First Horizon Corp (FHN) 2010 Q3 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to the First Horizon National Corporation third quarter 2010 earnings conference call.

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

Later we will conduct a question and answer session and instructions will follow at that time.

(Operator Instructions) As a reminder, this conference call is being recorded.

I would now like to introduce your host for today's conference, Aarti Bowman.

Thank you, operator.

Please note that our press release and financial supplement as well as the slide presentation we will use this morning are posted on the Investor Relations section of our website at www.fhnc.com.

Before we begin, we need to inform you that this conference call contains forward-looking statements which may include guidance involving significant risks and uncertainties.

A number of factors could cause actual results to differ materially from those in forward-looking information.

Those factors are outlined in the recent earnings press release in more details are provided in the current 10-Q and 10-K.

First Horizon National Corporation disclaims any obligation to update any forward-looking statements that are made from time to time to reflect future events.

In addition, non-GAAP financial information may be noted in this conference call.

A reconciliation of that non-GAAP information to comparable GAAP information will be provided as needed in the footnote or appendix of the slide presentation available in the Investor Relations area of our website.

Listeners are encouraged to review any such reconciliations after this call.

Also, please remember that this webcast on our website is the only authorized record of this call.

This morning's speakers include our CEO, Bryan Jordan, our CFO, BJ Losch, and our Chief Credit Officer, Greg Jardine.

With that, I'll turn it over to Bryan.

Thank you, Aarti.

Good morning and thank you for joining the call.

We view third quarter results as another step forward in executing our strategic plan.

Net income available to common shareholders was $16 million, a $13 million improvement over the second quarter.

Actions taken to refocus on our core businesses, restructure our balance sheet and proactively deal with problem credits are paying off.

Third quarter's improved results reflect lower credit related costs as well as better performance from our core businesses in regional banking and capital markets.

Our core businesses give us a competitive advantage in our markets.

The regional banks pre-tax income rose 63% linked quarter to $48 million driven by lower provision, improved net interest income, and relatively stable fees.

Capital markets pre-tax income grew $15 million second to third quarter or 56% due to stronger revenue driven by depository customers increased activity.

We saw positive results from our focus on growing our middle Tennessee market share.

According to the recent FDIC Deposit Market Share Survey, our deposits in National increased 16% year-over-year, twice the rate of overall market growth.

Loan demand, coupled with run-off -- excuse me, low loan demand coupled with run-off in our non-strategic portfolio resulted in a small decline in period end loans.

We're encouraged by third quarter solid pipeline of corporate asset based and commercial real estate loans.

There is some C&I pricing competition but in general we're seeing better pricing in our loan portfolio as yields were up 6 basis points from last quarter and up 28 basis points year-over-year.

Third quarter's bottom line was also helped by a $20 million linked quarter reduction in our credit provision.

Continued reductions in higher risk loan portfolios along with generally stable credit quality enabled us to reduce provisioning for the sixth consecutive quarter.

Even so, our loan loss reserve is at 4.22%.

Net charge-offs declined for the fifth consecutive quarter.

Non-performing assets although down 25% below a year ago increased 2% second to third quarter due to fewer resolutions and lower pay downs.

The total inflow of new NPA is steady despite a couple of larger commercial credits going on non-accrual.

Greg will give you more details later in the call.

It is important to keep in mind that with the winding down of our non-strategic loans we may experience a little more quarterly fluctuation in credit quality metrics given the size of our C&I and commercial real estate credit and the cyclicality of commercial portfolios.

Overall, we believe that our credit quality trend will be improving.

I'm pleased with our third quarter progress but a slow growth economy, low interest rates, elevated environmental expenses and implementation of the Dodd-Frank bill are likely to present challenges for the financial services industry and us.

We believe we're well positioned to meet the challenges ahead as well as take advantage of the opportunities that will ultimately arise.

On the regulatory front, it's too early to know the full impact of reforms on revenue or expenses, but we believe that they will be manageable for us.

We will continue to focus on improving our efficiency and productivity to help offset the impact of reform.

Additionally, we will prudently revisit pricing of effective products and services as circumstances warrant.

Let me take a minute to address some of the industry issues around the mortgage foreclosure process.

We deal with foreclosures and residential mortgages and in home equity loans.

As a reminder, we sold our national residential mortgage servicing and origination platform to MetLife Bank in August 2008 and have a sub-servicing agreement with them for the servicing rights that we still own.

We are working with MetLife in allowing them in the terms of the sub-servicing agreement to ensure that proper policies and procedures are being followed.

Through September 2010, MetLife has foreclosed roughly 4,500 loans year-to-date with approximately another 8,200 loans currently in the foreclosure process.

MetLife is currently reviewing its overall foreclosure process and working with outside foreclosure counsel and agencies as appropriate.

On the home equity side, our portfolio is mostly second liens and thus, the number of foreclosures remains relatively small.

Currently, there are roughly 200 foreclosures in process on home equity loans.

We believe that our risk with this issue should be manageable.

Foreclosures are an unfortunate and less than desirable outcome for everyone involved.

Investors, servicers, and especially homeowners.

For that reason, like others, we believe that it is important that foreclosures when necessary be handled properly.

Finally, we built a strong balance sheet with a solid capital base, another advantage for us in our footprint.

At September 30, tangible common equity and tangible assets was 8% and our Tier 1 common ratio was over 10%.

We believe that we will be well positioned for the newly issued Basel III requirements as they become the new standards.

Now, BJ will take you through the financial results and then Greg will discuss credit quality and I'll be back for some final comments.

BJ?

Great.

Thanks, Bryan.

Good morning to everybody.

If you flip to slide five, this just shows our consolidated financial results for the third quarter.

EPS again was $0.07 up from last quarter's $0.01.

You'll find all of our key highlights on this slide but I'll talk about them in more detail on the following pages.

So if you take a look at slide six, we'll look at our overall and business segment trends, our consolidated pre-tax income increased $19 million linked quarter to $37 million.

Regional bank capital markets and our corporate segments which we call our core businesses produced combined pre-tax income of $77 million, up 50% from second quarter's levels.

Linked quarter, the regional banks pre-tax income was up 63% to $48 million driven by an $18 million decline in provision.

Revenues rose 1% at NII and the bank was up 4% reflecting higher spreads in our loan portfolio.

Fees were down a couple percent as we saw continued negative impact from Reg E which was somewhat offset by other income.

On the capital markets side, we booked another strong quarter as pre-tax income climbed $15 million to $43 million linked quarter.

Fixed incomes average daily revenue improved to $1.7 million from the prior period's $1.5 million.

The improvement in what is historically a soft quarter was driven by increased activity from depository customers.

In our corporate segment, we had a -- the pre-tax loss widened to $14 million primarily due to higher expenses and lower NII.

On the expense side linked quarter, the expenses were up $8 million with a variance primarily driven by the inclusion of a $5 million benefit related to a Visa litigation liability reversal in the second quarter.

And on the NII side, our securities portfolio remains stable at about $2.6 billion.

However, reinvestment rates are lower pressuring yields which dropped about 26 basis points in the third quarter.

In the non-strategic segment, we posted a 15% decline in revenue as servicing income declined 29% to $44 million in the quarter reflecting lower net hedging results, the full effect of second quarter servicing sale, and the reduced size of our servicing portfolio to approximately $30 billion.

Net hedging results decreased 28% to $32 million due mostly to interest rate movements and credit marks.

On the expense side, mortgage repurchase provision expense decreased from $56 million to $49 million in the third quarter and I'll go into more detail on this on the next slide.

So if we click there to slide seven, if you look at the bottom left chart, in the third quarter the active pipeline grew to $469 million.

New requests were fairly stable from last quarter's levels.

That's the dark blue bar, with the vast majority continuing to come from the GSEs.

If you look at the light blue bar, resolutions nearly doubled to $146 million from second quarter's $74 million and are reflected in higher net realized losses of $36 million.

As you can see on the bottom right chart, requests are still concentrated in the 2007 Vintage.

Our rescission rates have held steady at 40% to 50% and our loss severity remains at approximately 55%.

Going forward, we will have continued emphasis on increasing resolutions, and a note, though we've seen negligible putback activity from private securitizations, we know there has been increased industry discussion on this topic and we here continue to review and monitor this very closely.

As you know, the standards for reps and warranty somewhat differ between GSEs and private labels and as such, may cause differing trends in both request activity and the resolution process.

As a point of reference on our historical putbacks, which again is largely GSEs, out of the roughly $60 billion of our GSE originations from 2005 to 2008, our total repurchase requests to date have been approximately $800 million or roughly 1% of originations and we have successfully resolved in our favor of 40% to 50% of those requests.

Moving on to slide eight, you'll see margin and the balance sheet trends.

Our consolidated NIM increased 4 basis points to 3.23%.

Core business NIM, regional bank capital markets and our corporate segment remained solid at 3.57%.

Third quarter's consolidated margin benefited from better loan pricing, lower deposit costs, and less drag from our non-accruals.

These positives were somewhat offset by the negative impact of our excess fed balances that we carried during the quarter as well as those lower reinvestment rates in the securities portfolio.

But looking at all of these factors in aggregate, we do believe that the NIM could modestly benefit in the short-term as we reduce the excess balances that we carry at the Fed and continue to improve our loan pricing.

But we generally expect little opportunity from meaningful improvement in our consolidated margin until interest rates increase.

As Bryan discussed earlier, we view our balance sheet as well positioned.

Core deposits were relatively stable, linked quarter we saw non-strategic loans decline 6% as expected but going forward we expect the rate of run-off to slow as the shorter duration construction portfolios are eliminated.

Overall, we're pleased with our progress and positioning for this environment.

We're focused financially on further strengthening our balance sheet, improving our pricing in our margins, as well as our productivity and efficiency.

Now, I'll turn it over to Greg to discuss some of our asset quality trends.

Thanks, BJ.

Good morning, everyone.

I'll start with slide ten.

Overall, third quarter showed continued stabilization in credit quality, although not surprisingly, there was some volatility.

Charge-offs decreased 16% to $111 million from last quarter.

Aggregate reserve declined 8% to $720 million due to lower loan balances from run-off, pay downs and charge-offs.

Now moving to slide 11.

We saw some lumpiness in our non-performers which rose 2% from last quarter, but were nonetheless down 25% year-over-year.

Inflow stayed steady and the percent of NPLs was basically flat from last quarter at 4.31%.

The linked quarter increase was driven by a handful of large credits and fewer payments and resolutions in the NPA portfolio.

We're seeing a reduction in resolutions as the composition of non-performers is changing from more dated non-strategic assets to commercial loans.

Additionally, commercial TDRs increased reflecting efforts to mitigate loss potential by working with our distressed borrowers and adjusting as the industry moves toward more consistent practices.

I'll now discuss key trends by portfolio, starting with income CREs on slide 12.

Income CRE balances were $1.5 billion or 9% of our loan portfolio.

Linked quarter, net charge-offs declined $22 million to $11 million.

Non-performers were up at 10.1% and as we progress through the maturity cycle of commercial real estate, we expect continued deterioration in 2011.

At third quarter, reserves in our income CRE portfolio were at 9.5% and reserves have been above 8% for seven quarters now.

Moving on to the C&I portfolio on slide 13, ending balances were at $7.3 billion, up 5% from Q2 2010.

Linked quarter charge-offs increased from $20 million to $24 million.

This included an $11 million fraud-related credit that we charged off in the third quarter.

But you can see on slide 14, the C&I portfolio also includes approximately $700 million of TruPS, bank holding company and other bank-related loan.

About $300 million are bank TruPS including seven loans on interest deferral at quarter end.

Insurance TruPS comprise $164 million, $136 million were loans to bank holding companies and $96 million were other loans secured by bank stock.

Financial institutions remain stressed and we will continue to monitor this portion of the C&I portfolio very carefully.

I'll talk about our home equity portfolio on slide 15.

Home equity balances were at $5.8 billion at the end of the third quarter.

30 day delinquencies were 2.33%, up 14 basis points or $5 million linked quarter which was driven by more borrowers in the foreclosure review process.

Non-performers in the home equity portfolio were up 11 basis points to 0.46%, reflecting our ongoing efforts to work with borrowers on modifications.

Net charge-offs were up $40 million in the second quarter to $46 million in the third quarter.

This increase includes $9 million of charge-offs related to accelerating loss recognition of charge-offs for clients who are non-responsive for 60 days.

Due to the vintage mix and strong borrower characteristics, we expect relative stability in the home equity portfolio over the near term, noting the consumer delinquency and loss rates remain highly correlated with unemployment trends.

We continue to assume the economic recovery and employment gains will remain slow.

I'll wrap up on slide 16.

Third quarter demonstrated generally positive credit metrics including lower provision expense and a decline in charge-offs.

There was some fluctuation in non-performers as we are at a stage in the credit cycle when some commercial loans are experiencing greater stress and given their size, this can lead to lumpiness in charge-offs in NPAs.

Also, as our non-strategic portfolios wind down, the magnitude of reserve decreases is likely to lessen, especially in our consumer and construction portfolios.

As Bryan noted -- earlier noted, we believe that our overall credit quality trends will remain improving.

I'll now turn it over to Bryan for some closing comments.

Thank you, Greg.

I'll end on slide 17.

Our proactive approach to credit has allowed us to get on our front foot.

We're able to concentrate on new customer acquisitions and retention with improved underwriting, better pricing, and continued great service.

We know that we have additional work to do in improving productivity and efficiency and we're focused on doing it.

Thank you to the First Horizon team who takes care of our customers and continues to take the actions necessary to refocus our Company.

We're taking steps toward our goal of achieving sustainable profitability to drive consistently attractive returns for our shareholders.

Operator, we would now like to open the call for questions, please.

Thank you.

(Operator Instructions) Our first question comes from Craig Siegenthaler from Credit Suisse.

Thanks, good morning everyone.

Good morning Craig.

Just two questions here on the private label mortgage business.

The first one, putbacks from the private label side still are quite small.

I'm just wondering if you could help us in evaluating the risk that there's a material increase in this area in the next few quarters?

Yes.

Hey Craig, it's BJ.

I'll take a crack at that.

We continue to monitor this very closely as I've said and as I've said, we've seen negligible putbacks to date, so for us to monitor something that we haven't yet seen is tough so how we do that is we just monitor the same types of things that you do, discussing activities, where trends are and some of the different industry views.

As we see those start to come in which we do expect, we will be as proactive as we have been on the GSE putbacks, so as I said in my remarks, the reps and warranties somewhat differ between the GSEs and the private labels and maybe that's causing some timing issues in activity and we'll just be prepared for it as it comes.

Craig, this is Bryan.

Let me add to that.

We've got about $15.5 billion or $16 billion that are still outstanding.

I think that it's important to understand what that product is and the credit quality in it.

About 55% or $8.5 billion is what we would define as Alt-A adjustable ARM, et cetera.

It had going in a FICO score of over 700 with roughly an 80% combined loan-to-value and the remainder about 45% or $7 billion is Jumbo product and it had a 735 or so FICO score going in and a 60% original combined loan-to-value.

Of the Jumbo, say $7 billion, roughly $6 billion of that was full doc product so we think the credit quality of the product is a good product and so as BJ said, it's something where we've seen very limited requests at this point.

It's something that we're aware of and focused on and we will continue to monitor it.

And then just the credit quality is quite strong here, even if there is a -- let's say a modest risk of putback, there won't be a putback if the loan is still at par and still paying so is your view the credit quality is strong that could help offset it?

Clearly, the credit quality -- the strength of the borrower will have a big impact on the default.

Default leads to repurchase requests and so we think credit quality clearly has an impact on it and as BJ said, the requirements to repurchase the rep and warranty risk is different in these portfolios, so given the limited activity, it's difficult to estimate at this point.

Our next question comes from Steven Alexopoulos from JPMorgan.

Good morning everyone.

Good morning, Steve.

Bryan, could you just go into -- do you have any liability at this point with the foreclosure process that MetLife is conducting?

Steve, that's -- given the unfolding nature of this, that's a question I don't know the answer to at this point.

We're very -- as I said in my prepared comments, we're very focused on working with MetLife and understanding the processes that have been applied and as it unfolds we'll have a better sense of that.

I do think that any liability if it does exist is reasonably manageable.

But you don't have any control at this point as to the actual foreclosure process there?

Well, as I said earlier, we control the foreclosure process on the home equity side.

That's been fairly small.

We've got roughly 200 loans in the foreclosure process now and the reason it's been small in the past is loss severity had been very, very high and it didn't make sense to foreclose.

With respect to the first mortgage business, now the 4,500 loans that have been foreclosed, we rely on MetLife and the sub-servicing agreement to lay out the terms of that, so it's something that we're working with them and their teams to understand and I know that they're working very hard on this issue as well.

Our next question comes from the line of Matt O'Connor from Deutsche Bank.

Hi.

Hi, Matt.

I do have to ask a question on the putback but I also have an unrelated question so just first on the repurchase risk here, has there been any change on either the precision rate or the severity in the last couple quarters?

Have you noticed anything materially different there?

Hi, Matt.

It's BJ.

No, there hasn't.

Its been consistent precision rates 40% to 50% and loss severity around 55%.

Okay, and then separately, I saw one positive this quarter was from the commercial loan growth that you had about 5% period end on annualized and just wanted to get a little more color on what's going on there and how sustainable you think that growth is?

Matt, this is Greg.

A couple things.

One is the balances increased quarter-over-quarter from two things.

One, driven by our mortgage warehouse, more that's been fairly low utilized and second is as we've indicated at the beginning of growth and due to the pipeline that we have had and as we go through that pipeline, but the majority of the quarter-over-quarter balance growth was mortgage warehouse.

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

Good morning.

Good morning, Bob.

Most of my questions on repurchase have been asked.

Can we just jump over to TDRs for a second?

Obviously a little jump in the TDRs.

Is that accruing or is it non-accruing?

What's your thoughts on where that goes, Greg, over the next several quarters?

Yes, the TDRs include accruing and non-accruing.

The -- I would expect TDRs to continue to increase as we work with borrowers and obviously, it takes some time to -- as everything is performing for TDR to then remove that flag, so just where we're at in the cycle and working with it and as we've got the non-strategic portfolio lessening and we're working with our core franchise customers and working through problems with them in the cycle, I would expect that TDRs would continue to increase some.

The -- I think the other thing I'd comment on TDRs, I think we're all expecting that between the OCC and the FASB that we'll have some clear views of how the industry is to treat TDRs, because it's a little bit opaque to everyone right now.

Yes, but the new draft just came out earlier this week.

What's the breakdown of accruing and non-accruing?

Is it --

I was going to add that.

I think it's roughly, it really is determined based on where the loan is at the time of restructuring so if it's on non-accrual until it performs for a period under the restructured terms, it gets reported as non-accruing but it's about 50% or so that is accruing today.

The other would be non-accruing largely.

Is that total number in the NPL number?

Say that again?

Is the total number in NPL number?

Yes.

Yes, the accruing is included in the NPL.

I guess a question to go back on this because everybody is figuring out.

You are obviously making progress on the fundamentals, there's mortgage overhang and it's sitting on there with what everybody is trying to quantify.

Can you talk about the differences in the reps and warranties in your portfolio?

Hi Bob, I'll just give you a couple examples.

It's BJ, between the GSEs and privates.

One has to do with the ownership requirements in a private securitization.

You have to have a certain level of ownership and the securities to then get the master servicer -- or the trustee to make claims requests on behalf of the investor.

The second relates to the reps and warranties of what you're actually repping to on private securitization.

It's more to the tapes whereas in the GSEs, it's a little bit more to the actual loans and so those are very broad high level differences, so we'll see where those go.

Last question, Greg, you talked about the reserve relief beginning to slow.

Where is your -- we've been doing 30 basis points a quarter or thereabouts.

When are you -- keep up this pace throughout the next three or four quarters and where do you stop?

I'll answer that more broadly.

I think the point is there was a rapid reserve releases as we were working through non-strategic as that gets behind us and expecting that the portfolios continue to stabilize, I think that, that we would look potentially for some continued reserve releases, not at the rate that we've seen before.

That's going to be driven by the economy and by the individual portfolios but much of the reserve releases were coming out of some of the non-strategic portfolios as well as stabilization of the home equity [portfolio] as well.

Just put it in order of magnitude, we've said in the past that we expect normalized reserve will probably run under current accounting 1.5% to 2%.

Today, we're at 4.22% I think the number was so there's a significant amount of reserves that we think can come down as a credit picture improves over I think a couple years.

Our next question comes from the line of Jon Arfstrom of RBC Capital.

Good morning.

Good morning Jon.

Can you give us an idea of what utilization rates look like in the commercial business?

Utilization rates have not significantly changed.

I'm trying to go off the top of my head.

I can't quite, I don't have that number, I think it's about high 40%, I guess.

It's not moving a tremendous amount.

Not deteriorating though?

Right.

Any observations you can share on Reg E, maybe percentage opt in and maybe changes in behavior at all?

Yes, Jon, this is Bryan.

We've had, I think it's something like 60% or so of our customers who have made a decision.

About 50% or more have opted in but it had some impact on fees this quarter.

I think NSF OD charges were down in the $3.5 million to $4 million range.

We still see customers opting in.

As we've said in the past, we expect that net-net that when you work through an annual cycle, it's probably going to have something in the $10 million annualized impact on our revenue and so we still -- as I said we still see customers making decisions.

We still see customers opting in -- the pace has slowed a little bit here, our late third quarter moving into the fourth quarter.

And then just one last question.

You've got a couple of quarters of profitability back to back and you have some clarity on capital ratios and just curious what your thinking is today on TARP and that the capital clarity changed at all for you?

Well, yes.

I would say that our thinking has not changed an awful lot.

We've -- as I've said for the last several quarters, we would like to make progress with working with our regulators to repay the TARP in a practical and sensible way.

We would expect to continue our efforts in that regard and I'm hopeful that we can continue to make progress in that and repay it as that works through the process.

Our next question comes from Jefferson Harralson with Keefe, Bruyette & Woods.

Thanks.

Good morning.

Hi, Jefferson.

As far as the GSE putbacks, what's the most typical rep and warranty cause of conflict as these are coming through?

Jefferson, it's BJ.

I'd say that there's three.

There's appraisal questions, there's owner occupancy questions, and there's undisclosed debt questions.

So they're questioning the actual (inaudible) appraisal or there's just not one there?

No, they're questioning the appraisal, how the appraisal was made and what value that was assigned which then leads to what the loan-to-value was.

So that's the -- that's one of the main reasons for putbacks.

All right, and secondly, you had a really large C&I growth this quarter.

Can you talk about the types of businesses that you're lending to and what drove that $300 million initial growth?

Yes, again, the part of the growth in balances was mortgage warehouse lending, we're seeing significant utilization in that in terms of other we're seeing some good progress in the medical space.

And obviously, some in the pre-income property space as well which is also an area where we're seeing it, so generally, it's in terms of new opportunities is the medical space and growth in the warehouse.

Jefferson, this is Bryan.

As we look at our pipeline, we're pretty encouraged by what we see in the pipeline.

It's broad based, it's everything from commercial to commercial real estate.

We see opportunities continue to exist in asset-based lending.

We saw probably outside growth in warehouse lending but the lending activity we saw this quarter was fairly broad based and we're reasonably encouraged with the opportunities we see in front of us.

The pipeline is over $1 billion.

And that's a pipeline that is not just everything that we're looking at.

This is where we think there's a pretty high probability or have a verbal committment that we'll close a deal.

That's right.

Our next question comes from Ken Zerbe from Morgan Stanley.

Thanks.

Hi, Ken.

Hi.

So when you think about non-performing assets you mentioned those moving to commercial as opposed to the legacy business.

When you think about how that change is affecting the NPA balances, should we be expecting more of a flattening in NPA balances going forward as the non-strategic stuff just becomes less of a portion and you have longer commercial NPAs in there?

Yes, I think generally, there's a couple things.

I think we're at [fulcrum] point, that as a non-strategic is winding down, we're working with the commercial loans, one thing that will begin to happen is the upgrade process, so I think at this point in time what you're seeing, within our portfolio is generally, the portfolio grades are improving.

What happens when you criticize categories, are either healing or they are getting a little worse and that's part of what we see and expecting this part of the cycle so as we look forward, I would see NPAs be around this level and then as the -- we continue to work with them and as we can restructure as appropriate and then we will see some upgrades out of that.

All right and that probably sounds like that's also a driver of more of the stabilization to some extent the reserve ratio as well in terms of why it might not be coming down as fast as what we would have seen otherwise.

Yes, I think what you have seen is decent releases out of the commercial side as well and I think that continues.

But yes, I think it's -- it will -- I see this as a couple of quarters as we work through this that the NPAs will be level and begin to improve.

Our next question comes from Kevin Fitzsimmons with Sandler O'Neill.

Good morning, everyone.

Good morning Kevin.

Most of my questions have been asked.

Just wondering if you could comment on the sustainability of the capital markets revenues that was a line item that we've seen coming down the past few quarters and that had a nice spike up this quarter?

And then I just wanted to clarify on that earlier question about TDRs.

Is the accruing part of the TDRs, so the 50% of that $300 million, I just want to make sure I heard you right.

Is that included in your non-performing loans or is it not?

Thank you.

Yes.

The accruing is in our non-performing loans for TDRs.

Okay, great.

Kevin, this is Bryan.

As we said in the past, capital markets will have some fluctuation around the level of their revenues.

We feel pretty optimistic about the activity we see in the business for the next several quarters and we think that it may could ebb and flow a little bit but we think we're going to see pretty good activity flows particularly in the fixed income business over the next several quarters.

So I can't tell you whether it's $1.7 million on an average day or $1.5 million, but we think we're very optimistic as we look out and think about the next several quarters.

Okay, thank you.

Our next question comes from the line of Jason Goldberg with Barclays Capital.

Hi Jason.

Jason, your line is open.

Try unmuting your phone.

Next in line we have Kevin Reynolds with Wunderlich Securities.

Good morning everyone.

Morning Kevin.

A question on as you look forward moving beyond the mortgage foreclosure issues, what is your position on TARP repayment and I apologize, I've been trying to keep up with you since you've already addressed this a little bit but what's your position on TARP repayment.

And then also how do you feel about the acquisition environment today and I know we've seen in the general neighborhood down here a couple of interesting announcements with a small bank that was acquired at a pretty deep discounted price.

Where do you stand on that today?

Kevin, this is Bryan.

Let me start with the TARP and they are really closely related in some sense.

We've -- as I've pointed out as we went through the prepared remarks, we've got a very strong capital base, tier 1 common north of 10%, I think 10.4%, 8% tangible common to tangible assets, and we think that we've got a very strong capital base which really enables us to do things.

One, to work with our regulators as we think about how we repay the TARP to do it in a reasonable fashion and a reasonable time frame and we would expect to continue to work with our regulators in that regard.

Now with respect to the M&A environment, we think that's an opportunity for us to put capital to work.

We're going to be very focused and measured in how and when we execute on that.

We want to make sure we have the right opportunity and the right market and it helps us build the franchise for the long term and we think there will be opportunities there.

We don't feel any particular urgency around the M&A environment right now simply because we see ourselves making very good progress on the things that we're focused on day-to-day, growing customers, getting more productive in the way we produce revenue and more efficient in the way that we produce that revenue.

And so we think we've got a lot of opportunities in a number of different avenues so we're very encouraged about what we think the next several quarters and several years following the terms of our ability to grow the business.

Okay.

Thank you very much.

Thank you.

Our next question comes from the line of Marty Mosby with Guggenheim.

Marty, your line is --

Yes, I'm here.

I wanted to ask -- hello?

Hi, Marty.

We're here.

Hi.

I wanted to ask about asset quality improvement and given what we're being able to see on that front in the trends are we able to pull any of the expenses down related to work [out] or the analysis on the asset quality side?

Yes, that continues to rundown to that degree, even from the number of people in rehab is reducing substantially if you work through that, and then more environmental costs are also decreasing as well.

And then BJ, I was wondering with what we talked about the reinvestment risk in the securities portfolio, how are we trying to combat that given that we do have the low interest rate environment that's going to be around for awhile.

And then to tag on to that is how do we think about the prepayment risk and the mortgage side if you go from what is an inflated level but not really where we should be given where interest rates are at and if we were to lose some of the servicing profitability as well as the national HELOC volume and also more reinvestment risk and investment portfolio, how do we handle that phenomena as well?

Thanks.

Sure.

On the reinvestment risk, I think I talked about that.

Our yields declined about 26 basis points there.

What we're trying to do with our securities portfolio is make sure that the structure is right of what we're buying as opposed to looking for yields so our durations are staying very short probably in the two and a half year range and we want to make sure that we don't get caught upside down on a carry trade if rates suddenly move up.

So our reinvestment rates right now are right in the 2.5% range and if you look at our maturity stacks going forward into next year and next few years, there's certainly going to be a drag if interest rates stay where they are and our reinvestment rates stay where they are.

But as you know, our securities portfolio percentage of our assets is relatively small versus peers so we think that, that drag is manageable and we would rather not reach for yield there.

We do think with the pipeline that we have on the loan side we would much rather put some money to work there and try to get some loan yield which we think could happen over the next several quarters.

So like I said on the NIM, overall we think it can modestly improve over the near term and then it will take some interest rates in general to make it move up meaningfully.

In terms of the prepayment risk on MSR, I think our CPR this quarter was 13%, so it's still very, very low.

You're exactly right.

If that started to increase, we have had it running down but as we sit here today, we think that servicing portfolio is very manageable at this size.

We very much like how we're able to hedge it and the knowledge and expertise that we have around hedging it.

And so we think that it's a good asset for us to help us somewhat offset some of the mortgage repurchase expense that we have, so as we sit here today, we're pretty comfortable with it.

Our next question comes from the line of Heather Wolf with UBS.

Hi there.

Just one quick question on the putbacks.

Do you get the sense that putbacks on non-delinquent mortgages will be higher under private label securities relative to what we've seen for Fannie and Freddie?

Hi Heather.

It's BJ.

Yes, my guess would be no, that it would be more on delinquents or where there's actually been losses.

The experience that we've seen on GSEs is the vast majority of what comes back is delinquent, so I can't sit here right now and think of a reason why that would be different on privates.

Heather, this is Bryan.

I'm just trying to think through it and delinquency and default have been the trigger and in the past, I can't come up with what I think would be a good reason why you would see current mortgages be a significantly different proportion out of private securities as it would be in the agency servicing business or agency sales.

I had read a quick headline and I have no idea if this is out but something about how the documentation surrounding the entire trusts were being investigated, whether or not there was a risk of full trust being put back due to redocumentation.

Well, good question.

Don't know the answer to that.

As I understand it right now, again the reps and warranties somewhat differ on the privates and so on securitizations you're going to have prospectuses which clearly lay out the risks and we will look through and have defenses for what we think is something that we need to repurchase and things that we don't we'll put back.

Okay, great.

Thanks so much.

Thank you.

Our next question comes from Matt Burnell with Wells Fargo.

Good morning folks.

Just most of my questions have been asked and answered but just a couple of quick questions.

I guess I was -- I'd like to get a little more color on your net interest margin guidance.

BJ, I think you said that essentially you're expecting at least in the near term relatively flat net interest margin.

What was the benefit in the quarter from the fairly large or what was the magnitude of the benefit from the fairly large increase in the net interest margin and capital markets on the overall net interest margin in Q3?

In Q3?

It was just a few basis points.

I think the capital markets was actually down a little bit in the quarter.

The big increase came from the loan portfolio.

Yes, the loan portfolio had a much bigger impact.

It was a little bit of an impact on lesser drag from non-accruals, I think about two basis points.

The securities portfolio as I talked about was the net drag and as I mentioned excess balances at the Fed.

We probably averaged about $600 million of excess balances at the Fed during the quarter and so we think that, that comes down going into the fourth quarter pretty substantially.

And so we think over the near term the margin could modestly improve just because of that, but longer term, it's going to be hard to move up until interest rates rise.

Aarti pointed out to me I was wrong, that the margin and capital markets was up.

Right, okay.

Bryan, you mentioned a couple of types the commercial lending pipeline is starting to build and you're obviously enthusiastic about that.

If you've got $1 billion in the pipeline right now and you're pretty comfortable that most of that is going to turn into actual loan growth, what's the timing over which that $1 billion would flow through into actual loans?

Matt, maybe I misspoke.

I didn't intend to signal we expected most of that to turn into loan growth.

We think there's a probability.

We look at the pipeline based on probability or where we have a commitment so we think there's a good chance to close the loan but we understand that there are competitive deals and we may or may not win it but the pipeline has been stable to steady, maybe declined a little bit later in the third quarter.

But we expect that most of that pipeline will work itself through over the next two or three quarters maximum and we're optimistic that it will replenish as those credits work through.

Our next question comes from Mac Hodgson from SunTrust Robinson Humphrey.

Hi, good morning.

Good morning, Mac.

Just a couple questions.

Bryan, do you think this mortgage repurchase risk has delayed the Company's desire to exit TARP at all?

Has it pushed back your timeline there?

No.

The key to TARP -- we looked at and as we work with the regulators, we're thinking about all of the risks and our capital position in totality.

This mortgage repurchase is something that as you know, we've been very focused on for many quarters now and it hasn't had any impact on our desire to try to work with the regulators to come up with a way to deal with our TARP, our CPP, and appropriate repayment time frame.

And what about M&A?

Do you feel like do you need to exit TARP in order to participate in regular way M&A or do you feel like you could do that while still holding TARP?

Well, I don't know that it's an inhibitor but I do think that, my instincts tell me that having TARP repaid first is definitely an advantage and probably preferable.

Okay, great.

Thanks.

Sure thing.

At this time, I'd like to turn the call back over to Bryan Jordan for any closing remarks.

Thank you for, again for joining the call this morning.

We appreciate your interest.

Please let Aarti or any of us know if you have any additional follow-up questions and I hope you all have a great weekend.

Thank you.

Ladies and gentlemen, thank you for your participation in today's conference.

This concludes the program.

You may all disconnect.

Everyone have a great day.