Regions Financial Corp (RF) 2007 Q3 法說會逐字稿

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

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

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

We will conduct a question-and-answer session towards the end of this conference at which time you may press star and then the number one on your touch-tone telephone to participant.

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 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 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, our form 10-K for the year ended December 31, 2006, our 10-Q for the period ended June 30, 2007, and the furnished information in today's form 8-K.

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 also mention 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 you joining us for Regions' third quarter earnings conference call.

Also with me this morning is our Chief Financial Officer, Al Yother, who will provide a more detailed discussion of our quarterly performance in just a few minutes.

Let me begin, however, with a few highlights.

It's obviously an understatement to talk about the very challenging operating environment that we in Financial Services find ourselves in.

Our third quarter earnings from continuing operations were $0.64 per diluted share, excluding merger charges, and I'm also pleased that during this third quarter our merger-related cost saves continue to exceed expectations.

Our credit costs, while higher, remain at a reasonable level and results at Morgan Keegan, our broker dealer subsidiary, were again very strong.

Furthermore, we continue to return excess capital to our shareholders through the repurchase of 6.5 million shares of common stock during the quarter.

Al will provide the additional details about third quarter, as I mentioned earlier, but before he does I'd like to spend just a few minutes bringing you up to date on our merger process and some of the advantages being realized, and why I believe that Regions is well-positioned to weather this current economic and banking industry challenges as we go forward.

Regarding the merger, our initial integration targets continue to be met or exceeded in all cases and I'm very confident in our ability to achieve at least $500 million of pretax annualized cost saves by the midpoint of 2008.

Such cost savings are obviously significant at any point in time, but especially when the economy is slowing, as it is today.

Through these savings we have a very achievable means to improve operating leverage, which gives us an advantage at this point in time.

Not only are the cost saves proving larger than originally forecast, but in many cases they're being realized quicker than originally planned.

Given the success of our first branch conversion event, we did announce, as many of you know, that we are accelerating our remaining branch conversion schedule to complete the last one now in early December of this year.

Since we consolidate branches concurrent with those conversions, the almost 160 planned consolidations of our branch system will be finalized by year end.

As a result of that acceleration, our cost saves will also be accelerating.

We now expect our realized merger cost saves to reach at least $300 million pretax by year end 2007, which is double the amount that we anticipated for 2007 when we announced this combination.

We're also continuing to successfully capitalize on the merger's business development opportunities.

This is clearly demonstrated by Morgan Keegan's good 3rd-quarter results despite the fixed-income markets turmoil, not to mention the interest rate volatility.

Year-to-date, September 30, Morgan Keegan has added some 77,000-plus new accounts, lifting their total customer assets by $13 billion year-to-date to $83 billion.

We feel that this is only the beginning of the potential that exists as we more effectively leverage our expanded customer base and our relationship managers in the bank working with the financial advisers at Morgan Keegan expanding the sales of higher return fee-based product and services.

Our merger benefits and opportunities such as these not only enhance Regions' longer term profit potential, but also better position us to successfully navigate the economic and industry headwinds that we're experiencing.

Besides the merger advantages, there are other reasons why we feel Regions is well positioned.

First and foremost, particularly in this environment, is Regions' conservative risk culture.

This is perhaps best exemplified by what we do not have on our balance sheet.

We have no negative amortizing mortgages, no option ARMs, very little in the way of subprime backed or high-risk investment securities, only about $100 million of subprime loans or less than 1/10th of 1% of the total loan portfolio, and our alt A portfolio represents just 3.6% of the overall loan portfolio.

As to credit quality, our loan portfolio's products, geographic, and size diversification provides considerable protection from credit cycle downturns.

And we follow strict conservative underwriting standards.

There's no doubt that our loan tolerance for risk has caused us to give up on some potential loan growth in the past, but it serves us very well in the current market.

As an example, where home equity loans have been a troublesome area for many banks lately, Regions is faring well.

In the second quarter, our annualized home equity charge-off rate compared very positively to our peers and I would certainly think that our 31 basis points of average home equity outstanding losses in the third quarter will again, on a relative basis, be very favorable.

Al will give you some additional information on our loan portfolio and our credit quality trends in just a few minutes.

Final thing I would like to say, that at September 30, we were in a relatively neutral interest rate position.

We planned to continue that neutral position with as little interest rate as possible, specifically today each 100-basis point drop in interest rates, we currently estimate depending on whether you do it in a gradual or a shock scenario would reduce our net interest income between $17 -- $27 million annually.

The substantial deposit-gathering capabilities of the branch network provide considerable means to respond to the shape of the yield curve, whatever that may be without resorting to interest rate speculation.

I want to emphasize that in no way am I suggesting that Regions is immune to the current challenges, rather that we are in a good position to be able to weather some of the negative forces that are facing our industry.

There is no doubt that the economic conditions are limiting industry revenue growth, and pressuring more borrower's ability to repay their loans.

But we've managed through similar cycles in the past and what I feel is really different this time, at least for Regions is that we're in a better position to deal with the challenges.

In large part, this is because of the many opportunities afforded by our nearly year-ago combination with AmSouth.

We're already capitalizing on those opportunities and with the merger integration essentially complete by year end, we'll be able to turn our full attention towards maximizing those opportunities.

We're in the process now of finalizing our business plan and strategies for the next three years, which we will roll out to stakeholders later in the fourth quarter.

In summary, let me just say that Regions is increasingly well positioned to achieve better relative return for shareholders, regardless of the economic backdrop and notwithstanding the industry challenges, we continue to expect 2007 to be a solid year of performance for the company.

With that, let me turn it over to Al.

Thank you, Dowd.

Once again, good morning to everyone.

As Dowd stated, we achieved solid operating results in a challenging third quarter environment.

Linked quarter, brokerage and commercial credit fees were strong, helping offset weaker net interest income.

Credit costs rose, but metrics did remain relatively stable.

And we continue to actively manage our excess capital by repurchasing common stock.

At the same time, we invested heavily in preparing for upcoming fourth quarter branch conversions, as well as building out new branches in higher growth markets.

One of the big stories across the industry during the quarter obviously has been the continuing subprime dilemma and its impact on liquidity.

As Dowd pointed out, our subprime exposure is minimal at about $100 million in loans, plus a very small investment in securities backed by these products, so we've not been significantly impacted by the issue.

The other big story across the industry is declining credit quality, particularly in residential-related lending and commercial real estate.

These areas of our portfolio are experiencing some pressure.

Regardless, we are pleased with our portfolio's performance.

But while there's likely to be some softening in credit quality over the next several quarters, we do not anticipate significant deterioration.

And I'll talk more about this in a few minutes.

Turning to the third quarter's financial details, fully taxable equivalent net interest income declined $25.4 million linked quarter to $1.1 billion as a result of lower earning assets and a weaker net interest margin.

Softening loan demand and high equity lending paydowns along with modestly lower level of investment securities largely explain the dip in earning assets.

In line with our expectations, the net interest margin dropped 8 basis points linked quarter to 3.74%.

The margin was negatively impacted by a decline in low-cost deposits as well as share repurchase activity.

Additionally, we made a tax deposit that helped reduce the tax rate, but which negatively impacted the net interest margin by about 3 basis points in the quarter.

Overall, based on the current yield curve, we expect full-year 2007's margin to average somewhere between 3.75% and 3.80%.

Deposit pricing and mix will of course continue to affect our margin in the future, as will loan spreads.

Linked quarter, our average loans rose modestly over an annualized 1%.

Home equity production, just like last quarter,was very healthy at $2.2 billion during the third quarter, but was offset by higher levels of paydowns.

On a positive note, the pace of these paydowns has begun to slow recently, resulting in part from account and balance retention strategies that were implemented during the second quarter.

For the full year of 2007, we still anticipate minimal net loan growth.

While a higher growth rate would be beneficial in the short run, we will not compromise our balance sheet management and underwriting discipline to the detriment of long-term profitability.

Second to third quarter, average low-cost money market deposits grew at an annualized 5%.

However, these gains were more than offset by reductions in other deposits, particularly maturing higher-cost certificates of deposit.

Now, switching to noninterest revenue, Morgan Keegan experienced another strong quarter, particularly in light of the credit and liquidity market conditions.

They booked net income of $45.2 million on $318.4 million in revenue.

Strength in the quarter came from equity banking deals, primarily M&A, and higher commission levels given the impact of market volatility on customer trading volumes.

Linked quarter, fixed income banking revenues declined as a number of transactions were postponed during the quarter and investment advisory fees fell as we experienced net outflows of assets and some bond funds and our oil and gas brokerage business.

Morgan Keegan does not hold a large proprietary trading portfolio or engage in leverage lending, which insulated it from some of the write downs which affected banks during the quarter.

Looking ahead, the fourth quarter is traditionally a strong period for Morgan Keegan due in large part to increased capital markets activity.

We believe this year will be no different given their current transaction backlog.

On the retail side, Morgan Keegan continues to benefit from Regions' expanded customer base, primarily through new offices opened in former AmSouth branches.

A key indicator of their success is new customer account openings, which year-to-date through September 30 totaled 77,000 or 19% above the comparable 2006 period.

Commercial credit fees were also especially strong, jumping $10.2 million linked quarter, or over 200% over an annual basis.

Market volatility led to significantly higher customer derivative business as customers were active in managing their interest rate exposure, given uncertainty over the direction of interest rates.

On the other hand, mortgage banking fees were weak.

They were down (inaudible) for the quarter.

Originations declined $448 million to $1.7 billion and loan sale margins contracted.

During the quarter, we exited wholesale warehouse lending business, as it was not providing adequate returns given the risk it posed.

There will be no material effect on future earnings or revenue and residual exposure to this business is about $38 million of residential loans that will come into our portfolio.

These assets meet all of our normal credit quality criteria.

Longer term, we believe that the current shakeout among mortgage lenders presents a real opportunity to grow our traditional mortgage lending business.

We've already begun to add mortgage loan officers in an effort to ramp up retail production.

In fact, we have hired, or made agreements to hire, 100 mortgage loan originators since August.

Noninterest expenses for relatively flat linked quarter excluding merger charges (inaudible) and a mortgage rights reserve recapture and an interest recovery in the second quarter.

Through the third quarter, we have realized a cumulative $237 million of merger-related cost saves, up from $135 million at the end of the second quarter.

Offsetting these savings to some extent were costs associated with 29 new branches opened this year, including nine in the third quarter.

Another 21 branches are scheduled for fourth quarter opening.

As Dowd mentioned, given the accelerated conversion schedule, we are also accelerating our cost save target for year end 2007 to $300 million.

Third quarter's gap effective tax rate declined to 31%, primarily as a result of the tax deposit we mentioned earlier.

Our tax rate is expected to remain lower than normal like this in the fourth quarter before returning to 33 to 34% in early 2008 as certain tax credits expire.

During the third quarter, our accelerated repurchase program was closed out and we repurchased an additional 6.5 million shares at an average cost of $31.16.

This leaves approximately 27.6 million shares available for repurchase under our current authorization.

We expect to continue to opportunistically buy back shares in the fourth quarter.

Shifting to credit quality, net loan charge-offs rose to $63.1 million in the third quarter or an annualized 27 basis points of average loans compared to second quarter's 23 basis points.

This was fully in-line with our expectations and does not alter our full-year 2007 mid-20 basis points net loan charge-off estimate.

Given overall economic conditions, higher levels of charge-offs are to be expected in the coming quarters.

Similarly, losses inherent in the portfolio have changed from last quarter, but our reserve methodology when considering all factors still indicates that a reserve of 119 basis points of net loans at quarter end is appropriate for where we are in the credit cycle and that 119 basis points remains unchanged from last quarter.

Nonperforming assets were relatively stable with the prior quarter, the result of $43.9 million of nonperforming loans being sold and another $32.7 million of nonperforming loans being transferred to held for sale as of September 30 and these -- they were subsequently sold in early October.

We recognize that $11 million additional provision related to the loss on the sale of these loans which is reflected in the loan loss reserves that I previously mentioned.

Since these transactions were entered into, market pricing has deteriorated and unless it improves in the future, we will be more likely to hold nonperforming assets than we would otherwise.

This could result in somewhat higher levels of nonperforming assets in future quarters.

Current quarter nonperforming asset inflows were primarily related to single family development loans.

These new nonperforming loans were spread across the footprint.

Now, loans 90 days past due were up $127 million versus the second quarter.

Approximately half of which relates to individual commercial workouts on matured loans that are in the process of renewal.

We don't expect any of those to move to nonperforming status.

The remaining amount is residential related and reflects general market deterioration.

However, as Dowd mentioned, our home equity losses are relatively low versus peers and our losses on first residential mortgages are also holding up well at 13 basis points, which is up only 1 basis point from the second quarter.

In summary we think Regions is well-positioned to continue to deal with economic and industry challenges that may lie ahead and based on what we know today credit risk is manageable and merger opportunities will help us mitigate the growth challenges.

Operator, we are now ready to take questions.

[OPERATOR INSTRUCTIONS] Your first question is from Kevin Fitzsimmons from Sandler.

Good morning, everyone.

Good morning, Kevin.

I was wondering if you could -- I know you were probably just referring to this when you were talking about the inflow, but can you talk about the pace of inflow to the watch list.

Is it in your eyes accelerating?

Then secondly, of the loans that you sold or transferred to help forsale this quarter, is that, Dowd, a follow-on effect of the extensive review that you did last quarter or is this just part of the normal -- trying to handle nonperformers on a quarterly basis?

Is it more -- in terms of magnitude, more one-time from that review?

Thank you.

Thank you, Kevin.

That last part first.

A lot of that that Al referenced that we sold was related to that credit review, that first-time credit review and the new company.

The inflow piece, as Al said, it's literally across the footprint of residential, developers, and builders being the primary category of what's coming in and it's, from the very things all of us read about, just the slowness in the inventory of homes and home building that's taking place.

What kind of things do you look at that gives you comfort -- your earlier comments about credit,you said you expect modest upticks or increases in the levels of losses, I think you said, in perhaps nonperformers, but nothing significant.

What kind of things do you look at that gives you that comfort to say that at this point?

I think at this point in the cycle, it is looking at that -- if you take the home equity portfolio and the residential first mortgage together and those are the ones getting a lot of the attention and as we look at the metrics in terms of loan to value -- I want to say the loan to value on those combined portfolio, Al, correct me, but isn't it about 71%?

In that range.

And you look at how many of our home equity loans actually are first mortgage loans as opposed to second, that gives us tremendous confidence that instead of being 90% plus type lending, where when loan values start going down, that customer has no reason not to give you the keys, our customers in these loans really want to stay in that home.

They do everything they can to meet the payments.

Employment is still good and so you look at all the metrics and put them together, we're seeing an uptick, but we're not at all seeing anything that causes us outside of the norms that we've reiterated for 2007 full-year losses and as we look out in the future quarters, we're talking about basis points here and there rather than 50, 70% kind of increases that some people are seeing.

And I probably should also remind everyone, we talk about it back in the past, but on that home equity book, those that are for better customers and do have a higher loan to value, those loans, anything over 80% is insured.

So that further gives us an extra -- takes a little income off the spread on those, but we think it's the right thing to do for those higher loan to value credits.

Okay.

Okay, great.

Thank you very much.

Thank you.

Your next question is from Jennifer Demba from SunTrust.

Good morning.

A few weeks ago you announced some management changes in Florida and Tennessee.

I was just wondering if you could give us some color behind that and if we're expecting more over the near-term?

I'll be delighted to, Jennifer.

If he's listening to the call, he'll appreciate it.

Our regional President in Tennessee is just getting old.

Rusty Stevenson has been with the company for 38 years and Rusty had told us at the time, for those of you that don't remember Rusty, Rusty heads our Tennessee banking operation and Rusty has planned on this retirement at this point in time and was known and Keith Herring, who is taking over, Keith has been with us for many years and I should know it off the top of my head, but has great experience in not just the commercial side of the company early in his career, but later moved around, heading up -- well, he headed commercial in Montgomery, he later went to head the geography management in our north Alabama area out of Huntsville.

He ran the east Tennessee out of Knoxville for us before taking on the assignment of middle Tennessee area executive, where he went there with the sole intention of being onboard for Rusty's retirement to head that up.

And so a part of that is just part of our normal management -- our talent planning process internally.

And then of course Jim Smiths, who was head of Pensacola--lived in Pensacola, head of north Florida, Jim, in his area, had considerably been in the top quartile of our performers as we ranked internally and this was a good opportunity for Jim to go to Nashville to be the middle Tennessee area executive with a much bigger job and more responsibility for him.

And the last piece of that off the top of my head would be Marty Lanahan.

Marty has done a great job for us in a heavy de novo market in Jacksonville, and she has been greater for greater responsibility.

Again, all of this was a part of our internal talent management process and as I say was not unexpected.

Okay.

Thank you.

One more question.

You mentioned your new (inaudible) past due were kind of spread across the footprint.

Could you talk specifically about what you're seeing in your asset quality and your loan portfolio in the state of Florida?

Well, what we're seeing is -- you've got some softening in the economy, obviously, and in property values.

But while we're seeing some things go past due, we're not seeing a huge shift into NTAs.

We've got very strong underwriting, especially in the residential arena.

Florida is somewhat of an anomaly.

Almost all of our markets outside of Florida are continuing to do fairly well in terms of property values.

Florida is obviously in a different spin on that right now.

Most of the property values are down there, but in spite of that, we're not seeing any kind of a widespread deterioration in our credit quality.

You have one-off projects, but nothing that's widespread.

Okay.

One more question.

You said you're opening 21 branches in the fourth quarter?

That's correct.

Okay.

Thank you.

Your next question is from Gary Townsend from FBR Capital Markets.

Good morning.

How are you?

Hi, Gary.

Let's see.

You mentioned deposit runoff.

Could you just explain that a bit more?

Particularly, it seems runoff in low-cost deposits, is that a trend?

Are your competitors doing something different?

Is it seasonal or what?

Well, we think some of that is just cyclical.

We don't see anything that any of the competitors are doing that is pulling that out of our bank.

We've seen some business deposits, which are being large in nature, they can move fairly dramatically from one period end to another.

And we did see a good bit of that.

We think, obviously, that as the stock market has improved, people have moved low-cost deposits somewhat out of the banking industry and into investment vehicles.

But we don't think it's anything but a cyclical event.

Can you explain to the MSR impairment what were the things that caused that?

We do evaluation on the servicing portfolio and we market its value to current market at the end of each quarter.

It's just a factor of where interest rates are as of a point in time.

Okay.

And commercial real estate, migration?

Your analysis?

You talked about how it appears to have weakened.

Are there particular markets that it's been especially acute?

This is Bill Wells.

Bill Wells, our chief risk Officer is with us, and let Bill comment on that.

What I would say is we've seen a little bit of the softening in the panhandle area, principally in the condo side.

But feel very good overall about that portfolio.

A little bit in the west coast area, around the Naples, Sarasota, and Fort Meyers.

Then what I would say more residential related is in and around the Atlanta market as well as Northern Georgia.

Thank you for your comments.

Your next question is from Paul Delaney from Morgan Stanley.

Just wondering if, a little surprise seen interest bearing deposits down about $400 million.

I was wondering, is account attrition from the merger playing any part in that?

No, Paul, it's not.

As a matter of fact, attrition -- our account retention levels and our new business through the third quarter, we continue to enjoy net household growth.

So it's slightly 2%.

It's just as Al said.

What we saw was not any attrition rate increases, new business, there wasn't a change.

But there is certainly a change, we did see, with people moving their money in different directions.

Whether it be to higher yield or to equity markets or other investments.

Okay.

And then the strong home equity production in the quarter, to what extent did moving the legacy Regions home equity origination effort on to the hold AmSouth platform play a part?

Well, the Regions side has had very good increases in their production levels, but remember that only one-third of the conversions have yet to be done.

And I say that because the front end and backoffice systems that support that home equity won't really be available for the other two-thirds of the franchise until we finish these next two conversions.

So here in about --

I see.

-- we've got one coming up and then the final one the first week of December.

Then the entire company will be on that system that allows 30 minutes or less approval time, centralized underwriting, centralized document preparation, with the ability to close much ahead of industry standards.

And so we look for that to only improve as that takes place.

I see.

Thanks for the clarifications.

Didn't realize that.

Thank you.

Your next question is from Chris Marinac with FIG Partners.

Thanks, good morning.

Dowd and Al, I was wondering if you could give some color on how often you were doing loan clarifications as well as the establishment of interest reserves for clients, particularly on the construction side?

Al and I are going to let our chief risk Officer tell you that one.

Hold on.

This is Bill Wells again.

I don't necessarily see we've seen anything unusual than what we've been doing in the past.

One thing we started back in November of '06 is going to consistent policies and practices throughout the Regions area.

And we have a very good commercial real estate operation.

I don't see that we're doing anything different from what we have done in the past.

Does that in general kind of mitigate potential nonperformers or watch list credits of that --?

My view is that the loan sales was the first phase of that where we start to identify any credit that might have problems early to work out or restructure what those issues may be and then possibly sale.

The strength, I think, of our process that we put in since November is the early identification piece of that.

You have not only the relationships managers, as well as the credit people working or looking at it and plus you have an independent team for credit review that reports under risk that is going in and assessing where we are, where are we with this process, so we feel very good about that.

Okay, great.

One last question, Al, separate, how often is the dividend reviewed?

Is that once a quarter or just once a year?

Our board reviews the dividend on an annual basis and in the new company, obviously, that is done as many of our shareholders remind me that they always wait to see what our board is doing after its October board meeting.

Okay.

Which is still to happen this month, or has that already happened?

That has not happened.

Four -- our board meets later this week.

Okay, great.

Al, thank you very much.

Thank you.

Your next question is from Ed Najarian from Merrill Lynch.

Good morning.

Hey, Ed.

I would like to come back to your statement with respect to the full-year net interest margin of 375 to 380, according to my math, that implies a potentially lower margin in the fourth quarter relative to the third quarter by 9 to 29 basis points, which would -- in other words, 9 basis points of further margin deterioration would get you to a 380 full-year margin and 29 basis points would get you to a 375.

So I'm first wondering if you sort of agree with that math and that outlook?

My second question is, if you could provide some color, if you expect additional outflows of low-cost deposits?

That's something that we're not seeing as significantly at other banks this quarter as we saw at Regions this quarter.

Let me hit the deposit piece first.

Fourth quarter is generally a very good deposit quarter for us, or if everybody, so no, we don't expect to see continuing outflows.

On the net interest margin, as we go into the fourth quarter, we do expect to see some more compression.

As we said in the past, the assets that are rolling off generally are not being replaced at spreads that equal the 375 or 380.

That's just not happening.

We also have an event that we expect to have in the fourth quarter.

We will -- we plan to expand our life insurance program.

That will impact the net interest margin even though it will be accretive to earnings.

It will be about 4 basis points.

That's factored into our projection.

And as deposits continue to remix, that can have some impact as well.

But I think if you take those things into account, then that pretty easily gets you to that range of 375 to 380 that we were talking about.

Okay.

Thank you.

If I could just follow up maybe with some color on operating costs.

You talked about the amount of expense saves that you've realized to date with respect to the merger with AmSouth.

If we back out merger-related charges from your operating costs and we also back out gains and losses in the second quarter and the third quarter related to mortgage servicing valuation, essentially operating costs were flat on a linked quarter basis.

I would have thought that given the savings that you've been indicating that we would have potentially seen a decline in operating expenses.

Could you provide some color as to maybe why they were flat as opposed to declining and maybe as well talk about on an outlook basis as we get additional expense savings related to the merger, will they, as they seem to be this quarter, mostly be offset by growth initiatives related to new branch expansion and things like that so that we don't actually see a net decline in operating costs?

Thank you.

Sure.

Your observation about expenses being relatively flat quarter to quarter once you adjust for the mortgage servicing events in the second and the third quarter is correct.

We indicated that we had about $18 million in additional incremental cost saves in the third quarter compared to the second quarter.

In the second quarter we had about a $10 million recovery on some insurance reserves from the Katrina hurricane.

Those weren't available to us again in the third quarter.

We have done about a $5 million trueup in purchase accounting related to amortization of core deposit intangible.

Part of the reason you're not seeing some of this expenses is let's just say from the merger event that we did at the beginning of the second quarter is we are gearing up for these two events that are coming up over the next several weeks.

People that might normally -- the positions that might normally have gone away at the end of that first merger event are being retained to some extent so that we are able to provide assistance where we need it in the upcoming merger events.

We will also, as we go through those merger events, you will begin to see things that we could not realize such as occupancy expense reductions.

Those will begin to flow into the expense saves or into the expense numbers once we get past these merger events.

We also are, as you pointed out, we are building branches.

We'll continue to do that.

So those will -- those costs begin to accumulate over the course of a year.

But we think once you get past these merger events and sort of the bubble staffing requirements that are needed to make these events happen smoothly and effectively to protect the interest of the customers, you should start to see those expense savings really flow through the to the bottom line.

So would you expect in future quarters that despite growth plans and despite de novo expansion plans we should start to see the dollar expense number decline?

It will be down somewhat.

It sure will.

Thank you.

Your next question is from Todd Hagerman from Credit Suisse.

Good morning, everybody.

Al, I was wondering if you could just expand a little bit further on the mortgage side.

It looks like you took the reconciliation schedule out of the press release this time around.

I was wondering just -- given some of the recent changes with EquiFirst, the wholesale banking going away, give us a better context of what's flowing through that line now and kind of what the breakup is?

On the mortgage line?

Yep.

Okay.

Well, we did pull EquiFirst, it was out this time and it had been in some of the prior quarters.

Are you looking for just revenue --

Yeah, a better sense of the revenue mix in the quarter, just in terms of, again, just to update with respect to kind of the servicing component, what your production levels were like in the quarter relatively relative to the second quarter?

We've heard from others of a so-called flight to quality with respect to the banks in the quarter.

Give us a little bit of color in terms of your existing banking operation.

Well, what we're doing right now as we mentioned in the verbiage a little earlier, we are hiring additional mortgage lending officers.

We think this is a good time to beef up our retail mortgage sales process because of what you mentioned a second ago, the flight to quality, we think people will be looking to strong financial institutions as a safe place to do their mortgage banking.

We are building up that sales force throughout our footprint.

Obviously, we are in very good markets.

We will continue to grow that retail side.

We are reducing anything in the wholesale exposure that we have.

We've gotten out of that.

Our sales production -- our origination pipeline at the end of the quarter was about $316 million.

Which is down from the end of the second quarter.

But we feel as we build the sales force back up, we're going to be able to see those pipelines build fairly rapidly, because what we're looking for are very experienced, very seasoned mortgage loan officers.

As they come on board and tramp up their production, we expect to see our production levels grow relative to our competition simply because we're going to have excellent producers.

So to just make sure I understand you correctly, are you suggesting the costs or expenses associated with that hiring effort is showing up in the mortgage line?

It's not there yet.

We've hired a few of those, but most of them have just begun to come on board or we have offers outstanding to add those mortgage lenders.

Okay.

What about -- could you give me more detail, again, just in terms of your servicing component, where that stands today, and then secondly, again, with respect to-- you mentioned I think production volume, what about closed applications in the quarter?

How does that compare to this second quarter?

Well, let me talk about the servicing first.

We have about $43 billion in servicing outstanding as of the end of the quarter.

Our average servicing fee is about 30.3 basis points.

Our mortgage banking fees, though, overall, the general fees were down about $11 million in the quarter.

Gross originations were at $448 million -- excuse me, they declined $448 million in the third quarter and they were at $1.7 billion.

Okay.

And again anything in terms of flow sale gains in the quarter?

No.

They were very weak.

Thank you very much.

Your next question is from Jefferson Harralson from KBW.

Thanks.

I want to ask you about what you expect from the balance sheet in the upcoming quarters.

First of all, on the securities portfolio, is a little bit of steepness in the curve going to stop the security shrinkage that we've seen over the last few quarters?

What we're going to do really, I think I mentioned to you earlier, is we're going to invest in expanding our BOLI portfolio, which is securities-like.

So that will offset some of that decline.

Jefferson, as we see opportunities to invest in securities that give us a reasonable yield that are fairly short-term, we would invest in that.

I think you would still see some continuing decline, but at a slower pace in the fourth quarter in the portfolio.

And on the deposit pricing, we've had some rate cuts here.

You guys are also having some deposit outflows.

Are you, even though rates are going down, are you tempted to raise rates to defend your market shares out there, or do you think that you just go with your current rates and they look more attractive in a lower rate environment and you can level out your deposit outflows without higher rates?

We agree with your latter statement, Jefferson.

We think that our rates are properly positioned and we think we can manage those through marketing and service opportunities rather than price alone.

We think the pricing is very competitive and we're not chasing some of the smaller financial institutions pricing that is higher in certain of the markets.

Okay.

Thanks a lot, guys.

At this time there are not any questions.

Are there any closing remarks?

No, operator.

Let me just say to everyone that we appreciate you joining us today and we will stand adjourned.

Thank you.

This concludes today's call.

You may now disconnect.