First Horizon Corp (FHN) 2012 Q1 法說會逐字稿

Good day, ladies and gentlemen, and welcome to the First Horizon National Corporation first-quarter 2012 earnings call.

(Operator Instructions).

As a reminder, this conference call is being recorded.

Now I'll turn the conference over to your host, Aarti Bowman of Investor Relations.

Please begin.

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 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 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 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.

I'll now turn it over to Bryan.

Thanks, Aarti.

Good morning, and thank you for joining our call.

We're off to a solid start in 2012.

First-quarter results on the surface look a bit mixed, but our core business has performed well.

The pretax, pre-provision income increased 21%, and pretax income was up 12% year over year.

Our asset quality continued to improve.

In the first quarter we bought back $44 million of our common stock, leaving $11 million under our initial $100 million share buyback program.

Earlier this week, our Board approved an increase of $100 million to our share repurchase program.

I'm pleased with the strength in our core businesses.

Regional Banks net interest income was up 9% from a year ago, driven by higher loan value volume.

Capital markets revenues increased 18% year over year, benefiting from strong fixed income activity from both depository and non-depository clients.

Our capital markets segment continues to be a significant contributor to fee income with a high return on capital.

Our ongoing efforts to optimize our business mix paid off.

We grew our Regional Bank loan portfolio while the nonstrategic loans continued to roll off.

The Banks increased period-end loans by about $1 billion or 10% year over year, driven by lending in C&I, commercial real estate, and corporate borrowers.

Our loan pipeline remains solid and was slightly up at the end of the first quarter.

Loan pricing was relatively stable, despite aggressive competition in our markets.

Our bankers' disciplined pricing allowed us to hold the consolidated average loan yield relatively flat at 408 basis points.

In the nonstrategic portfolio, loans declined $1 billion from first quarter 2011 and were $189 million below the year-end level.

We also continued to improve our funding mix.

Average core deposits in the Regional Bank increased 12% from last year and were up 4% from fourth quarter.

The decline in our net interest margin was largely due to excess cash balances.

BJ will go into more detail on the margin in a few minutes.

Turning to expenses, first quarter's consolidated expenses were up 3% year over year, due to capital markets increase and variable compensation as well as higher personnel and mortgage repurchase costs.

Our productivity and efficiency efforts remain on track.

We've implemented $116 million of annual savings out of our targeted $139 million.

While total revenues in the banking priest 3% compared to the first quarter of 2011, annualized revenue per FTE improved 13% to $261,000 from a year ago.

We are continuing to invest in systems and technology.

We want to make it easy for customers to do business with us by simplifying our processes and offering innovative solutions.

We are also driving long-term efficiency.

With consolidated expenses, we are firmly committed to reducing the annualized level to about $1 billion by year-end 2013.

We feel good about our expense control efforts.

Moving on to asset quality trends, which remain favorable, year-over-year net charge-offs dropped 40%, while nonperforming assets were down 36%.

Reserves continued to decline, ending the quarter at 2.17% with loans outstanding.

We are seeing stable to improving trends across all of our loan portfolios.

To sum up, we are seeing signs of improvement in the economy, but we expect the recovery to be slow, interest rates to stay low, and regulatory challenges to persist.

In this environment we will keep controlling what we can control.

Our bankers are focused on making profitable loans to optimize returns, earning more business from existing customers, and taking market share by providing excellent and convenient service.

We're working hard to lower our expenses to become more productive, and we are returning capital to our shareholders with buybacks.

I'll be back for some closing comments, but now BJ will take you through the detailed financial results.

BJ?

Thanks, Bryan; good morning, everybody.

I'll start on slide 5.

For the first quarter, net income available to common shareholders was $31 million, diluted EPS number of $0.12.

You'll note taxes were $11 million in 1Q 2012, reflecting an effective tax rate of 23%.

Within that, there were permanent tax credits of about $6 million.

Linked quarter total revenue rose 4%, and expenses were up 3%.

Turning to slide 6 on segment highlights, Regional Banks pretax income was $75 million in 1Q 2012, down $16 million from the fourth quarter but up $10 million or 14% versus 1Q 2011.

Provision in the bank was a credit of $7 million compared to a credit of $13 million in the fourth quarter.

Linked quarter net interest income declined 2% from lower loan balances and a day count variance.

Fee income was down 7% due to seasonal declines and NSF fees.

Also, you'll remember that the fourth quarter included a $2 million Visa incentive fee.

We're working hard to mitigate loss revenue for the regulatory changes related to Reg E and the Durbin Amendment.

So far we've been able to offset about 80% of this lost revenue through various initiatives.

Regional Banks 3% linked quarter increase in expenses is primarily related to elevated pension costs and seasonally higher personnel expense.

Turning to capital markets, we were very pleased with continued strong results at FTN.

Our capital markets pretax income was $32 million, up 5% linked quarter and up 45% year over year.

Linked quarter total revenue increased nearly $19 million while expenses were up $14 million due to higher available comp and payroll taxes.

Fixed income average daily revenues were $1.6 million compared to fourth quarter's $1.3 million.

First quarter's fixed income ADR were above our normalized range of $1 million to $1.5 million.

Following the Fed's reaffirmation of an extended low rate environment, we saw spreads tighten and saw our customers deploy excess liquidity, resulting in increased fixed income buying activity.

We saw strong performance across the board on all of our desks and all of our customer types.

Looking ahead, we expect ADR to be more in our normalized range over the course of the rest of 2012.

In our corporate segment we had a pretax loss of $18 million compared to a loss of $23 million in the fourth quarter.

Our expenses there declined 23% linked quarter, and as you'll recall, in 4Q 2011 we had an $8 million expense related to the Visa stock we had previously sold.

Our pretax loss in the nonstrategic segment narrowed to $44 million in the quarter compared to a loss of $57 million in the fourth.

Revenues were $51 million versus $46 million in the fourth quarter.

The increase was primarily due to higher hedging results and an increase in servicing fees.

Nonstrategic expenses were relatively flat linked quarter, with a reduction in other costs offsetting incremental mortgage repurchase costs.

Turning to slide 7, take a look at the balance sheet and margin trends.

Our consolidated average total assets were about $25 billion.

Our consolidated average loans decreased slightly both linked quarter and year over year, while average core deposits were up 3% and 7% respectively.

Consolidated net interest margin was weaker than expected at 3.12% compared to 3.23% in 4Q.

Our core net interest margin was at 3.42% in 1Q 2012.

The decline in our margin was mostly driven by excess cash on our balance sheet.

We had a large inflow of customer deposits in the quarter and a decline in interest collected on non-accruals.

We're now four years into this low interest rate cycle, and it continued to pressure our yields in our consumer loan and our securities portfolio.

Margin decline was somewhat mitigated by stable commercial loan yields and loan deposit costs.

Our core deposit costs in the bank were at 47 basis points, down 4 basis points from the last quarter, and we are continuing to book new loans in the Regional Banks commercial portfolio at a higher spread than the loans that are paying off.

As you know, seasonal factors do cause volatility in the margin, but sitting here today we expect that the net interest margin could continue to float down modestly over the course of the year.

Moving on to slide 8, you can see our bankers' efforts to stick to disciplined pricing have resulted in commercial loan pricing holding up pretty well.

But we are seeing competition in our markets in both pricing and structure.

Regional Bank period-end loans declined 2% linked quarter, driven mostly by lower balances and lower-end loans to mortgage companies and payoffs.

Core C&I loans were up 2%, and commercial loans loan commitments increased more than $200 million linked quarter.

You can see our loan pipeline remained solid.

Areas of loan demand include commercial real estate and corporate in industries such as healthcare, manufacturing, and certain sectors within our asset-based lending group.

We expect that net loans on the consolidated balance sheet will likely remain flat to down for the remainder of the year, as customers remain cautious on borrowing and continue to delever in this somewhat uneven economic recovery.

Turning to slide 9, looking at our productivity and efficiency initiative, as Bryan said, we believe we are on track with our initiatives and remain committed to our goal of lowering consolidated expenses.

In the first quarter, progress that we're making was more than offset by a $26 million linked quarter uptick in personnel-related costs, which were inflated by capital markets variable compensation.

Otherwise, costs were mostly flat to down.

We were particularly focused on improving productivity in the Regional Bank and are pleased with our progress.

Year over year, Regional Bank expenses declined 6%.

And as you see on the slide, if you step back and look at our progress by comparison to two years ago in our banking and corporate segments, you can see the significant progress achieved on our efficiency efforts.

Moving on to mortgage repurchase on slide 10, our operational pipeline fell to $380 million in the first quarter.

Our mortgage repurchase provision remained elevated at $49 million, up from $45 million in the fourth.

Net realized losses increased slightly from last quarter to $53 million.

Resolutions were up 4%, and our reserve declined to $161 million.

Linked quarter we saw new GSE requests increase by $56 million due to Fannie recycling through older vintages.

We're also receiving a higher number of requests from Freddie quarter to quarter.

The GSE requests have shifted to an increased level of make-wholes, reflecting more requests for lost reimbursement on liquidations after foreclosure versus repurchase requests for delinquent loans.

For the remainder of 2012, we don't see a clear reason to expect quarterly mortgage repurchase provision expense to decline, but sitting here today, we continue to believe that we're on the backside of these requests due to the losses we've already experienced and the sale of our mortgage platform in 2008.

We continue to be involved in various lawsuits related to private securitizations that are in the early stages of litigation, and we've also recently received indemnification requests from purchasers that we sold whole loans to that were then securitized by others.

Again, we are in the very beginning stages of evaluating those requests.

We had no repurchase requests from our own branded first lien private securitizations.

At this time based, on our private securitization and origination mix, deal size, and performance, we continue to believe that the risks from these product securitizations should be significantly less than what we've seen with the GSEs.

Turning to slide 11 on asset quality trends, which continue to be very positive, our first-quarter asset quality trends were favorable again, with loan loss provision at $8 million.

Charge-offs declined $29 million linked quarter, or to $46 million, which included a benefit of about $3.5 million from a large recovery on a single credit.

You'll recall that our fourth-quarter's charge-offs included a $21 million loss on one bank-related relationship.

Our commercial and consumer credit trends both remained stable.

Our aggregate risk profile and commercial portfolio improved, resulting in upgrades to the C&I portfolio.

In the home-equity portfolio, we saw lower delinquencies and improved roll rates.

We decreased reserves in the consumer portfolio by $18 million from last quarter.

Our total loan loss reserve to loans ratio ended the quarter at 217 basis points compared to 234 basis points at year end.

Over the remainder of the year, assuming the economy continues to recover, we do expect continued to favorable credit trends and reserve decrease, but likely at a slower pace.

Quickly moving to slide 12, linked quarter our nonperforming assets were slightly up about 1%.

The increase was driven by regulatory guidance received in the first quarter, where we reclassified about $28 million of the second liens, where we know the first lien was 90 days plus delinquent.

This re-class did not impact the reserve.

Inflows were stable and ORE balances declined through continued disposition activity.

Wrapping up on slide 13, in our Bonefish, we've seen good progress in our core businesses.

Our Regional Bank trends remained solid as we grew higher spread loans year over year.

We're mitigating lost fee revenue from regulatory changes and improved annual efficiency.

Our capital markets had another strong quarter.

The nonstrategic loan portfolio continues to wind down, and we are defending the margin, as it remains a challenging environment to do so.

By controlling what we can control and being disciplined in our execution, we do believe we are still on track to deliver high levels of return to profitability over the long term.

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

Thank you, BJ.

Thanks to the hard work of our employees, first quarter marked another step towards achieving our long-term Bonefish goals.

We've demonstrated continued profitability in our core businesses, our efficiency initiatives are on track, and we continue to return capital to our shareholders with our ongoing share buybacks.

For the remainder of 2012, as BJ said, we will continue to control what we can control.

We will focus on providing superior customer service that differentiates us from our competitors.

We are committed to becoming more efficient and productive through simplified processes and better technology.

We will continue to manage the wind down of our nonstrategic assets and remain productive with credit quality -- proactive with credit quality.

And we'll continue to manage capital smartly.

In conclusion, I am confident that continued successful execution of our strategic priorities is leading to higher profitability and improve returns.

Thank you, and operator, we'll now take questions.

(Operator Instructions).

Steven Alexopoulos, JPMorgan.

I wanted to start -- Bryan, on the mortgage repurchase requests, are the GSEs continuing to recycle through these older vintages here into this current quarter?

Was that captured in the first quarter?

And did BJ say he expects some mortgage provision flattish this year?

Yes, Steve.

Good morning.

Based on -- it's really an incomplete dataset exactly what they're doing, but BJ's comments were essentially what you described.

It looks to us like they're going back through some older vintages.

We're seeing more make-whole requests as components, which are indications that those are foreclosed loans somewhere in the dead file heap as opposed to current delinquencies.

BJ's forward-looking comments sort of reflect, I guess, our frustration with knowing exactly where that is headed.

You saw some decline in requests in the middle part of 2008.

They spiked in the third quarter -- excuse me, in 2010; you saw it start to slope up in 2010 third quarter, or 2011 third-quarter, and that trend has continued at a little bit higher level than we would hope at this point.

Our sense as we sit here today is that we'll continue to work through it.

We don't see the size of the risk increasing.

The overall drivers continue to work towards, we think, the resolution sooner rather than later of these claims, simply because we are now 42 or 44 months from the last time we originated and sold.

We're continuing to see improvements in the overall fundamentals of housing in the US, and delinquency trends continue to stabilize to improve on the whole.

So we don't think the overall risk has grown.

We just think we're continuing to work through a sustained level of these repurchase requests, and the sooner we get to the end of it, the better we think it is.

Bryan, to get to the $1 billion target by the end of 2013, do you essentially need all of these costs to come off the P&L by then?

Well we need a fair amount of what we've described as the environmental -- mortgage repurchase is a significant part of that.

There's still some continued costs with ORE, and foreclosures, and default servicing, and things of that nature.

But that would be a big step in that regard, and if you take the level of expenses in the early part of this year and you start to adjust for some of these environmental costs, you can see that we are making pretty good progress towards our $1 billion goal.

So we need a substantial portion of it to come off by the end of 2013.

But we sit here today -- we don't see any reason that they wouldn't drop over that time period.

And just finally on the expenses, BJ, is a good rate run rate of expenses near term somewhere around $300 million?

Yes.

I mean, if you try to adjust some of these things that are hard to look at quarter to quarter because of volatility, whether it's mortgage repurchase costs, whether it's variable compensation from capital markets, etc., somewhere in that range between where we are today and that number is probably pretty good for the near-term.

Okay.

Thanks for all the color.

Thank you.

Brady Gailey, KBW.

Thank you.

Bryan, I was wondering at what stock price does it not make sense for you to repurchase your stock?

Well, we're obviously sensitive to price, and as we look at our current valuations and valuations relative to the tangible book value, we think that it's an attractive value at these levels.

As we approach more median valuation multiples, we become more price sensitive to it.

So I don't want to get into trying to say this price or that, but I think we look at it in a range.

The stock we've repurchased to date, we bought back at an average cost of $8.11 pre-commission.

$8.14 if you include the commission.

So at a discount to tangible book; so we're going to be opportunistic.

We're going to pick our spots.

We're going to get the capital back in our shareholders' hands at attractive prices, and we think that's a good use of the capital in today's environment.

Okay.

And then on the loan loss reserve, could you or BJ just talk a little bit about what you think that will do in the rest of 2012?

We've seen it come down a decent amount.

You're now close to 2%.

I'm guessing that release is going to slow.

Could you all just give some color on where the reserve goes from here?

Sure; it's BJ.

We ended the quarter at 217 basis points on reserve.

If you've heard us talk about our Bonefish, we think a normalized level is really more in the 150 to 2% range.

So, what we've talked about is we continue to seek some reserve decrease because of improvement in our portfolios, but likely at a slower pace.

So, you can kind of extrapolate those data points I just gave you to kind of say what we're thinking about over time.

John Pancari, Evercore Partners.

Bryan, could you talk a little bit about the pace of the buyback now that you've upped the program?

And just looking out through the remainder of 2012, specifically, can you talk about the pace of repurchases?

Yes, John, we -- we're not -- we try to -- we're not locked into any particular pacing.

What we're trying to do is make sure that we use the capital smartly, and as I said in the answer to the previous question, we're going to be sensitive to price.

On a macro sense, our capital ratios continue to remain very, very strong.

Our tier 1 common ended the quarter at 11.7%, virtually unchanged with the $88 million of stock bought back to date.

We are going to look at using that buyback program to get significant capital back into our shareholders' hands over the course of the next three or four quarters, a year, whatever it takes, but we're going to be opportunistic, and we're going to be smart, hopefully, in the way we pick our prices and do it in a targeted fashion.

So we don't see a need for our capital ratios to grow.

We would like to see them remain stable, and if we can do that, that's a really good start in our view.

Okay.

Can you give us a little bit more color around the margin outlook?

I know you expect some modest compression, but just given that the runoff is accretive to your margin and that your loan yields overall also remained relatively stable, that would bode for some support, but you continue to expect some pressure here.

So can you give us a little bit more clarity there?

Sure.

It's BJ.

What we saw quarter to quarter was clearly a little disappointing.

But, on the flip side, a lot of it was driven by something that is a little more positive, which is customer deposit inflows.

So a lot of that was just excess balances that we had at the Fed, which, you know, hurts the margin but not necessarily NII.

But even with our bankers doing the right things on holding up loan yields, reinvestment rates in the securities portfolio are very difficult.

They are down more in the 2% range, and it's hard to replace what's running off in that portfolio with what's coming on.

So there's a lot of dynamics in the margin, and the longer this low interest rate environment continues, the harder it is for us to defend the margin.

So, like you said, there's positives from the nonstrategic runoff, but there is also headwinds from the securities portfolio and so on.

We're doing everything we can to control the pricing that we have in the bank, bringing our average deposit rates paid down.

We think we'll be able to do that, but in the interest of caution, knowing that it's an uncertain environment, we think that it could continue to float down modestly over the course of the year.

Emlen Harmon, Jefferies & Co.

Can we talk a little bit about just the re-class of some of the junior liens into NPA?

You indicated that the loans that you did move into NPA there were -- those that you knew had gone 90 days delinquent on the first.

Could you give us a sense of what portion of those you guys are actually servicing?

What's tipping you off that those are going to the 90 day bucket?

Sure.

It's BJ.

As you know, the new guidance issued by the Fed in the first quarter that required institutions to perform reviews over the allowance of the loans, primarily focusing on loans where you had performing loans secured by junior liens, but the first was delinquent or has been modified; and it also talked about where institutions do not own or service the associated first lien -- which the bulk of ours fall in this category -- that you should use reasonably available tools to determine the payment status.

So for a significant majority of our seconds, we don't have first-hand visibility in the payment status of those, since we sold most of the servicing.

But as we went through our review, there was about $27.5 million, $28 million of our nearly $4 billion of second liens where we service it or own the associated first liens and that first lien was 90 days delinquent.

We do monitor refresh FICOs each quarter, which is what we really use to evaluate these, and those are obviously impacted by payment status of the first lien.

We review delinquency trends and negative equity positions, among other things, to detect deterioration.

So really, all in all, it had a $28 million impact on our NPLs, but the issuance of the guidance didn't really have a material impact on our reserves.

Right.

The other portion of the guidance, too, says that you may need to look at -- for the portion that you don't service, you may need to look at broader industry metrics to get a sense of whether there needs to be some migration to NPA in that portfolio.

Have you put any thought into kind of what you need to look at there, and what could be -- for the portion of the portfolio you don't service, what could be a driver to kind of push things to NPA there?

Yes -- so like I said, we -- it says use reasonably available tools, the largest of which for us is refreshed FICOs.

So if you have a borrower where we have the second and we don't know the first, and they had a 720 FICO one quarter and a 620 FICO the next, you might reasonably assume that something happened with the first.

So that's part of how we detect it.

We also look at negative equity positions.

If there is a significant change in the loan to value on our second, that might also lead to something that we need to look at.

So that's really how we monitor it on our side.

Okay, and just one quick one.

On the make-whole purchases or larger portion of the repurchase requests are now for make-whole -- I mean any -- you guys did indicate that loss severities stayed pretty similar quarter over quarter, but is there any potential change to severities as a result of the mix of new requests shifting that way?

BJ again -- not really.

What you have got -- if it has gone that long, you've got accrued interest that they are going to ask for.

They are also going to ask for imputed interest, which is after it actually goes to foreclosure, and however long it takes, they're going to ask for continued interest on that, plus the loss severity on what they lost.

So there might be a little bit more in terms of interest, but it's not material.

To give you an idea of how the mix has changed, nine months ago, maybe, we would've seen 80% repurchase request, 20% make-wholes, and today we are seeing around 50%-50%.

So that's really does tell us that they are recycling back through the foreclosed loans and trying to put those back.

Paul Miller, FBR.

This is Kevin Barker on behalf of Paul Miller.

I just had a question about the personnel expense.

I noticed it's come up about $26 million this quarter, even though capital markets is trading about -- expenses came up about $19 million.

How should we look at the variable piece of the personnel expense going forward, and what part would be fixed?

Can you give us an idea around that?

Kevin, do you mean the increase, or -- ?

Well you're running at about, in between -- you're running at about, what, $150 million to $155 million last year, and you came up to about $175 million this quarter.

How should we look at a run rate going forward if you had normalized trading revenue?

Yes.

So if you think about it quarter to quarter, variable comp from FTN was maybe $9 million of the increase.

So that's probably 30% of the increase, and in the first quarter, what you're going to have is things like annual bonus payouts, you're going to have resets of FICA and payroll tax related items.

There is some deferred comp that goes on in the first quarter.

Some trueups there, and we had an increase in pension.

So I'd say for the increase that we saw in the first quarter relative to the fourth, I think 85% -- I'd call it 80% -- let's call it 80%, 85% of it is more seasonal, if you will, or variable.

The one that will not go away for us this quarter that will remain elevated throughout 2012 is our pension expense.

Pension expense quarter to quarter was about up about $6.5 million, and that will continue to stay elevated throughout 2012.

We are closing our pension plan as of the end of this year, and we do expect a material drop-off in the expenses going into 2013, but there is a bubble that will occur in 2012.

Okay.

Thank you.

And then one other question concerning your provisions -- do you have a specific reserve to loan ratio you're looking at?

Are you trying to target, maybe, 1.5%?

At what point do you -- is there a certain target that you are looking at?

Yes.

In our Bonefish we assume in a normalized environment we would have about 50 basis points of annualized charge-offs and provision, and for the reserve we would hold roughly 3 times to 4 times debt level at any given time, so that's 150 to 200.

So we sit here at 2.17%, so it means that we have room to go on reserve decrease, but it's getting closer to our normalized targets.

Chris Gamaitoni, Compass Point.

If I look at page 23, there is a $36 million -- it's for mortgage requests outstanding.

There is a $36 million amount that's in non or other category.

Is that the loans that are related to the Citigroup transaction, where USB has initiated a suit?

Chris, I apologize.

We couldn't hear you very well.

Could you repeat it?

Sure.

On page 23 of the presentation, when you break down the outstanding repurchase request by type, there is kind of an other category that is comprised of $36 million.

Is that the balance where -- on which the USB acting as trustee suit is related?

No.

Those are -- the $36 million is really other non-repurchase requests, so those are things like requests for research or --

Chris, it's Aarti.

Those are non-repurchase requests, meaning there is no -- cash doesn't go out the door.

So for example, maybe a document missing its validable signature or something, so it can be cured without cash.

That is what that represents.

Yes, the bullet point right above it, the $3 million of non-GSE hold unrelated claims is I think what you were looking for.

So the -- it if I look at that USB lawsuit, which you wrote about, it states a UPB of $36 million.

I'm just wondering, did they request those and you turned them down, or they just initiated a suit without speaking to you?

We -- Chris, you know, we've gone through everything, and we can't find any evidence that they've made a request for us to repurchase those loans.

Those are home-equity loans.

So we know what you know at this point, which is about a two-paragraph suit, and so we are digging into it.

We don't have any detail on the reason for the request etc., etc.

We've got no evidence of them actually making the request at this point.

Thank you.

That's very helpful.

And then do you know the UPB on the balance where you've been asked to indemnify?

We don't know that.

They haven't identified.

We don't know that, and actually, on that suit we haven't to my knowledge even been served with it.

Kevin Fitzsimmons, Sandler O'Neill.

Just a few questions.

I just wanted to clarify the outlook for loan balances.

I know last quarter was the first quarter in quite some time that we on a net basis went from negative linked quarter movement in loans to actually positive, and then we went back to negative this quarter.

Was this more just an outsized reduction of the nonstrategic, or should we expect a return to positive sometime soon?

This is Bryan.

There are a number of moving parts.

Clearly we saw a little pickup in the runoff of particularly the national home equity portfolio.

But if you sort of go back to fourth quarter, we had strong year-end closings in the first quarter; we thought we had very good closings.

Our commitments were actually up a couple hundred million dollars during the course of the quarter.

Our pipelines ended the quarter strong.

We feel good about that, and in fact, the pipelines at the end of the quarter are as strong as they've been at any point in the last year or so, and even more confidence in our 90% confidence level.

So, I don't know that I would let one trend -- one quarter indicate a trend one way or the other.

We are going to have continued runoff in the nonstrategic portfolios, which is a positive.

I think our bankers are doing a fantastic job in their calling efforts.

I think they are doing a fantastic job in building long-term, customer oriented lending relationships.

I feel good about the spreads that we're able to achieve, and I can't -- I wouldn't take the first quarter and make a trend one way or the other, but I feel really good about the progress our teams have in growing our balance sheet in a quality way for the long term.

Okay, thanks.

One other follow up.

On the GSE's focus on the older vintages and doing these make-whole purchases, what does that tell you or suggest to you about where they are in the process?

Is it a positive?

Is it a negative that they're focusing on this in terms of the grand scheme of how it will all play out?

Does it suggest it's going to take longer, it's going to go faster?

I'm just wondering what your thoughts are on that.

Thanks.

It' BJ.

Honestly, direction of what we've seen from the GSEs has changed so many times, I don't believe that I could give you a good answer I could believe.

We've seen movement from foreclosure to delinquency focus.

We've seen movement through the vintages and back -- recycle back through older vintages.

So, it's hard to tell, but I think what we believe is a couple of things.

We've sold our mortgage servicing, as you know, in August of 2008.

The increases that we are seeing are -- we saw a big uptick in the 2007 vintages, and if you think about that, it's been 52 to 64 months since any of those loans were originated.

That's quite a long time.

And if we're going through foreclosure, you've also got to assume that they paid for a while, too.

So there's a finite end to what we're going to have to be deal with with the GSE's.

We do believe that we continue to be on the back end, and so without having much knowledge of exactly what they are doing, which we can't really ascertain from them, in the interest of caution we just say we don't see a reason throughout the rest of 2012 for it to come down, but we continue to see strong resolutions from our team.

Our operational pipeline continues to come down.

We are well reserved for it, and we'll just keep working through it.

Kevin, this is Bryan.

I'll add -- in a macro sense, I commented earlier, you don't see -- delinquencies in the housing market seems to be reaching more stabilization, coupled with the fact that although we get a frustrating request here or there, we don't see a significant change in the types of requests that the GSE's are making at this point.

So given that, we don't think that the overall size of the risk is changing very significantly.

And as a result, you might include conclude that a more aggressive pace in terms of making requests is actually a good thing in terms of getting to the end, but as BJ said, it's hard to call given the limited flow of information that goes on on a day-to-day basis.

On the abundance of caution, I would suggest we are confident that we'll work through it, that it will be an earnings headwind, but it's hard for us to sit here today and say we see it falling off in the next couple of quarters -- several quarters.

Okay, all right.

Thank you.

Sure thing.

Matt Burnell, Wells Fargo.

First of all, a quick asset quality question.

In terms of the regional banking portfolio and the C&I portfolio, specifically, it looks like you saw visible increase in the 30 plus delinquencies.

It looks like that had more to do with what happened in the fourth quarter than the first quarter.

But just curious if there's anything going on in that portfolio that is showing some early stage weakness?

No, there's not.

That portfolio is fairly stable.

There was a one loan event that caused a big piece of that 30 day plus, which was more of a strategy-related approach, but that portfolio is fairly stable.

We continue to see improvement in our weighted average probability to default within that.

Okay.

And then a bigger picture question in terms of your cost targets -- could you explain again for us how the compensation related to the capital markets revenues, sort of ties into your cost targets?

Is that included in that at all, or is that -- how should we think about how that would be included?

Matt, it's BJ.

It is not -- it's not we're really what we're focused on in terms of those core efficiencies; that $139 million is really related to Regional Banking expenses and corporate-related expenses.

So we exclude the volatility as the variable comp.

Matt, this is Bryan.

We basically assume that's the normalized range of average daily revenue for capital markets, and we consider it a high class problem to be outside of that on the high end and have higher comp expenses.

Erika Penala, Merrill Lynch.

This is Russell Gunther on for Erika.

A quick question.

You mentioned the pension expenses were up $6.5 million quarter on quarter.

Do you have the total amount those expenses were in 1Q?

You know, I would have to look back, Russell, real quick.

Aarti is going to look real quick or you.

All right, let me -- I'll jump in in the meantime with just one other on the margin in terms of the Bonefish targets of 3.5% to 4%.

Outside of rising rates, is there anything else you can do in the meantime to help you hit that in shorter order?

I think rates are obviously our biggest help.

We are asset sensitive.

We continue to be, and a rise in rates would certainly help us.

The things that we can control to do, I think, will help us on the margin, or modestly.

Things like continuing to bring down deposit rates paid where we can; improving NPA levels, which means less non-accrual and NIM drag from non-accruals.

But things like the reinvestment rate on securities portfolio is difficult to overcome, even if you're just reinvesting cash flows.

You know, yields on renewing loans -- though we're remaining disciplined on pricing, you can see that yields are remaining relatively flat, which actually is a great accomplishment, but it means yields are remaining relatively flat.

So it's hard to significantly move those up in the competitive environment that we see in lending.

We continue to work on it.

We continue to focus a lot of our efforts on it, but it's just a very challenging environment to work through.

Russell, this is Bryan.

We put the Bonefish out there with -- sort of serves as a roadmap, but I think it's important to sort of focus on the left side of that, which is sort of our end objective, which is to draw -- drive strong ROEs in the business.

Although we focus on the kind of margin we are putting on the balance sheet and how it moves from quarter to quarter, our primary focus is driving the higher returns on equity over the long term.

So as we look at the margin on a short-term basis, we're also very focused on the long-term nature of the business that we are putting on the balance sheet, the types of relationships that we have, trying to make sure that we have a high profitability, relationship oriented business that drives long-term shareholder returns through the Bonefish, but ultimately, higher returns on equity.

Understood.

Well, thank you for taking our questions and for the color.

I guess can we follow up on the pension expense?

Yes.

Thanks again.

Christopher Marinac, FIG Partners.

Good morning guys.

Bryan and BJ, just curious if you can give us a little more color beyond what you've already done about just kind of margin at the Regional Bank level compared to the wholesale channels, and can that, perhaps, behave differently and maybe better in subsequent quarters?

Chris, it's BJ.

It could.

Again, I think in the bank we had somewhat of a high-class problem in that we actually saw very strong deposit flows, and so as you can imagine in this environment, unfortunately the credit for deposits, if you will, that our Regional Bank will see continues to come down.

Even though we've got strong customer relationships and bringing in those deposits, they are actually worth less to us, and it's hard to deploy that and put it to work in anything besides Fed funds or investment portfolio.

So you may see continued pressure on the Regional Banking net interest margin because of that dynamic, but again, overall if you step back, we're pretty pleased with what we are doing in serving customers, defending the margin in that business.

And I guess just one clarification, which also goes back to last quarter disclosures.

Only page 24, on the private mortgage-backed securities, the $11 billion UPB of Alt-A, that already is netted for what you had paid off last year -- some of those pools that were called in mid-2011?

Right?

That $11 billion is in those securitizations what the outstanding UPB is across all the securitizations that are active.

Okay, very good.

I just wanted to clarify.

Thank you, and Bryan, just real quick with you.

From the standpoint of mergers, does anything seem like it is a possibility looking forward 12, 18 months, or is the capital used today sort of more reflective of a lack of external opportunities?

Yes, I think if you step back and you look at the little bit of pickup in activity in the early part of this year, I think it is a little more encouraging about the opportunities that might develop as the course of the year goes by.

We continue to keep an eye on what's going on.

We continue to look at things from time to time, but we intend to be very disciplined about it, and returning capital to shareholders like we have at attractive prices is a perfectly good alternative with us.

We don't feel the need we have to do that, but if we see the right kind of opportunity, we certainly would be willing and able to put it into an M&A transaction, given the right fundamentals around it.

Michael Rose, Raymond James.

Good morning, guys.

My questions have been answered.

Thanks.

Dave Bishop, Stifel Nicolaus.

Just curious, given the increase in the pipeline as it heads into the quarter here, overall for 2012, what are the overall expectations in terms of loan balances here?

There's going to be, obviously, some runoff on the non-strategic.

Do we see this balance as trending up, maybe single digits?

Relatively flat?

Just curious in terms of any sort of outlook there.

This is Bryan.

When I answered earlier -- I wouldn't draw a lot of trends.

I think given the continued runoff in the nonstrategic, which is a positive from our perspective, the opportunities for growth in the Bank and, really, if you go back to what we said about the economy with low interest rates and relatively low economic growth, we sort of look at it as maintaining the level of loans sort of in the neighborhood that they are in is where it's more likely to come out then not.

That doesn't mean they won't grow a little bit one quarter and be down a little bit in another, and as we evidenced in the first quarter, we had strong mortgage banking warehouse lending in the fourth quarter.

That receded a little bit in the first quarter.

If rates tick down like they have early part of the quarter, it may go up again.

So we're not trying to get real specific and say this is where the number is going to come out over the course of the year.

I'll take you back to the comment that I made earlier, which is we're really focused on putting strong lending relationships and transactions on our balance sheet and make sure we've got a strong customer-oriented balance sheet.

I think our bankers are doing a fantastic job on that.

Some of the commitments growth that we saw in the first quarter we'll fund; we're continuing to work on pipelines, and we'll continue that growth over the next several quarters in the core bank.

Year-over-year growth of about $1 billion in that portfolio is rather significant, and we feel good about the work that our teams have done.

There are no further questions at this time.

I'd like to turn the call over to Bryan Jordan for any closing remarks.

Thank you, Terrence.

Thank you for joining our call.

We appreciate your interest.

Please let us know if you have any follow-up questions or need additional information.

I hope you all have a great day.

Thank you.

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

This concludes the program.

You may now disconnect.

Have a wonderful day.