First Horizon Corp (FHN) 2012 Q3 法說會逐字稿

Good day, ladies and gentlemen, and welcome the First Horizon National Corporation third-quarter 2012 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 call is being recorded.

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

Ma'am, you may begin.

Thank you, Operator.

Please note that the press release and financial supplement which announced our earnings, as well as the slide presentation we use in this call this morning, are posted on the Investor Relations section of our 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 in our most recent annual and quarterly reports.

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

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

I'll now turn it over to Bryan.

Thank you, Aarti.

Good morning, everyone.

Thank you for joining our call.

During the third quarter, we built on our momentum, continuing to successfully execute on our strategic plan while controlling what we can control.

We improved profitability of our core businesses; made headway toward achieving our expense save target; and furthered strengthened our balance sheet as we reduced nonstrategic assets, grew loans and improved credit quality in our core segments.

We're also deploying capital.

Since the third quarter of 2011, we have bought back $140 million of common stock, including $15 million this quarter, and still have $60 million of our share repurchase program remaining.

Our core businesses, Regional Banking and Capital Markets, grew pre-tax, pre-provision net revenue by 5% linked quarter.

Year-over-year, the Regional Bank's pre-provision, pre-tax net revenue was up 2%, driven by a 7% increase in net interest income.

In Capital Markets, third-quarter fixed income average daily revenues were $1.2 million, up from second-quarter 2012 levels.

FTN Financial's expansive distribution platform and diverse customer base provide solid fee income and strong returns for us.

Capital Markets' return on assets was an annualized 2.3% in the third quarter.

Balance sheet trends were also positive.

Average core deposits it in the Regional Bank increased 9% year-over-year.

Recently released June 2012 FDIC deposit data illustrates just how solid this growth is across the markets we serve.

Even including a planned reduction in our Memphis markets' excess wholesale funding, we retained top ranking in our West and East regions, and we continue to make solid progress in middle Tennessee, where we gained 100 basis points of share.

Our Regional Bank grew average loans 12% year-over-year, keeping loan yields relatively stable despite competitive pricing in our markets.

Net interest spread in the Regional Bank was 354 basis points, up 4 basis points from a year ago.

Our loan mix continues to improve, as relationship-oriented loan growth in the Regional Bank more than offset nonstrategic loan runoffs in the third quarter.

Total consolidated average loans were up 3% year-over-year, driven by a 15% increase in our C&I portfolio.

Consolidated net interest margin was 3.15%, relatively flat from second quarter, but down from last year.

An ongoing positive shift in our loan mix, along with further improvement in our fund mix and pricing, should continued to mitigate margin compression from the drag of an extended low interest rate environment.

In general, asset quality continued to improve.

However, we implemented new regulatory guidelines that call for performing consumer loans discharged in bankruptcy to be written down to collateral value.

This new guidance caused us to take an incremental loan loss provision.

Our third-quarter loan loss provision was $40 million, including $30 million related to these regulatory-driven charge-offs.

Consolidated net charge-offs were $79 million, with $40 million related to the regulatory guidance.

Excluding the regulatory change-driven charge-offs, net charge-offs were $39 million, and declined 63% from third quarter 2011.

Nonperforming assets declined 23% year-over-year; 28% excluding the bankruptcy-related charge-offs.

We expect ongoing stable to improving trends across our loan portfolios as we look forward.

Improving our productivity and efficiency a key priority, and we are making good progress.

Consolidated expenses were down 18% year-over-year, reflecting the decline in mortgage repurchase provision expense to 0, as well as successful execution on our efficiency initiatives.

We are on track to reach our targeted annual expense goal of approximately $1 billion by the end of 2012, a year ahead of our initial plan.

Additionally, we now expect to have in place to another $50 million of efficiency initiatives in our run rate by year-end 2013, beyond our already announced $139 million of initiatives.

To summarize, we're successfully executing on our strategic priorities.

We expect the low interest rates, slow-growth economy to persist, so we're optimizing our business mix to well-position ourselves for when the economy does improve.

We are diligently working to improve our productivity and efficiency, which is increasingly important in today's operating environment.

At the same time, we're continuing to make inappropriate investments in technology and products that will help us better serve our existing customer base, and enhance our ability to attract new customers and profitable business.

We are committed to providing superior customer service, and we are focused on deploying capital smartly to achieve attractive long-term returns for our shareholders.

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

BJ?

Thanks, Brian, and good morning, everybody.

I'll start on slide 5 of our deck.

Third-quarter 2012 consolidated pre-tax income was $34 million, compared to second quarter's loss of $211 million.

As you'll recall, second quarter included $272 million of pre-tax charges from an addition to the mortgage repurchase reserve and our litigation reserve.

Pre-tax income from our core businesses was $70 million in the third quarter, up 10% from the second.

You'll see that consolidated revenues, excluding securities gains, grew 3% linked quarter.

Total average loans were up 3%, with new loan bookings outpacing nonstrategic runoffs.

And in fact, Regional Banking average loans were up 5% on a linked quarter basis.

Consolidated net interest margin was 3.14% in the third quarter, compared to 3.15% in the second.

We had some positive impact to the margin, including the higher loan volume and the lower cash balances, which was somewhat offset by continued lower reinvestment rates in the securities portfolio, as well as the seasonal decline in loan fees in the bank.

While we expect to see some variability in quarterly net interest margin, we do currently forecast that consolidated net interest margin should be in the 3.10% to 3.15% range in the fourth quarter.

If you look at slide 6, I'll hit some of the significant items in the quarter.

As Bryan mentioned, we took incremental loan loss provisioning associated with charging down discharged bankruptcies to estimated collateral value.

The provision related to this impact was net $30 million, or about a $0.07 EPS impact.

I'll get more into this in a few minutes.

We also had a $6.6 million expense, or an after-tax per-share impact of roughly $0.02, related to a litigation matter.

Moving to slide 7. I'll talk about our Regional Bank performance, which continues to strengthen and improve.

Linked quarter, pre-tax, pre-provision net revenue was up 5%.

Net interest income was up 2% on those higher loan balances.

Net interest income was down slightly, about 1%, with 6% growth in deposit-related fees, largely offsetting modestly lower cash management, debit card, and investment management fees.

Loan loss provision in the Bank was $4 million in the third quarter compared to $5 million in the second.

And expenses in the Bank were down 1% from last quarter due to lower compensation costs.

Looking at the balance sheet in the Regional Bank on slide 8. As I mentioned, average loans in the bank were up 5% on a linked quarter basis; driven primarily by loans to mortgage companies, corporate lending, and consumer lending.

Activity and outlook remains strong as well, as we remain focused on making higher-return, higher-quality loans.

Our loan pipeline increased, and our commercial fundings were up as well.

Average core deposits in the Bank were down slightly, due to some balance sheet management by some large commercial customers; but otherwise, deposit flows remained very strong.

And you'll notice that the cost of average deposits declined about two basis points from last quarter to 34 basis points.

Moving to slide 9 and our Capital Markets business that, at the end, delivered another solid quarter with pre-tax income of $21 million, up 7% on a linked quarter basis.

Our average daily revenues in the business were $1.2 million, up from last quarter's level, and within our normalized range of about $1 million to $1.5 million.

Expenses were up as well, 6%, due to higher variable comps associated with those increased revenues.

While the agency and mortgage products continued to lead our performance here, we continue to see an uptick in our municipal business as we focus more sales and trading resources on this sector.

As we've said previously, we currently anticipate our average daily revenues to be in the lower half of our normalized range over the next several quarters.

Moving to slide 10, on productivity and efficiency initiatives.

As Bryan mentioned, we should be around our targeted $1 billion annualized level of consolidated expenses by the end of 2012.

We're on track with our ongoing productivity efforts, and implemented about $130 million of our $139 million of core efficiency initiatives since 2010.

And as part of these efficiency efforts, and we currently anticipate a higher level of restructuring cost of about $10 million in the fourth quarter.

You also notice the legal expenses were up in the third quarter due to increased activity around litigation; and we do expect legal expenses to stay relatively flat going forward to the third quarter levels.

Our additional $50 million of efficiency, as Bryan mentioned, should be in our run rate by the end of 2013 as we execute on additional expense reduction efforts.

Turning to slide 11, I'll review mortgage repurchase reserves.

As you know, based on information we received from Fannie and extrapolated to Freddie, we added $250 million to the repurchase reserve in the second quarter.

In September, we received an update from Fannie and looked at the data, and it did not change our reserve estimates, resulting in a 0 repurchase provision expense in the third quarter.

The mortgage repurchase pipeline was up modestly, to $446 million.

And the net realized losses were $68 million.

Our net realized losses were up due to higher resolutions from working through the pipeline.

And the repurchase reserve at the end of the third quarter stands at $292 million.

On the private securitization side, we had no loan repurchase requests.

We did have three new lawsuits come in during the third quarter.

And at this time, based on our private securitization's origination mix, deal size, age, and performance, we continue to believe that any risk from our legacy First Horizon private securitization should be significantly less than what we've seen from the GSE experience.

Turning to slide 12, on asset quality -- in the third quarter, Credit Quality Metrics incorporated their recently issued regulatory guidance mentioned earlier.

Incremental provision reflects our decision to address this new guidance specifically, and not use unallocated reserves to offset this.

And at this time, we do not expect this guidance to have a significant effect on future quarterly provision or charge-offs.

Linked quarter, our loan loss reserves declined 12% to $282 million.

Our reserves to loan coverage stands at 171 basis points.

The reserve decline reflects charge-offs related to the new regulatory guidance; continued wind-downs from the nonstrategic segment; as well as stabilization and improvement across all our portfolios.

In fact, in our trust portfolio, we've had three bank trusts come off deferral during the quarter.

The next slide shows some of the characteristics of our third-quarter regulatory change-driven consumer charge-offs, which were primarily on the home equity loan side.

We charged off $40 million on current and early-stage delinquency, post-Chapter 7, bankruptcy loans to the value of underlying collateral.

Out of the $40 million of charge-offs, $33 million were related to performing loans; and substantially all of the $38 million of HELOC charge-offs were for current and early-stage delinquency loans.

As a result, we should experience recoveries from these loans in future quarters, as many of these borrowers continue to make payments.

You will see NPA trends on the next slide.

NPAs declined 4% to $450 million from last quarter.

Our NPA to period loans ratio declined 17 basis points, to 215.

Our inflows were significantly down from last quarter and our resolutions were up, resulting in a decrease in commercial nonperforming loans of about 15%.

Wrapping up on slide 15, we continue to manage our Company to achieve long-term returns and profitability targets using our bonefish strategy, and our progress is evident in return improvement.

Our core business trends are good, with core ROA and an annualized 1% in ROE at about 11.8% in the third quarter.

Capital remains strong, and we will continue to buy back shares under our stock repurchase program; and will continue to look at the mix of stock repurchases, dividends, and M&A to optimize return for our shareholders.

With the currently proposed Basel III capital rules, we continue to expect to manage our capital ratios within our bonefish range.

And we currently expect the negative impacts of the NPR to our Tier 1 common ratio to be offset by mitigating actions over time.

And with that, I'll turn it back over to Bryan for some final comments.

Thanks, BJ.

Thanks to the effort of our team, third-quarter 2012 demonstrated another quarter of successful execution.

We showed improved profitability in our core businesses.

We're continuing to put the nonstrategic issues behind us.

Our efficiency initiatives are on track.

And we returned capital to our shareholders with our ongoing share buybacks.

For the remainder of 2012, and throughout 2013, we'll continue to work towards achieving our bonefish goals, and remain focused on achieving high returns.

Thanks, and now we'll take your questions.

Operator?

(Operator Instructions).

Kevin Fitzsimmons, Sandler O'Neill.

Good morning, everyone.

We heard your comment about the private securitization being still significantly lower risk than what you guys experienced on GSE.

And now you have three more additional lawsuits.

Can you just dig into that a little more, on why you still feel good?

Before you have talked about time being your friend on this, and statute of limitations.

If you could give us your sense of comfort, and why the incremental lawsuits don't necessarily increase the risk for you.

And then, on the topic of putbacks, I noticed on page 26 of the slide deck, on whole loan sales, there is a new line in there on -- certain parties have initiated loan file reviews.

If you could comment on what that means, whether that's an incremental source of new putback requests to expect.

Thanks.

Hey, Kevin.

It's BJ.

Good morning.

If we could start with the second.

I don't think that comment is new.

And what we saw in the third quarter was the FDIC, with some suits putting back some loans from some failed institutions.

You've seen that across the industry.

So we got a few of those.

And we also got a few indemnification requests, which aren't technically lawsuits, but they are requests for us to indemnify loans that we had sold to others who then securitized loans; so they are a little different.

But stepping back from that, in general, there's obviously a lot of activity around this.

We knew that.

We actively monitor that.

We have seen lawsuits in the past.

But we continue to believe that, based on the fact that we haven't done anything since 2007 on these, that our performance on these is relatively good, relative to others, in terms of performance.

Time is our friend, particularly from a litigation perspective, in terms of suits being brought, et cetera.

We still continue to believe that there are a lot of mitigating factors here that give us confidence that this experience, if any, is going to be far less than what we saw with the GSEs.

BJ, what about the FHFA lawsuit?

Any new developments there?

I know that was probably set not to come to trial for quite some time.

Yes, that's right.

We currently understand that that's not supposed to go to trial until sometime in 2015.

So there's still a lot of back-and-forth going on in terms of the normal legal process there, but it's still in the early stages.

Okay, thank you.

Steven Alexopoulos, JPMorgan.

Good morning, everyone.

To follow up on Kevin's questions, if we look at the revised disclosures in the appendix on the private-label, you are now past the five-year statute of limitations on almost all of these, right?

The last big one was in August of 2007.

Why is this risk not now behind you, in terms of having to provide, on the private-label side, going forward?

Steve, it's BJ.

I think, as we talked about before, the state statutes of limitations are not all the same.

Many of them are three years; many of the others are five years; there are a handful that are longer than that, around six years.

But by the end of this year, 100% of our securitizations will be greater than five years old; which means that, particularly the [eight sixes] will be greater than six years old.

That's what we talk about when time is our friend.

There is still, as you can see in the industry, plenty of activity -- people trying to take action on these.

And we'll just have to deal with that.

But again, the longer this goes, the better it is for us.

Steve, this is Bryan.

I'll add to that.

I think, in the broad scheme of things, that the statutes of limitations in repose are our friend, as PJ said; and the passage of time is helpful.

We think that as these things have continued to perform, as they've continued to pay down, that that risk does diminish every quarter that goes by, so we do feel good about that.

There are, as pointed out in the comments BJ made about indemnification request for loans, there are two ways to have exposure.

One is on securities litigation, and that's where the statute of limitations in repose is most impactful.

But you also have whole loan requests.

The indemnification request that BJ referenced are not specific.

As I would translate it, they are basically a placeholder saying that we have been requested to buy back some loans; and if any of them are yours, and you breach covenants, we're going to ask you to buy them back.

So at this point, they are basically placeholders.

And it's hard to read through what that ultimately means.

As we have said several times over the last several years, when you look at this in total, we think that this is an exposure that is manageable.

Significantly less, in our view, than anything we've experienced on the Fannie Mae, Freddie Mac repurchases.

And we think it diminishes as time passes.

So we think it's important that we keep you up-to-date on what's going on in it.

But our view of the risk is still where it's been, which is -- this is manageable, and it declines with time.

Thanks for that color, Bryan.

Just one other question on the new OCC guidance.

It seems to be impacting the industry to different degrees.

Some banks have to provide for this; others, it's just impacting restructure loans and charge-offs.

Could you explain to us why you needed to provide another $30 million, as it relates to the new guidance?

Yes, Steve, it's BJ.

A couple of different things that I'll mention here.

And I mentioned it in my talking points at the beginning.

One is, when we got this guidance late in the quarter, and we looked at what this would impact, keep in mind that most of these are for performing loans.

And if you think about how you reserve for performing loans on the consumer side, a lot of times you're looking at a low-rate methodology.

And if something is current, you're going to have very little reserve against it.

So that's why we had much more in charge-offs than we had in relief of reserves, net, specifically related to this.

There is something called unallocated reserves; some people call it economic reserves, that are not specifically tied to any loans or loan portfolios that people have.

We specifically chose not to use any of these unallocated or economic reserves to offset this impact.

We didn't find that appropriate.

I believe, if you look across at others in the industry, they may have done that.

We made that conscious decision.

It hurts us right now.

We think it's an accounting issue, and an unfortunate accounting hurt.

And as we've said, we think this accretes back to us over the long-term.

You can see, in the talking points as well, for those customers that we have that have been bankrupt over two years, 60% of those have sent us a payment every month consecutively for the last 24 months.

That tells you that they are paying; they do believe that they owe this; and that we expect, again, to recover a lot of this over the next several quarters.

Steve, this is Bryan.

I'll give sort of the layman's recovery and accounting here that in some respects.

We go through and we look at the makeup of our portfolio; and as BJ and I pointed out indirectly, we had about 25% reserves on these assets, which is the difference between the charge-off level and the incremental provision.

So we had about 25% reserve.

As BJ described, that the unallocated or the qualitative factors that go into the reserve, there's a lot of judgment.

And this gets factored into it.

We just felt like it was appropriate not to adjust our qualitative factors at this time; to leave those reserves, and to take the charge through P&L.

Other people can reach different judgments, but we just erred on the side of leaving our qualitative reserves where they are, given where we are in the cycle.

John Pancari, Evercore Partners.

Morning.

On the private-label side, have you evaluated -- I'm not particularly sure if this is relevant here -- but evaluated the signing of tolling agreements around any of these lawsuits?

And would that be something, if you did, that would impact your view on the statute of limitations and how that weighs in?

Well, again -- hey, John, it's BJ -- I'm not a lawyer, but the way I understand tolling agreements is that both parties come to an agreement that a statute is about to expire, and that both agree to essentially extend that so that more dialogue and discussion can occur.

We haven't, to my knowledge, had any of those discussions.

I'm frankly not sure, sitting here today, why you would.

But I can't speak to what others may have done with those kinds of agreements.

Okay.

All right.

But you haven't signed any yet.

No.

(Multiple speakers).

We haven't signed any.

All right.

You indicated in your slide deck, on private-label, that file reviews have begun.

And the way we understand it, typically that could portend an increase or a pickup coming in requests -- in put-back requests, on the private label side.

Is that fair to assume?

Can you just talk about that a little bit?

I think the answer could be yes.

Yes, on file reviews, that would probably be a logical next step if something did occur.

Okay.

All right.

And then, lastly, in terms of the NPR, I know you indicated you expect to mitigate that over time.

In the context of what that meant for your capital ratios, can you try to talk about buybacks plans beyond this program?

I know you are in the process of [C-CAR] for 2013 and you may not be able to talk too much about it.

But can you give us a good way to think about, could the NPR here impact your longer-term buyback plans?

John, this is Bryan.

We think we've still got a fair amount of excess capital that we think it's appropriate to return to shareholders; and whether that be through continuation of our buyback program -- as we commented earlier, we have about $60 million remaining under our initial authorizations.

And we'll continue to do that as appropriate over the next several months and quarters.

We'll submit our stress testing; work with our regulators as appropriate; and continue to evaluate how we repatriate capital over 2013 and beyond to our shareholders.

And we'll consider all the appropriate elements of that.

That said, I think we've -- the NPR, and how Basel III gets implemented, I don't think it has any impact on our plans in the short run.

It more likely will have -- if it gets implemented as it's proposed, it will probably have more impact on the nature and the pricing of lending that we do rather than our management of capital, because we are driven by the bonefish.

We're driven by providing adequate returns on our capital.

And so we're not going to overreact to a proposed rulemaking at this point.

We'll react to it as it gets finalized.

But in the broad context, I think we've got plenty of capital.

We ought to look at appropriate ways and means to return that to our shareholders.

And we'll work with our regulators to ensure that happens.

Matt Burnell, Wells Fargo Securities.

Hi, folks.

Good morning.

Just wanted to see if I could switch the discussion just a little bit.

The reserve to loans ratio ended the quarter at about 1.7%.

I think you've said in the past that that you thought that a normalized run rate might be in the 1.5% to 2% range.

So I guess I'm curious, as you look out and you've started to see a little bit of loan growth in the portfolio this quarter, particularly in C&I, what kind of outlook do you have for further reserve releases from this point?

Hey, Matt, it's BJ.

Yes, you're exactly right.

I think we see the normalized range of 1.5% to 2%.

It would that be a good thing to have to build incremental provision for growing loan growth.

But at this time, as I've said previously over the last few quarters, we do it expect continued reduction in charge-offs and continued incremental reserve decreases as our nonstrategic loan portfolios continue to run off, positive grade migration continues to improve in the Regional Bank.

But, that reserve decrease will continue to get smaller and smaller as we get down towards the lower end of this range.

A little more color -- our models will continue to tell us to release reserves.

And so, what we want to do is make sure that we're operating very appropriately, looking at the adequacy of reserves for current and future events.

And we feel very comfortable with where we are at.

And we feel very comfortable with where the glide path is.

Okay.

So, not to put words in your mouth, but it sounds like the 1.5% number, you may go a little bit below that, just in terms of cyclicality; but not, probably, too far below it.

That's probably fair to say.

Okay.

A margin question -- you reiterated your guidance for net interest margin in the 3.10% to 3.15% range this quarter, which is consistent with what you said in the second half.

Looking into 2013, how were you thinking about your ability to be able to reduce deposit costs further?

The deposit cost decline has slowed a little bit; not surprisingly, given the environment.

But does QE3 help you at all, incrementally, relative to what you might have thought 3 to 6 months ago, in terms of being able to drive deposit costs down?

I don't see a huge impact, on the deposit cost side, from QE3.

I would also expect that we would still have maybe a few basis points or so, over time, of deposit cost reduction; mostly from our CD portfolio, and maybe some places here and there on other products.

But we've largely harvested probably what we can do with deposit costs.

I think our asset sensitivity on this topic specifically helps us, because we have a higher floating-rate loan mix; and, therefore, as loans are repricing here, it's not nearly as big of an impact as maybe some others might have, fixed rate portfolio that is repricing.

We still think, as you said, that we're in the 3.10% to 3.15% range.

And if I look at it in 2013, the same as we've seen in 2012, we think we'll be able to hold our margins pretty well.

We'll probably see it continue to float down quarter to quarter, but not drop off a cliff.

We think we're managing our margin pretty well in this environment.

Paul Miller, FBR.

To go into more of the macro -- I guess not so much the macro, but what you guys have seen in your area.

I know a lot of banks, yesterday, came out and said even though they saw in the beginning of the quarter some decent loan growth and some decent C&I, in September they thought a lot of guys were going to the sidelines.

Are you seeing the same thing in your market?

And also, on some of the commercial loans, C&I stuff, what type of pricing are you seeing out there?

Is it very competitive in the Tennessee market?

Hey, Paul, this is Bryan.

We are us seeing, still, a fair amount of cautiousness in borrowers; and really, the word that most often gets used, the uncertainty around the fiscal cliff, and what's going on in the economy, et cetera, et cetera.

So we are seeing some softness.

With that as a backdrop, though, I would say our pipelines have been pretty solid, and up slightly.

We think we're -- our calling efforts are paying off.

We had, I thought, very good results in the third quarter of this year.

It's an environment that's a little bit unusual, in terms of people moving forward until we deal with some of these structural issues.

But, I think, on a relative basis, our pipelines show we're doing reasonably well.

Competition is still very strong.

I would say, my sense is is that we've probably seen some stabilization in terms of competition on the structure.

Price competition still varies, depending on where you are in the state, and what customer you are dealing with; but it's still very competitive on price.

That's still very prominent in the marketplace.

We're still seeing a lot of, of what I would term low rate fixed -- long-term, fixed-rate lending, that doesn't seem to make a lot of sense to us.

So that's sort of a broad context.

I feel good about our opportunities, but I think it's in a difficult operating environment.

Okay, thank you very much, gentlemen.

Sure.

Thank you.

Erika Penala, Bank of America Merrill Lynch.

Good morning.

My question is on the expense guidance.

The $1 billion run rate that you'll be entering 2013, and the $950 million that you'll be entering 2014 -- is that net of any investments that you are going to make back into the franchise?

Or is that sort of a starting point?

Erika, this is Bryan.

That's a net number.

Okay, great, that was clear.

And my second [pop] question is on the dividend payout.

Bryan, how are you thinking about normalizing the dividend on a go-forward basis?

Do you see your next step immediately maximizing, to close just 30% of earnings?

Or do you think it's going to be a little bit more gradual?

I don't want to commit; but I think it's appropriate for us, over, as I said earlier, working with our regulators over the next several quarters, to think about how we use that dividend.

And I think it's appropriate that we consider increases to that.

The 30% guidance seems to be the high water mark, in terms of where the regulatory guidance is today.

So I think we ought to move in that direction.

I don't want to commit to that, or some number between where we are and there at this point.

But we will evaluate that, with an idea that it is appropriate to increase our dividend over the foreseeable future.

Thank you.

Ken Zerbe, Morgan Stanley.

Thanks.

Looking at loan growth a little bit, you haven't seen very good C&I growth.

It looks like it was driven a lot by lending to mortgage companies.

Can you talk about the sustainability of that?

Is that a one-quarter thing?

Or is that something that, at least for the foreseeable future, might continue to improve?

Hey, Ken, it's BJ.

It has continued to be pretty strong as the environment for mortgage refi; and, particularly, the long end rates have stayed low, and are guided by the Fed to continue to stay low.

That business is always going to perform very well in an environment like this one, and we have continued to see that.

So we think it could continue to stay elevated.

I think it ended the quarter at maybe $1.6 billion or so in outstandings.

We think, over the next several quarters, it could be in the $1 billion to $1.6 billion range, so we continue to think it's going to be very strong.

In a quote normalized environment, which we don't think for this business will be for quite some time, it could maybe go down more into the $500 million to $750 million range.

But for right now, we think for the foreseeable future it will stay pretty elevated and pretty strong.

Okay, that helps.

And then one on the expenses, that with the $1 billion target by year end -- I want to make sure I fully understand that, given that you had also mentioned that -- I think you said $10 million of additional or higher restructuring costs in the fourth quarter; higher or elevated legal expenses, as well.

When we look at fourth quarter, we shouldn't expect a $250 million expense number, is that correct?

How are you thinking about reconciling those?

Yes, thanks for picking up my hint.

You may have seen that we have been taking some actions in the quarter to further reduce our cost structure, which would obviously be related to employees and employee impacts.

And so, therefore, as we look at what the impacts might be from a one-time charge perspective on that, I was trying to give you an idea there was going to be around $10 million in the fourth quarter.

Obviously, that would not repeat itself at that magnitude going into next year, and would obviously result in lower run rate costs, as we take those costs out of the run rate into 2013.

Todd Hagerman, Sterne, Agee.

Morning, everybody.

I just wanted to follow up for a couple of things in terms of both expenses and credit.

First in terms of credit, Bryan, I noticed that OREOs stayed pretty -- has been pretty steady, if you will, the last couple of quarters.

And you referenced, in the slide deck, about expectations for lower environmental costs.

Can you put some perspective around that, particularly as we think about elevated litigation expense?

Yes, if you don't mind, I'll let Greg picked that one up.

Yes, hi, Todd.

This is Greg Jardine.

On the OREO end of it, we have seen OREO decline.

We saw it go up slightly from last quarter to this quarter.

That was driven by, I think, the -- our Nationstar portfolio.

As the shadow inventory starts to work through the process, we don't -- at this point in time, we do not see some significant issues there.

This may be more of a near-term situation.

But there is not a significant issue that we're aware of right now.

With that, thought, when you talk about the efficiencies going into the fourth quarter, if you will; and what my understanding is, is that the environmental costs will also continue to come down, net-net.

How should I think about that in terms of, again, this elevated level in the litigation?

I'm trying to reconcile the incremental lower costs, yet we're still fairly high in terms of some of these inherent costs.

From a credit standpoint?

Yes, credit and litigation.

I'm trying to reconcile the two.

Yes, so what I would expect, as we continue to see the portfolios heal, that you would -- that the environmental expenses in the portfolios also decrease -- that would include litigation expense -- but decrease as the portfolios continue to heal.

And on the whole, as the mix of the that ORE portfolio has changed, it's gotten more -- the stickier pieces of it tend to be land-oriented, where the maintenance costs and the environmental costs tend to be a little bit lower than they do on the physical structures and things of that nature.

And I think -- and the other thing, that when you -- the reference to legal costs, all of that is not associated with ORE and the loan portfolios.

As BJ pointed out, the litigation around FHA and things like that, as that ramps up, you will see additional, or somewhat higher legal costs associated with that.

But if you wrap all that together, back to short of our suggesting that we are going to be at the $1 billion run rate by the end of this year, as we move into 2013 -- that's incorporated into our estimation.

Christopher Marinac, FIG Partners.

Thanks.

Good morning, guys.

Just wanted to ask a little bit about the share buyback and how you see that evolving.

I imagine you're pleased with what you've done so far.

And just given the fact that the stock is a little higher, do cash dividends become an alternative in the future?

Hey, Chris, this is Bryan.

We've got the authorization, and we'll continue to be opportunistic and pick our spots.

We didn't buy as much in the third quarter because it was moving pretty fast on us.

We think it's still a relatively good value.

We think there are opportunities -- we'll see opportunities to pick our spots and buy our remaining authorization.

As I hinted earlier, I think it's appropriate for us, management, and the Board, to consider working with our regulators to evaluate the dividend.

I think the dividend is an important element of any capital repatriation strategy.

I think it's important, in particular, for the banking industry to have both tools at its disposal, given the -- I guess it's not a hard cap, but the presumptive cap around a 30% payout ratio.

So we'll work, and at the appropriate time, and the appropriate way, to use both the dividend and the buyback to get our capital back in our shareholders' hands that we can't deploy effectively in the business.

Great.

Just a follow-up for BJ.

I noticed on the roughly $7 million legal charge, that was obviously less than last quarter.

What's the likelihood that we see small amounts like that in the future?

Or is that something that may go away?

Hey, Chris.

That was related to a settlement where we actually had a litigation reserve that we had booked, that has been on the low end of the range, as we should according to accounting guidelines and policies.

And we've decided in the quarter that, based on negotiations, we should settle at a somewhat higher range.

So that $6.6 million that you saw is both the incremental charge above what we had in the reserves -- litigation reserve for that specific suit, as well as some attorneys' fees.

So, going forward, yes, that could occur, as we settle suits over time; depending on what kind of reserve we have; how quickly the settlement discussions come; all those types of things.

This is Bryan.

I'll add to BJ, and maybe change the word a little bit.

It is certain we're going to have some of that, given the -- as we continue to wind down these.

We don't think it's material.

We don't think it's going to greatly impact from quarter to quarter.

But we're going to have those things that gets settled.

I think we are working through it in a very deliberate and appropriate way.

We are evaluating on a case-by-case basis.

We are not rushing through resolving these things.

And this is a settlement that we think -- we thought made sense, given the context and evolution of the discussions in the suit.

And we'll continue to do that as appropriate.

Mike Turner, Compass Point.

Hi, good morning.

On the Capital Markets revenues, how was September -- the month of September, versus July and August, on a daily basis?

Hey, it's BJ.

It was roughly in line with what we thought.

And your guidance is sort of the low end of that, more in the $1.5 million per day -- is sort of your normalized range?

Yes, that is where we see it right now for the next several quarters.

With rates where they are, what we're seeing is, our clients are reinvesting a lot of cash flow, which is appropriate.

And they're trying to really pick their spot on -- we'll see much higher buying on certain days versus others, depending on where rates are spiking that day or not.

They're really trying to be very precise at what levels they are buying.

We continue to see the business grind it out at the lower end of that range.

But as you can see by performance this quarter, even at those types of ranges, it's a very profitable business.

And we continue to be pleased with the performance out there.

Okay, great.

And then what's a normal tax rate that we should assume going forward?

That one has been bouncing around quite a bit.

Here's how I would just simply look at it -- and it's going to vary -- but I would just look at what you think our pre-tax income is going to be, multiply that by something around 38% for an incremental tax rate.

And then we have roughly, on average, $7 million a quarter of permanent tax credits.

So I would deduct $7 million a quarter from that first calculation, and that should be a pretty good estimate of taxes.

Kevin Reynolds, Wunderlich Securities.

Good morning, everyone.

Most of my questions have been answered.

But, Bryan, I wanted to ask you something conceptually.

It seems to me that, if you guys have gotten it right, that the agency mortgage -- that reserve build is behind you.

The private-label statute of limitations seems like it might be coming to an end; as you said, time is on your side there.

So that's starting to become an issue that's behind you.

And this consumer charge-off that happened this quarter is behind you.

And there's likely to be some degree of recovery of a portion of that going forward.

So, if these big issues that have been weighing on you are behind you, what does that mean 2013 looks like for you?

Just from an operating -- I know it's a difficult environment; it's not going to be easy.

But does mean that 2013 actually could be a good year, where you could actually get back to just doing the banking, the blocking and tackling of banking?

Yes, Kevin, thank you.

Look, I think -- I'm encouraged about our prospects in 2013.

I think we have an awful lot of momentum in the organization.

And all the moving parts and things that you've talked about related to the non-strategic businesses, which have driven the vast majority of that -- even in the last year, from third quarter 2011 to third quarter of this year.

We've had very strong loan growth and customer activity, customer acquisition.

We've deepened relationships with existing customers.

Deposit trends have been good.

And I look at the execution that we've had in our two core businesses, Banking and Capital Markets, and I see a tremendous amount of momentum.

And as those non-strategic issues or wind-downs continue to fall away, I think that you see greater and greater, the core drivers of results coming to the surface.

As PJ pointed out on that slide 15, the returns in that business are very strong; close to a 12% ROE, and over 1% ROA, with a lot of momentum.

I'm very encouraged about where I think we can go in 2013.

Okay.

And then, you may have addressed this.

I think you addressed it in part a little earlier; I think to Paul's question about borrowers' activity going into the election and all, and the fiscal cliff.

Do you get the sense that borrowers prefer one outcome over another?

Or do they just prefer knowing what the next card on top of the deck is, so that can act accordingly with respect to the elections?

Well, I would guess most of them have a preferred outcome.

But I don't know what it is (laughter).

That said, I think everybody, me included, would -- just give us what we're going to be dealing with, and we'll figure out how to deal with it.

So I think that certainty is probably more important than anything.

As somebody looking in from the outside, it's hard to see how the election outcome really changes the big balance of power in DC.

We've still got big, tough issues that we've got to deal with.

It's going to take folks working together; and we if we can get people working together, and get some certainty, I think that's a net positive for the economy.

And I think most people, if you just gave them the roadmap, they would figure out how to deal with it.

And I think that would be good for all of us.

Okay, thanks a lot.

Dave Bishop, Stifel Nicolaus.

Good morning, gentlemen.

BJ, you alluded to, in the preamble, some offset in terms of the margin pressure related to seasonality, in terms of loan fees.

Just curious what that relates to.

And, I don't know if you have any exact negative drag from that impact.

Yes.

I don't.

If you really need it, you can follow-up with Aarti after the call.

But it was a modest impact, in terms of the quarter.

The larger headwind is, as you might imagine, the reinvestment rate in the securities portfolio.

Got you.

And then another housekeeping item.

I noticed a little outsized impact in terms of the increase in occupancy expenses this quarter.

I think we saw that last third quarter.

Anything -- seasonality involved in that?

Hi, David, it's Aarti.

It was actually a reduction in some sort of rental income we had in one of our buildings.

Okay, so it's more of a onetime catch-up from second-quarter level.

Yes.

Great, thank you.

Jefferson Harralson, KBW.

Thanks.

I wanted to do a quick follow-up on the mortgage warehouse lending piece of it.

You said it was going to be strong.

Do you think it stays at the current this current $1.6 billion level?

Or do you think that this sort of environment can generate growth in that line item?

Hey, Jefferson.

This is Bryan.

We think, given what's going on with the refinance activity because of low rates; and we think with -- you couple that with what may be the positive signs of a turn in the housing recovery, that we can -- coupled with the fact that we are trying to broaden and deepen relationships with existing customers, we think that we can stay at this level.

And there might be some upside to it.

As BJ highlighted earlier, in response to a question, there is always the likelihood of volatility in terms of what those balances may drift up or drift down.

But it's a business that we know well; we're comfortable with.

We think our team does a fantastic job in that space.

And we think we have additional opportunities to stay strong, and maybe even grow it a little bit.

All right, thanks.

And for my follow-up, I want to go into the specifics of the mortgage income quarter.

You'd had the much greater net hedging results, but you also had the $4 million negative swinging into mortgage warehouse valuation.

Can you talk about the that $4 million negative swing, and how that occurs?

What's the driver there?

And do these things offset each other next quarter, and we stay around this $10 million, $11 million range if we have the same originations?

Or should we -- was there some sort of one-time valuation adjustment that seemed [outside]?

No, Jefferson, I'd expect it to stay roughly in the range you've seen this quarter.

There is nothing really magic that we saw in terms of income.

Net hedge results were up modestly, but we think that it will stay in the mid- to high-single-digit range.

That is kind of where we see it based on the rate environment we've got, and the mix of what we've got.

The valuation adjustment is going to depend, every quarter, on prepaid speeds as well as credit.

This one was a little bit more related to prepaid speeds.

But it's not going to vary materially, we don't believe, in future quarters.

Okay, thanks, guys.

Marty Mosby, Guggenheim.

Thank you.

Bryan, I want to ask you about the -- when we look at the bonefish and the ratios are all like you are saying, lining up with the long-term targets, the only one that still kind of stands out is the efficiency ratio in the core operations.

If we look at that, and apply that over to the Bank, it really requires the Bank, the core banking, Regional Banking group, to get down probably meaningfully below 60%.

The $50 million we're adding an incremental efficiencies, is that moving from the Bank?

And what are the key things you're working on to get the Bank efficiency ratio lower?

Yes, Marty, good morning.

Thanks.

I want to make sure we are mindful of the two parts here, because there is a revenue part of this in getting that efficiency ratio right.

BJ commented earlier on asset sensitivity.

I don't know if it's in this deck; I know we have it in our supplement that we file on a quarterly basis -- our analyst packet.

We're -- a 200 basis point increase, which doesn't take rates all that high, to 2.25% on the short end of the curve, is about $70-plus million of net interest income to us.

But that accretes largely to the Bank as well.

That said, we are working on the expense side.

And the $50 million of incremental expenses that we have talked about here are largely targeted to come out of the ongoing operations of the organization.

We've taken a number of steps.

BJ has referenced some steps we've got in place to try to reduce our cost structure.

And then, we look at our business and recognize that the nature of banking, and how customers want to bank, how we bank, it really puts a lot of things into play.

We are working very aggressively to, one, recognize how customers' attitudes and means of banking are shifting; that we adapt to that; we invest in the right technologies; we deal with the right size and structure of our branches; and that we look for efficiency opportunities in the way we process information and technology.

So, net-net, I think you're generally right when you say that we need to be less than a 60% overhead efficiency ratio in the Bank.

I do think that we get there on both sides of the equation.

We'll continue to reduce some costs.

But we will see some revenue offset, just from asset sensitivity; and we'll get there with some growth, because we can handle the additional leverage that we have from incremental assets.

But cost is, in our view, a key lever or driver for us.

It's a de-levering driver for the industry.

And there's a lot of moving parts, in terms of how the industry is changing.

And we're going to be very active in trying to become more efficient and effective in the way we do business.

Thanks.

And, BJ, if we look at the nonstrategic part of the business segments, they lost about $22 million this quarter.

If we took out the bankruptcy, how close to breakeven would we have been?

We are getting pretty close to breakeven, on a pre-tax perspective, from nonstrategic.

And you should see it that way going into future years.

So we're getting to the point where we can largely offset it.

On a pre-tax, pre-provision basis, I think we're actually positive.

We're getting to the point in trying to that manage that as well as we can, to at least have a very modest impact on the income statement.

Emlen Harmon, Jefferies.

Good morning.

To take it a bit further on expenses, you walked us through the steps before of where the $139 million savings plan gets you.

You have an incremental $50 million next year and by the fourth quarter of 2013.

I think you guys also had some kind of pension expenses that were rolling of.

Can you help us understand how that fits into that picture?

And when we could expect to see those legging in, and how they fit into those expense savings plans?

Sure.

Yes, you remember correctly.

But we're not counting the pension-related reductions that we'll see in 2013.

That's really for the $50 million.

But we do it expect to see roughly $35 million of -- $30 million to $35 million reduction from 2012 to 2013 for pension-related expenses.

And, again, it's because pension will freeze on December 31 of this year, so the expenses related to it will decline substantially.

Okay, so we should be thinking about that as incremental to that $50 million; and even potentially pushing you down below the $950 million level?

You should think of it as incremental to the $50 million.

Okay.

All right, got it.

Thank you.

Thank you.

I would now like to turn the call over to Bryan Jordan for closing remarks.

Thank you, Operator.

Thank you again for joining the call this morning.

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

I hope everyone has a great day and a great weekend as well.

Thank you.

Ladies and gentlemen, this concludes today's conference.

Thank you for your participation, and had a wonderful day.