Regions Financial Corp (RF) 2007 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the Regions Financial Corporation earnings conference call for the second quarter of 2007.

My name is Tonya and I'll be your coordinator for today.

At this time all participants are in a listen-only mode.

(OPERATOR INSTRUCTIONS) As a reminder this conference is being recorded for transcription purposes.

I would now like to turn the presentation over to your host for today's call, Mr.

Dowd Ritter, President and CEO.

Please proceed, sir.

Good morning, everyone.

This is List Underwood and we appreciate your participation today.

Our presentation will discuss Regions' business outlook and it 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 Regions' general outlook for economic 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 earning's press release, our Form 10-K for the year ended December 31, 2006, our 10-Q for the period ended March 31, 2007, 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.

Let me mention also that our discussions may include the use of non-GAAP financial measures.

A reconciliation of these to the same measures on a GAAP basis can be found in our earnings release and related supplemental financial schedules.

Dowd?

Thank you, List, and good morning, everyone.

We appreciate your joining Regions second quarter earnings conference call.

With me, of course, this morning is Al Yother, our Chief Financial Officer, who will provide us a detailed discussion of our quarterly performance later in the call.

Let me begin with a few highlights.

I'm pleased with Regions' overall second quarter results and the progress toward developing a more efficient, more profitable business model.

Earnings from continuing operations were a solid $0.69 per diluted share, excluding merger charges.

On the same basis annualized return on tangible equity was a strong 25%.

Notably, our EPS matched first quarter's level, despite lacking an approximate $0.02 contribution from branches that we divested in the first quarter.

Significant contributions to second quarter profits include merger-related cost saves that are exceeding our expectations, along with continued low credit cost and excellent Morgan Keegan results.

In addition, we repurchased approximately 20 million shares of our common stock during the quarter.

Before Al covers our second quarter in greater detail, I want to spend a few minutes updating you on our merger progress.

I guess today as we sit here, we're even more excited about the merger's opportunities and benefits than when the transaction was first announced 14 months ago.

Granted, the current operating environment is proving more challenging than we anticipated, but longer-term prospects remained extremely bright.

Meanwhile, I'm pleased to report that Regions continues to meet or exceed all of our initial merger integration goals.

So far, our accomplishments include the divestiture of branches as required by our regulators and the conversion of our brokerage, mortgage, payroll, and employee benefits platforms.

And in our most significant milestone to date, last week we successfully converted 633 Alabama and Florida branches involving just over 2.9 million deposit accounts and over 400,000 loan accounts.

Importantly, this first conversion was the largest of any of our planned conversion events and bodes well for upcoming conversion success.

In fact, we have decided to accelerate the timeline for our remaining conversion events by combining next year's events three and four into a single conversion.

We will give you the exact revised dates for this last event once we finalize that, which will probably be sometime during the next 30 days.

Given the importance of customer retention throughout the entire conversion process, we kept a close eye on customer satisfaction levels.

In fact, we've hired the Gallup Organization to assist us.

They've helped us establish benchmarks by conducting 53,000 customer service surveys at the beginning of this process.

We will continue to track our customer sentiment at the branch level as we go forward, but I would tell you that the initial results show satisfaction scores slightly above industry averages, and our goal is to build on those results as we progress through the integration and beyond.

Our branch consolidation plan is also well underway.

Most consolidation is taking place concurrent with conversions, and therefore, as a result we closed 66 branches in Alabama and Florida last week, bringing year-to-date consolidations to 81 offices, or about half of all planned consolidations during the conversion of one, two, and three.

We're already reaping the rewards of our successful integration efforts by creating a more cost-efficient organization.

As I noted earlier, our cost savings are actually running substantially ahead of our $150 million full-year 2007 projection, and are likely to be substantially above the originally estimated $400 million run rate that we expect to achieve by the second quarter of next year.

Also, our one-time merger-related expenditures are running below initial expectations and should end up less than the originally projected $700 million.

On the other hand, as all of you know, the current operating environment is making it more difficult in the short run to grow revenue, particularly spread revenue, unless we were to compromise underwriting standards and increase balance sheet risk or leverage.

Be assured we don't plan to compromise either our underwriting or our balance sheet management discipline.

Additionally, while we're committed to improving our cost structure, we're also continuing to invest for Regions' future.

An example is our targeted branch expansion plans.

So far this year, we've opened a total of 20 new offices, ten in the first quarter and ten in the second, and for the year we're still on target for a total of 50 new offices.

Most of those will be in Florida, where we had the land bank available as we went into the year, but a few will be in a -- located in other high growth areas that we've identified across the footprint.

At the same time, we're continuing to invest in key business lines, such as Morgan Keegan, that have the potential to broaden and more effectively leverage our customer base through sales of higher-return, fee-based products and services.

In other words, even though our top priority is successfully executing the merger integration and achieving the cost saves, we indeed are not ignoring strategic planning and execution, nor are we taking our eyes off day-to-day business development, as evidenced by our solid second quarter operating results.

A further key indicator is that we're continuing to grow net consumer checking households despite spending considerable time and effort on merger integration plans and execution.

Specifically, our net consumer checking households have increased around 2% annualized during the first six months of this year.

That's an important measure, in that the net growth rate is the rate at which we retain customers and add additions, so when you think of a typical bank retaining about 85% of their consumer checking relationships in a given year, we're -- number one, we're exceeding that rate, and then you add on the addition of new accounts, that two extra percentage point doesn't sound like much.

But when you think about over three million consumer checking households the difference is actually very meaningful.

And because we took a number of key actions earlier in the year ahead of conversion events, such as replacing all customers' debit and credit cards with new rebranded ones and assigning new account numbers to any instances where it was necessary to eliminate duplicate account numbers, we fully expect that these households in these growth and retention measures should remain strong throughout the entire conversion process and beyond.

In summary, we're successfully building on Regions' solid foundation, improving our ability to fully capitalize on long-term growth opportunities, and maximize shareholders return.

Furthermore, despite near-term operating environment challenges, 2007 is still expected to be another solid year for Regions.

And with that, let me turn it over to Al to give you some greater detail.

Thank you, Dowd, and good morning, again, to everyone.

As Dowd said we are pleased with this quarter's earnings, especially given the fact that the results do not include the approximately $0.02 per share contribution of the 52 branches we divested in the first quarter.

Linked quarter, the earnings per share lost from divested branches was offset by good expense control, including strong merger-related cost saves, by fee gains, primarily Morgan Keegan and service charges, and also aggressive share repurchases.

All in all, operating results were solid.

Nonetheless it was another noisy quarter due to divestitures, merger-related items and a couple of other special items.

As a result, my goal for the next few minutes is to provide you with some clarity on our first to second quarter core operating trends.

Fully-taxable equivalent net interest income dipped $64 million linked quarter, impacted by a lower net interest margin and a smaller earning asset base.

Branch divestitures negatively affected both margin and earning asset levels, accounting for about $30 million of second quarter's drop in net interest income.

Our net interest margin contracted to 3.82%.

Over half of the linked-quarter decrease was related to the branch divestitures.

To explain, the divestitures not only reduced low-cost deposits by $2.7 billion, they also necessitated the reversal of a portion of an earlier positive purchase accounting mark-to-market on these deposits.

In addition to the divestitures, narrowing spreads and our capital management efforts, namely an increased level of share repurchase activity and the issuance of long-term debt, further pressured the net interest margin during this quarter.

The pace of margin compression should slow as we move into the second half of the year, leading to an estimated 3.8 % average margin for the full year of 2007.

This estimate assumes continued narrower spreads on new balance sheet growth, lower purchase accounting benefits as we go throughout the year, and no significant change in the short end of the yield curve.

Of course deposit pricing from a competitive standpoint, as well as the mix of deposits between low cost and time deposits, will play a critical role in the level of the net interest margin.

On an average basis, low-cost deposits, excluding the divestitures, grew an annualized 3.8%, helped by new marketing campaigns and shifts in the money-market accounts from certificates of deposit.

As high-cost certificate of deposits mature, we are either shifting the funds into lower-cost money market accounts or allowing them to run off.

Given the limited balance sheet growth and our own willingness to leverage our balance sheet in the current rate environment, we're using cash flows from investment securities portfolio run-off to reduce the high cost certificate of deposits as they mature.

Average loans declined slightly linked quarter.

Linked-quarter annualized commercial loan growth, however, was 8.8%, but it was effectively offset by a drop in commercial real estate outstanding, which reflected not only a reduced demand but an increasingly competitive market and our unwillingness to compromise underwriting standards to capture volume.

In the case of home equity lending, strong production of $2.59 billion in the quarter was offset by equally high paydowns of $2.61 billion, thus preventing any net balance sheet growth in that product.

For the year as a whole, we now expect minimal loan growth and low single-digit increase in deposits.

From a growth standpoint, the banking industry is currently experiencing a challenging environment, but we're convinced that we are doing the right things to position ourselves going forward, trying to strike a good balance between what will provide current return without sacrificing long-term profitability.

Turning to credit quality, net loan charge-offs remain low at $54 million or an annualized 23 basis points of average loans, which was up three basis points linked quarter.

Our outlook for the full year of 2007 for net loan charge-offs remains in the mid 20 basis point area.

Our credit loss reserve as a percentage of loans remains strong at 1.19%, which is a one basis point increase from the first quarter.

Non-performing assets rose to 62 basis points with loans plus other real estate, primarily driven by commercial real estate loans, a result of weaker demand for condominium and one-to-four construction projects.

Also, an important part of the integration process has been a recognition of our need to make modifications in the combined lending and credit review processes.

Specifically, we implemented a new, more prescriptive credit approval process.

We placed tighter restrictions on selected types of real estate lending.

We began requiring commercial real estate lending specialists to be involved in every commercial real estate loan.

We established a more rules-based environment for all lending and credit functions through increasing standardization, especially in small business lending.

We strengthened the overall approval process by requiring the approval of a credit officer in most instances.

We separated the sales process from the underwriting and approval functions.

And finally, we implemented a Company-wide credit servicing review of all loans $3 million and above, which we finished this quarter.

Now these changes in the combined Company's lending and credit review process, coupled with the previously-mentioned weaker demand for certain types of commercial real estate projects, led to the increase in non-performing assets in the quarter.

We believe that we are adequately reserved for any potential losses on these credits and we're comfortable with our mid-year loan loss reserve level.

Going forward, we're confident that the underwriting related issues affecting the increase in non-performing assets will not reoccur, given the changes in the approval process that I just described.

And importantly, we still expect our net charge-offs to be in the mid 20 basis point level for the year as we previously mentioned.

Now, turning to non-interest revenue, Morgan Keegan produced another excellent quarter.

The Company earned a record $50.1 million, which is $4.6 million above first quarter, on revenue of $328.8 million.

Sales were strong across the board, but particularly in the fixed income and equity capital markets areas.

Since closing the merger, we have 118 new offices, and our sales force has increased by over 200 in Morgan Keegan in order to more effectively leverage opportunities provided by our expanded customer base.

Second quarter's performance suggests that these actions are already providing solid results.

Service charges were also strong, up $13.5 million or an annualized 19% linked quarter growth, despite the absence of approximately $7 million of service charges that were recorded in the first quarter related to the divested branches.

Seasonal factors along with higher NSF and interchange volume largely explained this increase.

Regions' mortgage fees improved slightly first to second quarter, but remain still somewhat weak, given the ongoing market and industry challenges.

Additionally, in the second quarter we realized a $32.8 million loss on the sale of approximately $1 billion of securities.

Without increasing duration we were able to reinvest a majority of these proceeds in higher-yielding securities.

Non-interest expenses, excluding merger charges, increased $62 million -- I'm sorry, excuse me, decreased $62 million linked quarter.

Although there were a number of other smaller moving parts, the overall decrease can be attributed primarily to a $38 million mortgage servicing rights recapture and an increase of $33 million in cost saves in the second quarter.

The second quarter merger-related cost saves, most of which were personnel related, totaled $84 million, bringing the year-to-date total to $135 million in cumulative cost saves.

As Dowd said, we are ahead of plan on 2008 realized cost saves and are likely to exceed the net $150 million run rate from the amount originally forecasted to be achieved the end of 2007 by as much as $100 million.

And this would bring our total net saves to approximately $500 million as compared to the originally estimated $400 million.

And we will be keeping you up-to-date each quarter as the year progresses on our cost save benefits.

In addition to the cost saves, we are also very pleased with the level of merger costs that we are experiencing.

As you may recall, back at the original announcement of the merger with AmSouth, we estimated that we would spend about $700 million to put our two companies together.

We're now confident that we will spend less than that amount, and although this improvement won't entirely hit the bottom line, it is a real savings that will directly benefit our capital.

Finally, efficient use of capital does remain a top priority.

During the second quarter we repurchased 19.7 million shares, including a late April accelerated buyback of 14.2 million shares, and this leaves 34 million shares available for repurchase under our current authorization.

Our plan is to continue to repurchase shares aggressively in the second half of 2007.

In summary, to be sure, 2007 has had its share of challenges, including the effects of the implementation of FIN 48 in the first quarter, the lost earnings from divestitures, and industry issues like narrowing spreads and modest balance sheet growth.

But given the additional cost savings that we've been able to identify and capture, along with the actions we've taken to maximize the profitability of our balance sheet, the year is shaping up to be very solid and gives us great confidence as we continue to take advantage of the many opportunities afforded to us by the merger.

Operator, I think we would now be ready to take questions.

(OPERATOR INSTRUCTIONS) Your first question is from Todd Hagerman from Credit Suisse.

Good morning, everybody.

Al, I was just wondering if you could just spend a couple more minutes just thinking about the margin -- you took down the expectation a little bit to the 380 average for the year.

Just wondering if you could perhaps give a little bit more clarity in terms of the balance sheet repositioning that you did this quarter, in terms of the bond sales, as well as some of the debt restructure, and tie that into the FIN 48 in terms of how that's influencing the margin and your outlook there?

Okay, I'll be glad to.

Let me take you through -- first quarter to second quarter, down 17 basis points and we mentioned that about half of that related to the branch divestitures, roughly about ten basis points of the margin -- of the net interest margin decrease.

Three basis points or so was related to the balance sheet, the capital activities, the subordinated debt that we did, trust preferreds as well as the share repurchase, so that's about three basis points of it.

Another piece is the sale of EquiFirst, which took place at the end of the first quarter, also had about a four basis point impact on the margin in the second quarter.

And the margin numbers that we reported last time were on full Company.

They were not based off of continuing operations -- they were based on -- we had everything in there, so the EquiFirst impact was in the first quarter.

So quarter over quarter, that's a four basis point change.

Now that pretty well explains the 17 basis points.

As I mentioned, three of which had to do with the debt and the share repurchase activity.

So that's not to say there weren't other ins and outs, some offsetting things, but that takes care of the 17 basis points.

As far as the lowering of the projection from a 385 to 380, that's just a reflection, Todd, of just changes in balance sheet mix, as well as the lack of substantial growth right now, this change in the mix and the way that we're looking at our forward progress on the net interest margin.

The curve is still flat, real flat, and that's also continuing to have some impact on the future months of the net interest margin.

I guess what I was getting at was just in terms of -- on the balance sheet mix and the debt recast there, assuming that spreads -- the balance sheet growth remains basically static and spreads remain within a fairly consistent range, I would think that maybe with it seeing a little bit more -- would see some incremental pick up just from the balance sheet actions alone?

Well, also keep in mind, Todd, that we do have a positive -- and we mentioned this last quarter as well, we do have a positive impact from purchase accounting that diminishes over the course of the year, so that's also weighing against that.

Okay, and was there any FIN 48 influence in the quarter again?

Well, that impacted last quarter by seven basis points, so that was already in there.

Okay.

All right, thanks very much.

Okay.

Your next question is from Christopher Marinac from FIG Partners.

Thanks.

Good morning, guys.

Just wanted to get a little more sense on your pipeline from past dues or maybe even watch-list items.

Any further deterioration there other than what was in the 8-K?

No.

I mean, what we have there is pretty much it.

We just went through that Company-wide credit servicing review and took a hard look at every loan that we have above $3 million, so we've covered most of it and nothing -- you know, significant deterioration of any type since then.

Do you expect that the level of construction lending that we see that trend lower as a percentage of the portfolio, Al, or any feel for that as we go through the cycle?

Well, I think what you're seeing is a reflection of just the market itself right now.

The demand is slow, so a lot of the construction lending that we do has about an 18 month cycle, and those things turn fairly rapidly.

And what we're seeing is there's not as much new coming on as we have rolling off just on a natural basis.

And until the market improves, I think you would continue to see that phenomenon.

And, Chris, I'd add in this environment that you're seeing -- a lot of these projects that still don't have a certificate of occupancy, you're seeing them with some of these new funds being taken to permanent financing.

So not only do we have not the volume of new business on the real estate side, we're having the pay-downs accelerate, which on the commercial side basically wipes out this quarter, what would have been 7% to 8% growth on the C&I side.

Right.

On the consumer side it's the same thing.

Al gave you the figures in his details.

The bad news is there's no balance sheet growth.

The good news is that home equity customer has the liquidity and the credit rating to either refinance or pay off, and so in spite of good production, we're seeing no growth but also no past due increase.

Great.

That's helpful.

Thanks very much.

Your next question is from Paul Delaney from Morgan Stanley.

Good morning.

Good morning, guys.

Just wondering if you could just give us a bit more detail on the increase in non-accrual loans, the break out between just deterioration and the syncing up of credit policies and things?

Paul, it's kind of hard to delineate which is which in some of these things.

It would be very difficult to do that.

What we think we have seen, though, is that complete review of the portfolio of the large loans and so we think we captured it.

As to how much of it was related to the changes and policy or tightening of policy and how much of it was just natural gravitation to NDA's, it's really difficult to parse those things.

And also --

Paul, this is Dowd.

This part may be helpful, I guess, from our perspective.

You heard Al reference that credit review and the combination of ratings around the Company.

The good news is that 87% of this increase in non-performers came out of one geography with one credit underwriter, and from that standpoint we don't see this as systemic around the system, and we feel very good as to the fact that all of these are well secured with real estate.

And so we don't think it -- we don't think it's an alarm for any kind of huge loss flowing through as a result of it.

That's why Al went on to make the comment in his remarks that we're still comfortable with the mid 20 basis points for the full year.

Understood.

Which geography was that, the 87%?

I don't know that that -- it's just one particular geography and in melding these up and the rate -- syncing the rating systems of the two, that's just where the majority of this showed up.

Okay.

And then I'm just curious, once all of the merger turbulence dies away what sort of leverage do you see the bank managing to for the longer term?

We're going through an analysis right now of the balance sheet and putting together our strategic plan, and we'll come to a conclusion on that.

We have not reached a target level in our minds yet.

Obviously we are still above peer average, so there's room for that to slide downward, but we have not determined exactly what that level is.

Okay, and then just one quick question for Dowd.

Dowd, you mentioned the opportunity leveraging the customer base of the Morgan Keegan platform.

What do you see -- really see the major opportunities over the next couple of years to drive earnings?

Well, obviously if you think back a couple of years and look at what has been happening inside this Company, Morgan Keegan has gone from 150 offices to 300 to now we're close to 450 offices.

And you take the number of registered reps that they're adding -- I think getting that stable, it's across all of our geographies because they've literally been able to go from the size they were in what I would call the old Regions world, then when the combination of union planners they expanded again and now with AmSouth.

And so we're in the process right now of finalizing a new three-year strategic plan and I am excited, particularly about Morgan Keegan's ability to leverage with so many new offices and new people.

And I would also tell you, I don't think they're anywhere done adding new people for the new size of this Company.

As opportunities exist to lift out people, you will see them continuing to add experienced brokers into their network.

Thanks very much.

Your next question is from Gary Townsend with Friedman, Billings.

Good morning, gentlemen.

How are you all?

Good morning, Gary.

Could you tell me when the credit review process or the new analysis began, and you're well satisfied that you aren't closing the door too late then?

Well, it was a second quarter event, Gary; it all took place in the second quarter.

And as part of the ongoing efforts, we plan to do two more full reviews covering a lot of the same ground throughout the course of this year.

But different parts of the portfolio, or --

No, I mean it covered the whole portfolio.

We'll go back --

This was every credit $3 million and above, and the reason for doing two more is -- the best of all worlds and the way it really should work is when credit review goes out, they should be validating the ratings assigned by the line credit officers and relationship managers.

And this is -- I would tell you that this first one -- obviously in one instance that was not the case and we would hope by the other two that at the end of the process, there's no differences.

It's more of an educational and getting everybody on the same methodology for rating their loans.

So it's possible then that as you do a second and then a third review that you may catch yet further problems?

I guess that's an obvious question.

Well, it is possible, but it would only be, generally speaking --generally it's very new things.

You shouldn't expect to see --

It would denote deterioration in the portfolio since the last review.

Right.

Okay.

All right.

Well, thanks, that answers my questions together with the others.

Thank you.

Your next question is from Chris Mutascio from Stifel Nicolaus.

Good morning, all.

Morning.

Al, I had a quick question and it probably goes back to Todd's original question.

I'm trying to think this through.

If I look at the 17 basis points of margin compression during second quarter, I think you said ten was the branch divestitures and four may have been relative to the EquiFirst divestiture as well.

So those should not, I guess, cause incremental margin compression going forward from second quarter to third quarter or second quarter to the second half of the year.

And yet if I look at your margin outlook, it looks like it's roughly about a 370 outlook for the second half of this year to get to that 380 full-year estimate.

Am I right in that thinking?

Is the core margin actually going to come under more compression than what we've actually saw in second quarter, and if so, what's causing that?

Well, we think that, once again, the 380 would be the average for the year so that would lead you to the conclusion that the next two quarters would pull that average down some.

But we have two things.

One is the continued loss of benefit from the purchase accounting adjustment, so a lot of that rolls off fairly quickly.

How much is that a quarter?

I'll have to get back to you on that.

It's a diminishing amount throughout the year.

Okay.

But we can do that.

We'll come back to you on that.

The other part of it is just newer business is going on in tighter spreads, so as we roll through the portfolios, the spread on new business is not equal to that 380 level.

Okay.

All right, fair enough.

Thank you.

Okay.

Your next question is from Kevin Fitzsimmons from Sandler O'Neill.

Good morning, everyone.

Hi, Kevin.

Dowd, can I ask you to just repeat your clarifying comment on the increase in non-performers?

I didn't get it.

I think you said the bulk of it came from a particular geography.

If you could just repeat that?

Yes.

If you think about it, what we got -- I think we even said it on the first quarter earnings conference call that during the remainder of the year, we were going to have three credit reviews in putting -- you'll remember in a prior quarter we talked about getting the consumer loan policies in sync for the new Company.

The same thing was taking place in the second quarter with the first Company-wide credit review by independent credit review personnel in terms of all commercial loans out there $3 million and above, commercial and commercial real estate.

That process -- 87% of the increase in non-performing assets in the second quarter were a result of that process and primarily from one geography, and again, that's getting everybody on the same rating system.

The good part I said about that -- which the bad part is it identified them, but I look at that as a good part as well, we now know it, but these were all secured.

We have been through every one of these credits and they have good collateral and I would expect the losses to be minimal compared to that amount.

Okay, so 87%, when you look at the two -- just natural deterioration and the slowdown in reduced demand for commercial real estate and then this beefed-up credit underwrite -- or credit review process, the bulk of the increase came from the latter?

Exactly.

Okay.

And would you say that -- is this just a new, tighter approach or is this a -- taking the credit review process more over to how Regions, did it or how AmSouth did it, or none of the above?

-- I would say that this is more of getting this to the right process for this size Company, being sure that the ratings are the same.

And I know before some of you call List, I'll just go ahead and tell you that where these were was not the AmSouth Florida real estate portfolio, if that helps you, because I know that would be some of the questions and -- but it is just a given out of one particular geography and we're very comfortable that it is a one-time item.

Okay, great.

Can I also just ask, you guys had -- in the supplement you referred to a -- roughly a $10 million adjustment to the core deposit intangible amortization, which you attributed to the divestiture.

Can you just walk through -- not in full detail, but just the nuts and bolts of what goes into that?

And what I'm really trying to gauge is how much of that is just cut and dried accounting and how much of it is pretty discretionary in coming up with that?

Thanks.

That amount that you mentioned is also mentioned in the margin impact related to the divestitures.

That's in -- it's a reduction in net interest income, but it was also a reduction in non-interest expense, so it was net-net no impact.

What happened there is when we did the -- we put the core deposit intangible on back at the merger date with an estimate, and as we'd go through the months and the year, we continued to fine tune that estimate.

And resulting from the sale of the deposits with the divestitures, we had to go back and true-up our core deposit intangible.

And we'll continue to true things up throughout the year, where you -- the timing on that as we take this information --, we have a third-party partner who helps us in this review, so there shouldn't be any significant adjustments like this going forward, but we will continue to true that up.

So in other words, the original estimate didn't have the sale, the divestiture baked in, so you had to --

That's correct.

-- alter it for that?

That's correct.

Okay.

All right, thank you.

Back to November 4th, so you had to catch up from November 4th to that point.

Okay, great.

Thank you.

Okay.

Your next question is from Jennifer Demba from SunTrust Bank.

Good morning.

Good morning.

Just wondering if you could give us some more color on where you're seeing the upside in merger cost savings next year?

Well, we're seeing a lot of it -- most of it is personnel related.

We've been able to take advantage of very quickly consolidating some disbursed operations.

As we go through the process, we are right sizing every area.

We've seen people use this time to do very good analyses as they lose people just to normal attrition, as to whether or not they need to replace them.

And in many cases people were finding that they can do the function with fewer people, so -- but the majority of it is -- is going to be personnel related, Jennifer.

Jennifer, if you'll remember, at the merger announcement in May of last year, we said there'd be somewhere close to a 10%, which would have equated to around 3,800 head count reduction.

As we finish up the second quarter this year, we're just over 3,400 head count reductions already achieved, and I would tell you that we would think we'd be somewhere in the 5,000 to 5,500 headcounts by the time the conversions are totally complete as we get into the second quarter next year.

Is some of that related to just overall a slower overall operating environment, in that you don't need as many people?

Well, some of that is going to be through attrition, but you've got one of the biggest surprises in there.

You know, the EquiFirst would have been 1,200 to 1,300 people of that 5,500 I'm talking about.

Okay, thank you.

Your next question is from Matthew O'Connor from UBS.

Good morning.

Morning.

Could you guys give us a little more color in terms of the pace of the buyback for the rest of the year?

Obviously, as you mentioned you're sitting on higher capital than others and it doesn't sound like you expect much balance sheet growth, so I would think there's some opportunity for more buybacks?

Well we will continue to buy back as aggressively as we possibly can.

Third quarter, the buyback is impacted because the accelerated share repurchase that we did in the second quarter has to settle, so the pace in the third quarter will be slower until that settles.

But over the latter half of the year, we still expect to be very aggressive, as aggressive as we can possibly be.

Okay, and just remind us, when is that settling and can you buy back anything in addition to that?

Well there's a range of dates.

It could settle late second quarter -- excuse me, late third quarter, or it could go out into early fourth quarter.

And we have a small capacity to repurchase, but it's fairly small.

Okay.

And then separately, if we look at your cost savings this quarter, I guess it was $330 million run rate or so, and you just did some consolidations and closing, I believe, last week.

Do we get the benefit of those actions last week in the third quarter, so you'll see another ramp up in cost saves this quarter, or does it take a little bit of time?

That's correct.

You'll see some of it, yes, but at the same time, we have expenditures related to branch signage and other things, as we replace these branches that begin to kick in in the third quarter as well.

Okay, so net-net, does the cost saves go up consistently each quarter or does the reinvestment offset it?

Well, you get cost save benefits as we go throughout the year and we have merger events, but we do have investments that we'll be making throughout the year as well.

But as Al told you, we raised that target for the year from $150 million to $250 million, so taking your second quarter number and annualizing it, you can see there are additional cost saves to come this year.

Okay.

All right, thank you.

Your next question is from Jefferson Harralson from KBW.

Thanks.

Similar expense savings question.

Can you lay out over the next six months the mile post where we should be looking at events that are going to be translating into cost savings?

You've had the ones you mentioned in the late second quarter.

What are the next ones coming up where we should anticipate cost savings coming out of it?

October will be our second conversion event, and you will -- obviously, that's when we'll have about another 600 offices consolidate and you'll see some things there.

All along we're working on procurement improvements, things of that nature.

So from a purchasing standpoint -- and then, of course, you've got the final third event, which I described earlier, would be event four being accelerated into event three, which would complete all of the branch conversions.

And at that point, the entire Company is on one set of computer systems in one location and you'd obviously have some cost reductions there from a technological and facility standpoint.

All right, thanks.

And a follow-up is on Morgan Keegan, the increase of the fixed income capital markets and the equity capital markets this quarter was pretty impressive.

Can you talk about a little bit about what drove those increases, and do you think -- you mentioned the pipeline was pretty full.

Do you think those increases are sustainable into the second half of the year?

Doug Edwards told it was due to good management, but they are very pleased with their results and I think you'd have to say a lot of that is attributable to a larger, more diverse, more distributed franchise that they have today.

They're seeing more opportunities.

All right.

And on the sustainability, it's by nature a volatile business, but would you think it would be volatile around this kind of run rate going forward?

Well as long as the equity markets hold up, that was a good quarter for them there.

As long as those hold up, they would continue to do well in that.

And then fixed income was strong, and that has some seasonality and volatility to it, but in general, their outlook is good.

All right.

Thanks a lot, guys.

At this time, there are no further questions.

Are there any closing remarks?

Operator, there are no closing remarks.

We would just thank everyone on what I know is a busy day for joining us, and we'll stand adjourned.

Thank you.

Thank you.

This concludes today's conference call.

You may now disconnect.