Regions Financial Corp (RF) 2005 Q3 法說會逐字稿

Good afternoon.

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

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

Please go ahead, sir.

Good afternoon everyone.

This is [Les Underwood] and we appreciate your participation today given the number of other calls.

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 operation, products or services, forecast 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 10K for the year ended December 31, 2004, Form 10Q for the quarter ended June 30, 2005, and the Form 8K 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 [Les] and good afternoon, everyone.

We appreciate you joining us for our third quarter earnings conference call.

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

The operating environment during the third quarter was one of the most challenging that we've experienced in recent memory.

We saw a further flattening of the yield curve to the point where there was virtually one interest rate, both short and long-term.

In response to the narrower market spreads, the competition for deposit balances and loan volumes intensified, further exacerbating the problem.

And, of course, specific to our region of the country, we experienced the devastation in several of our markets due to hurricane Katrina.

Even with this challenging environment as a backdrop, we did complete the sale of our mutual funds during the quarter.

You will also see there are a number of unusual items included in our results this quarter which, unfortunately, make for an inevitably noisy quarter.

In the following comments we will do our best to describe our performance in a way that tries to minimize that confusion.

Let me begin.

As we announced in this morning's press release, we reported diluted earnings per share of $0.51 for the third quarter on net income of $180.3 million.

Our profitability remains strong with a return on equity of 20%.

The quarterly results include a pretax gain net of deal costs of 44 million from the sale of our mutual fund management business.

As many of you will recall, we announced the sale to pioneer investments back in late June.

We believe our core expertise in wealth management is providing asset management, trust services, and financial planning to our individual and institutional clients.

Because it's become more difficult with the regulatory burden and associated expenses for small mutual fund families to compete effectively, we decided to exit that and focus our efforts and resource on the delivery of those key services going forward.

In the quarter, we also repurchased over 5 million shares of our stock, provided for the effects of hurricane Katrina, and supported other actions designed to benefit future performance.

Beth will give you additional details of these actions later in the call.

Some operating highlights from the quarter included higher total loan growth versus the previous quarter, led by strong increases in commercial real estate, small business and first residential mortgages.

Core time deposits were up strongly as customers shifted their preference to the higher yielding deposit accounts, while our noninterest bearing deposits increased for the 18th consecutive quarter.

Our Florida markets continued to produce impressive results this quarter.

In our Florida markets, our low cost deposits increased 8.5% on a late quarter annualized basis.

Total loans were higher by 13% annualized versus the prior quarter, led by strong increases in commercial real estate and small business.

Household growth in Florida also continues to lead in our footprint in the third quarter versus a year ago, increasing just over 5% for consumer checking, 8% for business banking households, and 20% for private client households.

Our core credit quality continued to exceed our expectations in the third quarter, with net charge-offs and nonperforming assets continuing near their historic lows.

Additionally, we provided 19 million above our net loan losses in the quarter to reserve for the estimated impact of hurricane Katrina and one commercial credit.

Among the challenges in the quarter, the net interest margin was 3.31%, reflecting the impact of the flat yield curve and that shift in deposits towards higher rate time deposits that I referenced earlier, along with increased price competition for deposits.

While the third quarter has traditionally been a seasonally slow quarter for deposit growth, we did see higher noninterest bearing deposits in the quarter.

But for the first time in many quarters, we did experience a nominal decline in total loan cost deposits, reflecting both that increased competition and that shift in the customers preference to the higher yielding time deposits.

However, when you compare to the same period a year earlier, our low cost deposits are up over 13%.

Reduction levels of home equity loans and lines continue to be strong into the third quarter at 1.1 billion.

However, they did not translate into growth on the balance sheet due to the continuation of higher pay off, as we experienced in the prior quarter.

Of course we can't discuss the third quarter results without talking about the impact of hurricane Katrina.

Given the locations of some of our markets whether it be Florida or the coastal areas of Alabama, Mississippi and Louisiana, we have substantial experience over the past two years in responding to hurricanes.

This particular hurricane provided unique challenges with the significant flooding and the broad displacement of individuals and businesses.

We have a well-tuned business contingency planning process, which includes a centralized command center for disaster recovery where we monitor conditions and our responses continuously, 24 hours a day.

Our objective is to secure the safety of our employees, protect our financial and physical assets, and safeguard our customers deposits, all with minimal levels of service disruptions.

During hurricane Katrina we had, at the high point, almost 30% of our branches closed and 20% of our ATMs inoperable.

We were able to restore service to most affected areas rather promptly.

As of today, we have seven branches that remain closed and five ATMs that are down.

All but one of these are in the New Orleans market.

We expect it will take several more weeks to fully restore and reopen these particular facilities.

Despite these efforts, the effects of the storm were significant in the quarter, and included: five of our branches had major damage, two of which will have to be completely rebuilt. 593 branch business days, if you will, were lost.

Consumer and small business banking loan production levels were down, compared to our normal levels.

And based on total lost branch days in the storm affected areas, we estimate that dealer loan volume was down about 15 percent, home equity volumes were down about 17%, residential mortgage production off 25%, and small business loan production, about 18%.

Overall, when you combine the lost revenue from production decreases just mentioned, along with the decreases in other revenue sources such as service charge and investment services income, we estimate the total revenue loss in the quarter to be just under $2 million.

Potentially offsetting this loss of revenue in the future, we saw an increase in new checking account openings during the month of September, many of which were attributable to people displaced by the hurricane and settling in markets, other markets of AmSouth.

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

In many cases, generators allowed to us reopen branches well ahead of power being restored to particular neighborhoods.

We certainly didn't forget our broader commitments either.

We extended a number of special offers to our customers, waived ATM and overdraft fees, deferred loan payments, continued payroll for all AmSouth employees, and provided community funding through a number of charitable agencies.

Most importantly, none of our employees were seriously injured, and fortunately, insurance covered the largest portion of our losses for the physical damage that we experienced.

Eventually, from this tragedy opportunities will emerge.

One of the biggest opportunities for us comes in the fact that the largest parts of our footprint are in close proximity to the most adversely affected areas.

Because this storm created a large number of displaced individuals and businesses, many of them have relocated, as I said earlier, to cities and towns where AmSouth has a presence.

If they were not already a customer of ours, we now have an opportunity to gain their business.

Of course, another great opportunity will occur when the rebuilding begins.

We've seen this with past storms; as emergency relief funds and insurance claims were paid, deposits increased.

This is then followed by an increase in loan demand, much of which will be in commercial real estate, one of our core strengths.

These events, in time, stimulate further economic growth, new jobs, increased property values, et cetera.

Before turning it over to Beth, let me mention one other event that occurred in the quarter.

On November 24, we announced that AmSouth Bank had received a notice from the Securities and Exchange Commission that they may bring a civil action against AmSouth Bank and AmSouth Asset Management Inc., for possible violations relating to the mutual fund management business.

The potential action arose from the SEC's investigation of past practices of the mutual fund services unit of the Bisys Group, Inc., an outside company that provided fund administration and other services to the AmSouth family of funds and many other bank-owned mutual fund families.

We cooperated extensively with the SEC during its investigation of Bisys, and continue to cooperate with them to bring this matter to a prompt resolution.

Beth?

Thank you.

As Dowd just mentioned, this quarter has proven to be a continuation of one of the most challenging banking environments we've experienced in several years.

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

September 20 marked the 11th increase during the last 15 months, bringing the total increase over that period to 275 basis points.

As a result, the yield curve has continued to flatten, pressuring the net interest margin through narrowing spreads, and inviting increased pricing competition for both loans and deposits.

Loan demand, in general, has been good with total loans increasing during the quarter by an annualized 4.8%.

Imbedded within that growth rate, however, some areas have performed better than others.

Commercial real estate, small business, and residential real estate lending, have been strong, for example, while balance sheet growth for some consumer products like home equity lines and loans, have been muted by high pay off levels.

Our approach to our securities portfolio has not changed.

Given this rate environment, we again elected not to reinvest portfolio cash flows, and instead, used that cash to fund loan growth.

Also, we are not extending duration in either our investment or loan portfolios, and while this has a short run impact on net interest income, we believe this is a prudent move, given where we are in the rate cycle.

On the funding side, pricing has become more competitive, particularly in our market, as many mergers are in their final stages of name changes and systems conversions.

We chose to raise rates on money market deposits this quarter to remain competitive, and to protect those new relationships and balances we have gained over the last year.

In a quarter that is traditionally difficult to grow deposits, retention was, in fact, strong, but we did not experience the growth in money market balances that we had recorded in prior quarters.

This decision, which enabled us to retain those deposits, did have a cost in this quarter, both in lower net interest income and a narrower net interest margin.

We have talked with you before about how our growth in low cost deposits has allowed to us keep our net interest margin relatively stable over the last several quarters, despite the imbedded margin compression that stems from higher loan growth.

This quarter, loan growth was again solid, but without the benefit of growth and low cost deposits, and the increased cost of those deposits, coupled with the flatter yield curve, our net interest margin has narrowed to 3.31%.

Our earning asset base, which has been constrained by our move to reduce the level of fixed rate assets, averaged 46.3 billion for the quarter; the resulting net interest income for the third quarter was $374.7 million.

Now let's have a look at some of our lending areas.

As you may remember, last quarter our commercial real estate portfolio experienced continued strong production, with originations in excess of 1.7 billion.

This production was offset, however, to a large extent by unusually high levels of pay-offs.

This quarter, production was again robust at 1.9 billion, but pay-offs returned to more normal levels, resulting in very strong annualized growth of 18%.

The production was solid cross our entire footprint, but with our Florida operations again setting the pace for the company.

Demand was generally slower in our commercial middle market lending area in the third quarter.

However, our pipelines are at record levels, which bodes well for the traditionally strong fourth quarter.

Small business lending posted another outstanding quarter, with average small business loans increasing by 14% on a linked quarter annualized basis.

Our calling efforts, in particular our emphasis and focus on customers in the 5 to $10 million sales segment, have contributed to our success in this area.

Both home equity lines and residential mortgage portfolios posted strong quarterly production numbers, despite some slow down in storm affected areas.

Company-wide originations of home equity products this quarter were again healthy at $1.1 billion.

However, customers continue to pay off high costs variable rate loans at record levels, impacting our net balance sheet growth.

Currently, our customers are paying off their equity lines at a 6% a month, which translate into a 72% annual pace, making it challenging to grow balances in this current rate environment.

Growth in this portfolio was also affected by the second quarter sale of 240 million of fixed rate product from portfolio [vinages] containing higher risk loans.

Overall, excluding loan sales, equity lines and loans grew at a 3.9% annualized rate in the third quarter.

New originations of residential mortgages this quarter were again strong, reaching 1.1 [billing].

We have begun to sell, on a flow basis, some of our arm production, which continues to be the product of choice by our customers, and to retain only the highest quality private client customers on our balance sheet.

Consequently, in the future we expect balance sheet growth of residential mortgage loans to grow at a slower pace.

During the quarter, mortgage loans, on averaged, increased 124 million, or 8.9% on a link quarter annualized basis versus the second quarter.

The investment securities portfolio at period end was 11.9 billion, down 390 million from second quarter levels and down 716 million during the last six months, reflecting our decision not to redeploy cash flows into securities at the current unattractive investment rate.

The portfolio at September 30 represented 25.3% of total earning assets, down from 26.5% last quarter, and the duration of the portfolio was 3.7 years.

Shifting to the funding side of the balance sheet for a moment, total deposits are up an annualized 6.4% over last quarter, led by an increase in core customer time deposits, and a solid increase in noninterest bearing funds, partially offset by a decrease in other low cost deposit sources.

A change in customer preference has been the catalyst for a shift in this quarter's deposit funding mix.

Core consumer time deposits were up by 356 million this, quarter reflecting our customers' increasing willingness to enter into term deposits given their higher yield.

This increase in consumer time deposits occurred while low cost deposit sources have been slowing.

Specifically, although noninterest bearing funds were up by a solid annualized 6%, total low cost deposits were down versus the previous quarter by 141 million, or an annualized 2.3%.

The driver of growth in low cost deposits in recent quarters has been the success of our money market product.

Over the past few quarters, we aggressively sought these deposits and new relationships through a combination of marketing and attractive rate offerings.

As interest rates have continued to rise, money market pricing has faced increased competition, both from offerings at other financial institutions, and from our own CD rates.

Deposit growth has been a core strength for AmSouth, and we have responded by maintaining competitive money market rates, and by offering competitive rates on midterm certificates of deposit as well.

While this had a near term cost in the quarter, we believe it will provide future benefit by helping us accomplish our retention goals of these attractive households.

Low deposit growth continues to be a key strategy for us in every line of business and every geography.

Toward that goal, we have initiated new campaigns in the third quarter designed to generate new household and customer relationships and, more importantly, generate low cost funds.

The most significant was the introduction of a new free checking with check card reward campaign for both consumer and small businesses.

It was introduced in August and was supported by a significant new marketing effort.

While this program has been in place less than one quarter so far, we have been extremely pleased with the early results.

Since its introduction, we have experienced grossed annualized checking account volume increases of 25% and 24% for consumer and small businesses, respectively.

Related incremental interchange volumes have increased, too, as these new check card issuances have come on line through customer activation, and also with the increased usage of existing cards.

We expect the majority of contributions from this campaign to occur in the fourth quarter and continue into next year.

The timing of this campaign was no accident.

As you know, many of our competitors were involved in mergers in late 2004 and early 2005.

The kick off of our initiatives was scheduled to coincide with merger related sign changes, systems conversions and so forth, which historically marked the height of customer disruption and dissatisfaction.

This should aid significantly in the success of our program.

Turning now to asset quality, our credit quality continues to exceed our expectations as evidenced by another quarter of outstanding quality metrics.

Net charge-offs were again near historically low levels during the third quarter of 2005.

At 15.8 million, net charge-offs were 19 basis points of average net loans in the third quarter, a decrease of two basis points between periods.

The loan loss provision in the third quarter was higher than net charge-offs by 19 million.

As Dowd mentioned earlier, this was largely driven by providing 15 million of potential losses from Hurricane Katrina, and a provision for a commercial credit.

Our allowance balance at quarter end were 384.6 million, resulting in an allowance to net loans of 1.12% at September 30, and allowance coverage of nonperforming loans of 478%.

Nonperforming assets increased to 98.1 million at the end of the third quarter, and our nonperforming asset ratio is now 29 basis points, still near the best overall credit quality we have seen in over 25 years.

Turning now to noninterest revenues, noninterest revenues totaled 259.6 million for the quarter, and include a $44 million net pretax gain on the sale of our mutual fund business that Dowd described in his opening remarks.

Excluding this gain, noninterest revenues were 215.6 million.

Service charges on deposit account showed continued strength, increasing 3.7 million or an annualized 16% over the second quarter levels.

Trust income was lower in the third quarter versus the second quarter, primarily due to the impact of the sale of our mutual fund management business.

In future quarters, trust income will be lower by approximately 6 million a quarter as a result of the sale.

Mortgage income was 1.1 million higher than the second quarter, and commercial credit fee income at 12.2 million for the third quarter, was lower following the especially strong results recorded last quarter.

Security gains were minimal this quarter due to the interest rate environment and our previous decision not to reinvest portfolio cash flows back into markets at unattractive reinvestment rates.

Also included in other noninterest revenue was a $3.8 million gain from the prepayment of 400 million of federal home loan bank advances, which were subject to being called in the near future.

Now let's look at noninterest expenses.

As Dowd noted, this has been a noisy quarter that includes a number of unusual cost.

Without these items, our core noninterest expense level in the third quarter would have been similar to what we've reported in the last two quarters, in the range of 315 to 319 million.

The first item worth noting is higher marketing cost, which reflects the advertising and related costs of the new free checking with check card rewards campaign that I just described.

This campaign added 3.8 million of expenses to the quarter, but as mentioned before, it is already producing solid returns in terms of new household and deposits, and we expect future periods to benefit even more.

Professional fees were 4.4 million higher than the previous quarter, primarily due to additional consulting work related to our bank secrecy act and anti-money laundering compliance programs.

The consulting aspect of implementing these compliance programs will be winding down over the remainder of this year and early next year.

Finally, other noninterest expense is up significantly in the quarter, and includes a $1.7 million accrual for uninsured property losses related to Hurricane Katrina.

This accrual is in addition to the 15 million provided for estimated credit losses from Katrina.

We also set aside funds for costs related to the exit of the mutual fund management business, plus other legal and regulatory matters.

Let me close by pointing out that we also accelerated the repurchase of our shares this quarter, with repurchases totaling 5.2 million.

This brings shares repurchased for the year to 12.2 million.

We consider our shares an attractive investment and we will continue to repurchase them as our growth and capital levels allow.

That concludes my remarks, Dowd.

Thanks, Beth.

Before closing, let me give you an update on two very important items.

The first is the deferred prosecution agreement with the justice department.

We announced last week that we have fully complied with the requirements of that one-year agreement, and I'm pleased to tell you that it has dismissed and is now completely behind us.

Second, when you combine this development with our progress in building a much stronger bank secrecy act/anti-money laundering program, including the implementation of new policies and procedures throughout the company, conducting over 160,000 hours of training with all of our employees, installing state-of-the-art software and technology, adding key personnel, and most importantly, our commitment to sustaining our effort, over time, in this critical compliance area, we have already started construction on and have filed applications to begin opening branches in the first quarter of 2006.

Most of these initial branches will be located in our fastest growing markets, primarily central Florida and west coast Florida areas.

Our plans would be to open 15 branches throughout the first quarter, and that plan would call for 15 branches per quarter for the remainder of 2006.

That would conclude our remarks.

Why don't we open it up for questions?

[Caller Instructions].

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

Good afternoon, a question for Beth.

Beth, you referenced that going forward you will be selling the adjustable rates more on a flow basis.

Is that simply an asset liability issue, or is there something on the consumer side that you see, either specific to the portfolio or more from a macro where you want to cut back.?

Jeff, actually I would say that would be more of an asset liability management.

As we ramp up and continue to expand our mortgage operations, and with the shift in customer preference to adjustable rate mortgages, we view it as an important outlet for us to be able to grow our business and meet our customers needs.

And then, obviously, given the nature of those being three to five-year arms, they do perform in that period of time more like a fixed rate loan, so we want to make sure we have a good balance of putting the highest quality loans on our balance sheet and the ability to have the capacity to sell in order to support our growth plan.

And then a follow up, you referenced high prepays on the [heloxes].

As you step back and look at your various consumer portfolios, is the consumer behaving fairly similar to how he or she did in 2000 when rates were moving higher, or is there something different this time, sinister or not, with 3 dollar gas over laid and presumably more levered balance sheets?

I don't intend for that to be a loaded question, although I guess it sort of sounds like it.

Jeff, I think what we've seen in the past two quarters, we've had tremendous production, just what we would expect north of a billion dollars both quarters; its resulted in almost no growth on the balance sheet due to pay-offs, and what we are seeing is almost back to that yield curve.

Why pay a prime rate home equity loan if you can refinance that 30 years at a lower interest rate?

As we teased a little bit, the consumer is smarter, they've got higher credit scores and much more availability and we are just seeing a tremendous amount of that taking place.

And until that long end of the curve goes up, I don't know that I see that stopping any time soon.

And Dowd, consumer feels okay to you?

Absolutely.

Credit scores, delinquencies, all of the indicators, we still feel very, very good. mean the quality of the new business going on the books is every bit as strong as that that's paying off early.

Very good.

Thank you.

Your next question is from the line of Todd Hagerman, with Fox-Pitt Kelton.

Just a follow on to the earlier question.

Beth, just wondering as you think about adopting more of that mortgage model, if you will, I was just thinking in terms of the balance sheet and the earning asset mix.

As you look out into '06 and as rates continue to move higher, as you mentioned, the bond portfolios continue to trickle down here over time; how are you looking at the balance sheet as you manage between the decline, the bond portfolio, and the growth in loan portfolio, and as you see that shift in the earning asset mix going forward, particularly as you adopt that mortgage flow sale model?

Yes, Todd, I would be glad to answer that.

I think as we look forward, again, in this current rate environment, with the flattening of the yield curve, we thought, as we said several quarters now, that it's been important to allow that investment portfolio to run off.

We don't see reinvesting those cash flows out the yield curve as an attractive investment alternative now.

We have had success in generating good private client mortgages, but for many of the same reasons that we've been allowing some of the investment portfolio to run off, we would like to continue to grow that business and want to make sure we have a continued balance of sources of whether we put that on our balance sheet or we sell it on a flow basis, so we can manage the balance sheet concentration.

As the yield curve, as Dowd just mentioned, if it were to continue to steepen, there would be a point in time where we would constantly be making decisions about whether or not we would want to invest in additional investments or retain more of those on our balance sheet.

But in this current rate environment we think the liquidity of both is important.

Okay, that's helpful.

If I look at the balance sheet today and I look at the mix, say, of the consumer related assets on the balance sheet, particularly the home equity product, mortgage related product, obviously that concentration of assets has trended up over the last year or so as you have reduced the risk profile on the balance sheet.

Do you see that pulling back some, changing that much as we go into '06, given kind of what you've talked about with the rate environment, so forth?

No, Todd , I would not see us necessarily trying to remix those concentrations.

Again, we will put on our balance sheet attractive consumer, commercial and a variety of related loans.

As we go into next year we are hoping for strong and even into the fourth quarter, stronger commercial loan growth, but we are not uncomfortable with the concentration or levels of our consumer portfolios and feel very strongly about our underwriting metrics and the pricing of those portfolios.

So we would not do anything to specifically alter those intentionally.

Okay.

Just lastly, just in terms of what you have been adding on the balance sheet as it relates to consumer product, anything different there in terms of the type of product that you have necessarily been retaining on balance sheet over the last couple of quarters?

No, there have not been any differences.

Okay.

Very good.

Thank you.

Your next question comes from the line of Gary Townsend with Friedman, Billings, Ramsey.

Good afternoon.

How are you?

In terms of the sale of the mutual fund business, what part of the quarter was that done?

And, secondly, what do you plan for the use of those funds coming on?

Sure, Gary.

We closed that in the last week of the quarter.

So it was something we successfully closed right around September 25 or 27 and that was announced at that time.

Obviously, the gain was realized in the third quarter, and was able to help support what I think are a variety of items that we might not have contemplated when we originally announced this transaction, such as support for the effects of Hurricane Katrina, the extra provisioning there, and allowing us to do a variety of things on the expense side, to both invest in the future, as well as make sure we had fully taken care of a number of legal and regulatory matters that we think will serve us well as we go forward.

So, those funds have been largely spoken for.

They have been largely spoken for.

And the other thing is, we also accelerated our share repurchase.

We did that consciously if you look at our Q filing in August.

We very aggressively went into the market in July, managing our capital position to aggressively repurchase shares in the quarter.

I think you also mentioned that you are anticipating an increase in commercial loan volumes or, in the coming quarter or quarters.

Could you just provide a bit more color with regard to what is behind that expectation?

Certainly.

One, is the fourth quarter has always been a strong quarter for us.

If you look at commercial loans, they do have a seasonality for them, and fourth quarter has traditionally been a strong quarter.

But more importantly, two indicators -- one, if you look at our ending loan balances versus our average for the quarter, they ended higher, which indicates strong momentum as we go to the fourth quarter.

And something I mentioned in my remarks that is perhaps the best indicator, we have record pipelines going into the fourth quarter.

So we feel good about our mix of commercial activities and future growth.

And not everyone agrees with this as a proper measure, but do you see utilization rates increasing presently or not?

Actually, that is something we talked about in past quarters, and I hadn't mentioned it yet, but our line utilization remains about, it spikes up and down but it's within 40 to 45%, and so it really doesn't have a material impact in this current environment and the level of our outstanding.

So that's been pretty flatish.

Thanks for your information.

You're welcome.

Your next question comes from the line of Jason [Sayo] with Standard & Poor's.

I just had a questions regarding the increased expenses for this quarter; what we could expect for the fourth quarter, specifically in regards to marketing, professional fees and other noninterest expenses.

Thank you.

Yes, Jason.

What we said was, we did see an increase level of expenses in this quarter that would not necessarily reflect our core.

Our first and second quarter ranged between 315 to 319 million, which I think is more indicative of what our normalized expense level would be.

If we go into fourth quarter, as we said, we made a conscious decision to invest in that third quarter marketing campaign.

And that was probably, not be repeated at those levels in the fourth quarter.

As it relates to professional fees, we are really trying to bring in the consulting cost to finalize some of the work we've been doing under our Bank Secrecy Act and those will be declining from third quarter levels and winding up in the early 2006.

As far as the other expense, I believe you had 1.7 million uninsured damage cost?

That would be correct for hurricane Katrina.

That would be a non-recurring item, correct?

That would be event driven and non-recurring, that's correct.

Okay.

Thank you.

Your next question comes from the line of [Fred Fair], with [Fair] Foundation.

I've got two or three questions.

Did you happen to have business interruption insurance on your branches that you lost in there?

And did I understand you correctly to say that marketing costs for the quarter was up 3.8 million?

First, Fred, to your question about interruption insurance, yes, we do have business interruption insurance.

We are working with our insurance providers to calculate the costs of what we have been interrupted and will be making claims for those amounts.

So, yes, we do carry business interruption insurance.

And then, second, yes, in the quarter we had an increase second to third quarter, of $3.8 million to support this new marketing campaign that we described.

Okay.

Now in your other thing that you said professional fees and et cetera were up 4.3 million, I believe?

That's correct.

How much of that is related to Sarbanes-Oxley?

Primarily in the quarter, that would be related to consultants expenditures related to our Bank Secrecy Act and anti-money laundering that has been part of our efforts over the last year to strengthen our policies and procedures in that regard.

Sarbanes-Oxley is imbedded more throughout the year.

So the increase this quarter would be related to consulting expenses.

What was your average cost of the 5.2 million shares you repurchased in the quarter?

They were roughly $27 a share.

Too bad you didn't wait until today, huh?

I said we like our shares.

They were opportunistic.

Yes, well I like them too.

I bought more of them at $26.90, I think, right around in there.

I was probably competing with you.

But, yes,I like them, too.

I guess the final question in here is, how much do you think that marketing -- your marketing expense this year has increased over last year?

If you look year over year, we are probably year-to-date relatively flat with the levels of expenditures we had last year, but we were lower earlier in the year, and really did create a campaign as we went into this third quarter and all the mergers and conversions were going -- taking place to really emphasize this third quarter when we feel many of the consumer households and small businesses were going to be in play.

Do you think this rate of marketing increase will continue in the fourth quarter?

No, we do not plan to replicate the expenditures relative to this campaign we had in the third quarter.

We will continue our basic marketing and direct mail and so forth, but we did have a specific campaign in the third quarter that we concluded at the end of September.

Are you retaining most of your home loan portfolio in there, or are you selling some of, part of that off?

On the mortgage front, we sell basically all our fixed rate production and then we have developed selling some of our adjustable rate mortgages in order to support our volume.

So we do a mix on the adjustable rate as retaining on balance sheet and selling and then on a fixed rate we would sell those.

How big is that portfolio now that you've retained?

About three and a half billion.

Billion?

Billion.

Thank you.

You're welcome.

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

Beth, I think you went over the amount that the quarter was hurt, in terms of revenue that was lost by the disruption.

If you could just hit that again, and I guess, more importantly, looking ahead, do you see any signs of that starting to come back and do you have any initial assumptions on when that would return?

Thanks.

Kevin, be glad to.

We feel like, again, our presence in the storm affected areas is not as significant as some of the other banking entities in the area.

About 15% of our footprint was in storm related areas.

So as we calculated it, we felt there was about a $2 million revenue impairment that we -- or lost revenue opportunity that we incurred in the quarter.

Some of that has carried into the fourth quarter.

But more importantly, as Dowd mentioned, at the tail end of these storms you typically see a spurt in deposit growth, loan activity and there will obviously be significant rebuilding along the Gulf Coast.

So it is -- it was a decline in the quarter for us.

We have seen certain areas not fully rebound, but we are anticipating, as we go into 2006, that there will be probably a revenue opportunity versus what we were experiencing going into the storm.

Okay.

Great.

And just as a follow up, it seems like you've invested this money in the marketing campaigns for, to coincide with the merger, I guess, the sign change and the systems integration and all that.

And I know you look back historically and say, well, this is historically when the most disruption is happening and I'm sure there is a fair amount that is -- you can expect and feel good about, that's going to happen.

But do you think it's fair to say that, looking back historically, that companies have probably gotten better at doing this, at integrating and doing it so that there isn't as much disruption and -- I guess what I'm asking is, is there any risk of you over estimating this positive impact you are going to get from this?

Thanks.

All right.

I do think you're right.

Compared to mergers that used to take place years ago, I do think the large banking companies have gotten better at integrating their systems, and there's less disruption than there used to be around mergers, but it is still a point in time of change where consumers and small businesses, commercial customers, are dealing with new faces, new products, new names, new statements.

So that is a point of inflexion for what we would consider to be multiple opportunities.

One thing we did, as part of this marketing campaign, was not just to spend dollars on being, what I would call, top of mind.

We also introduced new products, so we tried to make sure that as we did this, that we had a compelling offer as it were.

This new free checking would be best-in-class in the market.

Our check card reward program.

There aren't many banks that have the opportunity for cash back on your purchases at participating retailers in your bank account the next quarter.

So we coupled it with not only th sense that it is a point of opportunity, but that we also needed to have a new product offering that distinguished us in the market.

I would also add to what Beth just said that, when we sat down with our consumer and marketing people and really all agreed to spend this extra money in the third quarter, it has to do with checking account households and with this new check card program as Beth just described.

I can't tell you that one month makes a trend, but if I take last month's number of revenue from this new product, we will recoup the entire expenditure increase in marketing in less than a year.

Okay.

And one last question, Dowd, I heard you mentioning that you, there is, that you have plans going into next year for new branches.

Is that just, did you characterize that as being just inevitably when the C and D comes off that you are ready to roll with these branches once that happens?

Well, basically, I'm not allowed and can't comment on anything for our regulators as to when they will or won't.

What I was trying to say is, that the deferred prosecution obviously went away last week.

We immediately, that day, filed applications with both of our regulators and we would expect to hear something from both of them very shortly.

And as I've stated, we do have 15 branches primarily in those two fast growing geographies in Florida under construction as we speak.

Okay.

But I know this is difficult because you said you can't comment, but am I correct in assuming, I guess what I was assuming was that you couldn't put new applications in for new branches until the C and D order got lifted.

Maybe it's a technicality about, you can put applications in but, they get approved after it gets lifted or?

As I say, the applications have been submitted less than a week.

The deferred prosecution has been gone and as you said, I'm between a rock and a hard place giving you a direct answer.

I can just tell you that I feel like that we have done anything within our power, whether it be human effort or spending money to have one of the best Bank Secrecy Act/anti-money laundering programs in the country.

We think we're there.

The justice department obviously was comfortable and now we are awaiting word from our regulators.

Okay, great.

Thank you.

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

Good afternoon.

Just if you could, I don't mean to belabor the point, can we just walk through, piece by piece, the Katrina costs?

I want to make sure I've got them all.

You've got 1.7 million, I think you said, in direct sort of damage, physical damage write-offs.

That's correct, uninsured property losses.

Did I hear you say a $15 million accrual in the other category for some other costs?

No, $15 million in our loan loss provision, provided in excess of charge-offs, $15 million for what we believe are the anticipated losses related to Hurricane Katrina in both our commercial and consumer portfolio.

There wasn't anything in operating -- any additional accruals in operating expenses.

There was a $1.7 million, the uninsured property loss is in other NIE.

Have you all provided a general guess as to the general credit exposure to that region?

Some of the banks have actually come out and said, in dollar terms, we've got approximately this amount of loans in that region.

Yes, David, we do.

We have approximately $1 billion in outstandings in what we will call the most severely impacted FEMA zip codes, approximately 600 million of those would be commercial customers, about 400 would be consumer and small business.

And much like you've heard other banks describe, we went through a process of narrowing down the zip codes, assessing the property types, and in the case of our commercial loan book, we contacted those customers and were able to talk to almost 95% of the customers and get an assessment of their business capacity.

And then on the consumer side, what we did was went through our various loss metrics and stress tested them all to come up with an estimate of the provision required to support what we would think would be the anticipated losses.

Is there much risk of, I think, aren't there a lot of deferred payment flexibility that's been offered to the consumer side.

Is there much risk, not just for you all, but in general that we really won't know on the consumer side what the impact is until you start requiring payments again?

Again, the process would have put this, a consumer loan in this group by its mere existence of its zip code.

And obviously we are working with customers to help them.

But the zip code would drive it being in this bucket, not the payment history.

So you feel pretty comfortable that this $15 million provision should cover it?

I know it's not a given but you feel pretty comfortable that, as it stands today, anyway, an assessment of the credit risk?

We worked diligently and very methodically in the month of September to come up, what we believe is a good estimate.

Okay.

All right.

I won't go into the detail by portfolio, but our people have done a very thorough job and I will give you a quick example at the risk of boring you.

You take automobile lending, we know that we had 103 cars financed in those areas. 92 of those that we have contacted have insurance and the loss we are going to take is minimal over the values of a few of those.

We have one of those accounts that has no insurance and we have ten that were waiting on their insurance company to tell us the amount of the payment.

So there's that kind of detail on all of the segments of the portfolio.

We feel very good about the way and the process we went about determining that amount.

That example is reassuring, Dowd, thanks.

Slightly different direction if I may.

No one has asked about the margin yet.

Clearly, the environment certainly hadn't gotten much better.

You talked about sort of some of the funding mix customer preference that's driving funding towards some more expensive categories.

What's the outlook on the margin, I mean, it downweighed or on basis points this quarter?

What would have to happen to see that margin stabilize, I guess?

All right, David.

I would be glad to talk about that and I have to admit I am surprised it took till Tuesday at five to get asked this question.

Two things happened in this quarter.

If you look back on our prior conference calls, we have said that there is an imbedded compression, probably to the tune of two to four basis points in any given quarter, off our loan growth and the mix of our loans.

And that that has been stabilized through the level of low cost deposit growth we've seen.

This quarter, we did see some compression because of the loan mix.

We also had some issues around day count.

So that accounted for about half of the compression.

The other half really was in the deposit category as well as the cost.

You heard me talk about the decision to raise the money market rate without corresponding low cost deposit growth within the quarter, that had an impact on our net interest margin.

So kind of lack in deposit growth and the increased pricing on the money market accounts for the other half of the margin compression.

As we look into the fourth quarter, would think it would be much more stable if for no other reason, the decision on the deposit pricing or management set rate, and when we made the decision to increase rates in August, we essentially looked at it as accelerating what we would do in the fourth quarter with the expected Fed rate increases into the third quarter as part of supporting that marketing campaign and being well thought of and aggressive with consumers.

So some piece of that is within our control, and then again we typically have a seasonally slow third quarter for deposit growth, and some piece of the intended stability in the fourth quarter would be low cost deposit growth being at stronger levels than we saw in the third quarter.

And then my last question, related question, what about, we talked about loans a little bit and deposits and funding on the securities portfolio which is decent size for you, we actually had lower yields, if I understand it correctly, Q2 to Q3.

Is there, was there a surge in bond premium amortization or anything to account for that?

What's going on on the security yields?

On the investment securities, it actually went from about 485 yield to a475, about down ten basis points.

Interestingly enough, between first and second quarter, they also declined eight basis points.

So the margin impact in there really does reflect the deposit growth in deposit costs.

But in the ten basis points within this quarter, some piece of it does get back to that day count.

Okay.

And a little bit lower yield.

And as it relates to premiums amortization and the lower conduit, that's probably two to three basis points of it.

But it's a mix of several things I'd say, the day count and yield are about half and premium amortization and conduit are about half.

Okay, thank you.

Operator, this is Les Underwood.

We need to limit each of the next questioners to one question, please, just in order to get everybody in.

We are running up to an hour already.

So if I would ask that each of the questioners please limit themselves to one question.

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

Hello.

Good afternoon.

Hey, Chris.

You might have already answered this, but you mentioned, I think $6 million sort of run rate on a quarterly basis related to trust fees, if I'm correct, that you will be losing based on this mutual fund sale?

That's correct, approximately $6 million will appear on the trust revenue line in future quarters.

Will disappear?

Yes, where the mutual fund income.

Now, what is the expenses that will go away as a result of this?

The expense is more in the tune of about $3 million annually, and then we will also have some trailer income as we continue to sell what is now pioneer funds into our customer base.

What you will see in the trust revenue line is $6 million.

Okay.

Thank you.

Your next question comes from the line of Bob Patten with Morgan Keegan.

Hey, guys, how are you?

You had to limit the one question now that I come on.

The one question I wanted to ask you guys is, the issue of prices, can that complicate your C and D being lifted?

Are they different regulators?

Are they issues that they will look at as a whole?

Can you give us any color on what's going on there?

I certainly won't begin to try to speak for the regulators, but I will tell you factually what I know.

They are different regulators.

The Fed and the state of Alabama are the two regulators on the C and D side and the branch applications.

The SEC is the investigating body on the Bisys matter, and as I say, we are cooperating fully on that and would hope for a quick resolution but that's not on our control on the Bisys matter.

As I said on the other matter, the applications are submitted and we're waiting to hear from our regulators.

So you don't believe that the two could be commingled in terms of one holding up the other one to get resolved?

I won't say that anything is not possible but I have a hard time connecting them knowing the facts as I and the regulators know them.

Okay.

Thank you.

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

On the branch expansion side again, when you, whenever it is that you begin that, what expenses can we expect going forward, whether that's anything imbedded in the fourth quarter for build out or more likely going forward per quarter of '06?

Cameron, I tell you probably in fairness, next quarter what we will do is, we will share with you what that expense you can expect next year and at the same time we will tell you the expense that we have incurred this year for Bank Secrecy Act/anti-money laundering that will not be incurred next year, a lot of one time expenses which will significantly be greater than what the branches will cost.

All right, thank you.

Your next question comes from the line of Cory Shipman with Stanford Group.

Good afternoon all.

This is Kevin, actually.

I wanted to run through in my one question, there are going to be multiple parts.

Oh, no, Kevin.

To work through the numbers, just because I want to make sure that I get the, I guess the proper buckets right in terms of reporting the number and then trying to determine that run rate, I get about 47.8 million or thereabouts, and sort of one-time benefits during the quarter, the gain on the funds biz, and then the FHLB prepayment as I understand it.

And then sort of 16, $17 million of one time Katrina related issues in terms of provision in the expense line and other expenses.

And then looking at the sequential Q2 to Q3 moves, in terms of marketing expense, professional fees, and then lost revenue, about $10 million of adverse impact, the net of those helps, at least if I'm getting those properly, points to about a, sort of a 47-cent core number versus 51.

That's part one.

Am I getting to the right number?

But then second part of the question, to get to the run rate, Beth, of I think you said 315 to 319 in total expenses for Q4 or so, I still appear to be about $10 million short versus if I back out all of these one time items from the Q3 levels, what else might I be missing to help me get to that 315 to 319 run rate?

Kevin, why don't I ask Les to give you a call after this, to go through it because I'm not getting the same math on either part of your question.

So why don't we get Les to give you a call and go through that off-line from the call?

He will call you right after it.

Okay.

Thanks.

Your next question comes from the line of Casey Ambrich with Millennium.

Thank you very much for taking my question.

Just one question, could you just kind of comment on the bank's exposure to some condo conversions in Florida, particularly in Miami and, what are you seeing in the underwriting trends in this segment?

And on a scale of one to ten with ten being uncomfortable, like the bank is uncomfortable, where are we?

I would be glad to answer that.

Thanks very much, because it seems like it's a hot topic, I'm just trying to gauge whether it is or not.

We have approximately $600 million in condo loans in our Florida markets.

But we are not in conversions.

We are not in Miami.

These fill the bill of what I call location, location, location.

They are on beach front.

They are with long, established customers.

They are new construction.

They tend to be 80% presold with 20% down payments.

And we have been following the same underwriting standards for many years with this book of business with much success.

And on your question are we comfortable or not, we are very comfortable that these are well underwritten, well located, quality projects.

And this last question, has the bank seen any deterioration in this portfolio whatsoever?

No, we are not.

In terms of lengthening or selling the condos and all that, nothing is being extended?

We do not see anything other than what we would have anticipated when we underwrote them.

Okay, thank you very much.

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

Thanks, good afternoon.

Just to follow up on credit quality, I was wondering if you could just take that to the next level out, which is charge-offs continue to move lower this quarter and yet you did have a minor inflexion on MPA's and 90-day past dues.

Can you just talk through your kind of just general feel on credit quality going forward and if are we, in fact, near in an inflexion point as far as the charge-offs and the nonperformers?

Yes, Ken, we've said for several quarters now that the level of credit quality and performance continue to exceed our expectations.

And while we did see an increase in nonperformers on a $35 billion loan portfolio, that was $10 million, so things are so pristine at this point that literally one or two loans can move that needle.

If you look at our 90-day past-due loans, they went down by almost a corresponding amount.

It was just something that was formerly past due now going into nonperforming.

And like I said, 10 million on a $35 billion portfolio is not a significant move.

When we look out, it is hard to know when or where there will be a different credit quality cycle.

But If do you look at some of the leading indicators in both our nonperforming as well as our past dues, certainly nothing indicates that that would be anything in the immediate term that would change dramatically and we are sticking to our knitting, as it were, in terms of our underwriting standards.

Are there parts of the charge off profile that could even still get better from here?

Home equity had been a piece, previously that you said could still see some, are we kind of near the bottom on that?

Are there any other pieces that can continue to get even better from here?

I hate to predict anything getting better than 19 basis points of charge offs.

Like I said, we continue to feel like credit quality is a strength and every quarter comes in a little lower than the prior quarter, but I can't see that there would be any significant improvement from here, but I also don't see things deteriorating any time soon.

Okay.

Thanks very much.

At this time I would like to return the conference to Mr. Ritter for closing remarks.

Okay, thank you, operator.

Let me thank all of you for joining us today.

I know it's a busy earnings release day and we'll stand adjourned.

This concludes today's AmSouth Bancorporation third quarter earnings call.