First Horizon Corp (FHN) 2011 Q1 法說會逐字稿

Good day, ladies and gentlemen.

Welcome to First Horizon National Corp.

first quarter 2011 earnings conference call.

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

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

I would now like to turn the conference over to your host, Aarti Bowman.

Thank you, operator.

Please note that the press release and financial supplemental which announced our earnings, as well as the slide presentation we use in this call this morning, are posted on the investor relations section of our web site at www.fhnc.com.

In this call we will mention forward looking statements and non-GAAP information.

Actual results may differ from the forward looking information for a number of reasons outlined in our earnings announcement materials and our most recent annual and quarterly reports.

Our forward looking statements reflect our views today and we are not obligated to update them.

The non-GAAP information is identified as such in our earnings announcement materials and in the slide presentation for this call.

It is reconciled to GAAP information in those materials.

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; and our CFO, BJ Losch.

Additionally, our Chief Credit Officer, Greg Jardine, will be available with Bryan and BJ for questions.

With that, I will turn it over to Bryan.

Thank you, Aarti.

Good morning, everyone, and thank you for joining the call.

I'm pleased with the progress we have made.

Our core business has showed solid performance.

We made good headway in our efficiency initiatives, credit quality improved notably and we maintained our strong capital position.

In other words, we are executing on our key priorities for 2011 and are getting back to blocking and tackling.

As first quarter results show, we are gradually optimizing our business mix, taking steps to build our higher return regional bank and capital markets businesses while continuing to wind down the lower margin non-strategic segment.

The regional bank's pre-tax income rose 4% linked quarter and moved from a pre-tax loss to a pre-tax profit year over year.

Capital market's performance remains solid.

The non-strategic segment continued to be less of a drag on our overall results.

Our proactive steps to identify and provide for problem credits are paying off as we were able to sharply reduce the loan loss provision as credit trends improved.

In fact, the regional bank booked a provision credit in the first quarter.

At quarter's end, we maintained a reserve of 3.7% of total loans.

Revenue trends in the regional bank are also encouraging despite ongoing environmental challenges.

Linked quarter revenues declined from unfavorable seasonal impacts from lower NSF fees, a shorter day count, and a lower level of earning assets.

Our bankers' intensified calling efforts along with emphasis on customer service are helping us deepen and expand profitable customer relationships.

The regional bank's loan activity has been good.

As a result, we are seeing a positive shift in the loan mix with attractively priced growth in our corporate asset based lending and CRE portfolios.

Total loans though were down linked quarter due to a decrease in loans to mortgage companies as mortgage refies slowed from the rise in interest rates.

Pricing on new loans remains favorable as spreads were up 9 basis points linked quarter and are 29 basis point above a year ago.

We will continue to improve our bank's balance sheet composition as we focus on a diversified, appropriately priced loan portfolio.

Even though the current environment is competitive, we plan to stay disciplined with our loan pricing and structure while continuing to build market share.

We are focused on winning good relationship-oriented customers which should help us generate better revenues and fee income.

Our capital market's business continues to be a strong contributor to fee income.

As expected, average daily revenues were in the range of our normalized levels at $1.3 million in the first quarter.

Capital market's return on assets was approximately 3% and we expect it to remain a high return business for us.

Losses in our non-strategic segment narrowed, reflecting lower credit costs and a decline in mortgage repurchase expense.

We signed agreements to sell our First Horizon Insurance and Highland Capital businesses in the first quarter reflecting our continued emphasis on improving profitability and returns.

We also made progress in improving productivity and efficiency with consolidated expenses dropping year over year and linked quarter.

There is clearly more work to be done, but we are well on our way toward implementing initiatives that should save us more than $100 million annually by 2012.

Approximately 40% to 50% of the targeted savings are currently in our run rate, as BJ will discuss in more detail.

We are committed to right sizing our expense base with the same vigor that we addressed our capital position and our proactive stance on credit quality.

Credit quality notably improved in the first quarter with total provision costs of only $1 million.

Improvement was broad based across our portfolios.

We are experiencing more upgrades and fewer downgrades.

In our income CRE portfolio, we are seeing stabilizing property values as well as guarantors and sponsors stepping up.

Our C&I consumer portfolios benefited from an improving economic environment.

Enhanced efforts and technological upgrades in our collections process helped mitigate losses in our consumer portfolio.

As a result, overall net loan charge-offs and non-performers were down in the first quarter to the lowest levels in three years.

Our capital position remains strong.

During the first quarter, we repurchased a warrant issued to the Treasury in 2008.

We also declared a $0.01 per share quarterly cash dividend.

We will continue to manage our capital smartly, balancing needs and opportunities as we strive to enhance our shareholders' long term returns.

To sum up, first quarter results were on track with our expectations.

We are successfully executing our strategic priorities and are committed to continued successful execution in what is likely to be a slow growth, low interest rate economic environment this year.

I will be back for some closing comments, and BJ will now take you through the detailed financial results for the quarter.

BJ.

Good morning, everybody.

I will start on slide 5.

As Bryan mentioned, net income available to common shareholders was $40 million compared with a loss of $49 million in 4Q '10.

Included in first quarter's numbers were consolidated pre-tax income of $54 million and core business pre-tax income of $78 million.

We also had some significant items, which you can see at the bottom of this slide, this quarter, which I will discuss in a few minutes during our segment highlights.

If you turn to slide 6, this shows our consolidated financial results.

Again, diluted EPS was $0.15 a share up from fourth quarter's loss of $0.20 a share.

If you look at our net interest income, it was down primarily due to shorter day count as well as loans to mortgage companies.

Non-interest income, excluding securities gains, climbed a bit from 4Q to 1Q.

You can see non-interest expense was down quite a bit from 4Q to 1Q, Provision, we booked a $1 million provision this quarter to drive our pre-taxed income results of $54 million.

You will see in discontinued operations the impact of our First Horizon Insurance sale.

And down at the bottom right of the page, you will see our diluted share count moving up from 4Q '10 to 1Q '11, which reflects the full quarter impact of our December common equity raise.

Flip to slide 7, I will go through some segment highlights.

Pre-tax income in the regional bank increased 4% linked quarter.

Provision expense in the bank declined from $2 million to a provision credit of $12 million.

NII decreased 7% from lower loan balances in mortgage warehouse lending, which offset modest growth and other commercial loan categories, as well as the shorter day count.

Year over year, NII was up 1% in the regional bank.

The increase was driven by higher loan fees, fewer interest reversals and favorable pricing on new loans.

Total revenue decreased 7% linked quarter, but was only down 1% from a year ago despite regulatory change impacts on NSF and overdraft fees.

Capital markets pre-tax income declined $1.5 million or 6% linked quarter.

Revenues were down 5% and lower variable compensation drove expenses down 4%.

Fixed income average daily revenue declined slightly from $1.3 million from $1.4 million.

Corporate segment had a loss of $8 million compared to fourth quarter's pre-tax income of $5 million.

First quarter included a $5.8 million gain from the redemption of $100 million of trust and an 8.07% rate.

Fourth quarter included a $14.8 million gain from sale of our Visa shares.

Corporate expenses increased $2 million to $21 million.

First quarter included a $3.3 million reversal of Visa contingent liability compared to $8 million in the fourth quarter.

Pre-tax loss in the non-strategic segment narrowed to $24 million from $77 million linked quarter.

Loan loss provision decreased 69% linked quarter primarily from improved metrics in the consumer portfolio.

Servicing fees were up modestly and mortgage hedging results increased to $12.5 million from $7.2 million in the fourth quarter.

Mortgage repurchase expense was also lower, which I will go into more detail about in a few slides.

As for recent regulatory commentary regarding mortgage servicing and foreclosures and the actions outlined against our sub servicer, we currently believe there is little basis for liability on our part; and in the event we have any exposure, we believe it would be limited.

Moving on to slide 8, consolidated net interest margin was at 3.22%, up 4 basis points from the prior quarter.

Core business NIM was at 3.58% up 2 basis points from fourth to first.

NIM was positively impacted by continued business mix shift, better loan pricing, lower deposit costs, and a reduction in excess balances at the fed.

Linked quarter total average assets decreased to $24.6 billion from lower fed and loan balances.

Our average fed balances declined by about $700 million quarter to quarter.

The non-strategic portfolio continued its runoff at about 5%.

We also had a reduction in loans to mortgage companies, as I mentioned, as the shorter duration loans were paid off as industry refi activity slowed considerably.

From fourth to first quarter, average total commercial loans decreased 6% including a $519 million drop from those loans to mortgage companies.

Excluding these mortgage warehouse loans, commercial loans actually increased 1%.

We saw loan growth in our corporate CRE, ABL, and business banking loan portfolios.

While the decline in higher yield mortgage warehouse loans contributed to the decline in loan yields, yields on new loan products improved, particularly in CRE where they were up 18 basis points from last quarter.

As anticipated, core deposits were down slightly linked quarter due to roll off of higher cost deposits associated with our exit from the TAG program.

Weighted average cost of total deposits declined again 3 basis points to 67 basis points.

Moving on to slide 9, consolidated expenses declined 4% from the fourth quarter and were down 7% from a year ago.

As Bryan mentioned, we started to see results from productivity and efficiency efforts in the first quarter.

Compensation decreased 5% linked quarter despite seasonally higher employee related expenses and declined 11% year over year.

Areas we have identified as efficiency opportunities, which you can see, include business process simplification, streamlining IT functions, and reducing our procurement expenses.

Recent examples of how we've achieved about $50 million in cost savings include closures and consolidations of five financial centers, an FTE reduction of 5% from last quarter, and numerous other initiatives across the company.

As Bryan said, we are committed to improving our operating efficiency and delivering $100 million to $125 million in annual cost savings by 2012.

Moving on to slide 10, I will discuss mortgage repurchase trends.

You will see that our pipeline actually decreased $5 million to $529 million.

The mortgage repurchase provision expense declined 16% to $37 million.

This is the third consecutive quarter that our repurchase expense declined.

The provision balanced against net realized losses of $37 million so that the reserves stayed flat at 183.

Rescission rates have actually improved from 40% to 50% to now 45% to 55% range and severity remains steady at 50% to 60%.

New requests were down 16% linked quarter and resolutions were modestly higher than new requests.

Over 90% of our repurchase [makeover] requests are from Fannie Mae and Freddie Mac.

And while the majority of requests in the pipeline are still from the '06 and '07 vintages, we are seeing a continued shift into the '08 vintage.

As you know, we sold our mortgage platform in August of 2008.

We did not have any repurchase requests or any new litigation related to our private securitizations in 1Q '11.

Based on the vintage mix and the fact that we did not originate any new GSE loans after August '08, we believe the GSE mortgage request volume should decline over the next 12 months compared to 2010's levels.

Moving on to asset quality highlights on slide 11, as Bryan mentioned, our proactive approach to credit quality enabled us to reduce provision to $1 million this quarter.

Linked quarter charge-offs declined 23% to $77 million.

We decreased reserve 11% to $589 million.

We saw improved credit trends from lower delinquencies in the consumer portfolio and favorable grade migration across the commercial loan portfolios.

Moving to slide 12, NPAs declined 2% linked quarter and inflows were down 21%.

Our ORE balances decreased 15%.

While we could experience quarter-to-quarter volatility, we anticipate 2011 NPA levels to decline compared to last year.

As we sit here today, we believe the next several quarters' provision levels are likely to be below what we consider normalized levels of our bonefish targets.

However, we are mindful that national and global economic events and subsequent changes in our portfolios could impact this outlook.

I will wrap up on slide 12.

First quarter marked another step towards achieving our long term bonefish targets.

We still have plenty of work to do, getting there with the right mix of revenue, expense and credit levels in the profitability equation, but our core business's ROA was at 126 basis points in 1Q '11 compared to our long term bonefish targets of 125 to 145 basis points and our consolidated ROA with 71 basis points.

We are making continued progress towards higher returns by continuing to optimize our business mix, improving productivity and efficiency, favorably positioning our balance sheet, and decreasing our credit costs.

I will turn it back over to Bryan for some closing comments.

Thank you, BJ We started 2011 on our front foot thanks to the hard work of our employees, I am pleased with our progress in executing on our strategic priorities and expect continued success as the year unfolds.

There are still challenges to work through, but I believe our superior customer service, unique product set, and a market focus give us a competitive advantage both near term and longer term.

We are committed to producing consistently attractive returns for our shareholders.

Thanks and now we will take your questions.

Operator?

Bob Patten, Morgan Keegan.

Stock's getting hit a little right now and obviously it's like the headline view of what revenue growth is for the franchise.

Can you just talk about when you say there is a lot of activity going on in terms of calls, business development, but clearly I think people are focusing on the top line this quarter.

How do you ramp that focus up at this point in time?

First quarter is a hard quarter to get a read on revenue growth.

Seasonality impacts it; day count impacts it; the number of loan line items, and day count impacts fee businesses, both in banking and in capital markets.

So there is always a little bit of volatility.

In our quarter, as BJ and I both pointed out, we had some contraction in the mortgage warehouse lending, which tended to be tied more to what is going on in interest rates in the refi market.

What we are seeing day in day out customer business.

The pricing continues to remain strong.

As we pointed out, we are seeing improved spreads.

We are seeing improved business mix on our balance sheet.

Our pipelines continue to look very strong.

In fact, our pipeline for new loan production at the end of the first quarter was up slightly from where it was at the end of the fourth quarter.

So, we are reasonably encouraged with the opportunity for continued customer growth, continued customer activity, and as we both have said, a slower growth environment and a low interest rate environment.

We are reasonably optimistic with the opportunity for growing the business and improving the business or balance sheet mix over the longer term.

Okay.

On the capital side, can you just talk to your thoughts about what the minimum levels of tier 1 that you're going to need to keep on the balance sheet over the next couple of years, because you've been pretty vocal about saying you are not a warehouser or a capital.

Bob, It's still unfolding a little bit.

Capital management, I think for the foreseeable future, is going to be an exercise that we will all spend a lot of time on in the industry and it's going to involve our regulators as we lay out our capital plans.

We think longer term that we ought to be able to run this company in the 8% to 9% tier 1 common range.

We think over time we will migrate to that level.

As I said, it's still a period of change and we are all working through the guidance that we are all trying to gather information from with the latest SCap or stress testing work that was done on the larger institutions.

We think 8% to 9% tier 1 common over the longer term.

Okay, thank you.

Sure thing.

Have a good weekend.

Steven Alexopoulos, JPMorgan.

Bryan, your quote in the press release talks about deploying capital and being fast and nimble and how you make decisions in response to changes.

When I read that, I think of M&T being given an opportunity of Wilmington responding quickly.

Are you signaling you are more likely to go after a larger distressed deal here?

I'm just trying to understand what that message is.

It's probably less focused on M&A transactions as it is something that we are trying to build into the culture.

Very simply put, I would say, we, as a company, we as an industry, are facing a tremendous amount of change over the next four or five years.

Some of it from the impacts of legislation Dodd-Frank; some of it from the impact of an economic growth environment that is low interest rates and low growth.

So, we are focusing our efforts on adapting to change, being more flexible, being more nimble and being in a position where we can implement new technologies.

If that means integrating an M&A transaction, it means that.

But that's not targeted specifically to an M&A transaction at all, Steve.

Okay.

That's helpful.

One follow-up on the margin.

Looks like loan yields are down in the quarter, security yields are down, your cost of funds looked like they flattened out.

Should we look for NIM pressure over the next couple of quarters from where we ended here in 1Q?

We still believe that the fundamentals of the margin remain pretty strong.

We talked a lot about business mix and what kind of spreads we are getting on new and renewed loans.

I still think we have a modest amount, not a lot of room, to move deposit rates down, but you are right, that is getting close to the bottom.

We are optimizing the balance sheet, as you can see, in terms of taking down excess balances at the fed.

We are taking advantages when we see them to put on assets in the securities portfolio at reasonable yields with reasonable structures.

But I would overall say that our NIM should be relatively flat to maybe modestly up over the next few quarters.

Perfect.

Thanks for all the color.

Sure.

Ken Zerbe, Morgan Stanley.

On the mortgage repurchase expense, obviously it has been coming down.

I just want to get any status of if you have been in discussions with the GSEs about potentially settling this or if your thoughts have changed, because the expense is coming down, that you don't feel that is necessary at this point.

I think we have talked about before that we are willing to entertain discussions and dialogue with the GSEs; and at the same time, as you can see in our trends, we are also willing to continue to do what we are doing to manage down the exposure.

I think we are going down any and all of those paths and continue to do so; and if there is something that -- some kind of resolution we could work out that's economic with the GSEs, we will certainly pursue that.

If not, we will continue to hopefully see improving trends like we saw this quarter.

When you think about M&A, is there any hurdles that you want to reach internally before you get more aggressive with thinking about M&A?

Maybe it's just finishing off the run off portfolio, maybe it's something else.

But obviously cleaning up your book is a priority.

But is that going to stop you, at least near-term, from actively looking at deals?

I don't particularly see it as a linear process, but I do think that we are very focused internally on executing on a number of fronts, as I described in my opening comments; the blocking and tackling.

It's about improving our customer service, implementing the technology changes that we have been working on for the last year or two and getting more efficient as an organization.

So we are perfectly content to focus there.

And assuming that the right transaction at the right price doesn't come along, we are perfectly content working on the execution in the business.

We think we can do a lot in the next 12 months focused there to improve our financial performance, and as you said, continue to wind down the non-strategic business.

Great, thank you.

Sure thing.

Thank you.

Tony Davis, Stifel Nicolaus.

In view of this latest regulatory directive and instructing banks to consider reserve adequacy, borrowing for second lien credits, what are your thoughts regarding your disposition and options for the non-strategic home equity book?

I will let Greg talk about the credit elements of it.

It's been our experience in the past, and we continue to keep a little bit of an eye on it, that market expectations around financial performance and home equity portfolios is going to be significantly worse or consistent across all portfolios.

Our experience has been that our portfolio has performed better than other portfolios.

We think that will continue, given the credit quality inherent in that portfolio.

So that in particular hasn't been an area where we thought it made a heck of a lot of economic sense to pursue.

Thank you.

Just to amplify on that, our book is a lot different than the books that have traded in the market.

Therefore it's very difficult for the market to get a grasp, because it is such a higher-quality book compared to what's traded in the market.

So as Bryan mentioned, then the economics of it just don't reconcile to how the book performs.

Fair enough.

BJ, to you, the $120 million to $125 million savings by 2012, are we correct to infer there is probably still $200 million or so in the environmental costs to be achieved in savings there, and what your thinking is about a better time frame for that?

That's right.

That is exactly the right way to think about it.

If you look at the expenses in our non-strategic segment primarily, we expect those to go away over time.

And I would expect that they should be substantially, not fully but substantially, gone by 2013, and have a lot of it gone by 2012.

If you think about the biggest piece of expense that is in there, it's mortgage repurchase.

If you look at last year, we would have had something like $270 million of expense in non-strategic.

$190 million of that was mortgage repurchase.

So we expect that to come down substantially over the next couple of years.

With that being the biggest piece, that will drive those wind-down costs lower.

Greg, if I could just ask one final one of you, is it reasonable that we might expect a consolidated provision credit sometime in the next few quarters?

Once again?

Is it reasonable to expect a consolidated provision credit in -- (multiple speakers)

As we look at the continuation of the healing of the book, I think it's going to be lower.

Whether it's a credit or whether it's slightly negative as this quarter, it's going to be close in those ranges.

It's going to be less than we have seen in the past.

I think I said in my prepared remarks as well that we think that provision levels consolidated are likely to be below our normalized bonefish targets.

If you go back and do the math, our normalized bonefish targets are 30 to 70 basis points of annualized provision.

If you take that and multiply it by our loan balance, that is how we are thinking about it.

With the caveat again that global, Middle East oil, other economic impacts, regulatory changes, et cetera, could change that outlook.

But as we sit here today, that is how we see it.

Marty Mosby, Guggenheim.

Your line is open.

I wanted to talk a little bit about the bonefish actually and what you were just talking about.

If you look down the 1Q '11 column in the quarter, what I was looking at is we are hitting most everything that we have and actually this quarter we had about a $12 million recapture in the core number relative to the 30 to 70 basis points of charge-offs.

The only thing left to show improvement on is the efficiency ratio.

My key question was forgetting about the non-strategic parts of the business and just focusing on the efficiency ratio and cap markets and the regional bank, how fast can we migrate from 79 down to less than 65?

As Bryan and I both talked about, this is something that we are absolutely focused on just as hard at executing as we did on improving our capital position and getting out in front of credit.

Our folks across the Company, literally in every part of our Company, are doing a fantastic job on this.

I talked about that $50 million of our targeted $120 million to $125 million is already in our run rate.

We are moving towards getting that $100 million to $125 million executed and in our run rate by the end of this year so that we have a clear glide path into 2012.

As I just mentioned when I was answering Tony's question, the wind-down will take a little bit longer, it should make meaningful progress in 2012, but take a little bit longer, such that we are really targeting to achieve bonefish efficiency ratios in 2013.

The other part of the equation that just doesn't get defined is the balance sheet size.

Right now, if you just look at the core amount, we are talking about $17 billion in core assets.

So I think you have balance sheet size and share count are the other two things that, Bryan, you may be able to give us a little bit of a feel for, given that the earnings assets and the bank this quarter did come back in about $0.5 billion.

The balance sheet, it's been in this plus or minus $25 billion range for a while.

We think that is going to be reasonably stable.

It is going to ebb and flow just a little bit here and there.

As you correctly point out, the core bank balance sheet is somewhat smaller when you extract the impact of these national strategic portfolios.

But I think it's important to note that those aren't going to zero over a very short period of time.

There is components of it that are going to be larger, longer amortization.

Home equity portfolio is a portion that is running off most rapidly.

It's probably running off today in the 15% to 20% CPR range.

So the opportunity for us is, as the economy picks up, we will continue to offset that contraction with growth in the core banking and other opportunities.

As we look at it, we think the balance sheet will remain reasonably stable.

Capital and share count is a different question that really goes back to my earlier comments which are, we are going to look at how we smartly manage that capital.

It will involve a capital planning process.

It's going to involve stress testing the balance sheet.

It's going to involve communicating with our regulators.

And it's going to take some time, but we are mindful of that.

And to the earlier question, I don't think we need to warehouse the capital.

We will manage it at the appropriate times and the appropriate ways and we will be as proactive as we can in doing that.

(Multiple speakers)

Thank you all.

The only other thing I was going to say, if you are thinking about the non-strategic as part of the balance sheet size, do we need to think about that as at some point turning profitable?

I'm just wiping it away and saying we're just going to focus on the core.

And at some point, three, five years down the road, that is not around.

But as long as that balance sheet is there to cover the expenses and we are losing money, I am just trying to say -- let's say that is zero and just focus on that core part of the organization or do you think in the short run we could actually flip positive?

Marty, I think we lost $24 million pre-tax in the non-strategic segment.

This quarter we had $37 million of mortgage repurchase cost in there.

So when we work through that problem, that segment goes back to pre-tax profitability.

So it won't always be as much drag as it has been, and that is diminishing.

And as we work through the mortgage repurchase and as we get out of some of the costs of foreclosures and credit challenges, that profitability will improve.

It's lower profitability, if you look at the net interest margin slide that BJ walked you through, the net interest margin on it is lower than what we have on the bank and what we are putting on the bank, but it can be profitable over time.

One more thing, I might add to Bryan's point; your question about assets.

You have heard us talk several times now in the last several months about optimizing the business mix.

That is exactly what we are trying to do.

The reality is our asset size will probably bump around at this level for the next several quarters.

But it's critical for us to replace things that are running off in the non-strategic segment at 220 basis points of margin and replace it with 358 basis points of margin in the core businesses.

So that is what we are trying to do, improve the profitability of the balance sheet, even if it is the same size.

John Pancari, Evercore Partners.

Getting back to the comments you made around some of the seasonality you saw in the quarter, particularly around fee income.

Can you talk about the seasonal impact that -- in other words, I guess the pickup that you could see next quarter in, for example, service charges and also the -- we know there is a degree of seasonality in the fixed-income business just given rates and activity.

I just want to get an idea of what we could be looking at coming out of this quarter and some of these fee lines that got hit pretty hard in 1Q.

In the regional banking of fee income in terms of lower day count, as well as some of the continuing impacts we are seeing from regulatory changes was probably $3 million to $5 million in this quarter with probably more than half of that being seasonality.

So you could probably see some of that come back in the subsequent quarters.

Fixed income is a business where, again, we are a trading distribution business; we match up buyers and sellers with the market environment that we are in.

It's been a little bit slower than certainly what we saw a year ago.

With that said, we are very pleased with what we are seeing out of our folks in fixed income.

As a matter of fact, if you break it down a little, we talk about average daily revenues down from 1.4 to 1.3.

They were actually down from 1.39 to 1.34, so they were virtually flat on the quarter.

So we expect that to continue, meaning stay at these relative levels at least for the next quarter or two.

The fixed income business is one where there is a lot of money that is still -- we expect to see invested in the fixed income markets.

When you have the kind of volatility we saw in the first quarter on days where the market is backing up and rates are up, you see more activity on dates when the rates are falling.

We expect that rates get to a higher level.

We expect we'll see some of that market -- or some of that money come back into the market and we think we are extraordinarily well-positioned to pick up in that.

Okay.

On the loan demand side, can you talk a little bit about what you are seeing in terms of opportunities to grow C&I and where your line utilization may stand currently?

Loan demand, we talked about several areas being promising where we saw modest growth.

We saw some in our corporate segment which we define as companies over $100 million in annual revenues, so we continue to see a good solid pricing there.

We continue to see growth there.

Asset-based lending; business banking, which is roughly $10 million in annual revenue companies and a little bit in core C&I and CRE.

So really across a lot of our different commercial portfolios we are cautiously optimistic that we are starting to see a little bit of demand.

In terms of -- will you give me your second question again?

Utilization.

Utilization.

We really haven't seen a lot of movement on it.

It's still in the mid-30s.

Paul Miller, FBR.

This is Jessica Ribner in for Paul.

We just had a question about the mortgage banking revenue.

Was that due to the hedging gain or can you walk me through that?

Primarily from the mortgage hedging gain, we were up from about $7 million in the fourth quarter to $12.5 in the first quarter.

Servicing fees picked up very modestly about $2 million.

And just with the oncoming legislation, how can we think about servicing fees going forward?

It still remains to be seen.

But depending on where that goes, they certainly could be challenged.

In terms of our MSR asset, the evaluation is predominantly related to delinquencies.

We have seen improvement in delinquencies over the last several months as well as prepayments, and prepayment speeds have slowed quite considerably this quarter.

So we are obviously actively monitoring the events that are going on external to us and making appropriated adjustments.

Okay, great, thanks.

Sure.

Chris Marinac, FIG Partners.

Just want to ask one more question about this non-strategic versus strategic top line income.

Do you think that this ends up being the low watermark; is it fair to say that?

With the changes in the pipeline, are you articulating that this probably shouldn't increase linked quarter, the next quarter or two?

I'm sorry, Chris.

I couldn't quite hear you.

Sorry about that.

If you look at the core and interest income, is this first quarter most likely going to be the low watermark compared to the rest of this year?

In terms of net interest income?

Correct.

Yes, in all likelihood, yes.

And then just a general question, Bryan, can you contrast against the various parts of the franchise, whether it's middle Tennessee, Memphis or eastern Tennessee in terms of how they are acting for loan growth as well as just overall asset quality?

I will let Greg pick up the asset quality piece for any distinctions.

There doesn't seem to be as much distinction geographically around loan demand as there does to be line of business.

We're still seeing strength in all areas of state and our corporate borrowing.

As BJ pointed out, we are seeing some pick-up in terms of our commercial real estate businesses.

If you look at our pipeline growth from December year-end to March first-quarter end, the strongest area of growth was in commercial real estate.

Geographically -- then the area that we are seeing probably the least growth right now tends to be on consumer demand.

But it tends to be more line of business than it does geographic.

We see the recovery taking hold across the entire state.

Yes.

I would say from a credit quality standpoint overall because of the economic environment in eastern Tennessee, the metrics there look pretty good, and across the state they are improving.

The mid-south market or the Memphis market in business banking is a little bit slower than some of the others in terms of healing, but to Bryan's point then across the segments that we have, business banking would be the slowest to heal and we are seeing healing across all the other segments.

But the improvement in business banking is apparent.

It's just at a slower rate.

Kevin Reynolds, Wunderlich Securities.

I ask you this every quarter, but how do you feel today versus last quarter?

And specifically, you are talking, it sounds, more optimistically, modestly so, about the environment.

But what about the competitive environment?

Are other of your more traditional competitors starting to become more active as well?

Are they seeing the same things or is the near term going to be one of more market share gains than net loan growth and increased business activity out there?

Yes.

Thank you.

I am more optimistic.

I am more optimistic that the economy is picking up traction.

It's gaining some momentum.

There is risk to it, but it seems to be recovering slowly.

We are getting more confident about that.

I am more optimistic about our positioning.

I feel good about the traction I see on the initiatives that we have talked about around technology and efficiency as well as our customer-acquisition efforts.

We have made good progress there and we continue to do very well in terms of hiring and bringing additional relationship managers into the organization; and all that said, the competitive environment is still very competitive.

There is a lot of competition for customer transactions that come up.

We don't expect that to abate simply because the economic recovery is at a lower growth rate, but we expect there to be a fair amount of competition, particularly on the C&I side.

As I said in my earlier comments, we are trying to build long-term relationships with customers.

We are trying to grow our market share.

We are being mindful of the pricing and structure implications of what is going on in the competitive environment.

But on the whole, I'm much more optimistic.

I just might add on the competitive environment, particularly as it relates to loans, we are seeing a bit more aggressiveness on structure than we probably would have seen 90 days ago, particularly from some of the larger competitors.

As Bryan said in our prepared comments, and what we are emphasizing with our bankers, we are very focused on the right price and the right structure.

We believe that some of the competitive advantages we have in terms of what Bryan talked about, customer service, the talent of our bankers, our abilities and capabilities, we would rather compete on that than start to give to structures.

That is what we are going to continue to do.

One other question, I will just ask you this as straightforwardly as I can.

I don't want to get the cart before the horse too much, but any thoughts on raising the dividend?

If we are in a slow growth environment and you're rich with capital, if the M&A environment doesn't come your way, could we see that move higher more quickly?

I don't know how to define more quickly.

That is a term of art, so I'm going to try to avoid that.

We in the industry probably learned a lot from what the Federal Reserve and the stress-testing work and the dividend activity that occurred with the larger institutions.

We recognize that it's a process where we need to have interaction with our regulators and work with them.

But our capital has stayed strong.

Our capital ratios remain strong this quarter, and we actually redeemed the CPP warrant this quarter.

We are taking all that into context.

We will work on it.

We'll lay out our capital plans and we'll evaluate the right way to manage dividend policy and capital repatriation with what's going on in the business; what's going on in terms of organic opportunities; what's going on in credit quality, and what we see is the need for capital in the business.

Mac Hodgson, SunTrust Robinson

Bryan, on M&A, I just wanted to see if you could clear them up for us again.

As you look at current potential M&A opportunities, the company's interest in distressed transactions versus healthy, and market versus deals that might extend the footprint a state or two out.

Mac, I think it's still the first or second inning in terms of the M&A environment.

I think that there is going to be plenty of time to deal with that.

Our first and foremost interest is to be disciplined and to only focus on what we can do at the right price and in the right way that makes us a better franchise for the long term.

In terms of priorities, there is probably this equal balance between the ability to fill in where appropriate here in Tennessee with the opportunity to open up contiguous markets that would be additive to our business model, where we can operate our business model in a similar fashion to what we do here in Tennessee, where we can build strong market shares; we can provide a differentiated product and service model that allows us to be differentiated and put capital to work in attractive ways for our shareholders.

Back to where I started, given that it's the early stages, we are willing to be patient and a couple of what we have going on in the organization in terms of key initiatives that we think are important, like getting the cost savings identified and executed in 2012 that BJ and I have talked about of $100 million to $125 million, getting our system's upgrades completed, we feel like we need to be patient.

We will be patient and we'll only do the right thing at the right time.

Given the headquarters in Memphis, is there more of a preference to go west or southwest of Tennessee in that market as opposed to east?

We don't have biases in that regard, no.

Okay.

Thank you.

Thank you.

There are no further questions in the queue at this time.

I will turn the call back over to Bryan.

Thank you all for joining in our call this morning.

We appreciate your questions and your interest.

I hope everyone has a great day and a great holiday weekend.

Please let us know if you have any follow-up questions.

Please contact any of us or Aarti if you have any follow-ups.

Thank you all.

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

This concludes the program.