First Horizon Corp (FHN) 2011 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Horizon National Corp.

third-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 be given at that time.

(Operator Instructions).

As a reminder, today's conference call is being recorded.

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

Aarti Bowman, Head of Investor Relations.

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'll use in this call this morning are posted in 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 quarterly report.

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 thanks for joining the call.

During the third quarter, we continued to successfully execute on our strategic priorities by controlling what we can control.

Our core business has performed well.

Regional Bank pretax income was up 26% linked quarter and capital markets revenues increased 26%.

We made progress in lowering expenses in our core businesses.

Balance sheet trends were favorable with period-end loans up 1%; average core deposits up 2%; and consolidated net interest margin was up modestly.

We also made headway in exiting nonstrategic business by selling about $150 million of non-performing loans.

On slide 4, we are making solid progress in strengthening our core businesses and working hard to overcome economic and regulatory headwinds.

Our bankers are focused on providing exceptional service, expanding customer relationships, and proactively soliciting new business.

As a result, we've seen solid market share gains across our footprint.

According to recent FDIC data, our deposits in Tennessee increased 6.5% over last year compared to the 2.5% growth rate in the markets we serve.

We retained our top ranking and our West and East regions and we continue to make progress in middle Tennessee.

For the second year in a row, we outpaced the market in Nashville as our deposits grew 7.4% and our share increased 30 basis points.

We're also seeing encouraging loan growth trends.

To date, our bankers have made almost 40,000 calls on existing and prospective customers.

This effort has paid off as period-end loans in the Regional Bank were up 5% from last quarter, driven by loans to mortgage companies, corporate borrowers, and asset-based lending.

We remain focused on replacing our lower-yielding nonstrategic loans with better priced relationship-oriented assets.

Again, our strategy is working.

Despite competitive loan pricing pressures, loan yields in the bank were relatively stable from second to third quarter.

The Regional Bank posted 2% total revenue growth second to third quarter driven by higher net interest income and steady fee income.

Implementation of the Durbin Amendment this month will pressure banking industry fees, and we expect roughly a $20 million impact to annual revenue.

To offset lost revenue, we continue to make pricing adjustments.

But we're taking a thoughtful approach to ensure we provide true customer value.

For example, beginning later this month, we are initiating a $0.04 charge per pin debit transaction, $0.14 on signature transactions, and capping the monthly fee at a maximum of $3.00.

Capital Markets had a strong quarter with fixed income averaging daily -- with fixed income average daily revenue increasing 28% to $1.4 million in the third quarter from the second quarter.

Our unique business model, which is focused on distribution and not proprietary trading, combined with the depth and diversification of our customer base across the depository and non-depository sectors, positioned us well for market conditions.

Productivity and efficiency improvement remains a top priority for us.

We made good progress in the third quarter, with Regional Bank expenses down 4% and an improved efficiency ratio of 66% in the bank.

However, environmental costs remain elevated as mortgage repurchase provision expense increased from last quarter.

In our core businesses, we are on track with our efficiency initiatives and now expect $124 million in cost savings.

We estimate that we realized an annualized $88 million of cost saves in our third-quarter run rate.

Our productivity efforts are starting to pay off.

For example, revenue per FTE in the Regional Bank increased 5% from last quarter.

We continue to work toward our goal of achieving a 60% to 65% consolidated efficiency ratio.

Turning to credit quality, we were able to accelerate the reduction of our non-performing loans, selling approximately $150 million in net book value of nonperformers.

These NPLs were mostly in our nonstrategic permanent mortgage portfolio, and the loss on sale impacted third-quarter provision by $36 million.

For the quarter, consolidated provision was $32 million and total net charge-offs were $106 million.

The loan sales impacted third-quarter charge-offs, accounting for 45% of total net charge-offs.

To sum up, third-quarter results demonstrated that we are continuing to successfully execute, as I said, controlling what we can control, which is resulting in solid core business performance.

BJ will now take you through the detailed financial review, and I will be back with some closing comments.

BJ?

Thanks, Bryan.

Good morning, everybody.

I'll start on slide 6.

Net income available to shareholders was $36 million and earnings per share were $0.14 in the third quarter compared to second quarter's net income of $20 million and EPS of $0.08.

Core business net income was $94 million compared to $27 million in the second quarter.

While third quarter's bottom line was solid, there were also some significant items.

We executed non-performing loan sales as Bryan said, approximating $150 million in net book value.

Provision impact from loss on these sales was $36 million.

We also sold some Visa shares in the third quarter for a securities gain of $35 million.

Expenses related to our restructuring, repositioning and efficiency initiatives were $2 million, down from $17 million in the second quarter.

And additionally, a previously announced divestiture resulted in an after-tax gain of about $5 million within discontinued ops.

Moving to slide 7, take a look at some segment highlights -- pretax income in the Regional Bank increased to $94 million from $74 million in the second quarter.

We booked a provision credit of $22.7 million compared to $13.7 million in the second quarter, as we saw continued credit improvement in our loan portfolios.

Revenues were up 2%.

NII was up primarily from a higher volume of loans to mortgage companies.

Fees were stable.

Regional Bank expenses declined $6 million linked quarter and were down $15 million from third quarter 2010.

In our Capital Markets segment, pretax income increased to $28 million in the third quarter compared to a pretax loss of $20 million in the second, which included a $36.7 million litigation settlement expense.

Fixed income average daily revenues increased to $1.4 million in the third quarter from $1.1 million in the second.

Growth in average daily revenues reflects the strength of our extensive distribution network and our substantial penetration of the depository customer segment, combined with favorable market conditions.

Following the Fed's early August announcement of an extended low-rate -- interest rate environment, we saw our customers begin to deploy a greater amount of their excess liquidity, resulting in increased fixed income buying activity.

Since we generate the vast majority of our revenue from sales and distribution activities on behalf of our clients, we benefit when there is strong buying activity while avoiding significant negative trading results experienced by other firms.

We believe that in the near term, fixed income average daily revenues could stay elevated within this range.

However, as always, our performance remains sensitive to interest-rate changes and the overall economic environment, among other factors.

In our Corporate segment, pretax income was $19 million in the third quarter compared to a loss of $27 million in the second.

Third quarter included $35 million in securities gains from the sale of Visa stock and lower restructuring expense.

In the nonstrategic segment, pretax income was a loss of $98 million compared to a loss of $13 million in the second quarter.

The increased pretax loss was driven by higher loan loss provision, primarily driven by the loan sales; increased mortgage repurchase provision expense; as well as elevated costs from the transfer to a new sub servicer; and a negative adjustment in our mortgage warehouse valuation.

On slide 8, we'll take a look at balance sheet and net interest margin trends.

Consolidated net interest margin was relatively stable at 3.23% compared to 3.20% in the second quarter.

Core business net interest margin was 3.52%.

Positive drivers for margin included higher loan volume; lower deposit costs, which were somewhat offset by lower reinvestment rates in the securities portfolio.

Over the next several quarters, we expect to defend the margin by replacing lower-yielding non-strategic assets with better priced Regional Bank assets, further reducing deposit pricing and experiencing less of a drag from nonperformers.

However, there is likely to be continued pressure with lower reinvestment yields in the securities portfolio, and margin is likely to decline modestly by a few basis points per quarter over the next several quarters.

As you can see on slide 9, loan pipeline trends in our Regional Bank continue to be encouraging as loan commitments and loans funded are up compared to last year.

Although borrowers remain cautious, we're seeing areas of demand from customers in our corporate asset-based lending CRE and mortgage warehouse lending segments.

With limited demand, pricing and structure remains competitive.

Our loan yields in the Regional Bank were relatively stable at 4.01% compared to last quarter's yields at 4.02%.

Given the competitive environment, we expect yields will be under pressure.

Nonetheless, new loans being booked in the Regional Bank continue to be better priced than Regional Banking and nonstrategic assets that are running off our balance sheet.

Moving to expenses on slide 10, we were very pleased with our continued progress here.

Consolidated expenses declined 6% from last quarter.

Regional Banking expenses decreased 4% as we continue to implement cost-save initiatives.

Productivity and efficiency actions in the third quarter include reductions of FTEs, lower discretionary spending, and gaining efficiency from exited businesses.

We will continue to evaluate efficiency actions such as consolidating branches and further process improvement.

And we should also benefit from technology investments.

Over the long-term, we continue to target a 25% reduction from the level of 2010 consolidated expenses, mostly by the end of 2013.

Moving on to mortgage repurchase on slide 11, linked quarter mortgage repurchase provision expense increased to $53 million from $25 million.

Net realized losses matched provision, leaving reserves of flat at $169 million.

The rescission rate stayed steady in July and August but trended lower in September, reflecting a higher mix of mortgage insurance-related resolutions, leading to higher loss content.

In the quarter, the GSE's made a push to resolve by September 30 unresolved repurchase claims based on MI coverage loss.

To some extent, this accelerated charge-offs and contributed to third quarter's higher level of losses.

Our operational pipeline dropped from $451 million to $418 million with new requests of $200 million and resolutions of $237 million.

The operational pipeline includes requests where mortgage insurance cancellations are under review.

Once this coverage is lost, it comes out of our operational pipeline, but we continue to consider these loans in the reserve calculation.

The GSEs appear to have become more aggressive in their recovery efforts.

Quarter to quarter, we are likely to see volatility in repurchase expense from the variances in the mix of both inflows and resolutions.

Sitting here today, we expect our repurchase inflows to be reasonably steady; resolutions to continue to be strong; and we also still believe we are on the backside of GSE-related repurchase requests.

Moving to slide 12, a minute on private mortgage securitizations.

We still have had no repurchase requests from these securitizations to date.

We still currently have four lawsuits related to private mortgage securitization, including the FHFA lawsuit.

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

As you can see on this slide, 66% of private mortgage securitizations are outperforming industry cohort on cum.

loss.

And 81% of these securitizations are outperforming cohorts on 60-day plus delinquencies.

Our mix is different.

We did no subprime.

And additionally, reps and warranties are generally more limited than for GSE whole loan sales.

Considering the differences between the private securitizations and GSE loans that we have outlined on the slide, we continue to believe right now that our private securitization risk is likely to be significantly less than our experience with GSEs, which continues to be manageable as an earnings headwind.

Moving to asset quality on slide 13, credit quality metrics will continue to be positive.

NPAs declined.

Net charge-offs excluding the loan sales were down.

Loan sales of about $150 million and net book value included $126 million from our per mortgage portfolio, and about $24 million from our commercial loan portfolio.

UPB on the sold loans was $220 million, reflecting a 47% blended mark on the loan sale.

Reserves decreased $74 million, including $12 million associated with the loan sales.

Despite several quarters of reserve releases, our reserves to loans remain healthy at 2.77%.

Given that our credit quality trends are generally favorable, we expect additional reserve releases, but the rate of reserve decrease could slow down depending on the economic environment.

Moving to slide 14, nonperforming assets declined 22% linked quarter, primarily due to the loan sales and upgrades in our commercial portfolios.

In addition to broad-based improvement in our loan portfolios, we expect that the sale of nonperformers should be favorable to overall credit quality metrics in the future.

Wrapping up on slide 15, our core businesses showed good progress in reaching our long-term bonefish targets as we focus on controlling what we can control with solid trends in the Regional Bank, continued strong performance in our capital markets business, and improving productivity and efficiency.

Although the nonstrategic segment and mortgage repurchase remain a drag, I'm pleased with the momentum in the bank and in our Capital Markets business.

Bryan?

Thank you, BJ.

Heading into the final quarter of 2011, I'm encouraged by the First Horizon team's progress and successfully executing our strategy.

And I'm confident that we have the ability to continue to streamline and strengthen our business model, profitably growing our core businesses, significantly improving productivity and efficiency, and favorably shifting our asset mix.

We are also taking a disciplined approach to capital deployment.

And today, we launched a $100 million common stock repurchase program.

We and the industry are facing economic and regulatory headwinds, and we remain in a slow growth environment, but with our dedicated team and customer focus, we will continue to make steady progress.

Thank you.

And now we will take your questions.

Operator?

(Operator Instructions).

Bob Patten, Morgan Keegan.

Bryan, BJ, or anybody that wants to throw it in, on the loan sale, just talk how we should be thinking about the rest of the portfolio as we took 24% sort of write-down on that mortgage book?

This is Greg Jardine.

I think a couple things -- one, that was a sale of nonperforming assets and it was a bulk sale.

And as I've mentioned in other calls, we explore the market all the time, and what we found in this particular case was that the bid/ask was in an area of which we felt comfortable with.

So the [$188 million] of UPB, the net book value was 67% of that, and so we had another 68% execution against net book value.

And we took a significant tail risk off by nonperforming per mortgages.

So in that case, Bob, we feel very comfortable.

As you know, we have done some bulk sales, not something of this size because we get basically good execution on one-off sales.

But this made sense for the rate we got.

This was principally, Greg, product that came out of the mortgage company that was originated.

It was scratch and dent at the time and it wasn't salable in the whole loan market.

That's right.

And then one last question, Bryan.

just some thinking around the $100 million share buyback and how you came to that number.

Did you guys request more?

Is it an ongoing process?

And when do you guys, if you use this up, think you would be eligible to go back and talk about increasing that?

Yes, let me try to start with the calendar.

This is -- we think based on everything we have been able to gather, that the process around the other than 19 is not a -- as a structured a process, so we think it is a continuing dialogue with the regulators.

So with that said, we think that we have the opportunity to revisit the issue in the future.

We made an initial request of $100 million.

From our perspective that capital management is a process.

We will work through it with the regulators, and we will continue to evaluate the timing of repurchases and so on and so forth.

So that was our initial request.

We will work with the regulators in the future.

As we work through that, we will continue to evaluate how we manage our capital base.

As I've said in the past, we think that we have a very strong capital base.

We think over time, as the economy improves, we will have a fair amount of excess capital to deploy, either in repurchasing stock or investment in the business.

But we are going to be very disciplined in the way we do it and that involves working with our regulator.

Okay.

Thanks, Bryan.

Ken Zerbe, Morgan Stanley.

Great, thanks.

Just a couple quick ones -- first, on the buybacks, are there any restrictions in terms of the timing and how -- I know you said August of 2012.

But that's obviously over a full year.

Are you more -- are you thinking that you would rather buy back sooner, later, just want to spread out evenly?

This is Bryan.

Good morning.

As you properly noted, the authorization approved by the board expires in August of next year.

We are going to be -- we're going to pick our spots, and we're going to try to buy at attractive valuations.

And if that means being slow and deliberate, we will be slow and deliberate.

If it means accelerating, we will do that as well.

But we're going to pick our spots, and we're going to look at it on a day-to-day basis as market conditions dictate and we will take advantage of that.

Okay.

And then do you have any additional NPL portfolios that are similar in quality or type to the ones that you sold, such that we may actually see another bulk sale if opportunity presents?

We obviously have more nonperforming loans in our portfolio.

And we do explore and we'll continue to explore the market.

When the opportunity is acceptable to us, we may in fact do another sale.

But we are not -- we don't feel that we are compelled to have to go out and do a bulk sale, but we will, on an opportunistic basis, look at opportunities, so --.

Okay.

That's fine.

And then just on the GSEs really quick, you said the increase this quarter in terms of a loss content was because of a push the GSEs were doing on the MI loans.

All things considered, if we sort of look at the trend in losses, backing out that quote increase, is it feasible to assume we are back down to sort of more trend line reduction?

Or are we more at a kind of a higher level going forward?

Hey, Ken.

It's BJ.

Here's how I would tell you to think about it.

There's two pieces to the mortgage repurchase provision, as you know.

There's the actual charge-offs, so the losses we realize, and then there's the calculation of the reserve.

The latter, the reserve, is harder to pinpoint because you obviously have to look at the mix of resolutions and inflows and all that kind of stuff on a forward-looking basis.

But from a charge-off perspective, the way I see it is this was an acceleration in this quarter, and therefore, the realized losses that we saw this quarter may in fact be elevated or high.

And I would expect that charge-offs may very likely come down from this level over the next few quarters.

Again, the provision itself will depend on how we look at the reserve and the mix of it.

But I would expect that the actual charge-offs may likely come down.

Steven Alexopoulos, JP Morgan.

Bryan, I wanted to ask you, on just announcing the stock buyback, what changed that now is the right time to announce this?

Are you feeling better on the mortgage repurchase risk?

Or is it just that the stock is below tangible book; it's the best use of capital?

Well, as I sort of hinted in the second-quarter call, Steve, that we're going to be disciplined about deploying capital, and I said at the time we would work with our regulators.

And we worked through that process in the third quarter with our regulators.

As I said to Bob, we made an initial request of $100 million.

And I guess nothing else, we had a press release going out this morning on earnings, so we just attached it to that.

So we shouldn't read into it that you are feeling better about credit quality, mortgage repurchase or anything like that?

Well, I guess I don't know how you would define better.

I guess I would tell you that we feel good about credit quality.

We feel like credit quality has been improving, and that's consistent with what we've been saying for an extended period of time.

Our mortgage repurchase exposure -- BJ talked a fair amount about both the GSEs and the privates.

We do think we are on the backside with the GSEs.

We are three years out from the last loan we originated and sold to the GSEs.

The private securitizations for the reasons that BJ has described in detail -- we feel that the private securitization exposure to likely to be significantly less than the exposure to the GSEs.

And we think it is, as well, manageable as an earnings headwind.

So from our perspective, our balance sheet is getting better.

I think our balance sheet is better today than it was three months ago.

I think it's better than it was six months ago.

I think it's better than it was a year and a half ago.

So I think every quarter, our balance sheet continues to get better.

And some of these actions to resolve non-performing assets -- the residential mortgages that we've talked about, the NPA sale.

So I feel good about our balance sheet, I feel good about our capital position and I feel good about the trajectory our business is on.

I think our bankers, our Capital Markets teams are executing very well on customer business.

So all of that said, we feel like we've got a very strong capital base.

We think it's appropriate to manage that capital base smartly in a disciplined fashion, and when appropriate, return excess capital to our shareholders.

And that's the step we have taken.

Craig Siegenthaler, Credit Suisse.

Thanks.

Good morning, everyone.

First just on the Capital Markets revenues, I'm wondering what level of activity you are seeing kind of quarter to date here in October and at the end of September, relative to the July and August levels.

Hey, it's BJ.

I would say kind of as I said in my prepared remarks, that we still see strong flows and activity in that business.

We do business on behalf of our clients.

So we are sales and distribution, not trading.

And so when there's a lot of activity, callable activity, on the agency side, for instance, or the flattening of the curve tends to benefit us because clients have cash flows that are rolling off and they need to reinvest it at rates higher than cash.

So all of those things tend to favor us, and we are still seeing those trends going into October.

Thanks, BJ.

And then we heard your comments related to higher volatility trends given the more aggressive nature of the GSE put backs, but given the mortgage repurchase losses now, if you look at reserve coverage there less than 1 year, I'm wondering, should we really expect losses to decline from here?

Well let me give you a little more color than even I gave a couple of questions ago, Craig.

Our losses -- our actual losses in July were $10 million.

Our losses in August were $13 million.

And our losses in September were $29 million.

The high watermark for any particular month over the last 18 months had been around $14.8 million or so.

So, that coupled with the communication that we did receive from the GSEs that they wanted to resolve certain types of claims by 9/30, leads me to believe that there was certainly an acceleration of our charge-offs.

So, those are all things that we have contemplated -- we have always contemplated in our reserve calculation.

So even with a higher level of charge-offs, you didn't necessarily see higher-level reserves for future content based on what we see in the pipeline today.

And what I call our operational pipeline continues to go down.

So what that means is we have folks literally working on claims.

Once MI coverage is actually lost, there's literally nothing else for folks to work on.

So it comes out of our pipeline, but it continues to be accounted for in our reserve.

I see that as a positive sign that at some point, we don't have to work these anymore, and we are just waiting to literally resolve the paperwork on it one way or the other.

So I continue to see good progress, good trends, good work from our folks.

And as I said before, I actually believe that the level of charge-offs are likely to be down over the next few quarters.

Jefferson Harralson, KBW.

Thanks, guys.

I was going to ask you about the change in sub-servicing, sub-servicer, and it looks like you had a litigation reserve release there.

Does that mean that you are not exposed to litigation in any potential settlements that that sub-servicer might have with servicing you sold them?

Hey, Jefferson.

It's BJ.

I'm not sure about a litigation reserve release.

We did have about a $1.2 million or so contingent liability that we released, but that was related to MetLife.

It was an early termination contingent liability which we obviously don't have anymore.

So we didn't do anything on litigation.

Okay, so following up on the MetLife thing, is I guess they're a part of the servicer suit; you are not.

By going away from them and finishing this contract, would that make you I guess not potentially liable for pieces of the servicing you did through the period?

Well, again, MetLife was the one that was -- that is part of the foreclosure assessment process.

They are our sub-servicer, so we are working with them and monitoring what they are doing closely to ensure that what they worked on on our behalf was done in the right way.

But as I've said before, that is their issue, but we are working with them and monitoring closely our risk related to it.

Okay.

Thanks.

And secondly, what's the milepost we should look for on this FHFA lawsuit?

This is Bryan.

Good morning.

I think we are a ways away from any of the mileposts.

At this one, none of the discovery, the responses, it's very, very early in that process, and I think this is a process that's going to take some time to resolve.

As we have said in the past, we feel like we've got a strong position and we intend to try to vigorously defend that position.

Brian Foran, Nomura.

Hi.

Do you have a sense of what a normalized size for the mortgage warehouse portfolio within the C&I book -- the mortgage warehouse company's corresponding banking at $1.1 billion?

Hey, Brian.

It's BJ.

As you can see, that's really going to fluctuate.

I think we've had a high of $1 billion or $1.1 billion, and something as low as $300 million to $400 million.

So, I'm not sure I can tell you from quarter to quarter.

It depends on what mortgage applications look like across the industry.

And so it's going to fluctuate, but probably between those two goalposts.

Got it.

And then as we think about the core NIM, them, can you just remind us, in the Regional Banking segment, the NIM is actually higher than loan yields.

Is there some kind of deposit credit, transfer pricing credit?

And if so, does the nonstrategic segment pay for that or does the corporate segment pay for that?

Yes.

There is a fund's credit that the bank gets for deposits.

And, no, the nonstrategic does not pay for that.

It's balanced out in our corporate segment and the way we balance the balance sheet in [alco].

Got it, perfect.

Thank you.

Paul Miller, FBR Capital Markets.

This is Jessica Ribner for Paul.

We just had a couple questions on the trading revenue, and also the decline in mortgage revenue.

Where did the decline in mortgage revenue come from?

And can we expect this number going forward?

This is BJ.

I think our mortgage net hedging results were about $7 million versus $15 million last quarter.

We saw -- after the Fed's announcement on Operation Twist, a lot of volatility in our hedge assets as it relates to the MSR book.

So, we saw the positive ineffectiveness come down pretty materially, but it was still positive for the quarter.

So when we planned for this, we planned for very modest revenues, and so we plan for the $7 million to $10 million range every quarter.

So this is roughly within the range that we would model internally.

Okay.

And then can you go through -- I know you were saying that your trading revenue is mostly client driven.

Is that commissions -- or -- is that commissions or just market making?

Yes, so, I guess the point I was making is, if you look at our fixed income business model versus some other ones out on the street, we do all of our business really for the benefit of our clients.

So we are doing sales.

We're distributing product.

We're matching up buyers and sellers.

And we are not necessarily trading -- we are not trading on our own book.

And I think that's a quite different model from what you will see out on the street.

And so when you see volatility and fixed income results elsewhere, you may see it from trading results, whereas for us, it's literally going to be related to the level of activity or the volatility or the volume of what you are seeing in the market.

And when that happens, we're going to benefit in that environment.

John Pancari, Evercore Partners.

On the private-label side, can you talk a little bit again about why you think the losses or the risk would be significantly less than what you are seeing on the GSE side?

I know you're emphasizing that this quarter again, particularly since you haven't seen any cutbacks yet.

Hey, John.

It's BJ.

I think we have -- if you go back and look at what I have said in the prepared remarks, if you even go back and look at what we said in second quarter, we just look at what the -- what we have experienced with GSEs.

And we take a look at what the reps and warranties were on those types of loans versus what the reps and warranties were on privates and the significant differences between the two, which are mitigating factors, number one.

Number two, we look at our performance versus industry to get a general feel of how we are performing.

Third, we did no subprime securitizations.

And I think if you look at the industry mix, there was 30% plus of subprime done during this time period.

So, all of these things, kind of put in a bucket.

And the BofA settlement, whether or not it goes through, provided somewhat of a benchmark, if you will.

And as we outlined in the second quarter, our delinquencies and defaults relative to that portfolio are significantly better.

And so, we couple all that GSE stuff, couple anything that we know externally, we study our securitizations in detail, and we come to the conclusion sitting here today that it could be significantly less than what we have experienced in GSEs.

Okay.

One thing I would add, John -- and this is Bryan -- is that the starting balances originated were roughly half of what we originated.

And if you look at the mix there, it was about 40% jumbo, about 60% Alt-A.

Jumbo has performed very well, as BJ pointed out in his prepared comments.

And if you factor in just the aggregate size of what was originated, you factor in potentially the statutes of limitations and other factors, we do conclude that it is significantly less in all likelihood than what we have experienced on the GSE side.

Kevin Fitzsimmons, Sandler O'Neill.

I don't want to really spend that much time on this issue, Bryan, but if it is the big issue for the stock or one of the main issues out there on when does this play out and what the magnitude will be, I would have to imagine having gone through this process with the regulators and while maybe you can't be that specific with us, you can give us a general sense that if they are going to approve you to do buybacks, I would think they would be interested in what the exposure is and how long it takes to play out.

So I know we haven't had a private request come yet, but from an investor's point of view who is trying to gauge the timeline of when this plays out, what's your best guess?

And how was that factored into the analysis that likely took place with the regulators for the buyback?

Thanks.

Kevin, the timeline on it is going to take a while.

I mentioned where we are in the FHFA suit.

That's going to take a while, but I think it's appropriate for us to take the time to start the discovery process, to defend the position.

If there are -- there are factors that are just going to take a while to work through and it's not something that's going to be a quick resolution.

That said, as you would expect, when we make application to or consult with our regulators to manage our capital level, we walk through stress testing; the significant risks in the balance sheet; and we lay that out over time.

And we lay it out and compared to our balance sheet is, what our credit quality looks like, what are GSE exposures look like, what our private-label securities potential -- exposure looks like.

And we put all that together and we stress our capital, and we put forth a proposal.

And the regulators are -- they are with the organization and evaluate us on a long-term basis, so it's a process that is sort of all put together, it doesn't -- unfortunately it doesn't work with a timeline in terms of when the GSEs or when the private-label securities might come to a resolution.

It's just going to take some time.

As we have said, we will continue to work on it.

And I would add this -- that as -- in some sense, time is our friend when it comes to dealing with the GSEs and the private-label securities.

Every day that goes by, more loans pay down, more loans pay off.

The exposure continues to reduce.

And as we pointed out a couple of times, we haven't originated or sold any of these loans going back over three years.

And over that period, the last ones originated and sold were August of 2008.

Over that period, you've gone through the worst housing crisis in possibly the nation's history.

And we have gone through a 25-, 30-year high in unemployment.

So it's just going to take some time to work through it.

We're trying to be patient and deliberate in the way we do that.

We're looking for opportunities to resolve it, but it's a process we just have to work through.

Tony Davis, Stifel Nicolaus.

There are I guess some issues at the bank outside of rep and warranty.

Aside from warehouse, has the strength that you saw in the C&I and CRE pipelines in August and July, Bryan, has that continued into September and October?

And has there been any improvement in your draw rate?

Yes, I'll let Greg sort of help me out here, but the pipelines in early October were sort of consistent with where we saw them at the end of September.

They might have been a little bit lower than they would have been going into the early second quarter, but still pretty solid.

We're still seeing reasonable customer activity.

Competition is still fairly intense for loan deals that are out there.

As I've said for several quarters, we are still seeing later-cycle behaviors in terms of pricing and structure.

But overall, pipelines have continued to be modest but strong relative to an economic recovery that's sort of running in the low single digits.

Greg?

Yes, I couldn't add much more to that, Bryan.

I think that's exactly what we see.

Competition -- one thing I would say is the competition in the income CRE space has increased quarter over quarter as some of the larger banks have come back into that market.

But it's still in relatively good shape.

Greg, any further color on that and high in terms maybe credit spreads today and income CRE or small business, middle-market, C&I versus say three to six months ago?

Yes, I think in C&I it's going to depend upon really the segment we're in.

In the corporate area, that's pretty transparent in terms of what spreads are.

Small business lending -- those spreads are typically holding fairly stable.

In kind of the middle market is where you see a lot of pressure in terms of structure and pricing as some banks have kind of got out of the CRE business and gone into the C&I space.

I have the exact number quarter over quarter in front of me, but if -- we are seeing some pressure there, and in the municipal market as well.

There's some aggressive pricing in the municipal market.

Tony, this is Bryan again.

If you look at it over the last couple of quarters, really the last year and a half, we saw spreads in new originations continue to build.

They started flattening out some in the early part of this year.

I expect them to sort of be flat to down; it's just a little bit over the next couple of quarters as you see this pricing structure pressure in the marketplace.

Kevin Reynolds, Wunderlich Securities.

I guess it's kind of following up on Tony's question.

Since July and August, the world apparently has come to an end out there if you watch the news at all.

And I'm trying to figure out how behaviors have changed.

Not just what do the numbers show, but as you talk to your customers out there, maybe across the state of Tennessee in the Regional Bank, do you get the sense that customers are getting more nervous or maybe adapting to the environment that we're in right now?

And has their actual behavior changed on the ground?

Have they hunkered down and gone into hiding?

Or are they just sort of grinding right through this situation?

Good morning, Kevin.

This is Bryan.

I think -- you know, I've said a number of times that if -- I think people's sort of nervousness in this environment is directly proportional to how much TV they watch, how much they read about it.

My sense of our customers is that they are continuing to transact -- to act in a way that is consistent with a modest low single digits type recovery.

Clearly, people are paying attention a little more to what's going on in Europe and what's going on in the US economy because it is so prevalent in the media.

But it doesn't feel to us at this point that customers have really pulled back.

I would say that the customer base that we do business with in our surrounding marketplace feels to me a lot like it's been through 2008, it's been through a tough environment in 2009.

People have right sized costs.

They've got their expectations right sized for the economic environment that we are in.

And people continue to move forward at a modest pace.

Have you noticed any changes out there with respect to your competitors, maybe without naming names?

But our competitors starting to become nervous on the bank side and how they allocate credit in the marketplace?

Yes, I don't know that it would be -- that I have any way to speak for competitors.

That said, though, we've seen a little bit of shift in product mix or people who are doing -- appear to be doing less commercial real estate and things like that.

But we don't see anything that I think is worthy of comment, unless you have something, Greg, that's different.

No, it's just -- I think there are certain areas, as I mentioned, in municipal where pricing has gotten very thing, so you do see competitors that are definitely running at certain segments pretty hard.

That over the last 120 days or so is something that we have seen.

I think you can sort of conclude, Kevin, that late cycle behavior in structure and pricing tells you that people aren't particularly nervous about where the economy is at this point.

Chris Gamaitoni, Compass Point.

Thanks for taking my call, guys.

Can you tell us where you are putting gross new origination yields on today?

Gross new origination yields on commercial loans or --?

I mean the weighted book would be great or commercial loans -- anything you want to give me.

Yes, I think, Chris, we have in our slide presentation some commercial loan yields and what we are putting stuff on at.

So --

Chris, it's on page 8 and 9 of the slide presentation.

I think that that may even be stated in terms of spreads, right?

One is the yields -- that's the portfolio?

I think and consolidated.

It's in our supplement as well, the breakdown between commercial and consumer.

Thank you.

And then Bloomberg reported that the Fed and OCC was looking at home equity review.

Have you had any conversations with regulators regarding your home equity, or any color into that situation, whether it's happening with you or what they're looking at?

Yes, this is Bryan, Chris.

I'm not sure that there's anything any different when we go through the exam process.

It's a thorough process and they look at all aspects of business.

And naturally, the home equity portfolios -- because of the relative size on our balance sheet, that's a natural part of it.

But it just appears to us to be part of the natural exam process.

All right.

Thank you.

I appreciate it.

Christopher Marinac, FIG Partners.

Thanks.

Bryan, I want to look at the Bonefish slide and just focus on the core margin that was down from last quarter.

Should we expect that to slip a little further in the fourth quarter?

And does that change at all your targets on the core margin going forward?

Hey, Chris.

It's BJ.

I think that's -- it's a positive thing.

What we are seeing -- it's just movement between some of the segments.

But our long-term targets are to have 3.50% to 4% net interest margin across the company.

Core business is where we're going to get it.

In this low rate environment, it's hard to defend that margin.

Once interest rates normalize based on our asset sensitivity, you should see that continue to move up, but the movement there is nothing that we are very concerned about.

We're still very pleased with our margin in the quarter.

Okay.

And then incremental progress on the reported NIM in the 3.20%s is still possible as we go forward?

Well I think I said in my prepared remarks that the longer this low rate environment lasts, the harder it is for us to defend the margin.

So the way we are doing it is better yielding assets coming on in the Regional Bank, replacing lower yielding assets, either in the bank or in our nonstrategic.

We will continue to do that.

We'll continue to bring our deposit costs down marginally.

But the reinvestment rates that we are seeing on the portfolio will certainly create a headwind.

So the way I see the margin over the next several quarters is us defending flat as well as we can, but most likely seeing a few basis points decline per quarter over the next several quarters.

Got you.

And then just to follow up on where cash dividends sit as a priority the next 12, 18 months.

Yes, Chris, this is Bryan.

That's something that we will evaluate in due course.

And it is -- cash dividends are an important part of capital repatriation.

Given the current valuation of the stock price relative to tangible book value from an immediacy standpoint, the repurchase initiative seemed to take priority.

But we will evaluate it and continue to work through that over time.

Michael Rose, Raymond James.

Good morning, everyone.

Just had a clarification on the repurchase reserves.

I think you said in the past you don't have any specific reserves allocated to the private-label portion.

Is that correct?

Correct.

Okay.

And then secondarily, Bryan, do you have any updated thoughts on the M&A environment, and maybe as a way of repatriation of capital or a way to generate earnings while we're in this kind of slower growth environment?

Thanks.

Yes, Michael, this is an environment where I think M&A is going to be reasonably slow for awhile.

I think it's -- with valuations hit as hard as they have been hit over the last 90 days, I don't think it makes a lot of sense in many ways for buyers and maybe for sellers, so I think it will be a little bit slower than it has been or seeming to build.

So I think it's going to take a little time.

Valuations are going to have to get right.

Given the valuations of our currency, I think capital repatriation makes more sense in the short run than M&A unless it's an extraordinarily attractive financial transaction.

So I just think it's going to be slow for awhile.

Great.

Thanks, guys.

I would now like to turn the conference over to Bryan for any final remarks.

Thank you, operator.

We appreciate all of you participating in the call this morning.

Please let us know if you have further questions or need additional information.

I hope everyone has a great day.

Thank you.

Ladies and gentlemen, this does conclude today's conference.

You may all disconnect and have a wonderful day.