot.

Thanks.

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

Hi, Dowd.

I wondered if you could give some more color on the Florida Panhandle, in terms of both the deposits, depth of that market as well as the real estate and other--.

Christopher, can you hear me?

I can hear you.

Could you -- I'm sorry I don't know what happened but we didn't catch but a couple of words.

Can you talk about the Florida Panhandle, and the deposit growth there in addition to the loan opportunities?

Okay.

Florida Panhandle.

I don't have the numbers and we will be delighted to share those numbers in the Florida Panhandle Northwest Florida, as we refer to it, which would be our markets really, Pensacola, Destin, Fort Walton, Panama City, all the way over to Tallahassee, I will tell you this, as we measure our internal sales scorecards and just this morning we're talking about the results as we stack like our geographies, Northwest Florida, in terms of most of our lending and deposit-based scorecards, consumer, business banking, middle market, private client services, they're one, two, or three in just about all of those scorecards.

They would be growing at both deposits and loans currently at rates at least at that level you heard me talk about in the state of Florida.

Because they have performed at the top of the Florida three areas in terms of the second quarter and first quarter scorecards.

So -- and I think that will only continue to increase in that area due to the fact that they -- I won't say they dodged a bullet but they certainly weren't impacted nearly as much in the most recent storm with Dennis, but there is still a lot of rebuilding to do, particularly in the Pensacola and the Navarre area, and you will see a -- there is a lot of money on the sidelines and a lot of construction still to come.

Great.

Are you still satisfied with the asset quality there?

We are absolutely satisfied.

And as you would suspect, in this environment, and as much attention and talk as real estate values, both on the residential and the commercial, our people throughout the organization on the credit side have been through that, and all of our policies and underwriting criteria and we are extremely comfortable with it.

Great, Dowd, that's helpful.

Thank you.

Thank you.

Your next question comes from the line of Jennifer Demba with SunTrust Robinson Humphrey.

Good afternoon.

Good quarter.

Just wondering if you could give us your thoughts on kind of your current perspective on condo lending specifically in Florida, what your total exposure is, any changes you may have made in the last few months?

Okay, Jennifer, I would be glad to give you a little color on that.

Our -- we have not changed our lending practices, because we have honed a really good model of how we lend money, particularly in Florida against condo exposure.

We've got about $3 billion worth of commercial real estate loans in the state of Florida, and of that, about 600 million would represent our condo book.

And when I say we haven't changed, part of why we haven't changed is we lend to top quality developers, who are doing projects on the water, and that is a very important thing, because historically the projects that tend to get in trouble are the ones that are in markets not necessarily on the beach, and we do them against 100% pre-sold, with about a 20% average down payment in cash where the ultimate owner has already put in 20% of their purchase price as part of the presale.

In addition, we're doing what I would call well-sponsored projects with quality developers who also have a strong profit margin in these projects, so we look at the dynamics of our lending there, and that $600 million worth of condo lending in Florida, you got pre-sold, 20% down, and a profit margin and we feel of the developer profit margin typically around 20 to 30% on top of it that we're well secured and well margined in that book of business, and consider it to be attractive, as well as quality business.

Thank you.

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

Good afternoon.

I had a couple of questions.

First if you could maybe expand on your comment about the pricing pressures you're seeing in middle market commercial, if that is geographically focused?

And I'm also wondering if you've made the decision to not compete as aggressively on price to protect your margins and kind of how you see that pricing environment playing out in the back half of the year?

Well, if I had my commercial lenders here, they would tell you -- I don't think there wouldn't be a one of them that doesn't say they feel some level of pricing competition in their market.

But we clearly have pursued a relationship strategy on the right piece of new business, we will -- we are willing to be very, very competitive against our assessment of the ultimate potential and cross-sell of any particular piece of business and customer, and in this particular environment, as we go into, as we've talked about the merger disruptions, we are very aggressively and actively calling on commercial middle market customers that could be impacted by these mergers so I would say that we will compete, but we will compete smartly.

I think there have probably been examples of loans where if the price gets to low you let somebody else have the opportunity to have it but with our relationship and cross-sell block, we're trying to stay competitive on the right deals for the right customers.

Okay.

And then on the topic of merger disruption, could you maybe expand and see if -- talk about if you're starting to move some business, you've obviously, in the past, talked about the number of lenders you've hired from South Trust, et cetera, but is that kind of being lost in this pricing and pay down environment?

Or are you actually seeing benefits?

I would say that again, our production numbers continue to be very strong, and anecdotally we continue to see relationships migrate from banks that are currently going through merger disruption, as we've talked about, we've successfully hired lenders across the footprint who are in some of these different banks, and continue to aggressively call.

The real disruption of when statements change, signs change, and systems change, happens this quarter, in the third quarter, so we have been poising -- positioning ourselves to make sure that we are kind of top of mind when these transactions occur, but we have all along seen good anecdotal evidence that we are getting more than our fair share of these customers as they come into play.

And then if I could--.

John, I would absolutely add to what Beth said that we are very pleased with the production, the pipelines, the new business in these efforts, but the pay downs has masked the benefit on it really showing through.

Okay.

And then Beth, I missed your comment about the existing capacity left under the current repurchase agreement.

Yes, we have 17 million shares that are still authorized under our current authorization.

Okay.

Thank you.

Your next question comes from the line of Cameron Hearse with Portals Partners.

One quick follow up.

The loans held for sale in the period end balance sheet had a pretty good comp this quarter and I was just wondering if some of that was maybe loans that you will be moving this quarter or how much there was left in terms of home equity sales you were still going to do?

Ones held for sale, Cameron represent residential first mortgages.

Okay.

And that is the pipeline of residential mortgages for sale.

Okay.

Then is there -- are you still planning any further home equity sales?

As I mentioned earlier, that those equity sales really surface out of our portfolio management group.

Who look for opportunities for reducing our loss volatility and continuing to meet our targets on home equity loss.

At this point in time, we don't have anything in the hopper per se, but we look to them, as they constantly evaluate our portfolio for groupings of loans that they believe will help our loss rate and the quality of our earnings going forward.

And it really comes out of that group.

Okay.

Okay.

Thanks.

Our next question comes from the line of Jefferson Harralson with KBW.

Thanks.

My question is on the personnel line.

It was down on an absolute basis versus the last quarter and you may have mentioned it and I apologize if you did, was it just the absence of FICA or is there something else going on on that line item?

I would say the largest driver, Jeff, would be FICA, that always spikes up in the first quarter.

Okay.

This is a decent base to grow our models off of then?

I would say so, yes.

I think this it is a pretty good run rate quarter.

Excellent.

And lastly, I just missed what you said, the gain was from the sale of the home equity loans.

That was $2.7 million gain recorded in the quarter on that sale.

All right.

Thanks a lot, guys.

You're welcome.

Our next question comes from the line of Jeff Davis with FTN Financial Securities.

Dowd, a follow-up question.

On the acquisition side, to the extent you were, if you were free from your written agreement, once the South Trust offices become available in Florida, if you were able from a regulatory standpoint is that something that would be of interest to the Company?

Are you talking about, I assume, Jeff, the brick and mortar there?

Yes, sir.

As a matter of fact, buying that brick and mortar would not come under the agreement, and as a matter of fact, as those packages come out, we will be looking at potential brick and mortar there to buy to be warehouse so to speak, to be opened when we're allowed to do so.

Do you know when that is likely to occur, Dowd?

As I understand it, the packages for the bidding are in process as we speak.

Okay.

And do you know, are they going to require a single bulk purchase?

Or are they going to break it up?

I do not know that.

Okay.

Great.

Thank you, sir.

Thank you.

Your last question comes from the line of Todd Hagerman with Fox-Pitt Kelton.

Good afternoon, everybody.

A couple of questions.

This is one, Beth, I've heard you say now for a couple of quarters, that credit is basically as good as it gets, it has certainly given you guys quite a bit of earnings leverage over the last couple of quarters.

Does it get any better from here, do you think?

Or -- and do you have any more leverage, do you think on the consumer side in particular with the recent asset sale?

Well, Todd, I think you're -- I'm smiling as you say that you've heard me say this over the last couple of quarters because I also think the constant theme has been we continue to be surprised by the level of our credit quality.

The one thing about where we go from here is the decline in nonperformings that we saw this quarter, would suggest to me that we still have a very clean credit book without emerging problems.

I think you're to the point particularly in the commercial loan book where it would have to be a particular borrower having a problem, but all the credit metrics continue to approve.

So I guess, if I had that crystal ball, I can't see anything on the horizon that suggests there are any emerging issues and as it relates to books where there might be some incremental opportunity we continue to look at our home equity book as something that could have a slightly lower loss rate than what we're currently expecting, but at the end of the day, it continues to exceed our expectations.

Okay.

So I shouldn't really read too much into it.

There is a slight uptick in the C&I line in terms of charge-offs in the quarter, but you've really continued to get a nice benefit on the consumer side as it relates to charge-off numbers in absolute dollar terms.

Is that just kind of a one-off, or how do you see that trending?

The consumer book or the commercial?

The commercial book.

Commercial does tend to be driven by a loan from time to time, that at this point in time our losses are so low, that it really is a particular loan that would have a problem.

I would say that, again, we're performing against historical levels but if you look back over the last couple of quarters it has been ranging in about the 6 to $8 million range in charge-offs and consumer I think is a trend.

When the consumer will weaken, I don't know, but everything you read suggests they're highly liquid.

They're paying their bills.

They're paying their debt.

And we continue to see the strength in both those books and our charge-off levels are at historical lows.

Okay.

Thank you.

That's helpful and then just unrelated on the money market demand product, Beth, could you give a little bit more color in terms of how you guys marketed that product this quarter?

I know, if I recall, in the first quarter, you were doing some different things with it, as it relates to the rate, and the Fed funds rate, in terms of how you were promoting and marketing that product.

Anything different this quarter that you may have done with that product in terms of how it's influencing the numbers and what you kind of see in the back half of the year as it relates to further Fed rate increases tying to that product?

Sure, Todd.

What we have done is what we think has served us very well is we went out early with a very aggressive product, last fall, in the early rounds of the Fed rate increases, there was not much pressure in the marketplace, and people weren't raising their rates so we went out with a new product which as you know has successfully garnered several billion dollars of new money for us.

As we now go into what is the more mature end of the rate cycle with the Fed, we have continued to hold that rate through June 30, at 2.5% so what was a market leader and generating something north of $1 billion in new deposits going into this quarter continues to grow for us, but at a more moderate pace, as market rates are catching up to it.

So we are going to keep it well priced.

We are going to keep it an attractive product.

Heavy emphasis on retention of those, potentially with modest growth.

But we are not going to outprice the market at this point in time.

It has grown to be about a $4 billion book of business with about 70% of that representing new money.

And that pricing is consistent across all of your markets?

I believe there are some markets that are slightly above and below, but on average, that rate, we do price market by market on average and that rate is 2.5% at the end of June.

And just finally, going forward, is there any sense that maybe you can perhaps give us a little bit more color in terms of how that has been translating into net checking account growth?

You've been talking quite a bit about the household growth.

Just kind of curious what the trends have been like in terms of the net numbers in terms of checking accounts opened?

That money market account, as I remember it, required a checking account, and so when Beth talks about 70% new money, obviously some of that could come from a customer who had an existing checking account, but I think you should make the assumption that there were a tremendous number of new checking accounts that opened along with those money market accounts which represents people, as we look at it, the checking account is the primary relationship account, and so building off that, we think gives us an opportunity to cross-sell into several more households.

And the cross sale on that money market product has been substantially above, even with new customers, our average household cross sales.

So we are extremely pleased with that and are not just in it for that money market dollar alone.

Thank you.

That's helpful, Dowd.

Thank you.

At this time, there are no questions.

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

We appreciate your time.

And we will stand adjourned.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.