First Horizon Corp (FHN) 2011 Q2 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Horizon National Corporation second-quarter 2011 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 is being recorded.

I would now like to introduce our host for today, Ms.

Aarti Bowman of Investor Relations.

Ma'am, please go ahead.

Thank you, operator.

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

In this call we will mention forward-looking 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 in 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, and 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 and thank you for joining the call.

During the second quarter we continued to successfully execute on our strategic priorities.

We made headway in optimizing our business mix for profitability and returns, as the Regional Bank's pretax income increased 13% linked-quarter, and the nonstrategic segments' drag decreased.

We improved productivity and efficiency, with overall expenses down 2% linked-quarter and 8% year-over-year.

Net income rose 6% to $43 million.

We are controlling what we can control in our Company and making progress on our strategic priorities.

Our bankers are focusing on profitably increasing market share with superior customer service.

We have made more than 14,000 customer calls year to date, resulting in 3% period-end loan growth in the Regional Bank.

In our C&I portfolio, growth was encouraging as period-end loans were up 5%.

The increase was driven by loans to mortgage companies and our corporate borrowers.

Commercial loans, excluding loans to mortgage companies, were up 1%.

We are positioning our balance sheet for higher returns by replacing low-yielding nonstrategic loans with better priced, more profitable relationship-oriented loans.

Our success in expanding and deepening customer relationships benefited revenues in the Bank, as net interest income was up 1% and fees increased 2% from last quarter.

Capital Markets continues to be a strong contributor to our overall fee income.

In Capital Markets, average daily revenue was $1.1 million, down from last quarter's $1.3 million, but within our normalized range of expected revenues.

We made additional progress toward achieving our productivity and efficiency targets, having identified $110 million in annual cost savings.

$50 million of annualized savings is in our expense base run rate, and we have identified for execution another $60 million to be mostly completed by the end of 2011.

BJ will provide more detail in a few minutes, but we took actions to streamline our Company as we reorganized our structure, simplified our lines of business, and made investments in technology.

These actions should result in our becoming more flexible and nimble to serve our customers better.

Our strategic expenses declined 15% linked-quarter due to a 34% reduction in mortgage repurchase provision expense.

Our goal is to achieve a full-year 2013 consolidated expense base that is 20% to 25% less than full-year 2010's consolidated expenses of $1.3 billion.

Achieving our goal should enable us to reach a 60% to 65% efficiency ratio sometime in 2013.

Our efficiency goal also assumes ongoing investments in people, products, and technology.

From 2009 to the end of this year we will have invested more than $100 million in systems upgrades and technology.

Credit quality trends also improved as nonperformers and net charge-offs declined.

Provision expense was unchanged at $1 million in the second quarter.

We are seeing continued stabilization in our commercial loan portfolios.

Additionally, enhanced collection efforts have helped lower delinquencies in our consumer portfolios.

All in all, I am pleased with the progress we have made in successfully executing on our strategic priorities.

BJ will now take you through the second quarter's financial results, and I will be back with some closing comments before we take your questions.

BJ?

Thanks, Bryan.

Good morning, everybody.

I will start on slide 6.

Second quarter's net income available to common was $43 million, an increase of 6% from last quarter.

Diluted EPS at $0.16 compared to $0.15 in the first quarter and $0.01 a year ago.

Significant items totaled $16.6 million and were related to our restructuring, repositioning, and efficiency initiatives.

Major items include $7.5 million of expense from employee severance costs in that number and a $9 million charge to terminate a technology services contract which will create efficiencies going forward.

In the second quarter we completed the sale of First Horizon Insurance, and we recognized a $4.2 million after-tax gain which you can see in discontinued operations.

Revenues were down primarily due to lower fixed income in Capital Markets, offsetting Bank NII and fee increases as well as higher mortgage hedging results.

Expenses were down despite $16 million of restructuring-related charges due to a combination of our efficiency efforts, mortgage repurchase expense declines, and lower variable compensation in Capital Markets.

If you turn to slide 7, look at some segment highlights.

In the Regional Bank pretax income was $73 million, up 13% linked-quarter.

Revenues in the Bank increased 2%.

Expenses were down 3%.

And we booked a provision credit in the Bank of $13.7 million compared to $12.4 million last quarter.

Capital Markets pretax income declined to $17 million from $22 million linked-quarter as revenues decreased 13%.

Lower variable comp drove expenses down 9%.

Fixed income average daily revenues declined to $1.1 million from $1.3 million as market conditions continue to result in cautious buying activity.

In our Corporate segment, we had a pretax loss of $27 million compared to a loss of $8 million in the first quarter.

Second quarter in the Corporate segment is where we include the $16.6 million of restructuring, repositioning, and efficiency charges as well as a $3.4 million interest related to tax refund which is booked in other income.

Remember that the first quarter included $3.1 million of restructuring charges, a $5.8 million gain from the redemption of our TruPS, and a $3.3 million reversal of our of Visa contingent liability.

In the nonstrategic segment the pretax loss narrowed to $11 million in the second quarter.

Net hedging results were $15.4 million this quarter compared to $12.5 million in the first.

Nonstrategic expenses decreased as mortgage repurchase provision expense decline, and I will go into that in a little more detail in a few slides.

A note on Durbin.

We expect that the impact from the final decision should be about a $15 million to $20 million annual hit to our revenue.

However we believe that the impact should substantially be mitigated by the implementation of new sources of revenue.

So for example, we are charging noncustomers to use our delivery systems; we are increasing existing transactional and product fees; we are reducing fee waivers; and we are modifying our checking product suite.

Turning to NIM and balance sheet on slide 8, the consolidated NIM was relatively stable at 3.20% compared to 3.22% in the first; and our core business NIM was 3.57%.

We expect the NIM to remain relatively stable for the remainder of the year.

Linked quarter, total assets remained stable as well at approximately $25 billion.

The Regional Bank's period-end loans, as Bryan talked about, were up 3%.

And the nonstrategic loans declined 5%, resulting in modest net growth in total loans.

New commercial loan spreads were at 365 basis points, up 19 basis points from last year and were flat linked-quarter.

As we have emphasized, we are replacing lower quality, lower yield loans with higher quality, higher spread loans across the Bank.

In fact, the net growth we saw in the Bank versus the run-off in nonstrategics should generate 2 times the NII annually.

On slide 9 let's talk a little bit about the successful execution showing up in our loan pipeline trends.

Bryan talked about our bankers' successful calling efforts, and that execution is reflected in the year-over-year growth of our commercial loan pipeline and our closed and funded commercial loans.

We are seeing demand in the C&I space, especially from our corporate borrowers and asset-based lending borrowers.

We have also seen some opportunity in new CRE customers.

Our Regional Bank commercial funded loans have increased by 67% since last year at higher spreads.

Overall pricing spreads are favorable, but we do expect continued pricing pressure in the market.

Moving on to productivity and efficiency on slide 10, the linked-quarter consolidated expenses declined 2% to $309 million.

As I mentioned earlier, that includes that $16.6 million of restructuring.

Recent efficiency actions including streamlining the Regional Bank structure, reducing costs in procurement, reducing costs in technology, as well as numerous other back-office functions.

As Bryan talked about we have now identified $110 million in annual cost saves with an annualized $50 million executed already and in our 2Q '11 run rate.

The remaining $60 million is expected to be largely executed by the end of '11, and we will continue to execute on getting our costs down to achieve our targeted efficiency ratio.

Turn to slide 11, talk a little bit about mortgage repurchase.

Linked-quarter our pipeline declined 15% to $451 million, and the repurchase provision expense declined 34% to $24.6 million, marking the fourth consecutive quarter of decline.

Net realized losses were relatively flat at $38.5 million.

We decreased reserves by $14 million from last quarter.

Rescission rates improved but are still within a range of 45% to 55%, and severity remained steady at 50% to 60%.

Linked-quarter you see that new requests were down 18% and resolutions were up 10%.

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 repurchase request volume should continue to decline.

And again we do not have any private securitization repurchase requests to date.

Turning to slide 12, let me take a few minutes to discuss private securitizations, as they have recently become a hot topic again in light of Bank of America's announced settlement.

Though comparisons to their settlement have been made regarding our securitizations, we believe there are significant differences that make those comparisons less relevant.

Our view of our potential risk here has remained consistent over time.

If you look at the bottom of the slide, there are a few data points which may help you analyze this.

We issued about $33 billion of private securitizations between '04 and '07, of which 40% was Jumbo and 60% or so was Alt-A; and we did not have any subprime securitizations.

As I said before, we have had no repurchase requests from these securitizations to date and have three previously disclosed lawsuits, one of which has been withdrawn.

Our securitizations have generally performed favorably overall to industry cohort benchmarks.

Our reps and warranties on private securitizations are generally more limited than for GSEs.

So as we sit here, of course we can't know everything, particularly since we have had no private securitization requests; but sitting here today, considering the differences between the private securitizations of $33 billion originated between '04 and '07 and the $70 billion of GSE volume originated between '05 and '08, the more limited nature of the reps and warranties, and the procedural differences of initiating repurchases versus GSEs, the disclosures in the securitization prospectuses, the relative performance versus industry cohorts of our securitizations, and the mix of our securitizations versus the industry, we believe it is unlikely that our private securitization risk is greater than our repurchase experience with GSEs, which has been manageable as an earnings headwind.

As you can see on slide 13, our asset quality trends continue to improve.

Loan loss provision was flat at $1 million.

Linked-quarter net charge-offs declined 14% to $66 million.

And we decreased reserve 11% to $524 million.

The reserve-to-loan ratio remained strong at 3.26% at the end of the second quarter.

Moving on to slide 14, nonperforming assets declined 9% linked-quarter.

Commercial inflows decreased by 35% and resolutions were up 40%.

Lower inflows were driven by continued credit stabilization in our commercial portfolios.

Wrapping up on slide 15, we are continuing to make progress towards reaching our long-term bonefish goals.

Core business ROA was at an annualized 1.06% in the quarter and our core NIM was at 3.57%.

We are taking steps towards achieving higher returns by controlling what we can control, continuing to better position our balance sheet by replacing lower yielding nonstrategic loans with higher spread loans in the Bank.

We are improving productivity and efficiency, and we are decreasing our credit environmental costs.

So with that I will turn it back to Bryan.

Thanks, BJ.

I am proud of the progress made by the First Horizon team.

We have strong core banking and Capital Markets businesses.

We have strengthened these businesses by our team's efforts to win new clients and grow organically, by our continued investments in systems and processes to help us provide unparalleled customer service, and by our steps to make us a significantly more efficient Company.

We have a strong capital base, and we have made solid progress on credit quality and our pipeline of mortgage repurchase requests.

Our bonefish tool is widely used in the organization and serves as a constant reminder that we are managing the Company for profitability and strong returns to our shareholders.

Our top priority for the remainder of this year and next year is to continue to focus on improving profitability and the long-term earnings power of the core franchise.

We are working on our blocking and tackling daily, actively calling on new and existing retail and commercial customers, improving spreads, managing our fee revenue, and reducing our cost of doing business.

Our strong capital levels give us a significant level of flexibility.

We are committed to investing that capital in a disciplined manner.

Our principal goal is to increase value to our shareholders as we prudently evaluate our options, invest in organic growth, potential mergers and acquisitions, and/or increase dividends and stock buybacks based on which option best meets our goal.

We believe that excess capital should be returned to our shareholders when it can not be attractively invested in organic growth or well-priced deals.

Expanding our business by investing capital in well-priced, value-creating mergers and acquisitions is still a priority.

But it does not take precedent over our goal to increase value for our shareholders.

We look forward to executing on our strategic priorities and remain committed to producing consistently attractive returns for shareholders.

Thank you, and now we will take your questions.

Operator?

(Operator Instructions) Steven Alexopoulos, JPMorgan.

Good morning, everyone.

All right, just to follow up first on your comments on capital, it doesn't look like you bought back any stock again this quarter.

Now that earnings are up significantly, what is the holdup in buying back stock?

Do you expect to get more active here over the next few quarters?

Yes, Steve, we did not buy back other than just a few shares associated with benefit plans.

We have, as I said, a strong capital base.

And as you probably gleaned from what the largest institutions went through with the capital stress testing and dividend process, there is regulatory involvement in that.

So our plan is to work with our regulators at the appropriate time, work through stress testing, the adequacy of our capital, and develop a plan in conjunction with our regulators, and execute it accordingly.

Okay, got you.

Maybe just another one on capital.

With the economy seeming to slow a bit, can you talk about how this might be impacting seller expectations?

Do you find current expectations on the more reasonable side compared to comments from last quarter?

I don't know that I have any fresh data, Steve, that would indicate one way or the other.

I think our point of view has been that the building pressure with the slower growth rate in the economy, coupled with increased cost of operation and regulation and pressure on fees and spreads, would contribute to that.

But I don't know that there has been a significant shift in seller expectations during the last 90 days.

Thanks.

Craig Siegenthaler, Credit Suisse.

Thanks, good morning everyone.

First, just maybe hit on the mortgage putbacks and repurchase trends, and please reference slide 11 or the other ones if it helps.

But in your view, should we see the decline in reserves this quarter really as a signal that both reserve levels have likely already peaked and should probably trend downward, and maybe we are probably pretty close to a peak in net charge-offs?

Hey, Craig, it's BJ.

Good morning.

You know, what we saw -- and you can see it in some of the major drivers here -- is positive trends across the board.

So I talked about fourth consecutive decline in the provision.

If you look at, again on slide 11, new requests down 8% linked-quarter, 28% since the peak in the fourth.

As well as our folks are doing a great job resolving these and reducing the pipeline.

So again as we have seen for quite some time that we believe the momentum is certainly shifting more towards the end of this than the beginning.

And I would expect that we would continue to see positive trends here over the next several quarters.

What should we roughly assume about prospects for settlement on the GSE or private label side?

Previously you have talked that there was a prospect on the GSE side.

Has that prospect actually dimmed now that you have recognized more loss the last few quarters?

Yes, I think we have always -- it's BJ again -- we have always looked at it as an option.

We are going to do what we think is the most economically attractive for the Company and shareholders.

So if that means continuing to work through it like we are doing now, we will do that.

And if something else comes up that works, we will look at that as well.

But again, going back to controlling what we can control, we can't control what happens, working on things like a settlement, where we can control how we improve resolutions and work through our pipeline.

And I think our folks are doing a fantastic job doing that.

Great, thanks, BJ.

Thanks for taking my questions.

Paul Miller, FBR Capital Markets.

Yes, thank you very much.

Just to follow up on that last question, on the particular lawsuit you said -- you said you have three lawsuits out there on your private label, and one has been dismissed.

Is the reserves for those lawsuits in, on page 11, that $169 million?

Or is that a different litigation reserve?

No; those three lawsuits, if they were estimable and probable would be in our litigation reserve.

So you can refer to our Q on that.

But as I said one of them was just recently withdrawn.

So now we have two outstanding.

Paul, this is Bryan.

All those suits were very early stages, in the very early stages.

They have been out there for I guess for six, nine months.

As BJ said we have been informed that one of them is either dismissed or in the process of being dismissed.

Has your outlook changed on those suits relative to the Bank of America settlement with their private label guys?

No.

Paul, this is Bryan again.

No; as we have said on this call even, we don't have any request on these private label securities.

As BJ said our performance has been good vis-a-vis cohorts and industry performance.

We think the structure of those deals is solid.

The quality and the performance has been better than the industry.

So our outlook really hasn't changed.

It has been consistent over time.

We think -- BJ sort of walked through a way to think about it; but we think that it is something that we will work through over time.

But it is likely to be manageable as an earnings headwind.

Okay.

To change direction a little bit on the Capital Markets side, listen, we all know on the trading side it was very tough this quarter on a macro sense across all companies.

But can you just address it?

I mean this is one of the lowest revenues that you had off that Capital Markets in a couple years.

Can we expect that to bounce back, that this was just a bad quarter?

Or is this a trend right now in that segment?

The interest rate environment has been very volatile.

Yields on the fixed income business tightened a lot.

But if you looked into our quarter you saw earlier in the quarter average daily revenues were lower; they built over the quarter; they were stronger in the June time frame.

So we think there is likely to be some volatility around revenues over the next several quarters.

But we do expect to see this significant amount of cash that has got to be invested, invested over time.

And we think that we are well positioned to help in that, and we think there is great opportunity for our Capital Markets business in that effort.

I would also add, Paul, that we have talked about a normalized range of $1 million to $1.5 million.

We are $1.1 million this quarter.

I would expect that we would certainly be able to stay within that range over the next several quarters.

John Pancari, Evercore Partners.

Good morning.

Can you talk a little bit about, on the putback side or the whole mortgage issue, the FHA investigation into representations and mortgage originations?

And if you can just discuss your potential exposure on that front.

You mean the FHFA?

Yes.

Okay.

So I don't know if there is anything particularly new.

You are talking about the subpoenas that were sent out to multiple institutions last year?

About a year ago.

Is that what you are talking about, John?

Yes.

Then also I know the FHA loans have been getting a lot of scrutiny more recently about banks that have been big in originating those loans.

Wanted to see what your general view would be in terms of exposure on that front from the underwriting perspective.

Got you, John.

I apologize for misunderstanding the question.

On the FHA side, there is not really much materially new with us.

We are certainly monitoring the situation; but there is not anything that has been material that has come up here recently.

Okay.

Then also on the putback side you indicated that the private label risk from your perspective, given all the trends and the differences between the Bank of America portfolio, that it should not exceed that of the GSE losses you have incurred.

Is that how you put that?

I think the way, John, we think about it -- and again we tried to lay out our view, again considering that we haven't had any repurchase requests to date, so we don't have any tangible basis necessarily for it; but we do certainly have views.

So as we look at all of the things that I mentioned, we believe that it is unlikely that we would see -- that we would have risk that was more than what we have experienced or will experience with the GSEs.

It is just our current view.

Okay.

All right.

Then lastly a question on credit here.

The new SEC TDR guidelines to be implemented in the third quarter or required to be implemented in the third quarter -- first, have you implemented that?

Have you been an early adopter at all?

Then second of all, do you expect an increase in TDRs as a result of it?

I know your TDRs did jump about I believe 8% this quarter.

Hi, John, this is Greg Jardine.

Actually we met with regulators as well as our accounting firm when that came out to make certain that, as we were practicing our TDR processes now, that there would not -- what the impact would be and if there is a gap.

The good news is, based upon that meeting, that we believe that we are substantially in the right space in terms of how we approached TDRs at our institution.

So I would not expect a large change or difference based upon that meeting.

Bob Patten, Morgan, Keegan.

Good morning, everybody.

I guess it really comes down to what the market is going to try to figure you guys out in terms of normalized earnings.

So I am looking at the size of the balance sheet.

Can you give some commentary on where you guys think you are in terms of accelerating momentum on, one, the culture of the Company -- changing from a credit side to a revenue producing side?

It has been kind of a long haul.

The second thing is warehouse was up a little this quarter.

What is your C&I opportunities and CRE and so forth?

And what is the general market, like this quarter and your expectations going forward?

Bob, this is Bryan.

I will start and then BJ and Greg can chime in as they would like.

You know, I mentioned the bonefish tool and you talk about the culture.

We have spent a lot of time and energy in the organization and people, as I said in the prepared remarks, really do focus on the bonefish tool.

It is a way we measure performance in the organization, and it is driven by driving profitability.

I think we have made great progress in that regard.

I am really encouraged by the usage that is getting.

The business is one that is going to be scalable over time.

We have sort of hung around this $25 billion asset number.

We are working to control our costs, and we are going to be driven by how the bonefish drives our results.

So we are going to look to book profitable loans.

If we have fewer profitable loans that we can book, we will control our costs and we will fit into that right size.

But we are going to scale the business to drive profitability.

The pipelines have been strong.

The second quarter was strong particularly with our corporate borrowers.

We saw good volume there.

We saw our pipelines build significantly over the last several quarters, and they continue strong into the third quarter.

So we feel like we have got very strong momentum and encouraged by the calling efforts that we see going on in the business and the results of those calling efforts.

It is still a competitive environment.

There is a lot of pressure still on pricing and structure, more so at this point in the credit cycle than we would have expected.

But we do think that we are doing a good job competing in that environment.

We are winning high-quality business.

We are doing a good job, in my view, serving our customer base.

So I feel good about the momentum that we have in the business as we transition here into the third quarter.

Bob, I might add, too -- I mean if you go back to slide 9, that one to me is particularly impressive.

It is really talking about all the effort that all of our bankers are doing across our franchise to really serve customers and get out on our front foot.

I mean if you look at how much our pipeline has grown year over year, how much the fundings have increased year over year, we are getting better spreads, we are getting better quality loans, we are making a bunch of calls.

This is all against the backdrop of doing some very difficult things from a change perspective across the Bank -- whether it is process improvement changes, whether it is efficiency and cost reductions.

Our folks are facing all that every day, still having to talk to customers, and starting to deliver results like this.

I am very encouraged by what we are seeing in terms of the culture.

Okay.

Then just one last thought.

In terms of the temperature today, piggybacking on Steve's question initially, originally when we talked about capital deployment we talked about maybe keeping a Tier 1 of 9%; and then we kind of came down to around 8%.

What is your gut today?

Are you optimistic that something in terms of dividend and capital deployment will happen in 2011?

Bob, this is Bryan.

There is still a lot evolving around what is adequate capital levels for the industry.

But we still believe that an organization like ours is probably in the 8% to 9% Tier 1 common ratios.

In the answer to Steve I indicated it is a process in terms of capital repatriation, that you work with your regulators.

I don't know how long that will take.

But that is something that we intend to work on and we will continue to work through that process.

Whether we make progress in 2011 or not, we are going to work on it and see if we can get that done.

Jon Arfstrom, RBC Capital Markets.

Good morning, everyone.

Couple of, I guess, more model questions.

But BJ, do you expect any restructuring and repositioning type charges for Q3?

I think you will continue to see some restructuring and repositioning charges from us because, as I talked about, we have more efficiencies to go in the second half of the year.

We talked about $60 million that are identified for execution.

But with that said, I don't see the level of restructuring charges being nearly as high as what we saw this quarter.

We had a $9 million termination of a technology contract, in addition to some other things that I don't see repeating going forward.

That $7.5 million number also seems a bit high.

Yes, that one was pretty high this quarter.

I would not see it higher than that going forward.

I think the first quarter, Jon -- this is Bryan.

I think first quarter it was in the $2.5 million, $3 million range.

So more in that range.

Yes, that's right.

Okay.

Then maybe a question for Greg.

There was a big decline in the nonstrategic income CRE.

I wondered if you could touch a bit on what happened there.

Sure.

There was a couple of things.

One, there was a large loan that was taken out, and that was a substantial piece of it.

As well as just refinancing that happened and a couple of smaller loan sales.

Okay.

Then just one follow-up on that; I don't know which one of you will take this.

But just you talked a little bit about income CRE and your appetite maybe getting a little bit better for that business.

It seems to be the one category in the core Bank that is not growing yet.

But give us an idea of what you are seeing and what is possible for that business for you.

Sure, Jon.

This is Greg again.

Within income CRE, if you think about the vintages of '05 to '07, where there was -- kind of at a peak.

So as we have been working through those, that has turned better than I would have expected as the CRE market is more stable than I expected in early fourth quarter.

So what we see within the book is a continual improvement within credit grade categories.

As it relates to the opportunities we have, we were probably an early adopter because we were not heavy in income CRE compared to some of our competitors.

What we see now -- so we also have seen in the second quarter and really at the end of the first quarter is some permanent market activity as well.

So we are taken out of loans, and as we are putting new loans on there is kind of a trade going there.

So we are seeing good activity.

I think the good thing, Jon, is it is good to see some permanent activity.

So you actually see a roll of the book which is a positive thing as opposed to a stagnant book.

So I think this is moving in the right direction.

I think there is increasing competition in CRE from what we saw in the fourth quarter and the beginning of, into the first quarter.

So that competition is increasing there, but we are still in a good place.

Momentum has been good there.

Pipelines have been strong.

We are booking more loans this year than we were booking last year, and we have an opportunity to look at a lot a very good deals.

So we are encouraged by it.

Brian Foran, Nomura.

I guess, looking at the mortgage warehouse balances being up $200 million linked-quarter, how should we think about the size of that book?

It has accounted for a lot of the shrink in 1Q; accounted for a good chunk of the growth in 2Q.

So as we think about modeling that out, should we just link it up to overall market application volumes?

Or is there a geographic expansion?

Or I guess how should we think about the size of that book going forward?

Brian, this is Bryan Jordan.

I think that is a good way to think about it.

It is going to be sensitive to rates and mortgage applications, and it is going to be based on the warehouse customers that we support and how much activity they are seeing.

And those are probably as good a proxies as any.

And Brian, you mean loans to mortgage companies, not mortgage warehouse loans.

Right?

The one that is in the appendix; I think it is slide 22.

That's right.

Yes, that is loans to mortgage companies.

Then it was up this quarter just -- I guess I was surprised it was up this quarter.

Was I thinking of the wrong variable that drives it?

You saw a significant drop, which we talked about in the first quarter.

This was just a little bit more of a normalization.

So it is still going to be -- it is still going to bounce around.

But the big drop from fourth to first was certainly a big drop.

This was just a bit more growth in the second.

The two big variables that are hard to get proxies for and to model would be delivery of loans out of the warehouse to buyers and then closing of loans.

So the two best market proxies are going to be rates and application volumes.

It is hard to model some of the other variables.

Then on the GSE putbacks, I mean, is there anything obvious to you why BofA and JPMorgan would be seeing acceleration in their GSE problems and you would be seeing, I guess, declines?

I guess maybe specifically, does it feel like maybe the GSEs are working through the files sequentially?

So if they are on 2008 now, and you only have half a vintage, then from here you would have half the problem?

Yes, Brian, I think certainly that last part is right, that we have the truncated year in '08.

I think it goes back to how we like to conduct ourselves as a Company and being proactive in trying to tackle issues.

One of the things that we have done -- I don't know if all the others do it -- is that in our pipelines we have put mortgage insurance rescissions in the pipeline, even though they aren't necessarily actual requests yet from the GSEs.

So it is almost like we have a pre-pipeline pipeline.

So that when that comes we have already prepared for it and reserved for it.

So I am not sure if others are doing that way or not.

But we certainly feel comfortable about where we are and continue to see improving trends.

Kevin Fitzsimmons, Sandler O'Neill.

Good morning, everyone.

Just a few questions on credit.

I know you have the total TDR number that you give us.

Would it be possible to get what part of that is accruing TDRs?

I believe it was roughly $154 million last quarter.

Yes, about 61% of the book is accruing; 50% is current; and 11% is accruing but delinquent.

That is slightly up from the first quarter where it was about 58%.

Okay; but 61% of that balance you give of TDRs is accruing?

That's correct.

Then should we think of the pace of underproviding as -- I believe you said a few quarters ago that it would probably be declining as time goes by, because of working off more of that nonstrategic portfolio.

Should we think of that as the credit leverage theme continuing to play out, probably continuing to underprovide net charge-offs, but maybe at a lessening pace?

I think that is a fair way to put it.

Okay.

Great, thank you.

Marty Mosby, Guggenheim.

Good morning.

I wanted to go back to the normalized earnings in the sense that the excess capital that we have, and if you look at the positive trend that we are seeing, and the momentum on the risk items, the loss in the nonstrategic items coming down -- basically I think starts to take off the risk in a sense of a lot of that is covered in the capital cushion; and we are already starting to see nice progress.

So once we get past that it really comes back to normalization.

If we look at the continued operations this quarter, about $0.15 worth of earnings, you could add back the unusual items of $0.02; and that gets us to about a $0.17 number.

And if you look at the nonstrategics -- so if we wipe out the loss that we had there, that $11 million loss, then you end up adding $0.03.

However we are not providing anything.

So if you take the provision back to a normal level, you would take out $0.05.

So you go through a lot of gymnastics to get down to still a run rate around $0.15, or $0.60 per year.

Bryan, if we go back and look at the $60 million in incremental savings that we are now still working towards and would have in place by the end of the year, that would add another $0.15.

So that gets us potentially up to $0.75.

But then the critical thing in my mind is that we have to look for a normalized number around $1, which would be kind of our long-term goal.

And there's really two levers to get there, which would be further efficiencies or share repurchase.

So then tapping those two things becomes pretty critical.

So I was just wondering, if we add another $40 million in expense savings, we would have to take the Regional Banking efficiency ratio down towards 60; and then getting about $500 million worth of share repurchase; that would get us to the 20% accretion that could get us to $1.

So all that financial engineering to get back to really two questions.

Can we see an additional $40 million to $50 million in expense savings?

And is $500 million the right bogey to think about eventually to be able to get back from the share repurchase?

Marty, this is Bryan.

I trust that BJ followed all the math.

Yes.

Real simply, on the expense side -- and we, I talked about this in previous calls and I talk about it a lot internally.

Expense control has got to be cultural.

It doesn't have to be a project.

We talk about targets; we laid out a target, $100 million; we talked about $110 million.

That doesn't mean we get to that level and quit.

That means we keep going.

We're working to get more efficient day in, day out.

And as I said in the comments earlier on, we are targeting to see that 60% to 65% ratio sometime in 2013.

That means we have got to get the efficiencies that we have talked about this morning and probably a little bit more.

It means that we have got to get some of the environmental or credit cycle kinds of costs reduced.

And it means we will probably get a little bit of continued help on the revenue side, but we think we can do that.

We think that the banking overhead efficiency ratio ought to be in the high 50s over time.

That we have got an opportunity to do that, and we will.

On the capital side as I mentioned earlier that is still going to evolve.

But that is an area that we are focused on.

We recognize that we have greater capital in the organization today than we believe we need to run it long-term.

And we will look for ways to repatriate that to our shareholders either in dividend or stock buyback if we can't put it to work attractively in organic growth or otherwise.

So we are going to work through that process with the regulators on an appropriate fashion; and at the appropriate time we will deal with that.

Erika Penala, Bank of America.

Good morning.

I wanted to ask about the timing of the repatriation.

I guess what I am struggling with is you mentioned that there is regulatory involvement in not being able to buy back stock this quarter.

You clearly have improving credit; very high Tier 1 common ratios, no matter what the eventual bogey ends up being.

I am wondering; is the private label overhang preventing the timing of capital repatriation at this point in terms of your conversations with the regulators?

Erika, this is Bryan.

As you saw with the largest institutions, there is a series of testing and stress testing, and there is nothing about -- anything that we know about that would impact that.

It is just a process much like repaying the TARP.

You go through an analysis with the regulators.

You lay out stress testing.

You go through a lot of work.

It takes a little bit of time.

It is done in connection with examination cycles and so on and so forth.

It is just a process.

And it doesn't -- as far as I know it has nothing to do with anything on the balance sheet.

It is just where we are in the process.

Okay.

But is that a big part of that process in terms of that discussion?

Is that a variable that of course they are taking into account when thinking about timing and magnitude of distribution, that they will permit in 2011?

Clearly our regulators, they know us very well.

We spend a lot of time with them.

They are here with us on a 24-by-7 basis, and we have a lot of transparency with the regulators.

As you think about TARP repayment last year and as you think about capital repatriation this year, all those issues are not new; and all that gets factored into the analysis and stress testing around capital.

So I would say it is not a new issue or a new discussion for our regulators.

It is factored into our capital management last year, and I am sure it will factor into our capital management again this year.

Okay.

One more question, and not on capital or buybacks or rather repurchase.

But in terms of slide 9, it is clear that you have done a lot in terms of changing the culture of this firm.

I am wondering if you could give us an update in terms of the other side of the coin in terms of demand.

When you talk to your customers, do they have enough confidence to expand or invest in their businesses this year?

And that we could actually see loan growth ex your loans, ex the correspondent banking momentum that you saw this quarter?

Is there enough confidence that we could see back half of the year C&I loan growth on balance sheet?

Yes, if you look at the loan growth in the second quarter, a couple hundred million or so was the mortgage warehouse, which would fall in that correspondent category.

So we actually had pretty good growth in our large corporate and our C&I borrowings as well.

Net loans would have been up and -- if you exclude what happened with the loans to mortgage companies.

From the conversations we have with customers it is still mixed.

There are some customers -- principally our larger customers -- that are becoming more confident.

There seems to be some disparity on what segment of the economy is being served, whether it is the consumer segment or whether it tends to be more of a manufacturing base of the economy.

But we are seeing a little bit better demand across the entire spectrum, but particularly with our largest customers.

The only thing I would add is what Bryan said is exactly right, but I think what you see in our results is our folks taking more share than there is demand out there.

The demand is still a bit mixed as Bryan said.

Todd Hagerman, Sterne Agee.

On the reserve position, just curious, Bryan and BJ, if you can update on the credit side.

There was an earlier question on the pace of the reserve release.

But as I look at the numbers in terms of the Regional Bank and the nonstrategic portfolio, the Regional Bank, the credit stats are pretty close to normal in my view.

Similarly, we still have a ways to go on the nonstrategic.

But you are now starting to see a little bit more momentum on the loan side.

TDRs are ticking up a little bit.

How do we think about the reserve coverage and again when you are going to have to start providing again for that incremental growth and the fact that the core Bank is close to normal, if you will?

Todd, this is Greg Jardine.

I think what we are still seeing, as I mentioned, is some continued healing within the Regional Bank portfolios.

We are getting closer to normal.

But after the nuclear winter we are still not all the way to a normalized environment yet.

So I think the pace decreases in terms of the healing because we are getting closer and closer.

But if you look at our coverage ratios, we still see -- we still have a decent coverage in the Regional Bank and the income CREs as an example.

So I think you will continue to see releases a little bit into the future, and at some point in time it stabilizes.

The other side of the equation obviously is the nonstrategic.

The C&I portfolio and the CRE portfolios in nonstrategic is almost wound down ex the TruPS.

So I think that just continues to play out over the next foreseeable future.

Okay.

But what I am hearing is no real change near term in terms of as I think about 2011.

I don't think so.

Okay.

Then just a separate question, BJ, just in terms of the MSR and the environmental costs if you will.

I am just curious with the writedown in the MSR this quarter.

I am just curious where -- if that was largely just rate driven, if there was any incremental in terms of foreclosure-related cost issues that may have factored into that decision.

Then how do we think about where you are on the expense side in terms of that run rate of environmental cost?

Is there something, based on all the discussion in terms of the improvement on the reps and warranties, credit improvements and so forth, is there anything -- any potential roadblocks or hurdles out there from preventing that environmental cost if you will from continuing to trend lower?

Yes, I think there were two questions in there.

One on the MSR, you know it wasn't any special.

You will see if you look back in our supplement that there was some change in the prepayment rates, interest rates.

It wasn't credit-related.

So there is not anything particularly special going on, on the MSR valuation itself.

As it relates to the environmental expenses coming down, sitting here today we expect that to continue to trend down nicely, as we have seen over the last several quarters.

We can always have something that comes up that we don't anticipate, whether it is a double dip in the economy or other factors.

But in general based on what we can see sitting here today, we expect that to continue to come down at a very nice clip over the next few years.

Kevin Reynolds, Wunderlich Securities.

Good morning, everybody.

Bryan, a couple questions for you.

I mean most of mine have been answered, and we have gone way down into the granular part of the soil.

But bigger picture, I know one data point doesn't really make a trend.

But does it feel to you like, with core revenue up slightly this quarter, does it feel like your business might have made a turn on an overall basis?

Or are you not comfortable saying that yet?

And then I have got a follow-up question on Capital Markets.

Sure.

You know, I think your question assumes or makes, I guess, an embedded or implied assumption about what happens in the economy.

The economy is still improving, in our view; but clearly there's been some tremors through in terms of the last couple of months.

It probably doesn't feel like it is improving at the same rate it did maybe even 90 days ago.

But that said, I feel very, very good about the momentum that we see in our business.

As we talked about the loan portfolios and the growth there, and as BJ rightly pointed out the great job that our folks are doing on winning market share in a difficult operating environment where loan growth is probably not as strong, I feel good about the momentum in the balance sheet.

I feel good about the momentum in our revenue stream.

As we said at the very beginning, we are working real hard to control what we can control.

Winning customer business.

Serving those customers well.

Getting more efficient.

And growing the business in a thoughtful and profitable manner for our shareholders.

So to me, yes; it feels like we are making good progress on those fronts.

It gets diluted or masked from time to time by what happens in the nonstrategic portfolios.

But the core franchise, both Banking and Capital Markets, feels to have very good momentum right now.

Okay.

Then I guess of the follow-up question on Capital Markets, the revenue trends are down.

We know your business is largely fixed income sales to the community banks out there across the country.

Can you read into lesser activity the fact there may be a slight uptick in loan activity for those banks out there?

Or may it be slower inflows of deposits and less liquidity just sort of building up on the balance sheets of these banks?

Well, I think it is probably more of the latter coupled with the fact that at a 3% plus or minus 10-year treasury it gets harder to pull the trigger, particularly when you question whether rates are going to go higher or whether they are going to go lower.

In the early part of the quarter rates seemed to be ticking up a little bit, then they rallied in later in the quarter and volume picked up.

So I think it is probably more the latter.

It is liquidity continues to build, and at the same time you are seeing rates that pulling the trigger -- it gets more difficult at different levels.

Jefferson Harralson, KBW.

Hey, thanks guys.

You touched on it a little bit, but I wanted to ask you about home equity.

Some of the weakness you are talking about maybe in the last 90 days, is there anything tangible you are seeing that might make you think that home-equity delinquencies or loss rates change versus your original expectations on the second half of the year?

Jefferson, this is Greg Jardine.

No; I think as you look quarter over quarter, actually a quarter trend, you see our delinquencies decrease in the home-equity book.

So we are actually seeing it has been stabilized to improving across those books.

If you look in the Regional Bank it is a very clean book.

And then the nonstrategic home equity book, quarter over quarter you can look at the metrics and see the improvement.

So we are not seeing anything that would indicate to us that it would move a different direction.

We obviously keep our eye on the unemployment figures.

But to date that has not been an impact.

How about this concept of principal forgiveness in some of these settlements we are talking about?

You think a concept of principal forgiveness could come in and affect this product at all (multiple speakers)?

Certainly any kind of regulatory or other impact like that that is not there, we have to keep an eye on.

But I would hate to speculate one way or another on that.

But we watch it.

I don't know that the momentum is picking up that direction; but we keep an eye on it.

Mac Hodgson, SunTrust Robinson Humphrey.

Hey, good morning.

Just a quick clarifying question on expenses.

In the target of 20%, 25% reduction from the 2010 level by the end of 2013, does that assume that you will have any environmental costs in 2013?

Or is that exclusive of environmental costs?

May, it does include some.

I think I have said in the past that in 2013 we will still have nonstrategic expenses largely because we will still have a nonstrategic book; we will still have mortgage servicing, all that kind of stuff that is in those numbers.

But I think what we are seeing is that those numbers, assuming credit continues to improve, the cycle continues to normalize, that those expenses will continue to fall out of the run rate.

I may have said nonstrategic.

I meant environmental costs as well will be in that 2013 number?

Correct.

Okay.

So you have got some environmental stuff baked into that number?

We do.

We do.

Okay, that's it.

Thanks.

I would now like to turn the conference back over to Mr.

Bryan Jordan for any further comments.

Thank you, operator.

Thanks for your questions, thank you for participating in our call this morning.

We appreciate your interest.

If you have any further questions please don't hesitate to contact one of us during the day or sometime next week.

I hope everyone has a wonderful weekend.

Thank you.

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

This does conclude the program and you may now disconnect.

Everyone have a good day.